Squeeze, Relax: New Labour Economics
The events described so far were all, in different ways, secondary to the transformation of Britain that Blair had promised. Northern Ireland was a crisis needing solving. Scotland and Wales were inherited commitments which did not engage much of the Prime Minister’s time, nor any of his passion. The Dome was also inherited, a sally of optimism and opportunism which went terribly wrong. The death of Diana was one of Macmillan’s ‘events’, brilliantly handled. But none of this was what New Labour was really about. Its intended purpose was a more secure economy, radically better public services and a new deal for the people at the bottom. And much of this was in the lap not of Tony Blair, but of Gordon Brown. The saturnine Chancellor would become a controversial figure later in the government too but his early months in the Treasury were rumbustious, as he overruled mandarins and imposed a new way of governing. Like Blair, Brown had no experience of government and, like Blair, he had run his life in Opposition with a tight team of his own, dominated by his economic adviser (later an MP and Treasury minister) Ed Balls. Relations between Team Brown and the Treasury officials began badly and stayed frosty for a long time, rather as other civil service bosses resented the arrival of the rule of special advisers at Number Ten.
Brown’s handing of interest rate control to the Bank of England was a theatrical coup, planned secretly in Opposition and unleashed to widespread astonishment immediately New Labour won. Other countries, including Germany and the United States, had long run monetary policy independently of politicians, but this was an unexpected step for a left-of-centre British Chancellor. It turned out to be particularly helpful to Labour ministers since it removed at a stroke the old suspicion that they would favour high employment over low inflation. It reassured the money markets that Brown would not (because he could not) debauch the currency. In a curious way this gave him more freedom to tax and spend. As one of Brown’s biographers put it, he ‘could only give expression to his socialist instincts after playing the role of uber-guardian of the capitalist system’. The Bank move has gone down as one of the clearest achievements of the New Labour era – tellingly, like the devolution referendums, actions taken immediately after winning power. Brown also stripped the Bank of England of its old job of overseeing the rest of the banking sector. If it was worried about the health of commercial banks but also in sole charge of interest rates, the two functions might conflict. His speed in doing so infuriated the Bank’s governor Eddie George who came close to resigning and so spoiling Brown’s early period as Chancellor.
Labour won an early reputation for being economically trustworthy. Brown was the granite-and-iron Chancellor. Then a bachelor, his only mistress was the pinched-cheeked, pursed-mouthed Prudence. Income tax rates did not move. The middle classes could relax and feel free to vote Labour a second time, as they duly did in their droves in 2001. Even when Brown found money growing on trees he did not spend it. In 2000, at the most iridescent swollen glossiness of the dotcom bubble, when Britain was erupting with childlike candy-coloured names for companies promising magical profits, when anyone would pay anything for anything allegedly digital, Brown sold off licences for the next generation of mobile phones for £22.5 bn, vastly more than they were soon worth. The fruit went not into new public spending but into repaying the public debt, £37 bn of it. By 2002 government interest payments as a proportion of its income, were the lowest since 1914. Brown’s stock soared.
Another consequence of the early squeeze was more immediately controversial. What became known as ‘stealth taxes’, like the stealth bomber itself, made a lot of noise and did not always hit the targeted area. Stealth taxes included the freezing of income tax thresholds, so an extra 1.5 million people found themselves paying the top rate; the freezing of personal allowances; rises in stamp duty on houses and a hike in national insurance (both of which provided huge new tax streams in the Labour years); the palming off of costs onto council tax, which rose sharply; and most famously the removal of tax credits for share dividends in 1997. This was sold at the time as a sensible technical reform, removing distortions and encouraging companies to reinvest in their core businesses. In fact it had a devastating effect on the portfolios of pension funds.
By 2006, according to a paper for the Institute of Actuaries, this measure was responsible for cutting the value of retirement pensions by £100 bn, a staggering sum, more than twice as much as the combined pension deficits of Britain’s top 350 companies. Pensioners and older workers facing great holes in their pension funds were outraged. What is more, Treasury papers released in 2007 showed that Brown was given ample warning of the effect. The destruction of a once proud pension industry is a more complicated story than the simple ‘blame Brown’ charge. The actuarial industry, rule changes in pensions during the Major years, a court ruling about guaranteed pay-outs and Britain’s fast-ageing population are also part of the tale. But the pension fund hit produced more anger, directed personally against Brown, than any other single act in his time as Chancellor.
Longer term, perhaps the most striking aspect of Brown’s running of the economy was the stark, dramatic shape of public spending. For his first two years he stuck fiercely to the promise he had made about continuing Conservative spending levels. These were so tight that even the former Chancellor Ken Clarke said he would not have actually kept to them had he been re-elected. But Brown brought down the State’s share of public spending from nearly 41 per cent of gross domestic product to 37.4 per cent by 1999-2000, the lowest percentage since 1960 and far below anything achieved under Thatcher. He was doing the opposite of what earlier Labour chancellors had done. They had arrived in office, immediately started spending, and then had to stop and raise taxes later on. He began as Scrooge and quietly fattened up for Santa. Then there was an abrupt and dramatic shift and public spending soared, particularly on health, back up to 43 per cent. So there were the lean years followed by the fat years, famine then feast, squeeze then relax.
Prudence was a stern mistress. The first consequence of her reign was that the 1997-2001 Labour government achieved far less in public services than it had promised. During the 2001 election Blair was confronted outside a Birmingham hospital when a postmistress called Sharon Storer exploded with rage at him over the poor care being given to her partner who had cancer. Vainly he tried to stem the flow and usher her away from microphones and cameras. New Labour’s choreography was usually slick but for once Blair was pinned down and harangued by someone who was no longer prepared to hear his excuses. John Prescott had promised a vast boost in public transport, telling the Commons in 1997, ‘I will have failed if in five years’ time there are not many more people using public transport and far fewer journeys by car. It’s a tall order but I urge you to hold me to it.’ Because of Prudence, and Blair’s worries about being seen as anti-car, Prescott had nothing like the investment to follow through and failed completely. Prudence meant that Brown ploughed ahead with cuts in benefit for lone-parent families, angering Labour MPs and resulting in a Scottish Labour conference vote which called them ‘economically inept, morally repugnant and spiritually bereft’.
Reform costs money, and without money it barely happened in the first term, except in isolated areas where Blair or Brown put their heads down and concentrated. The most dramatic programme was in raising literacy and numeracy among younger children, where Number Ten worked closely with the Education Secretary, David Blunkett, and scored real successes. But unequivocally successful public service reforms were rare. And the real drawback of the squeeze-then-relax Brown guide to fiscal fitness was that he did not entirely conform to it himself. Some new money had to be raised and it was.
One curious thing a time-traveller from the seventies might notice in the Britain of the early twenty-first century would be unfamiliar uniforms and symbols in public offices, by roadsides, in hospitals and outside schools. The men and women on security duty in the Treasury in not-quite-official caps and jackets, the badges on construction workers’ jackets and helmets, the little logos of jumping manikins, bright flowers, bean-like blobs, and the new names, Carillion, Vinci or Serco, were all visual hints about the greatest change in how government was working. The name for it, public finance initiative, or PFI, was dull. Yet the change was big enough to arouse worry even outside the small tribes of political obsessives. The underlying idea was simple. It had started life under Norman Lamont, five years before Labour came to power, when he experimented with privatizing public projects and allowing private companies to run them, keeping the revenue. A group led by the Bank of America built and ran a new bridge connecting the Isle of Skye to the mainland. There were outraged protests from some islanders about paying tolls to a private consortium and eventually the Scottish Executive bought the bridge back. At the opposite corner of the country, another bridge was built joining Kent and Essex across the Thames at Dartford, the first bridge across the river in a new place for more than half a century; it was run by a company called Le Crossing and successfully took tolls from motorists.
To start with Labour hated this idea. PFIs were a mix of two things, the privatization of capital projects, with government paying a fee over many years; and the contracting-out of services – waste-collection, school meals, cleaning – to private companies, which had been imposed on unwilling socialist councils from the eighties. Once in power, Labour ministers began to realize that those three little letters were political magic. For the other thing about PFI is that it allows today’s ministers to announce and oversee exciting new projects, and take the credit for them, while the full bill is left for taxpayers twenty or fifty years in the future. Today’s spending on schools or hospitals is a problem that will eventually land on the desk of an education minister who is presently still at primary school, or a Chancellor who has not yet arrived at the maternity unit. This was government on tick. It was invented in Britain. And for better or worse, it is now spreading round the world. PFIs were particularly attractive when so many other kinds of spending were so tightly controlled by Prudence. At the same time large swathes of money for new schools, hospitals, prisons and the like were declared to be investment, not spending, and put to one side of the national accounts. Was this clever, or merely clever-clever? The justification was that private companies would build things and run them so much more efficiently than the State, that profits paid to them by taxpayers would be more than compensated for.
There is no doubt that sometimes this has been so, but assertions tail off into guesswork because they depend on misty unknowables – how well a modern civil service might have run such projects itself, whether the contract was drawn up tightly enough to fully protect the taxpayer, and so on. Committees of MPs certainly thought they had found incompetence and inefficiency in PFI deals. Ministers, pressed against a wall, tended to reply that since without PFIs Britain would not have got the shiny new school buildings or health centres that were so desperately needed by the late nineties, it was by definition a good thing. It was certainly a big thing. By the end of 2006 a total of £53 bn of such contracts had been signed, with another £28 bn in the pipeline, for fire stations, army barracks, helicopter training schools, psychiatric units, prisons, roads, bridges, government offices, computer programmes, immigration systems, as well as hundreds of schools and hospitals. The biggest was for the modernization of the London Underground, hugely expensive in legal fees and hugely complex in contracts. Tellingly, the peak year for PFIs was 2000, just as the early Treasury stringency on conventional spending had bitten most.
The cost of the forward contracts for running these places, sometimes half a century ahead, is hard to estimate but there is certainly over £100 bn of rent due to be paid by tomorrow’s taxpayers. In the private sector lawyers, company managers and accountants began to specialize in PFIs. A whole new business sector arose. In the public sector civil servants struggled to grapple with the new skills they would need to negotiate with unfamiliar private sector partners. There is an obvious problem about defining the real risk of these projects. If a firm is commissioned to build a prized new hospital at a certain budget and falls behind, to the point where failure looms unless the taxpayer intervenes again, is it likely the hospital will simply be abandoned? Risk is a routine business idea but means something else in politics. How do you blend the culture of ministerial promises and that of construction and IT firms? Yet another white-collar industry arose to try. And by the mid-2000s the number of PFI contracts being sold on from one company to another, a booming secondary market in subcontracted government, was well over four-fifths of the total. How to keep a grip on sold-on PFIs? Another mini-profession popped up to try that, too. All of it, of course, paid for by the taxpayer.
Yet, PFIs did not make quite the noise one might have expected. Most politicians from most parties reflected that one day, they too might find them useful.