After the Storm E-Book

Vince Cable

• Herausgeber: Atlantic Books
• Kategorie: Geisteswissenschaft
• Sprache: Englisch
• Veröffentlichungsjahr: 2015

Seitenzahl: 548

Beschreibung

Vince Cable's bestselling book, The Storm, explored and explained the causes of the 2008 world economic crisis and how Britain should respond to the great challenges it brought. In After the Storm, Cable, who was Business Secretary in the 2010-2015 Coalition Government, provides a unique perspective on the state of the global financial markets and how the British economy has fared since 2008. Providing a previously unreported inside view of the Coalition, After the Storm offers a carefully considered perspective on how the British economy should be managed over the next decade and beyond. This timely book is a fascinating and urgent intervention from one of the key figures in British politics of the past two decades.

Leseprobe

Contents

Introduction

Part One: The Global Context

 1

After the Storm

 2

Banking: Regulate, Retreat and Regroup

 3

Different Routes out of the Great Recession

 4

The Eurozone: Existential Threat

 5

China and the New Economic Centre of Gravity

 6

Globalization and its Enemies

Part Two: The UK after the Crisis

 7

Boom, Bust and Recovery

 8

Life after Cheap Money

 9

The British Housing Obsession

10

British Banking after the Banking Crash

11

Getting the Long-Term Fundamentals Right

Appendix

Bibliographic Note

Acknowledgements

Index

Introduction

The decision of the US Federal Reserve in December 2015 to raise official interest rates for the first time since 2006, albeit by only 0.25% per cent, was intended to send a powerful signal to the world that the prolonged, debilitating era of financial crisis and its aftermath of austerity was approaching its end. ‘Normality’ – in the sense that we have known it in rich countries in the post-war period, of steady economic growth and improved living standards, with modest and manageable inflation – was returning, or appeared to be.

A few days earlier, although overshadowed by terrorist atrocities, a global agreement had been reached in Paris on a far-reaching and ambitious agenda of inter-governmental cooperation to address the issue of global warming and climate change. Critics argue that the agreement was not far-reaching or ambitious enough, or that it is precarious or insincere and won’t lead to concrete action. Nonetheless, it represents a return to habits of practical internationalism, embracing the big emerging powers such as China and India. This is in stark contrast to the dissonant voices of nationalism and rejection of what has come to be called ‘globalization’ (closer economic integration) stirred up by the insecurities and resentments of those left behind or hurt by the crisis.

These two events provide an ideal context in which to review the question: is the crisis finally over? Is it correct to discuss The Storm, the title of my 2008 book that sought to explain the financial crisis, as an episode that is now in the past: After the Storm. Or are we just entering a new and dangerous period of turbulence centring on the big emerging markets, notably China, which powered the world economy after 2008? And are the legacy problems – in particular the ‘overhang’ of private and public debt – still sufficiently serious to drag Japan and the eurozone, and even the more strongly growing USA and UK, into stagnation or worse?

I return to these issues after a gap of seven years, when there is a better understanding of the financial crisis and its aftermath. The book also draws on my experience of five years in the UK coalition cabinet, responsible for key elements of economic policy as Secretary of State for Business Innovation and Skills and President of the Board of Trade, and, before that, as economic spokesman for my party in opposition during the financial crisis. If I am able to contribute something new and different, it is through having a national and global perspective on the interaction of economics and politics.

The 2015 Election

In the UK, politics has been heavily influenced by the 2008 crisis and the issue of who was responsible and who could be trusted to manage the aftermath. In 2010, the sense of economic crisis provided the impetus and rationale for a coalition government. The 2015 election campaign also had a strong economic thread. In most parts of the country, there was a collective judgement that the coalition government had been broadly successful in securing recovery, and that this should not be put at risk by allowing in what was successfully portrayed by the Conservatives as a destabilizing left-wing alternative of Labour and the SNP. One personally painful consequence was that even those of us who had contributed substantially to the economic recovery were swept away. I have described elsewhere (New Statesman, 22–28 May 2015) how the Conservatives’ ruthlessly effective deployment of the ‘politics of fear’, combined with disillusionment with the coalition among left-leaning voters, squeezed my party’s support to disastrous levels.

The election also exposed a deeper and more alarming under-current, as the issues of Scotland, immigration, and Europe generated an emotional reaction more powerful than the traditional class-based tribalism of British party politics. Twenty years ago I wrote for the think-tank Demos about the emerging ‘politics of identity’. I described how people were either developing outward-looking ‘multiple identities’ in response to growing globalization, or were retreating into political or wider social movements built on race, religion, language or national identity. At the time, the pattern fitted the collapsing autocracies of the USSR and Eastern Europe better than the mature Western democracies. But it has spread in the wake of the financial and economic crisis. The practical consequence of the politics of identity is that British politics is now dominated by the issue of the future of the United Kingdom, by debate in the forthcoming referendum campaign about our continued membership of the European Union, and by the perceived threat of Islam. For a country that defines itself by its self-confident openness to ideas and commerce, the dangers of a revival of nationalism and the fear of others are especially acute.

Moreover, this tension between the outward-looking politics of an increasingly globalized world and the inward-looking politics of identity is being experienced much more widely than in the UK. Shortly before the successful Paris summit addressing global warming, France had a regional election that pitted the traditional parties of centre-right and centre-left against the nationalist and racist appeal of the Front National, fired up by popular anger and fear in the wake of terrorist atrocities perpetrated by Islamic militants.

The United States, in the early stages of selecting candidates for the 2016 presidential election, has seen, primarily in the appeal to Republican activists of Donald Trump and Senator Cruz, unqualified hostility towards all Muslims and Mexican immigrants. We do not yet know which forces will dominate. Suffice it to say that the logic of economics and technology, and environmental concerns, are pulling countries into more integrated arrangements, while national politics are generating a powerful force in the opposite direction.

The rest of Europe has been convulsed by the question of how to respond to a wave of Syrian and other refugees, with the generous and liberal response of the German chancellor and many other Germans and Swedes contrasting with the visceral rejection of others, notably in Eastern Europe – a rejection that has put in doubt Europe’s achievement of the ree internal movement of people. The whole concept of the European Union and the alternative it has offered to a ghastly history is now being brought into question.

Following the 2015 general election the UK now has a Conservative government unencumbered by coalition, which, despite having a small overall majority and having gained minority support (37 per cent) in the election, is able to pursue most of its policy agenda in the face of a fragmented opposition. Moreover, the bitter discussions within the Labour party following the surprise election of the far-left Jeremy Corbyn as leader have helped to create a fatalistic view that Conservative government is here to stay, for a decade if not for a generation. There is already a sense of an elected dictatorship, a one-party-state in which the vested interests and prejudices of the Conservatives and their associates dominate policy-making and the public discourse. I don’t believe in such fatalism and I set out below some approaches and policies that can hopefully inform an alternative.

The Coalition

But before the coalition recedes into history, there is value in recalling the controversies that dominated its inception and existence. These revolved primarily around economics.

Who was to blame for the financial crisis and subsequent recession? Was austerity, in the form of budget deficit reduction, premature and excessive? These old arguments now obscure more topical, forward-looking questions. How serious are the domestic and overseas risks to recovery? How should residual fiscal deficit reduction objectives best be secured with the least economic and social damage? Is the banking system now secure? How can short-term recovery be translated into long-term sustainable and balanced growth? The backward-looking arguments matter, however, because whoever owns them has legitimacy and the crucial advantage of a reputation for competence.

The Conservatives showed great political skill in winning these arguments, because it involved transcending a succession of negatives: a history of Conservative government characterized by ‘boom and bust’ and a reputation for mismanagement after Black Wednesday in 1992; a failure to anticipate the 2008 crisis or to offer useful solutions when it happened; complicity in creating a weak system of banking regulation; and close association and affinity with some of those whose greed and folly were at the heart of the financial sector failures. But memories can be short and impressions remoulded.

There are also aspects of that history that reverberate to this day. Was the coalition really necessary? What persuaded my party to take the risk of losing its identity as a minority party in a tie-up with its traditional political foes? And what persuaded the Conservatives to abandon a long antipathy to coalition and to ourselves? There is now a broad understanding, even among the coalition government’s critics, that the arithmetic of the 2010 election created its own logic, with no other combination of parties capable of forming a stable government. Numerically a Labour–Lib Dem government or pact could have been formed with the support or acquiescence of Ulster’s Democratic Unionists and Nationalists from Scotland, Wales and Northern Ireland, but it would have been precariously dependent on single-issue minorities. The story of how the coalition was formed has been described in detail elsewhere. As my party’s deputy leader and shadow Chancellor, obviously I had a heavy responsibility. Whatever my personal aversion to working with the Conservatives, I could see no alternative.

During the negotiations, I had several conversations with Gordon Brown, exploring the alternative of a centre-left coalition. He was as aware as anyone of the dangers posed by international financial turbulence and he wanted a strong government that could take a leadership role in Europe, continuing the work he had done to help stabilize the world economy two years earlier. I personally had – and have – a high regard and liking for Gordon Brown and I believe the history books will be kinder to him than contemporary judgements. But it was clear, despite his own commitment to making a coalition work, that the parliamentary arithmetic was not there. I am sure it was true, too, that the Cameron–Clegg talks were too well advanced by that stage, and that Gordon Brown’s wish to continue in office was regarded by my colleagues as an obstacle rather than an alternative. In any event, the precariousness of the country’s economic position meant that there was a sense of urgency about creating an agreed, substantial plan of action, rather than a temporary sticking-plaster solution. What is perhaps not so readily understood, by a public inclined to believe that most politicians are thieves and knaves, is that my party colleagues and I believed we were doing the right thing for the country.

This sense of urgency and importance was enhanced by the personal briefings that I and others received by phone during the coalition negotiations from the Cabinet Secretary and the permanent secretary to the Treasury, reflecting, at one remove, the views of the Governor of the Bank of England. The formation of the coalition coincided with the first major crisis of confidence in Greek government bonds and the euro. The government’s top officials expressed the fear that, as the country most exposed to the banking crisis and with the largest fiscal deficit of any major country, the contagion could easily spread to the UK. Since the UK had its own currency, which can float, the fear was not of a classic currency crisis, but that it would be difficult to sell British government debt, which would have driven down the price of bonds and driven up their yield – that is, driven up the cost of borrowing. While they were speaking within civil service constraints, they made it clear that the politicians had a key role – to establish confidence – and that it required a stable government with a commitment to improve the public finances.

There was little disagreement either then or during the early stages of the coalition government about the necessity for such action. At that stage there was a broad understanding among all three parties that spending cuts and tax rises were inevitable – though there was a marked absence of specifics. I had written a pamphlet nine months before the 2010 general election detailing a programme of consolidation, setting out some difficult possible spending cuts, and proposing a schedule close to that later adopted by the coalition. The view prevailed, however (and not only among the Lib Dems) that talk of cuts repelled voters while spending commitments attracted them, and this led us into the disaster of the tuition fees pledge. Even the Conservatives, anxious to appear as the leading fiscal hawks, had said little beyond the need for ‘efficiency savings’ and ‘tackling waste’, and one of their main commitments – hailed by much of the press as a political masterstroke – was a promise to sacrifice revenue by cutting inheritance tax. But whichever party was in government would have faced the need for difficult, unpopular cuts and tax rises.

The new element introduced by the eurozone drama and agreed during the subsequent coalition negotiations was a Conservative-led commitment to bring forward a first round of £11 billion of fiscal consolidation. Much was made of this change of emphasis by the Lib Dems at the time, but it seemed a sensible and modest response to what was happening in the real world. The fact that, five years later, the coalition government had reached roughly the mid-point in its programme of fiscal consolidation is eloquent testimony to the flexibility that was employed in practice and also to the practical difficulties of proceeding any faster. Despite the sound and fury around fiscal policy – the austerity debate – I do not believe that any plausible government would have pursued radically different policies or achieved a radically different outcome. The outgoing Labour government had, in fact, already initiated cuts, as I discovered when I entered ministerial office, in areas such as further education. Moreover, by launching the Browne review of university tuition fees it was preparing the ground for unpopular decisions that the next government would have to take.

The more potent and lingering disagreement has been over who was to blame for the financial crisis and the legacy of budget deficits. The search for the ‘guilty men’ was, explicitly or implicitly, a theme of almost every speech during the 2015 election campaign – and, I suspect, will reverberate for a generation to come. For the Conservatives, it was crucial to establish that the crisis was caused by a fiscally incontinent Labour government which spent too much, rather than by the financial markets that they had let off the in the 1980s and where they retained close and lucrative relationships with party donors. This political battle the Conservatives won hands-down, despite there being only weak evidence to support their argument. A combination of Tory triumphalism and Labour embarrassment has led to a rewriting of history. As I show in chapter seven, the fiscal position before 2008 was heading in the wrong direction but was basically sound and better than that which Labour had inherited in 1997.

For the angry populist fringes of left or right, however, these nuances are of little interest. They see crisis as a failure of a corrupt, complacent ruling class of politicians who had allowed greedy bankers to run amok and then escape, and who were abetted by a variety of other pantomime villains, from Brussels bureaucrats to multinational companies. The populist fringes made only limited inroads in the 2015 election (outside Scotland, where there has been a different dynamic). But the Labour party has now been captured by the far left. And the coming European referendum will provide a stage for anti-EU populism.

In The Storm I argued that there was no politically convenient, simple explanation for what happened during the crisis. Responsibility was widely spread. The banking crisis was global in character, but it struck the UK particularly hard because of the scale of the UK banking sector. For that, the excesses of the banking industry and poor supervision of it were largely to blame. The Labour government can reasonably be criticized for being asleep at the wheel and failing to spot the warning signs of an uncontrolled credit and housing boom and an inflated banking sector, and for reacting too late. But when disaster struck, the government and the Bank of England, along with the US authorities, dealt with the consequences in a commendably rational way. The large fiscal hole inherited by the coalition government was mainly the consequence of the financial crisis itself, rather than a previous history of structural deficits, which were real but small.

However unfairly, the Conservatives have won the political argument about historic responsibility, and they had the support of the coalition to take difficult decisions after 2010. But in future, their approach to dealing with the residual fiscal legacy may be judged more harshly, since, beyond the rhetoric about a ‘long-term economic plan’ and ‘financial responsibility’, the public has not been properly prepared for continued austerity, which no longer has the endorsement of a consensus-based coalition and has a weaker economic rationale. The proposed £12 billion in welfare cuts, for example, advocated before the 2015 election by George Osborne, appears to have been formulated without much forethought and on the basis that the Liberal Democrats would be around to dilute them.

The subsequent furore over deep cuts to tax credits was very badly received and the Chancellor had to abandon the policy. The 2015 Autumn Statement proved to involve less draconian public spending cuts than had been foreshadowed, due to optimistic forecasts from the Office for Budget Responsibility (OBR). But they are still severe, and if sustained they will have major cumulative impacts on the scale and shape of the public sector. With economic policy now having an increasingly ideological edge, it is useful to contrast it with the style and content of the coalition.

The Workings of the Coalition Government

After five years of coalition government, there is a lot to be written about who said what and to whom and when. There will come a time when the life of the coalition is told in full. This book has no such pretensions. I was involved in some of the high-profile dramas of the government – around the Murdochs and Leveson, the scale of spending cuts, the Lib Dems’ tuition fees disaster, clashes over immigration and Europe – but more peripherally in many others. I will use the discussion of my time in government primarily as a backdrop to considering the economy, past and future.

It may come as a surprise to many that the government worked much more smoothly and that relations were much better than the daily reports of rows, feuds, splits, leaks and plots would suggest. What the public actually sees is somewhat like professional wrestling: a confusing mixture of play-acting and genuine combat. For the most part, my experience of coalition government was that, when it mattered, it was professional and surprisingly collegiate. Messrs Cameron and Clegg deserve credit for that.

Critics of the Lib Dems (who clearly include large numbers of former supporters) have argued that the party, and Nick Clegg in particular, were culpable and perhaps naive in mistaking civility as signalling empathy and, especially in the early stages as symbolized by the Rose Garden press conference, something more intimate than a business-like relationship. I would defend Nick Clegg, though my own instincts were different, more suspicious and conditioned by decades fighting the Conservatives. He believed that displays of common style and purpose were important in persuading a sceptical public of the value of coalition government, that there was a constituency for parties that could rise above petty, tribal politics, and that European politics, which he understood well, offered successful role models for centrist parties in coalition (that was before the demise of the German FDP).

For their part, the Conservatives, no doubt taking a lead from the top, operated with personal courtesy and good manners. Some, perhaps even Cameron himself, genuinely believed, at least for a while, that the country had stumbled into a better model of government. Any illusions on that score were stripped away during the Alternative Vote referendum. With deep cynicism the Conservatives colluded with Labour critics of AV to target Nick Clegg, exploiting his personal unpopularity. The nastiness may have been outsourced, but we knew that it coexisted with surface charm. Labour was always less subtle. From day one of the Coalition, they directed aggressive and very personal hostility towards Nick Clegg in particular. The abuse he encountered from Labour activists, especially in Sheffield, almost certainly had the effect of reinforcing our close working relationship with the Tories.

In my own corner of government, sometimes portrayed in the press as an ideological battleground between a grumpy, left-wing secretary of state and various true-blue Tory ministers, relations were always business-like and often cordial. In some cases, as with the universities minister, David Willetts, there was a real sense of partnership. I took the view from the outset that we should leave our ideological weapons at the door and work as a team on issues where we had common ground. Our shifting cast of two Lib Dems and up to six full-time or shared Tory ministers, with a small team of special advisers to broker agreements, largely functioned in this cooperative way. Towards the end there were spats about who should claim the credit for various achievements, though I take satisfaction from the fact that there were achievements to fight over rather than disasters for which to apportion blame.

As in other areas of government, I and my Lib Dem colleagues wanted what we regarded as progressive reforms, which we had to barter for things the Tories wanted. I sought to block what I regarded as ideologically driven spending cuts beyond what had been agreed as necessary for fiscal stability, especially in capital spending. And I carried out a five-year rearguard action to prevent high-flying Treasury graduates demolishing adult and further education, which I felt they neither understood nor respected. I did block ‘hire and fire’ labour market legislation as recommended in the Beecroft Report, as well as the more extreme proposals to tighten immigration rules on overseas students and non-EU skilled workers, attempts to stop free speech in universities, and unnecessary and provocative reforms to trade unions. I also referred the News Corp–BSkyB takeover to the competition authorities, which helped ensure that it did not happen. I see that the post-2015 Conservative government has quickly moved its tanks on to most of these now unprotected corners of the battlefield. Under the coalition it was possible to mobilize my party leader when the Conservatives would not take ‘no’ for an answer, so as to weave particular disputes into the wider tapestry of the coalition agreement.

Not all the disagreements were between the coalition parties. Although I had difficult exchanges with the Home Secretary and prime minister over immigration controls on non-EU students and skilled workers, almost all my Conservative colleagues and ministers agreed, at least privately, that those policies were seriously damaging to business, universities and the wider national economic interest. As a Lib Dem, I was able to speak publicly about the way that the government’s claim to be ‘open for business’ was being undermined. But I was struck by the inability of powerful Conservatives like the Chancellor, or even the prime minister, to move the Home Secretary an inch. It is one of the more bizarre outcomes of the election that the Conservatives, having freed themselves of the inhibitions of coalition, should shackle themselves once again to a pledge to reduce net immigration from over 300,000 per annum to under 100,000, a pledge that could only be achieved by inflicting considerable harm on the economy.

Most of the time and energy of my Lib Dem team of two, and my two special advisers, was devoted to finding common ground with the Conservatives and delivering positive results. These included the launching of an industrial strategy and the boosting of advanced manufacturing and creative industries; an unpopular but necessary overhaul of university and student finances, and a liberalization of the sector; the resurrection and reform of apprenticeships; bank restructuring and ‘ring-fencing’, and the successful launch of the British Business Bank and the Green Investment Bank; corporate governance reform, including executive pay and a register of beneficial ownership; a chain of new industry-led innovation centres, known as Catapults; shared parental leave and flexible working; better gender balance on company boards; the introduction of private and worker ownership of the Royal Mail and the rescue of the Post Office network; an overhaul of the competition regime and the Takeover Code; protection for supermarket suppliers and pubs from market abuse; expansion of the role of adult education into mental health; copyright reform; and much else besides. Sometimes, an explicit deal was involved. I obtained the Chancellor’s backing for the British Business Bank in return for not opposing his controversial scheme to create a new form of worker ownership with fewer rights (on the assumption that it wouldn’t fly, as it didn’t). In short, the coalition was not a zero-sum game. It did many useful things, but usually at the price of a messy compromise.

With the benefit of hindsight, it is clear that the Lib Dems singularly failed to communicate and claim ownership of the very real achievements of government. We were, of course, heavily outnumbered, five to one across government, and we did not have the same depth of support in the media. But we never found a formula for translating achievement in government into public support.

Indeed, the dilemma for me as a Lib Dem secretary of state was that I could gain a distinctive identity for my party by opposing and blocking, or I could achieve results by gaining Tory acquiescence and support for my own proposals, which often meant risking losing ownership of the issue. A typical example was apprenticeships. In the tough bargaining around the 2010 spending round I had managed to ease some of the political pain of increasing student tuition fees by channelling more resources into apprenticeships, which subsequently expanded rapidly. The Conservatives were quick to spot the appeal of the apprenticeship brand and never ceased to claim ownership of the policy. A similar fate awaited the Lib Dem commitment to raise income tax thresholds, which the Conservatives initially disdained, or the strengthening of the state pension and pension reforms. This battle for ownership was at the heart of the coalition.

Whatever external impression may have been created, I was primarily interested in making things happen rather than stopping things happening. Moreover, I had the benefit of some impressive and enthusiastic civil servants and a generally harmonious ministerial team. Whitehall gossip had it that the Department for Business, Innovation and Skills (BIS) was one department where coalition worked, with genuine give and take. Others included Work and Pensions under Iain Duncan Smith (IDS), Health under both Andrew Lansley and Jeremy Hunt, and Transport under Patrick McLoughlin. Others were notoriously factional. The experience of Nick Harvey at Defence and Norman Baker at the Home Office was altogether less happy. We also had to work across government, through Cabinet committees, as well as in Cabinet and in direct relationships with the prime minister and Chancellor. I was left with very ambivalent feelings. The Tories collectively could be appalling, with some ugly tribal prejudices, and when their party interests were directly challenged they could be vicious. But as individuals they were invariably courteous and professional, and often likeable and considerate.

This ability to operate on different levels is part of the modus operandi of all successful politicians and can be seen in the way the House of Commons constantly switches mood between elaborate good manners and boorishness, between real or synthetic anger and bonhomie. But the Tories appeared to have an exceptional ability to compartmentalize, to commit political murder with a charming smile. By contrast, in its rapid ascent from the Championship to the Premier League, my party hadn’t acquired this ruthlessness, and it has paid the price.

There was, however, in economic policy an underlying tension that was not simply between Lib Dems and Conservatives, or between George Osborne and myself. I believe that the structure of economic policy-making in government is badly flawed. I am far from being the first minister to lament the overarching power of the Treasury, full of highly intelligent and personable individuals, but institutionally arrogant, obsessively short-termist and deeply conservative. The creation of a powerful independent central bank, and other institutions like the OBR, has diluted its influence. But the Treasury is still a powerful agency for short-term cash management – a continental finance ministry writ large, but without a compensating mechanism for mobilizing long-term investment and planning. I tried, like Michael Heseltine and Peter Mandelson before me, to create such a mechanism in the form of a strong and respected Business Department (previously the DTI), but my successors will have their work cut out to preserve and strengthen it – if they want to. All the signs are that since the general election, BIS has been brought very firmly back under the control of the Treasury. My undoubtedly able successor has stepped back from an interventionist role and lauds financial services rather than manufacturing and creative industries as the main source of wealth creation.

One of the weaknesses in the workings of the coalition was that it accentuated the structural flaw of Treasury dominance. A key mechanism for resolving disputes between the coalition parties was the ‘Quad’. It was an achievement of Nick Clegg to have created a mechanism in which the two parties had equal status, and he was able to use it to good effect on many issues. And I understand why he wanted his close friend and confidant Danny Alexander alongside him. (I was told that David Cameron would not have tolerated my being the fourth member of the Quad in any event.) The upshot was that there were two Treasury ministers and no one from elsewhere in government. Whatever their other admirable qualities, Nick and Danny seemed convinced of Treasury orthodoxy on matters of economic policy. Indeed, I think they genuinely believed that our party should accept the received wisdom of the Treasury over deficits and debt as part of the party’s ‘Strong Economy–Fair Society’ message. I didn’t agree, and areas of disagreement are apparent in the text below. But the consequence was that Osborne and the Treasury had effective control over the government machine, with political cover often provided by the Quad.

I was better insulated than some from the Treasury’s influence by having a strong, well-run department with a sense of purpose and some economically literate officials. This was boosted by recruiting some of the brightest and best Treasury officials and promoting them from junior gamekeepers to senior poachers. Since I was considered difficult to sack, I could be bloody-minded, and was. But the Treasury was able to intimidate weaker departments like Culture, Media and Sport, DEFRA and Justice, whose Tory ministers could not afford to offend the Chancellor. Some of the greatest pressure came on IDS at the Department for Work and Pensions whose poor, disabled, unemployed and otherwise vulnerable clients were seen as easy targets for cuts. IDS was a significant political figure, a former leader on the right who couldn’t be trifled with, and a fundamentally decent man, but he spent much of his time fighting off pubescent Treasury advisers and officials with brilliant but wacky or cruel ideas for saving money.

My own relations with the Treasury were forged in the negotiations around the spending review in 2010. I believed at the time that we had given too much ground and in the process had compromised some good programmes which gave excellent value for money. My officials, however, felt we had, if anything, got off lightly, and the agreed cuts to current spending (the Departmental Expenditure Limits, or DEL, in the jargon of Whitehall) of 25 per cent had already been agreed in principle by my Labour predecessors. I compensated by being more aggressive subsequently and this, no doubt, contributed to a steady distancing from the Chancellor. My relations with him had initially been very affable, as we jointly defended government economy policy in the toughest early period of office. But our instincts and world-views were very different. I believed in the need for government to be disciplined in its management of public money and delivered large savings, especially in administration. However, I also believed that government could be a force for good and that it should intervene to counter market failures and promote sustainable growth. The Chancellor had an ideological belief in a small state, which I didn’t share, as well as a ruthless eye for party advantage.

A Global Perspective

In the chapters that follow I try to deal with a forward-looking agenda. A forward-looking prognosis is easier to write if the background is one of clear failure and obvious solutions. But in reality we are dealing with a world of glasses half-full or half-empty. In contrast to the last major global economic crisis, during the inter-war period, governments have proved collectively more rational, cooperative and economically literate. World trade has continued to expand, albeit less exuberantly. Global growth has slowed a little, but not dramatically. Yet there remains, as discussed in chapters one to six, persistent threats, most obviously in the eurozone. The eurozone has confounded the critics who expected it to implode, but there is a lingering malaise and the possibility of a major crisis resulting from Greek default and a Greek withdrawal from the single currency remains very real.

Even in the more successful developed economies, like the United States, there is pessimistic talk of ‘secular stagnation’. It is not at all clear how Western economies can escape from the legacy of abnormal monetary policy deriving from an overhang of private and public debt, and from a destabilizing cycle of boom and bust in asset markets. There is also a high level of uncertainty over whether the slowdown in growth in China – to rates of expansion (around 6 or 7 per cent) still inconceivable in the developed economies – will be managed in an orderly manner. The knock-on effects of the slowdown on commodity markets are having a serious impact on African and Latin American countries highly dependent on exports of materials, oil and other raw materials. Taken in conjunction with the move to higher interest rates in the USA, attracting mobile capital from emerging markets, there is a likelihood of serious adjustment problems and slower growth in the emerging markets that have helped power the world economy since the financial crisis.

The large financial institutions are more secure and richer in capital, as described in chapter two, but it is doubtful whether they are robust enough to deal with some of the potential threats to financial stability. In general, governments have acted prudently to reduce systemic risk from the known unknowns in financial markets through regulatory reforms – but the unknown unknowns may be more dangerous than we appreciate.

In terms of the conduct of UK policy, I have set out analyses and recommendations below. I do so with the specific aim of contributing to the beginnings of a serious debate about the currently fragmented and demoralized centre and left. The context of the debate is the challenge to the two dominant political traditions of the post-war era. One is what can loosely be called the centre-right: traditional American Republicans, British Conservatives and European Christian Democrats, and one strand of European liberalism, as in the German Free Democrats. These parties and individuals fully embraced globalization and free markets, including financial markets, and were seen to have been vindicated by the collapse of communism and the evident success of capitalist economies. But the crisis and its aftermath have shattered these illusions. Leading capitalist economies have barely recaptured the living standards that they enjoyed before the crisis and are falling behind the more directed state capitalism of China and the emerging economies. Many people, especially the young, have been badly hurt – excluded from the housing market in the UK and from employment in some continental EU countries. There is still a lot of anger directed at banks in particular and at business in general, and at the elites who presided over the crisis. Most damagingly, the connection between rewards and talent – the moral basis of capitalism – has been lost. Extraordinary rewards for a narrow area of employment, encouraging risk-taking that has damaging social consequences, has changed the sense of what is useful work.

Pragmatic adaptation and skilled leadership have so far helped centre-right parties to do well politically, especially in Germany, the UK and Japan. A period of insecurity and instability has, paradoxically, increased the appeal of ‘the devil we know’. But a protracted sense of crisis could pull them apart, with a reversion to more atavistic politics: disengagement from Europe and the possible disintegration of the UK; a retreat from the European project in continental Europe; aggressive nationalism in Asia, including growing assertiveness by China and India in particular.

There are challenges also to those in the social democratic tradition. In the good times, parties and individuals of the centre-left coasted along, accepting the benefits of open-market economies along with the promise that they could be reconciled with a sense of social solidarity, redistributive fiscal measures, and strong social services and public goods. In the UK there was a Faustian pact between the City and a social democratic government that traded light regulation for tax revenue. In their different ways, Labour under Blair and Brown, Scandinavian and German social democrats, Australian Labour, and their emerging equivalents in Brazil, India and South Africa, all succeeded politically by offering this beguiling cocktail of the best in capitalism and the best in socialism. The crisis should have reinforced their appeal by underlining the need for state intervention and regulation, not least in the financial sector: action to curb the greed of incompetent and reckless financiers; measures to cushion the impact of the crisis on the vulnerable; and inter-governmental cooperation to uphold rules and prevent contagious collapse.

Moreover, the crisis has brought to the fore one issue on which parties of the left have fed throughout the nineteenth and twentieth centuries: the concern that income and wealth inequalities are becoming too extreme. On one level, the world is becoming a more equal place, as many poor countries, especially the giant Asian economies, are growing much faster than rich ones, and the numbers in absolute poverty are falling fast. But governments are national, not global, and within countries there appears to be a widening of inequality. The share of labour in national income has, in general, fallen over the last few decades. The income share of the top 1 per cent has risen strikingly. In terms of the stock of wealth, rather than the flow of income, the richest 1 per cent have a third of all wealth in the USA, and a quarter in the EU, with both figures rising. Such inequalities are not just intrinsically offensive but economically damaging, because they drain demand and reward rent-seeking behaviour and the accumulation of assets, mainly property, rather than innovation and wealth creation. There is undoubtedly resentment that much of this wealth has accrued to financiers and others whose activities were at best socially useless and at worst contributed directly to the crisis and the misery that followed it. At first sight, there was never a better time for progressive politics.

In practice, this hasn’t happened. In general, politicians rather than bankers have paid the price for allowing the crash to happen. In particular, governments of the traditional centre-left, as in the UK and Spain, were seen to be overwhelmed by a crisis they hadn’t anticipated or prepared for, or, as in France, were seemingly unable to offer more than rhetoric and good intentions in the face of forces over which they had little control. Instead, the political beneficiaries of the crisis have been not just traditional conservative parties but those on the populist fringe: right-wing parties of a nationalistic or even racist bent, feeding off the politics of identity (in France, Holland, Belgium, Sweden, Denmark, Norway and Finland and parts of Eastern Europe such as Hungary and Slovakia, plus UKIP in the UK); some on the left based on anti-austerity platforms (Spain, Greece, Ireland, plus Sinn Fein and the SNP); some simply anti-establishment (Italy); and some based on a reaction against globalization (the Greens). In some instances, these parties are putting forward worthwhile ideas that should form part of any policy response: the demand for debt restructuring by Syriza in Greece and Podemos in Spain; the environmental imperative of the Greens; the pressure for decentralized, federal structures of government in Scotland and Catalonia. But the political adrenalin that sustains these moments is essentially a negative one of anger and protest.

There is thus a gaping hole which used to be filled by those of the centre and centre-left, the ‘progressive’ parties drawing in varying degrees on social democratic and politically liberal traditions. Their purpose was to combine idealism and practicality in office. But, as with Labour and the Lib Dems in the UK, and the Democrats in the USA, and in countries like Canada and Australia where such parties used to flourish, as well as in Scandinavia and in much of continental Europe, and in the democracies of the emerging economies, such as India, there is a sense of weakness and retreat – demoralisation, too, from having been seen to be complicit in a consensus that became discredited.

The position is by no means uniformly bleak. One beacon of encouragement has been the election and re-election of America’s first black president, who has accumulated a body of legislative reform in health and financial services in the face of a hostile Congress, has presided over economic recovery, and has maintained a calm and rational approach to foreign policy in the face of extreme provocation. Another is the return to power, from a seemingly hopeless position, of the Canadian Liberals.

Yet there is a new agenda that urgently requires convincing answers from those who identify with this tradition: how to constrain and manage the financial sector without destroying it; how to build public support for an open economy and international rules in the face of domestic economic insecurity and fears of terrorism and ouncontrolled immigration when there is also a weakening sense of social solidarity; how to reconcile financial discipline with the growing demands on government, particularly from the health needs of an ageing population; how to reconcile environmentalism with growth and jobs; how to provide a framework for long-term decision-making through business and personal security while embracing the speed of digital and other innovation; how to redistribute income and wealth progressively in a world of great porosity and without destroying incentives to work and to invest. I hope that my own analysis and practical experience of office will at least point to some answers.

What is to be done?

I have been an elected decision-maker as well as an analyst and commentator, and consequently I know that the first is more difficult. Policy-makers have to face the question, ‘what do I do next?’ And do it. And be judged on the outcomes. So, while this book is primarily analysis and commentary, I have tried to answer the questions, ‘what would you do?’ and ‘what would you have done differently?’ and occasionally, ‘why did you do what you did?’ Here, I try to bring the policy conclusions together.

I do so largely from the standpoint of the UK and the British policy-making of which I have experience, recognizing that the UK has a 2 per cent and diminishing share of the world economy and that national action is heavily constrained by the forces of international economic integration and, more narrowly, by European commitments and rules.

Economic policy-makers normally have an acknowledged and important set of principles on which they draw. Economics, however, has not weathered the financial crisis well. Substantial areas of theory built around ‘efficient financial markets’ have had to be ditched. It has been necessary to disinter forgotten thinkers like Hyman Minsky, or economic historians like Charles Kindleberger, who understood and wrote about financial bubbles, speculative manias and panics. University syllabuses are having to be rewritten to reflect the new awareness. There is still a distinct lack of clarity. The 2013 Nobel Prize for economics was awarded to authors of two contrasting explanations of asset market behaviour that directly contradicted one another.

In practice, no single unified theory forged by the crisis has emerged. Governments, notably in the USA, the UK and Japan, have followed a somewhat eclectic approach to economic policy, drawing on three different strands of thinking: the Austrian approach, which emphasizes deep structural problems around private and public debt, insolvent or malfunctioning banks and corporate profitability; the Friedmanite monetarist school which, based on experience of the Great Depression in the 1930s, emphasizes adequate money supply and unorthodox monetary policy to support demand; and the Keynesians, also based on experience of the 1930s, arguing for flexible and expansive fiscal policy to support demand. Much heat and emotion has been generated by protagonists of these different approaches. But in practice, governments and central banks have been refreshingly non-ideological, whatever the political rhetoric deployed, and have been broadly successful so far in averting a 1930s-style disaster. The one major exception is in the eurozone where dogma, as well as the difficulties of intergovernmental coordination, has stood in the way of rational demand management and debt restructuring.

My own prejudices inevitably influence my conclusions. I draw on both liberal and social democratic traditions. Looking forward, parties and leaders within those traditions face a major constraint and a major opportunity. The constraint is that since the fall of Soviet communism there is no serious alternative model to what the left calls ‘global capitalism’, a system of close integration between market economies within sets of regional or global rules. Contrary to many predictions and historical precedents, and some continuing doubts, this system has weathered the storm so far. Protest movements from left and right or the environmental movement have identified injustices and weaknesses but, so far, have provided no coherent alternative. It could be argued that the nationally based state capitalism of China, India, Brazil, Russia, Indonesia or Turkey represents something fundamentally different, but (perhaps excepting Russia) those countries are adapting their economies in ways that are still broadly liberalizing and integrated with the world economy. The comprehensive rejection of Western ideas of all kinds by the growing Islamic insurgency does not purport to offer economic as opposed to spiritual salvation. So, political programmes have to start from where we are, rather than from hypothetical alternatives.

The opportunity is that, within this set of constraints, there is a market for active government (local, national or multinational) based on attacking monopolistic concentrations of economic and political power; fostering public goods, from parks, libraries and common culture to transport and communication networks, education and security, the planning of cities and protection of areas of natural beauty; pooling risks surrounding healthcare or economic uncertainty; developing a capacity to deal with market failures, the short-termism of capital markets, the under-provision of training and long-term scientific research, and dysfunctional land and housing markets; encouraging different forms of capitalism, from private family enterprises to publicly quoted limited companies, domestic or foreign-owned, and mutual models involving customer or worker shares; and creating a system of financial rewards seen to be fair because they reflect hard work, creativity or entrepreneurship rather than extortion, luck or inheritance. These are, of course, massive subjects that range far beyond this text – suffice to say that my own biases are based on a belief that the pendulum has now swung too far, emphasizing the failures of governments rather than the failures of markets.

I also make some assumptions about the future within which policy will have to be framed. Assumptions are not predictions. I have no better knowledge than anyone else about the future. There are clearly risks and the value of scenario planning is to avoid the trap of believing that trends are inexorable or that the conventional wisdom must be right. Many distinguished people made fools of themselves predicting in the 1990s that Japan was set to become the world’s leading economic power; or, in the first decade of the century, that clever financiers had found new mechanisms to support ever-growing credit and ever-rising house prices; or, until very recently, that oil prices must continue to rise. But any forward view has to make some working assumptions. I am assuming that, despite some considerable risks, economic Armageddon is not around the corner, that China and the USA will continue to dominate the world economy, the former increasingly so despite its current slowdown, and that Britain’s troubled neighbours will manage to make the eurozone work, albeit with poor growth prospects. But the legacies of the storm in the main economies of the West are real and burdensome: exceptional levels of household and public debt; unresolved problems of restoring more normal monetary policy and managing house price bubbles; a dearth of investment to absorb savings at a global level; and a decline in productivity growth and innovation. I broadly support the view that these factors together are contributing to so-called secular stagnation. The UK itself has these negative features and will also be affected by negative developments elsewhere.

I have set out ten broad areas where I believe action is required.

Banks

This is where the financial crisis started. As discussed in chapters two and ten, Britain’s mainstream banks are now safer and better capitalized, which is clearly welcome. The big British global banks were too big for their own good and for the British economy, and the reaction of Lloyds and Barclays in particular to move towards more traditional lending and a domestic focus is also welcome. Despite the apparent attractions of a large, exporting, tax-generating financial services industry, international research as well as experience tell us that a bloated financial industry is a net negative. Relative contraction is welcome, though painful for many individuals. So what remains to be done?

First, the regulatory reforms separating traditional and ‘casino’ banking through ring-fencing are a major step forward and must be protected from backsliding and industry lobbying. The banks have still to establish that they are no longer too-big-to-fail, through ‘living wills’ and adequate capital, and the more the financial crisis recedes into history the greater will be the need to ensure that regulatory standards are maintained both domestically and internationally.

Second, small business lending has been a disaster area, with net lending still negative seven years after the crash. Post-crisis risk aversion has reinforced pre-crisis habits of failure to support entrepreneurial business, especially companies unable to offer strong property collateral. Progress has been made via the publicly owned British Business Bank, acting as a catalyst in developing new forms of credit (like peer-to-peer lending) and, with the private Business Growth Fund, in supporting equity investment in medium-sized companies. But much remains to be done, including by expanding these institutions.

Third, bank lending remains highly concentrated, for business especially, but also for personal customers. Under the coalition, healthy competition had started to emerge thanks to challenger banks, helped by a less bureaucratic licensing regime and the British Business Bank. One particular lacuna, relative to Germany or the USA, is the dearth of local community banking, other than the remaining small building societies. Regulators should ensure that red tape is minimized in order that new small-scale technology platforms can flourish and new local banks emerge.

Fourth, the elephant in the room is RBS. I believe the Labour and coalition governments were remiss in parking RBS in an arm’s-length body for seven years, rather than using it to promote small business lending and to create more diversity and competition in the sector. There has never been any urgency about privatizing RBS, though it should happen in due course. It is not too late to make further divestments beyond the planned, but enormously protracted, Williams and Glyn’s carve-out, so as to increase competition and diversity. One model would be to restructure the bank’s very centralized operation so as to create a semi-autonomous, community-based structure along the lines of Handelsbanken, with a particular emphasis on small business lending.

Lastly, the endless scandals resulting in ‘regulatory revenge’ – imposing fines on the banks themselves, with minimal sanctions on the individuals responsible – has been a continuing source of public cynicism. While petty benefit cheats face jail, it seems unlikely that the architects of the 2008 disaster will suffer any sanction beyond criticism. The Parliamentary Commission on Banking Standards has produced a sensible set of recommendations for creating professional standards around banking which must be followed through, along with legislation, now passed, criminalizing recklessness. A key test will be Governor Carney’s proposed Fair and Effective Markets Review, which rightly seeks to establish senior bank executives’ personal responsibility for their banks, but leaves oversight to a panel of market participants, which could easily become a cosy, self-serving as well as self-regulating, process. The removal of the tough Mr Martin Wheatley from the leadership of the regulator, the Financial Conduct Authority, a succession of concessions to bank lobbying and the rhetoric of a ‘new settlement’ with the banks, all suggest that the Conservative government wishes to weaken the post-crisis regulatory framework.

Deficits and Debt

The bitter, highly polarized debate about austerity has disguised some rather mundane realities, as I argue in chapters seven and eight. It is not true that the Labour government grossly mismanaged the public finances in the run-up to the 2008 crisis. There was a small structural deficit, but the Conservative narrative of spendthrift incompetents is simply wrong. The left has been equally dishonest in attacking the coalition for unnecessarily causing the slow post-crisis recovery through aggressive deficit cutting. In practice, structural deficit reduction has been measured and pragmatic – indeed, Keynesian – and aggregate demand has been systemically supported through monetary policy.

The forward-looking debate is about how to manage the residual structural deficit and the legacy of public debt. First, the residual cyclically adjusted structural current deficit – the central policy objective of the coalition – is highly uncertain because of massive statistical disparities in measurement of the ‘output gap’. It was cavalier of both coalition parties to promise a crash deficit reduction over three years after 2015. That was over-ambitious and the post-election Chancellor has extended the period for an extra year. It still represents a faster pace of fiscal consolidation than under the coalition. It may well have to be extended again if the economy slows, as it could well do when tighter monetary policy takes effect.

A bigger issue is the government’s inclusion in the deficit, which it plans to eliminate by 2019/20, of capital spending. The practical consequence is that the Conservative government’s planned deficit reduction is around 2.5 per cent of GDP greater than that planned by the coalition. Ideology rather than economics is driving this. Deep cuts in public investment under both the coalition and Labour have been damaging and unnecessary, greatly aggravating the recession in the construction sector. Income and employment multipliers are much higher for capital than current spending. A major opportunity continues to be missed to borrow at negligible interest rates for capital projects, renewing the country’s infrastructure and supplementing social housing.

The Treasury’s hostility to public sector capital investment is long-standing – it led to PFI and other expensive alternatives – but it has been intensified by worries over the level of public debt to GDP. The ratio is high compared to pre-crisis levels, having doubled to around 80 per cent, though these are not historically abnormal levels and debt service costs are at a historic low. The USA has very similar levels of public debt and some countries (Japan, Italy, Portugal) have much higher levels. Attempts to force down the deficit debt ratio by curbing investment or otherwise sacrificing growth will be counterproductive, because they depress the denominator while trying to reduce the numerator. The IMF has wisely advised that the debt ratio come down by ‘organic growth’, not by curbing public investment. Even Kenneth Rogoff, whose analytical work on debt ratios was often cited as evidence of the dangers of public borrowing, now argues for more UK (and German) borrowing for investment. In the face of Treasury scepticism about capital investment there needs also to be an institutional innovation – a National Investment or Infrastructure Bank – modelled on the Green Investment Bank to prepare a pipeline of sound, feasible projects with the prospect of good returns.

The continued resistance of the Treasury is due to lingering fears that Britain is close to a ‘cliff edge’, losing its creditworthiness and leading to much higher borrowing costs. The ‘cliff edge’ theory had some plausibility back in 2010, but now borders on the absurd. Even after losing its AAA status, the UK continues to borrow at historically low rates (just over 2 per cent on ten-year bonds), less than the USA and, after inflation, close to zero. To underline the absurdity of the ‘cliff edge’ argument, Britain’s bond yields happen to be higher than, for example, those of Italy, let alone Japan, which have far higher levels of government debt. What the government should be worrying about more is the ratio of household debt to GDP, which is predicted by the OBR to be approaching pre-crisis levels of 170 per cent by the end of the decade, when the public debt will have fallen to 60 per cent.

To date, deficit reduction has primarily centred on cuts in public spending rather than increased tax, and the Conservative government also has a clear objective to shrink the share of the state – though the 2015 post-election budget, sensibly if surprisingly, rebalanced future fiscal balancing towards tax. For parties to the left of the present government the challenge is that the British public appears to have a North American rather than a Scandinavian approach to tax, while retaining a European approach to most forms of public spending. There is little public appetite for substantial increases in taxes on income and, though I don’t agree with the Chancellor’s efforts to lead a global bidding war on corporation tax, it is unrealistic to aim for large increases in revenue from internationally mobile companies and individuals. Therefore, the tax base will have to centre on consumption, particularly where environmental costs are involved, and immovable property and land.

It should be one of the main tasks of opposition parties to redesign the archaic, inequitable and unpopular system of property taxation (council tax, inheritance tax and capital gains tax). One basic step would be to make council tax more closely proportional to the value of property. A more radical and far-reaching reform would be to give practical substance to long-mooted ideas for the taxation of land, not least to encourage more efficient use. The practical problems of valuation and making the transition from a land market massively distorted by planning have so far frightened away reformers. But such a reform is now long overdue.

On the spending side, politicians of all parties have sought to protect public spending on sectors of the population who can be relied upon to vote (the elderly rather than the young) or on valued areas like the NHS and schools, at the expense of, say, local authority services, social housing and science and innovation. I was, I believe, the only minister to oppose consistently the ring-fencing of departmental budgets. But the further deep cuts in spending agreed in the 2015 spending review will undoubtedly lead to a serious deterioration in important services, including some of economic importance. To change priorities in future means finding new ways of funding universal public services, limiting some non-means-tested benefits such as the winter fuel allowance, and being more creative about public sector delivery – good examples from the coalition being the growth of mutual health and social service providers and a reformed Post Office network.

Money

One of the biggest economic policy issues in the next few years will be the gradual disconnection of the life-support system of cheap money: a move to higher short-term interest rates and the ending and reversal of quantitative easing (QE), at least in recovering economies like the USA and the UK. The potential for major destabilizing shocks – large currency appreciations, distress in highly indebted households – is all too real and in some areas, notably the eurozone, the need for monetary stimulus may well grow rather than diminish.

The fact that monetary authorities are operationally independent makes this transition easier than if it were politicized. But there are several complications for the UK, as I discuss in chapter nine