The prime minister and his chancellor may have had six months to prepare last
week’s “austerity” budget but, as so often happens in Gordon Brown’s chaotic
administration, the really important decisions were made only at the 11th
hour.
The key elements of what David Cameron, the Conservative leader, would later
describe as one of the most “dishonest" financial statements in
history were confirmed at a mini-summit between Brown and Alistair Darling
in No 10 just days before Wednesday’s budget statement.
Treasury number crunchers had concluded that, even in the best case scenario,
the public finances would be an extra £175 billion in the red by the end of
the year, sending the national debt sky high. Without radical cuts in
spending and increased taxes the finances would deteriorate further next
year.
Darling and Brown considered everything to plug the gap: increases in Vat
beyond 17.5%, hikes in national insurance contributions or raising the basic
rate of income tax from 20%. All were rejected for fear they could stifle
consumer confidence – or lead to Labour being rejected by voters in
next year’s general election.
One option remained – increasing taxes on the rich. Darling saw it as a
“necessary evil”. Brown saw an opportunity to divide the Tory opposition and
to divert attention from the truly terrifying borrowing figures. The deal
was done: £7 billion would be raised from the top 2% of earners through
higher income tax and reduced tax allowances and pension perks. “The way
they arrived at the conclusion was different,” said a Downing Street
insider, “but Alistair and Gordon eventually reached the same page.”
When the details of the budget were finally presented to the full cabinet on
Tuesday, the shock was palpable when Darling revealed the full scale of the
borrowing – £606 billion over the next four years.
There was not a murmur of dissent when he announced the hole would be partly
plugged by soaking the rich, even though the new 50% top income tax band
starting next year was in breach of Labour’s 2005 general election
manifesto. The most progressive, ultra-Blairite members of the cabinet, such
as James Purnell, the work and pensions secretary who was once Tony Blair’s
babysitter, remained silent.
It was the moment when the new Labour ideal, which had long been in intensive
care, finally died. It was also the death knell for Brown’s much-vaunted
reputation for financial prudence.
There was no cheering. No fluttering order papers. Darling ploughed through
his budget statement like a dead man walking. His audience included his
octogenarian mother, Anna, and 20-year-old son, Calum. The cabinet sat with
stony faces, as if they were at a family funeral, which, in a sense, they
were.
When he listed the forecast future budget deficits – £173 billion, then £140
billion, £118 billion and £97 billion – it was like a roll call of battle
casualties, said one MP.
Cameron struck back with a devastating critique, which in subsequent days has
become increasingly resonant. Describing the budget as a “a complete work of
fiction”, the Conservative leader asked: “When are they going to realise
they can’t spin their way out of this one?”
Frank Field, the former social security minister and one of the prime
minister’s most dangerous Labour critics, said waspishly: “This is a third
way budget. Some seem good on the day and collapse later. Some are poorly
received at the time and go on to grow in stature. This was poorly received
at the time and can only get even worse with hindsight.”
The Commons criticism of Darling’s budget centred on three areas. First, no
serious attempt had been made to control the budget deficit.
Second, the growth forecasts, upon which all other calculations were based,
hinged on a wildly optimistic assumption that the economy would bounce back
robustly next year.
And third, with the introduction of the supertax, Brown was playing party
politics at a time of grave national economic emergency.
To Labour’s enemies, the budget was another manifestation of the Nixonian
tendencies of his administration: shifty and tribal, with decisions played
for short-term political advantage. It was hardly surprising that the smear
e-mails sent by Damian McBride, one of the prime minister’s closest allies,
and exposed a few weeks ago invited comparisons with the Watergate “black
ops” to destabilise enemies. John Redwood, the former Conservative cabinet
minister, called Darling’s statement the “Damian McBride memorial budget”.
“It was a budget of posturing,” said Redwood. “A tax on the ‘rich’ to test the
Tories – which won’t raise much revenue and may even reduce the revenue.
More public spending for Labour areas under a cloak of ‘doing what it
takes’. And enough red ink to launch an aircraft carrier, if they ever get
round to building one.”
As soon as Darling mentioned the headline figure, the shock reverberated
around City dealing rooms, pushing the pound and government bonds lower. The
figure in question was not the new 50% top rate of tax but the £175 billion,
an eighth of Britain’s national income, that the government will be forced
to borrow this year, more than four times what the chancellor expected a
year ago.
Over the next four years, extra borrowing will total £606 billion, more than
the entire national debt at the time Darling stood up to make his speech.
If that was bad enough, there was worse to come. Each year after the budget,
the independent Institute for Fiscal Studies, having crunched the numbers,
holds a briefing near its central London offices for journalists and
analysts. The IFS is run by Robert Chote, a former Financial Times
journalist with an eye for a story. This year he didn’t have to look too far.
“The Treasury’s estimate of the fiscal damage wrought by the current economic
and financial crisis is breathtaking,” he said.
“The scale of the underlying problem that the Treasury’s detailed forecasts
identify will require two full parliaments of mounting austerity to repair.”
Even by then, he warned, government borrowing would have got back down only to
the levels the Treasury previously thought essential. Getting government
debt down to the 40% of national income ceiling that Gordon Brown previously
thought prudent would take much, much longer. On the IFS’s calculations it
will not happen until 2032, by which time Brown will be in his eighties and
an entire generation will have lived under the burden of high debt.
Economists began to queue up to attack his optimistic forecasts and his
decision not to tackle Britain’s ballooning borrowing problem until after
the general election. They echoed Cameron’s criticisms that the chancellor
was basing his numbers on a “trampoline” recovery, with this year’s 3.5%
slide in the economy fully reversed by 2011, when the Treasury is predicting
growth of 3.5%. “This was a deeply disappointing budget,” said Peter
Spencer, economic adviser to the Ernst & Young Item Club, an independent
forecasting group that uses the Treasury’s model of the economy. “The
chancellor was quite realistic about the recession and the immense damage it
was doing to the public finances, but simply failed to say how he planned to
rectify the damage when the recession ends. We were offered no guidance on
that at all.
“There was not the slightest hint of the massive measures that will be
necessary to close the huge gap between revenue and expenditure and prevent
the spiralling debt interest from overtaking the Treasury.”
Figures on Friday showing the economy sliding by 1.9% in the first quarter
were, the Treasury acknowledged, “at the upper end of expectations”. Though
they denied that the numbers rendered Darling’s growth forecast obsolete
before the ink was even dry, they are hoping that subsequent data will allow
the statisticians to revise the figures upwards.
For some independent economists, however, the figures confirmed the wishful
thinking behind Darling’s projections.
“The risks are that borrowing rises much further than Mr Darling expects
as the economy fails to meet his expectations, a likelihood confirmed by
last week’s figures revealing a 1.9% contraction in GDP in the first quarter
of this year,” said Jonathan Loynes, an economist with Capital Economics.
“That left even our forecast of a 4% contraction in the economy this year
looking optimistic and supports our view that borrowing will rise to £200
billion this year and to about £230 billion in 2010.”
Treasury officials deny that they are painting a rosy picture. Some of the
assumptions underlying the projections for tax revenues are extremely
cautious they say, implying that things could turn out better than they look
now.
They also deny that delaying the pain until after the election is a cynical
political ploy. “Politicians are politicians but there were good economic
reasons for acting as we did,” insisted one adviser.
If further action were needed it would be taken, Treasury sources added, but
there was a limit to how much could be done at one time. “It’s difficult to
set out detailed policies for what should be done in five years’ time,” said
one. “We can’t write the 2014 budget now.”
Action taken by Darling to cut the budget deficit, combining the November
prebudget report and last week’s budget, would in time add up to more than
£60 billion a year, officials said. Over at the IFS, however, they warned
that a further £45 billion of “fiscal tightening” – tax hikes and spending
cuts – will be needed on top of this.
Darling’s clumsy sleights of hand contrasted strongly with the transparency
shown by his Irish counterpart, Brian Lenihan, earlier this month. Ireland’s
finance minister spared nobody when he presented his budget to a numbed Dail
chamber in Dublin.
He froze social welfare rates and cancelled the Christmas welfare bonus – a
double welfare payment made each December – and extended a punitive new
income levy to minimum wage earners. Lenihan’s bleak portrayal of Ireland’s
prospects and his savage tax rises stunned the country, but his blunt
honesty brought a modest boost to his battered reputation. There was no
chance for even that brief redemp-tion for Darling or Brown after
Wednesday’s performance.
The seismic importance of Wednesday’s budget can be understood only by
rewinding to the formative years of new Labour in the run-up to the 1997
election. Then, as Britain entered the longest boom in modern history, Brown
was keen on a new 50% top rate of tax. The then shadow chancellor believed a
supertax would go down well with voters as long as the threshold was at an
income level which was beyond the aspirations of most people. But he was
blocked by Tony Blair and Philip Gould, his polling guru, who warned in a
memo: “Large numbers think that a higher rate band, even when set at
£100,000, is a tax on success. And there is a deep-seated unease with such a
tax: to many it seems punitive rather than fair.”
The plan was shelved and three successive Labour manifestos pledged not to
raise the top rate of income tax – a mantra that underpinned new Labour
economic policy: the rich were to be celebrated, not soaked.
The idea crept back into respectable Labour debate last summer. Ivan Lewis,
then a junior health minister, faced a sustained assault from the No 10
briefers when he wrote a tentative newspaper article in The Sunday Times
last August suggesting “higher taxes for the highest earners”. However, it
was not long before Brown himself was considering such a strategy.
The recession had created a new mood of anger against the banker class whose
greed was blamed for causing the credit crunch. A supertax on the wealthy
became attractive to No 10 as a way of creating a new dividing line with the
Tories. Frustrated by Cameron’s success in the polls, Brown hoped the
supertax could help to put him on the side of the many rather than the
privileged few.
“Fairness became the mantra,” said a Downing Street insider. “All our research
showed that people thought it was ‘fair’ that the rich paid a bit more,
because it was the rich who had got us into this mess.”
Surprisingly it was the return of Peter Mandelson to the cabinet last October
as trade secretary that put the supertax at the centre of the government’s
fiscal strategy.
Mandelson, in the warm, fuzzy days of the 1990s, had once said he was
“intensely relaxed about people getting filthy rich”. However, these were
new, darker times and Mandelson, always a pragmatist, could see the
potential electoral value of unleashing class warfare.
Darling, in his mini-budget in November, announced that a new 45% rate would
be introduced for those earning £150,000, but the measure would not come
into force until 2011.
The past few months of falling tax revenues and Labour’s falling poll numbers
put more pressure on Brown and Darling.
In January a report by the Fabians, a socialist forum close to Brown, found
new demand for forcing the wealthy to contribute more, with 70% of those
polled by YouGov agreeing that “those at the top are failing to pay their
fair share towards investment in public services”.
In the run-up to the budget the prime minister toyed with fixing the new top
rate of tax at £100,000. This was rejected because it was thought that,
while only 2% of earners would pay the new rate, many more might aspire to
earning six figures; £150,000 was chosen because most ordinary voters saw it
as unattainable.
The supertax has provoked little dissent from the Labour ranks. Tony Blair was
reported yesterday to be concerned at the move, but none of his acolytes
still in the Commons has yet broken ranks to criticise the plan in public.
The Labour MP Emily Thorn-berry, whose Islington South and Finsbury
constituency is where Blair lived when new Labour was born, said: “What a
lot of Labour MPs feel is that there was no alternative to the measures
Darling put forward. We just hope it is going to work.”
A few weeks ago she surveyed some of her constituents about a 50% tax rate on
£150,000 and found 80% supported it. “People understand that it’s fair that
those who have done best out of the good times help those who are less well
off,” she said.
Some businessmen who have donated to Labour have expressed annoyance at the
new top-rate tax. Sir Maurice Hatter, the electronics tycoon who has given
£176,000 to Labour since 2001, said: “The income tax increase is stupid.
Just stupid. People coming into the country who have money will not invest
it here.
“People here who have money will now be looking to take it out of the country.
I think at 45%, psychologically, the government could have got away with it
but not at 50%. I am a Blair man. He would never have done it. Brown was a
good number two. I will not be giving any more money.”
Derek Tullet, the City businessman and Labour supporter, said he would not
have changed the tax rates. “The problem is that it is a disincentive to
working here and we don’t want disincentives at this time. I think we will
lose people as a result.”
The more serious divisions are likely to occur in the Conservative party. In
an interview with The Sunday Times this weekend, Cameron made it clear that
an incoming Tory government would be in no hurry to scrap the 50p tax plan.
“It is going to have to take its place in the queue of things we don’t like,”
he said. “And we can’t make a specific pledge now to reverse it.”
Some of his core supporters, including rich donors, are impatient for a more
concrete pledge.
There is a small but articulate minority within the party that would like
Cameron to go even further and introduce a flat tax, scrapping even the
existing 40p income tax band. But so far – apart from a minor outburst from
Boris Johnson, the loose cannon and London mayor – discipline has stayed
tight.
On the day of the budget, Michael Spencer, the chairman of City firm Icap and
the Conservatives’ treasurer, was hosting a lunch for supporters on the
fifth floor of his Broadgate headquarters.
“We had Darling on with the sound down in a corner," said one
guest. “When news emerged of the borrowing there was a grim silence, but
when the 50p tax proposals came forward there was agreement that David
should not be allowed to fall into Brown’s trap.”
For Darling and his team, there is little that can be done except pray the
economy rebounds in line with their forecasts. Otherwise, national
humiliation – or even a 1970s-style begging bowl to the IMF – beckon.
The Conservatives have different challenges. First, Cameron has to hold his
nerve and avoid falling into Brown’s 50p tax trap. Second he must convince
voters that he has a genuine strategy for balancing the budget, even if that
leads to Labour charges of “Tory cuts”.
Cameron knows that – despite all that has happened over the past week – the
deal with the electorate has yet to be sealed.
Come back, Mrs T
Bring back the Iron Lady in our hour of need. The public wants Margaret
Thatcher to return and thinks she would make a better prime minister than
Gordon Brown or David Cameron.
A YouGov poll this week of more than 2,500 people, for Prospect magazine,
shows that 47% think Thatcher in her prime would be better than Brown while
34% believe she would be worse. Her advantage over Cameron is even greater,
with 49% saying she would be a better and 24% worse.
People think she was right to cut the top rate of tax to 40% and curb unions,
but say privatising gas, electricity, telecommunications and water was wrong.
