King and his Courtier

When the former Chief Secretary to the Treasury, David Laws, revealed in his book on the coalition negotiations that the Governor of the Bank of England, Mervyn King, was invoked as a supporter of the Conservatives’ plans to cut public expenditure by $6bn in an emergency budget, there was something of a furore. According to Anthony Seldon’s book, Brown at 10 (2010, p. 458), Gordon Brown demanded to know whether Mr King had spoken to Nick Clegg during the negotiations. The Bank of England denied this, but the incident provides more than irony, given that this was probably the first time Mr King and Mr Brown had spoken since the former called for a plan for reducing the truly terrifying deficit (Seldon 2010, p. 361).

Given this history, you would expect Labour’s approach to the Bank of England to be suspicious, if not outright hostile. The Shadow Chancellor, Ed Balls’ interview this morning could be interpreted as such, given that he accused the Governor of being ‘loyal’ to the current government and not being true to his own ‘heart of hearts’.

On the other hand, Balls also sympathised with Mr King’s situation. The Bank of England, in a settlement engineered by Mr Balls when an advisor to Gordon Brown back in 1997, is responsible for setting interest rates, buying and selling bonds and setting inflation targets, without the intervention of Whitehall. During the credit crunch and subsequent recession, the Bank has opted to keep interest rates at close to zero and practicing quantitive easing – buying back bonds to ensure that cash circulates and keeps the economy active. Generally regarded as a success, the Bank has nonetheless had to explain to his political masters why inflation keeps exceeding the target of 2%.

Perhaps Mr Balls is embarking on a relatively subtle (for a man renowned as an ‘attack-dog’) excercise to win friends and influence Mr King. In accusing the government of failing to support the Bank of England’s efforts to boost the real economy by raising VAT and precipitating an unemployment crisis, Mr Balls is attempting to make Mr King a prop – willing or unwilling – in his efforts to paint the goverment as irresponsible in its handling of the economy. In addition, he is using a card associated with Mr Brown – highlighting the more interventionist approach of the American Treasury – or, at least, while that lasts.

Confidence in a political party is as much to do with lack of confidence in the alternative, and Mr Balls will be determined to turn the tables on the Conservatives as soon as possible. Mervyn King has already warned of the likely decline in living standards as wages stall and inflation rises – that much will be accepted by anyone still in a job and with a mortgage. Unemployment will be more of a political livewire, and with George Osborne reportedly complaining at Davos that he cannot get British companies to spend the 5% of GDP that they are hoarding in cash, Mr Balls will feel he is well placed to exploit this paradox of thrift.

Obama’s Challenge

We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world. We have to make America the best place on Earth to do business. We need to take responsibility for our deficit, and reform our government. That’s how our people will prosper. That’s how we’ll win the future. And tonight, I’d like to talk about how we get there.

The almost universal consensus in the wake of the mid-term Senate and House of Representative elections last November, was that President Barack Obama would be forced to make concessions and cooperate with the newly-elected Republicans. The logic is that, because the Republicans took control of the House, and dramatically curtailed the Democratic majority in the Senate, the political mood of the country has shifted to the right. The President can veto bills adopted by Republicans, while Republicans can filibuster Senate legislation that the Democrats desire. If this face-off were to last until November 2012, public opinion will be the determining factor.

Yet Mr Obama’s State of the Union address showed little appetite for compromise. While Mr Obama gave the impression of being conciliatory and flattering, noting that Democrats and Republicans would have to work together to pass legislation, the main thrust of his speech was a vindication of his own policy platform. Indeed, the speech represents Mr Obama’s fullest repudiation (or refudiation?) yet of the spectre of Sarah Palin.

Two weeks ago, Mr Obama swatted Mrs Palin down in Tuscon for inflammatory rhetoric. Last night, he responded to the attacks of the Tea Party Movement on his patriotism. The ‘problems we face,’ he told Congress, ‘are bigger than politics.’ America is facing unprecedented challenges to its prosperity from developing nations, has its largest debt as a proportion of GDP since the 1940s, and the highest unemployment since the early 1980s (only the second time it has reached 9% since the Second World War). These things are all connected, Mr Obama implied, but competition is about innovation, education and flexibility.

Many Republicans will have agreed with Mr Obama when he stated that ‘None of us can predict with certainty what the next big industry will be, or where the new jobs will come from,’ and when he admitted that free enterprise was critical to innovation. But the President does not intend to rely solely on free enterprise, and his next budget is likely to contain subsidies for industries such as ‘biomedical research, information technology, and especially clean energy technology.’ Mr Obama also proposes to shift the energy subsidies America provides to oil companies – hoping to capitalise on the BP oil spill, no doubt – to renewable and clean energy supplies. In doing so, he risks the almost inevitable discontent that comes with higher fuel bills.

Mr Obama’s proposals to merge regulatory commissions will not be unpopular in Congress, and may prove productive. His suggestion that expenditure is frozen for five years, thus saving $400bn, is an important start to a debate that has not quite taken off in America – legislators, and recently a bi-partisan committee have been saying that the deficit must come down but the questions of how much, how fast and where the cuts will fall have not yet begun in earnest. Republicans will feel that criticism of their tax cuts, which Mr Obama supported in a compromise deal recently (and took credit for earlier in the speech), is politically egregious.

Mr Obama’s proposals to reduce corporate tax rates and look at medical litigation reform as a means of reducing costs are also examples of the President reaching across the aisle, but he made clear that if rebuffed, he would see that the Republicans were viewed as a party keen to put the burden of deficit reduction on the poorest, and as taking the ‘engine out of the airplane to lighten the load’ if they should reject his increases in education and industrial subsidies.

The reaction of the Republicans in the Chamber was suggestive of the future approach to Mr Obama’s Presidency. There was no heckling, but rather, a stony-faced silence. Will the Grand Old Party simply resist the President’s agenda with an air of severe responsibility? While many stalwarts of the party clearly sense an opportunity to dispense with Mrs Palin’s showboating, there is a decided passion for more conservative policies both inside and outside of Congress (House Republicans recently voted to repeal the health care reform in a symbolic act). Many will feel obliged to be vocal in their attacks on the President with primaries coming up shortly to select candidates for 2012.

This could make life difficult for President Obama. His stately manner will reflect well on the television, but he will not have the easiest of rides. He has already upset many in politics by threatening to pass the health care reform bill through a budget reconciliation and with bribes in the form of Medicare subsidies – which will smack of hypocrisy given his commitment to veto any bills with earmarks for the next two years.

The road to 2012 now looks uncomfortably short for the President. His long-term view, previewed in this State of the Union message, will not assuage the very current fears about unemployment, and his trade deals and subsidy programmes will take time to come into effect. That said, making a start on deficit reduction could allay a concern that that is one of the causes of America’s current malaise, as long as it does not play into the Republicans’ hands by allowing them to claim that they would be justified in going further. The debates over the next two years are likely to be rancorous, as tax cuts are pitted against protected budgets and increased spending in areas such as education. Promising to freeze spending overall suggests Mr Obama will seek to stay ahead of the economic debate and that after that, he will gamble somewhat on his record for bringing change to Washington.

Not Balls, Not Brown, Not Now

To win credibility, Ed Balls needs a new speech that acknowledges that the Coalition is not all-wrong on the economy.

Perhaps the suddenness of Alan Johnson’s resignation caught most commentators by surprise, or perhaps so much has already been said about the new Chancellor of the Exchequer over the past three years, but by the time that Ed Balls was called upon to take Labour’s lead argument against the coalition, the occasion seemed rather flat.

There are two chief topics of discussion about Labour’s new configuration. The first is whether Mr Ball’s unorthodox economics will have an impact on Labour’s political strategy in opposition. The second is whether giving Mr Balls a portfolio in which he will feel all-powerful will affect the chemistry of the Shadow Cabinet. Both anxieties are considerably overplayed.

Firstly, the Shadow Cabinet, including Mr Balls, endorsed the Darling plan for halving the deficit over the course of five years less than two weeks ago. There are also important political reasons for sticking to the course set out by Labour’s last Chancellor, Alistair Darling; the Party is in no mood to admit that it was completely wrong in its handling of the financial crisis, its current leadership does not have the authority or inclination to outflank the Coalition government on the right (either in part or in full), and confidence in deficit-broadening spending plans is flaky among the media, businesses, and the public (although polls show weakening resolve in that area).

The second reason Ed Balls will be required to act cautiously is that his popularity within the Party is fragile. Although he performed markedly better in the Shadow Cabinet election, coming third with 179 votes, than in the leadership election last year, MPs do not rush to worship at his feet. He will be cheered when he performs well – and he enjoys a sort of folk-hero status for his shadowing of Michael Gove – but like Wayne Rooney, politicians can be all-conquering one week and frustrating the next. Then there is the legacy of thirteen years of briefings – notably the blaming of Douglas Alexander and Ed Miliband for the election-that-wasn’t in 2007.

These two factors will keep Ed Balls on his toes, at least for the short term.

The Fight to Come

The sad departure of Alan Johnson, who lacked detail but was forthright in his defence of New Labour shibboleths, merely encourages the impression that Labour needs to be more aggressive in attacking the government. But where there are political opportunities, Labour ought to beware of political dangers.

Ed Balls was not regarded as a great Education Secretary, and while his Parliamentary performances may have forestalled the rise of Michael Gove, he also lacked the confidence in people’s aspirations that has allowed the current Secretary to re-establish his reforms based on the curriculum.

Gordon Brown’s book on the financial crisis, densely written and frustratingly self-serving though it is, gives an indication of the traps that Mr Balls could fall into. Brown has several arguments, among them that Britain needs to spend to maintain its educational, technological and financial ability to compete with the rising powers and that companies are hoarding cash rather than spending it. On the face of it, this justifies the Keynesian instincts of Messrs Brown and Balls, and their injunctions to the Conservative Party ‘not to return to the mistakes of the 1930s.’

Mr Balls based his economic pitch to the Labour Party on this message – in his widely acclaimed speech to Bloomberg last year. That speech is still being discussed, and Mr Balls may be tempted to say that the lower cost of borrowing justifies a retreat from the austerity programme. That would be a gamble however. The current crisis in the Eurozone is a result of significantly greater risks in Ireland, Spain and Portugal. The attractiveness of British bonds is cause for celebration, but not one we should be complacent about – the danger of a ratings downgrade in May 2010 was real, and no one knows what the implications of a change in tact could be today.

Furthermore, Mr Balls should be wary himself of making the mistakes of the 1970s. The Bloomberg speech raised the spectre of deflation – in 2011, the rising cost of commodities is causing inflation. Borrowing more would risk exacerbating this tendency, and it is for this reason, rather than the risk of protest that David Cameron has considered cutting fuel duty. Another reason that public spending needs to be restrained is that Britain is ageing and growing – meaning that there is no prospect of holding health and education spending steady without changes.

So while globalisation does require a new form of industrial intervention – one that cannot be provided purely by tax cuts – there is no other way to win business confidence and combat inflation than by reform. Indeed, there is a link between business confidence and public opinion, no matter how anti-business the current mood gets.

Labour sought to defend the interests of the consumer in 2008-10; reducing VAT temporarily and introducing scrappage schemes, and still lost the election. It may be that the unseen dimensions to the financial crisis do not intrude onto the voters’ minds, but it is beholden on Mr Balls not to mislead people on the sustainability of current spending. Given that he will not want to be a Labour Shadow Chancellor suggesting that he will raise new taxes, he will be locked into supporting some cuts.

The Great Offices of State

Just as the BBC is busy dismembering itself for the gratification of the political class, it produces a series of programmes that are a perfectly poised mix of investigations and polemic. The Great Offices of State is pithy and insightful, intelligent and utterly polite. No one does reminiscence quite so well, and Michael Cockerell is a formidable interviewer.

The three episodes cover the Home Office, the Treasury and the Foreign Office respectively. Each are delightfully idiosyncratic, and the mix of political and mandarin opinion highlights those problems which are unique to each, but there is also a larger story at work – the decline of these great ministries. Although hardly unremarked upon, the scale of the challenge that is presented by the outdatedness of Britain’s civil service is rarely so well exposed.

The Foreign Office – Diplodocus

The Foreign Office’s attitude to ministerial direction is described by one civil servant as “like an oyster regards a grain of grit… an irritant with a slim probability of producing a pearl.” It has perhaps the most mixed record, with triumphs like the negotiation of accession to the EC in 1972 juxtaposed with Suez and the cathartic end of Empire. It is often said that the Foreign Office lost an Empire and never quite found a role, but in truth it’s fate was to be rather swamped by the weight of European business – to the obvious distaste of those mandarins unused to European ways of working.

Perhaps the biggest downgrading of the Foreign Office has happened under the Blair administration, despite Jack Straw’s recent assertions of his potency (if only he had had a professional interest in resigning, he might well have done it in 2003, as implied here and in the Chilcott Inquiry). Blair has been the most internationally-minded Prime Minister since Eden and his personal involvement in Northern Ireland, Europe and American relations, not to mention Iraq directly, has been at the expense of the Foreign Office. Another factor is that the Office is necessarily diplomatic, which means a limited influence in times of war when contrasted with the forces.

The Home Office – Not Fit For Purpose

The Home Office has long been a political graveyard for Ministers because of its ability (in the words of Roy Jenkins) to spring disasters from the blue. The last ten years have shown that amply in the careers of both Jacqui Smith and Charles Clarke (who still resents his departure). Others have been luckier. Jack Straw told Cockerell that when he came into office the asylum backlog stood at over 100,000 incomplete cases. When John Reid became Home Secretary in 2005, the number was close to 500,000.

It was Reid who set in motion the division of the Office into its current remit and the Justice Ministry, which deals with prisons, the courts and probation, while the Home Office returns to something more akin to its original function of protecting public law and order. Still, it is regarded as a bitterly cynical department. Blair’s Chief of Staff, Jonathan Powell, remembers a presentation back in 1997; crime would be going up because the economy was growing, which meant more things to steal. What if the economy were to be going down, then, asked Powell. In that case, crime would go up, because there would be more people to steal things!

But the Home Office highlights better than any department just how limited the leverage most Ministers have when it comes to enacting policy. The tools at the disposal of the criminal justice system are far removed from the main offices on Marsham Street. The last Home Secretary to be regarded as setting the tone for his brief, Roy Jenkins, did so almost exclusively through legislation (repealing censorship, the criminalisation of homosexuality and the death penalty – the latter very probably because he wanted to replace the board that charts the progress of each death row inmate with a drinks cabinet). But legislation has only a limited effect on policing, probation, and the administrative nightmare that is immigration processing for example.

The Treasury – Gladstonian Revival

The Treasury is still largely recognisable as the department it was before 1997, with one exception. The decision to grant independence to the Bank of England has meant that control over interest rates has been given up. That means that it is less the Thatcherite department of monetary supply, and more the Gladstonian department of taxation, spending and balanced budgets. As we have seen in Alistair Darling, the Chancellor’s close relationship with the City means that with an element of boldness he can still take on the Prime Minister from a position of authority. The same was true, of course, of Lawson when it came to the ERM, before Thatcher wielded the axe.

The Treasury was also fleshed out by Gordon Brown’s Chancellorship, during which it attempted to play the role of a department for the combating of poverty. Some of that influence has been lost, but the current promotion of tax credits instead of benefits gives it a decided edge over the Work and Pensions brief.

New Labour and the Decline of the Office of State

In several ways New Labour has directly exacerbated the decline felt in these Departments. The first is the haphazard way in which devolution and freedom of information has been handled, depriving mandarins of considerable influence. The second is Prime Ministerial leadership. Blair was a particularly involved Prime Minister in many ways. He would go over the heads of his Ministers to the public, guaranteeing standards, promising targets and focussing on results – David Blunkett remembers his leader promising cuts in immigration without consulting his Home Secretary.

The redoubtable historian of the civil service, Peter Hennessy, substantiates Blair’s influence in his book, The Prime Minister; The Office and Its Holders Since 1945. Blair, he feels, veered dangerously close to both establishing a Prime Minister’s Department on top of the old architecture of Whitehall and of trying to force joined-up government without following the proper route through the Cabinet Office. Indeed, it was only as an audit trail that Cabinet was truly significant – most relationships were bilateral, and largely to the benefit of the Prime Minister. The other factor was that with Brown, Blair had a largely dual-Premiership in which each had spheres of influence.

It is a great shame that Hennessy looks unlikely to update The Prime Ministers beyond the 2001 cut-off. Indeed, there was a rush of good analysis in the early years of the Blair administration, which was never carried through into analysis of the political successes and failures of New Labour.

What seems clear insofar as the three so-called great offices of state are concerned, is that issues like crime, the economy and diplomacy will still be contentious. Indeed, they all look like potential election-winners. Whether New Labour’s reforms will lead to greater efficiency or politicisation of the civil service will see meddling preventing the incubation of policy, the institutional levers Ministers have at their disposal are already under scrutiny. The devolution of public services – Academies and Primary Care Trusts – was a key component of Blair’s last years in office. It may continue after an election, in which case the departments will be further truncated. But it may also depend where the strong Ministers are.