Events | 2009.12.12
Pre-budget report: Labour and Tories compete in the politics of pain
The fallout from the pre-budget report has made the dividing lines in British politics clear – how deep, where, and how fast should cuts be made to reduce Britain\'s deficit
The lights were still glowing and the arguments raging at 2am inside the Treasury. Tempers were frayed and exhaustion was setting in. In less than 11 hours, Alistair Darling, the chancellor, would rise to his feet in the Commons to deliver his crucial pre-budget report (PBR). But the government remained at war.
Rows about who should take the pain, and who the gain, divided not only No 10 from No 11, but cabinet minister from cabinet minister. Even members of the same family fought over the limited spoils on offer.
Ed Balls had emerged from negotiations delighted at having won a 0.7% increase in his budget for schools. But his wife, Yvette Cooper, the work and pensions secretary, was seething following a disagreement with the Treasury over personal tax allowances. According to one account, she went "ballistic" with Darling and at one point threatened to resign. Lord Mandelson, the business secretary, is said to have had differences with Gordon Brown and Balls until the last moment, when the final package was agreed.
"It is the kind of thing that happens. There are disagreements, even arguments, right up to the end. People care. But you get there in the end," said one source close to the discussions.
The atmosphere was highly charged because everyone in government knew it was a crucial moment – economically and politically. With borrowing soaring towards a staggering £178bn this financial year and debt on course to double as a percentage of GDP compared with a few years ago, tough decisions had to be taken. On the financial markets, traders were nervous. They wanted to hear a hard-headed plan from Darling for bringing the deficit down. Without it, international markets would lose faith in UK plc\'s ability to pay its debts, with devastating consequences.
Yet with a general election just a few months away, economic honesty had to be balanced against political necessity. Labour was recovering in the polls, eyeing the possibility of a hung parliament: some were even dreaming of going one better. "Too much honesty and austerity and people will take fright; too little and people will smell lack of leadership and opportunism. It will be a very difficult balancing act," said one Labour MP, shortly before Darling addressed the House.
The opposing views inside government about how to approach the PBR – how to play the politics of pain – had been clear for weeks. In fact, the seeds of many of those disagreements had been sown long ago. Early in his time as chancellor, in late 2007, Darling had been astonished and angered at Brown\'s attempt to prevent him reducing economic growth forecasts. Brown feared gloomy predictions would hurt Labour. The two men argued in private and on those occasions, ahead of the March 2008 budget, Darling won.
The chancellor has always taken the view that he, and the Labour government, must earn medium-term and long-term credibility by telling it as it is, rather than massaging or hiding the truth for political gain.
In the run-up to last Wednesday, that same tension with Brown resurfaced. Darling wanted to be far more explicit about where spending would have to be reined in over the next four years. "Alistair takes the view that you can\'t sweep all the bad news under the carpet, whereas Brown thinks, \'How will people think this reflects on me?\'," said one adviser.
Darling\'s officials were even asked to examine the merits of a deferred rise in VAT that would hit everyone in the land and raise many billions. But Brown and Balls, while aware of the need to have a credible deficit-reduction plan, were keener to use the PBR to sharpen the political "dividing lines" with the Tories.
They knew the Conservatives had dipped in the polls since David Cameron and George Osborne announced their austerity plans for the economy, including a pay freeze for many public sector workers, in early October. It was a question of emphasis and tactics. Brown and Balls looked at the PBR more as a political opportunity and less as an economic danger. Whatever could be done on tax and spending to discomfit the Tories, should be done. If the Tories were to complain afterwards that Labour had been too timid about cutting the deficit, this could play into their hands, because it would imply the Tories would tighten the screw even more.
There were two key ways, they believed, to make the dividing lines clearer. First, they needed tax announcements that would help sharpen the contrast in the public mind between Labour as the party of the many, those on low and middle incomes, and the Tories as that of the wealthy, privileged few. Second, Balls and Brown wanted spending plans that would allow Labour to go into an election claiming that, despite everything, it would remain the party that would defend core public services of education, health and the police, while the Tories would impose across-the-board cuts. "Ever since Gordon was first involved in devising New Labour, for him it has always been about Labour investment versus Tory cuts," said one party adviser who has known him for more than 20 years. "Nothing will ever change that mindset."
When Darling sat down at 1.15pm on Wednesday, Brown, sitting to the left of the chancellor, and Balls, two places farther along, were both beaming. Their fingerprints were all over the statement Darling had just delivered. The PBR was highly political and would hit the rich. The dividing lines were on every page. Bankers (the kind of people Mandelson once said he did not mind getting "filthy rich") would be stung by a new tax on their bonuses. Inheritance tax thresholds would be frozen, meaning more people inheriting sizeable estates would be dragged into paying death duties. (The Tories have promised to exempt all but millionaires).
But core service would be protected for two years. Spending on schools would rise and the budgets for health and the police would be protected. Today Brown says on his podcast: "We will always protect those services – the services of the mainstream majority." Yes, there was pain for the many announced by Darling, in the form of a further 0.5% rise in national insurance contributions, except for those earning £20,000 or less, who would be exempted. It would, however, be pain delayed until April 2011. There would also be a cap of 1% in public sector wage rises for two years. But there was no plan to raise VAT down the line. And there was also little in the way of a detailed plan on how spending would be cut by other departments over the next two years. Ministers are committed to halving the deficit in four years, so the promise to defend core budgets on frontline service would inevitably mean savage cuts elsewhere. But Darling\'s statement was devoid of comment on where the axe would fall. How would the markets, the press, opposition parties and, above all, voters react? Was it too harsh to be popular and credible, or not harsh enough? How would the politics play out?
The markets barely flinched on the day of the PBR itself. In fact, the price of gilts – the debt the government issues to raise money – rose very slightly, indicating that investors calculated that the UK was a less risky borrower than before. This was because Darling\'s borrowing forecast for this year was a fraction lower than expected. But as so often with financial statements, it takes time for opinion to settle. Thursday morning\'s headlines helped shape the mood. They made appalling reading for the chancellor. While the Sun \'s headline, "Darling just screwed more people than Tiger Woods", did not help, it was the one in the former New Labour supporting Times – "The axeman dithereth" – that most annoyed Darling. The Tories weighed in with charges that the government had acted irresponsibly, and for shameful political reasons. Cameron, who has said his party would cut spending much faster than Labour, likened the prime minister and chancellor to "a couple of joyriders in a car, smashing up the neighbourhood, not caring what is going to happen".
By Thursday, the markets were also buying the pessimism. Yields, or the return enjoyed by investors holding government debt – which rise when the price of gilts falls, indicating a higher borrowing risk – rocketed for 10-year gilts by 0.14% to 3.8%, the steepest one-day climb for months. On Friday, gilt yields continued to increase. Moyeen Islam, from Barclays Capital, explained: "Our view is that the PBR did very little to allay the fears of the market over whether there is a path being outlined towards medium-term fiscal sustainability."
Inside No 10 and the Treasury, people feel sore and bruised this weekend. But as one official put it, "no one is killing himself". They knew they had a virtually impossible hand to play in trying to sell tax rises and a halving of the deficit to the public just before a general election campaign.
No 10 answers its critics by insisting that sound economic thinking, rather than political manoeuvring, determined its message in the PBR. Officials say that four themes lay behind its approach. First was the need to protect fragile growth in the economy by maintaining overall spending increases for another year. A vital difference between Labour and the Tories is that the former believe economic recovery would be choked off if spending was to be cut too quickly. Second was the need to show its commitment to halving the deficit over four years, an aim now backed by legislation. Third was the need to ensure "fairness in the tax system", by getting the well-off to pay most, while protecting low earners. And fourth was the need to "protect frontline services", meaning schools and the health service. To those who claim he has not done enough, Brown\'s allies also point out that he is pushing hard for international agreement on a so-called Tobin tax on bank transactions that would raise billions.
But the government\'s problem is that it was not just the press and the opposition parties that laid into the PBR. Independent experts also tore into it with increasing ferocity as the week went on. The respected Institute for Fiscal Studies (IFS) said the unspoken result of the package was that public spending would have to be cut by a fifth by 2013-14 in areas such as defence, higher education, housing and transport as a result of the government\'s commitment to halve the deficit but maintain spending on core services.
IFS\'s director, Robert Chote, was scathing about Darling\'s obfuscation. "The chancellor spelt out neither how much he wanted to spend in total on public services, nor exactly how much of this spending he was planning to protect. Even if these numbers are not yet written in stone, it is hard to see why the requirements of good policy-making should demand such wilful obscurity."
Such criticism is music to the ears of the Tories. Yesterday Osborne accused Brown of "a serious dereliction of duty" in failing to address the deficit problem. Tory frontbenchers have been told to find substantial extra savings across the board as they prepare for government. Yet the Conservatives are also treading a tightrope. Since their party conference in Manchester in October, when they decided to "go for austerity" and promote themselves as the heirs to prudence, their lead over Labour has narrowed in most opinion polls. Ken Clarke, the shadow business secretary, has told Osborne to be careful about overdoing talk of cuts.
Labour may be getting it in the neck for ducking hard questions and failing to be more honest in the PBR, but the Tories will hardly be singing the most popular campaign theme tune if it is one about the need to administer more pain than Labour. As one leading Tory put it: "We have got to watch it a bit. It is all very well saying we would cut faster, but there is not much point in saying it if it scares away the voters. As George [Osborne] says, we really are all in this same mess together."
For more information, please visit
http://www.guardian.co.uk/politics/2009/[...]dget-report-labour-tories-pain
