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.

Nick Clegg’s Island Nightmare

It has become quite easy to underestimate Nick Clegg of late, what with his seemingly perverse desire to contradict the inclinations of the Liberal Democrat’s members and grandees and the agenda set by sketchwriters and the more laughable columnists that he is somehow Cameron’s fag.

Nonetheless, his performance on Andrew Marr’s programme this morning was quite reasonable. Most politicians have the weight of their party behind them in interviews and frequently tow a very predictable line. Mr Clegg is obviously freewheeling in Downing Street somewhat, so a chance to question him on government policy is often quite a good way to view some of the dynamics of the Coalition.

In a quite understated way Mr Clegg made his case for the government. This consisted of three points;

1.    The economic situation was a millstone around the private sector’s neck and that the public sector would have to be reduced almost to 1997 levels to allow a recovery;

2.    The Liberal Democrats were proving by their willingness to confront the political challenges of the day that they were a party of government, and that their current working-relationship was a matter of professionalism, which would not tie them into any agenda for the next election;

3.    That the Liberal Democrats were still capable of extracting concessions out of the Conservatives.

The first two points have long been part of Mr Clegg’s strategy for the Liberal Democrats and go some way to explaining his confrontation of his party. The third is one that will become increasingly important as the party attempts to assess the results of that decision before they are able to test it at the ballot box.

What did Mr Clegg have to offer in terms of policy then? One of the big stories of the week – the pupil premium – was absent from the interview, suggesting that Mr Clegg is vulnerable to accusations of presentationalism. The three significant policies in the interview were the cuts to housing benefit and linked social housing development incentives, the decision to allow councils to borrow against their projected earnings (something that will be less effective with grants worth only two-thirds of previous years and a long Council-Tax freeze) and a cap on tuition fees.

I don’t wish to go into the detail of these policies here, but I do want to note that while I have long been aware of the first two policies, the idea of a cap on tuition fees seems new and in no way linked to the Browne report, which appeared to be taken in wholeheartedly by the government. Does this mean that Clegg is making policy on Sunday morning TV (à la Tony Blair stealing Gordon Brown’s budget in Janurary 2000)? More importantly, were the rest of the Cabinet aware that there would be some form of restriction on fees (apart from the funding guarantee to universities, which would make it appear that Mr Clegg was backing down if it were the sole adopted measure to restrict fees)?

It is not an easy time to be in coalition with the Conservatives, but the one advantage that Mr Clegg has is that any concessions are likely to look more impressive when there is so much to be miserable about elsewhere. That may prove to be a saving grace by the end of the Parliament, although I feel that George Osborne will start to restrict their freedom to manoeuvre before 2014. In the short-term, Mr Clegg is in a bit of a thicket and will have to be sharp to avoid being damaged by attacks like Andy Burnham’s in this week’s Guardian. In the long-term, it is Mr Osborne he may have to look out for.

The Axeman Cometh

Labour underestimated George Osborne. “Where’s George?’ went the cry, assuming that Osborne was somehow the dark and scary underbelly of the Conservative Party, the sight of which would repel swing voters. Far from being hidden away, however, George was planning the election. And ultimately, he delivered.

Back in 2007, when Gordon Brown was riding high in the polls, Osborne saw that the rise in house prices had made a new swathe of people worried about the impact of inheritance tax on the estate they hoped to hand down to their children. Though it became an easy spot for Labour to jab at, it was in fact such a clever ploy to offer to raise the threshold, that Brown demanded that Labour adopt it.

Then came last year’s ‘austerity’ speech – the ‘we’re all in it together’ number. Again, some voters will have rebelled at the notion of cuts and it allowed Labour to fight a spirited rearguard campaign, but the speech had a more important effect. Firstly, it divided the Labour Party and called their economic management into question (subtly changing the terms of debate from the black eye given to the Conservatives over the banking crisis). Secondly, it got the chattering classes and the media obsessed with the idea that Britain was going down the tube – good for column inches. Finally, it allowed the Conservatives to criticise Labour’s plans to raise more taxes and to portray themselves as the party of enterprise and growth.

So Osborne’s latest coup de theâtre is just that, a political rather than an economic ploy. He has played up to the capital markets, helped in his cause by the fervours of the Greek debt crisis, and focussed the political light on what he would like to characterise as wasteful, or reckless spending.

Of course there is waste in government, as in every walk of life. Yet the notion that you should suddenly cut back on all of the systems designed to improve efficiency – and that might as well include cab fares – is ludicrous. ID Cards will be scrapped, but the savings will be so minimal that they aren’t even mentioned in news bulletins.

Some of these cuts will make a difference, though. The decision to abolish Child Trust Funds makes a mockery of the ‘Great Ignored’ that Cameron claimed to be fighting this election for. Instead, the poorest will simply become the new ignored, just as they used to be the old ignored.

Many will call the decision to give capital grants of £500 (in two instalments) extravagant. Admittedly, there was a case for means-testing the trust fund to return it to its original purpose of fiscally educating and capitalising the most socially and economically disadvantaged. And that is why the cuts announced by Osborne really sting – it’s not so much the £6bn, which we were all expecting, but the decimal point. Those extra £200 millions would have made up nearly half the trust fund budget, but instead they were culled, without study, without consultation, and within two weeks of taking office.

David Laws justified the decision by saying that those currently enjoying the benefits (and none are yet old enough to actually access them) will be better served by not being loaded with debt. What excuse is that? What kind of Liberal doesn’t believe in ensuring a widely distributed stake in the future? A minor modification to the scheme – to transform it into a voucher for higher education, for example, could have had the same effect and excluded the Liberal-Conservative fear that these payments are not socially-useful. Their very nature was that their utility was for the individual to decide, and what could be more Liberal than that?

Pushed to the back pages – page 42 in Saturday’s Guardian and not even on the front page of the BBC News website – was an interesting story. Britain’s borrowing estimates have been revised down by more than Osborne has just announced in cuts; £6.4bn. Income, capital gains and Value Added taxes all brought in more than expected – people are still earning and spending, which is a more useful measure of confidence than this misplaced faith in speculators.

Even so, the die is cast; the decision to cut spending has been made. The manner in which it has been taken is wearying. Among the cuts were ten thousand pledged university places in the sciences and technological courses. Also unable the escape the axe was the strategic investment fund, which directs investment to businesses that will drive future growth.

This government has a mistaken faith in the market to provide economic growth in Britain. In fact, laissez faire will not do, just as planning did not in the Post-War years. Osborne’s economic premise is that tax cuts are economically more efficient than spending. In this he is joined by his Liberal colleagues, who in 2005 were considering proposing a flat tax for the UK.

Flat taxes have been successful in Eastern Europe, where wages tend to be lower than neighbours (unlike the UK, and particularly if immigration is restricted). Ireland, which was lauded a few years ago for its low taxes and booming economy, is now one of the countries teetering on the brink of the Eurozone debt crisis. Lower taxes in themselves will not save the British economy. Instead, we will rely as always on our infrastructure and ingenuity. The Boy George has certainly learnt to colour in between the lines, but he hasn’t yet attempted to join the dots.

A Liberal Moment

It is a little over two years since Nick Clegg referred to the Liberal Democrats as ‘very much a national party,’ the only opposition to Labour in the North, and the Conservatives in the South. Now, the Liberal Democrats are in power for the first time, and Clegg holds the office of Deputy Prime Minister, albeit in a state of affairs described by William Hague as the best of their ideas (and people), and the bulk of the Conservatives’. And yet, there is little disguising the extraordinary way in which the Lib Dems have been incorporated into Conservative plans. Although there have undoubtedly been compromises on both sides, the negotiations of these past four days have struck everyone by their seriousness and affability.

The Coalescing of the Parties

Only the most die-hard activist (on either side) would deny that the Liberal Democrats and Conservatives have had much more in common in recent years. In the early years of the now historical Labour government, the Conservatives went right under William Hague, Ian Duncan Smith and Michael Howard, focussing on immigration and cession of powers to Europe, while Charles Kennedy (after Paddy Ashdown had taken the Party closer than it wanted to be to the Labour Party), gave the impression that the Liberal Democrats were the party of the Left with his opposition to Iraq and to Top-Up Fees.

Since then modernisers have risen on both sides and moderators to both leaderships. The Liberal Democrats, intellectually driven by David Laws and the Orange Book Liberals, began the acceptance of the Blairite line on public services – reform led by markets. The Conservative intellectual revival was driven by the young Notting Hill set, but particularly by Michael Gove, the one-time biographer of Michael Portillo and proponent of Burkean Toryism.

The recession has also had a significant impact on both sides. For Cameron, it necessitated the return of Ken Clarke to the Shadow Cabinet and let loose George Osborne’s tax-cutting instincts. The Liberal Democrats had adopted a policy of tax cuts for low-earners and saw the logic of becoming more critical of Gordon Brown’s efforts to prop-up the economy through state-action. Nonetheless, the oracular Vince Cable’s tendency to criticise the Conservatives as much as Labour, their position on Trident and Chris Huhne’s previous advocacy of green taxes maintained the impression that they were a party of the centre left.

Cameron’s Clause IV

That all changed with the General Election of last Thursday. Clegg had said during the campaign that he felt that the winner of the ‘largest mandate’ deserved the first opportunity to form of government in the case of a hung Parliament and that he would find it difficult to work with Brown (who, by Andrew Rawnsley’s account had been particularly patronising to his opposites during the expenses crisis). Accordingly, and despite a disappointing net loss of seats in the aftermath of the election, Liberal Democrat negotiators (Clegg’s Chief of Staff, Danny Alexander, David Laws and Chris Huhne), met with Hague, Osborne and Oliver Letwin to discuss areas they could co-operate on.

It is hard to conclude other than that both leaders were immediately in favour of a coalition, surprising a result though that is. For the Liberal Democrats, it would offer the best chance of their policies being implemented and an opportunity to present themselves creditably to the electorate as a party of government. Cameron arguably had less to gain, and could have opted for a confidence agreement, whereby the Liberal Democrats would back the Conservatives on key votes. That would not, however, have offered the stability that Cameron craved to make a successful fist of reforming the economy and public services.

Even so, Cameron has given a lot of ground. The Liberal Democrats bring with them commitments to tax cuts for middle-earners, increased spending on schools and civil liberties. Admittedly, there are those in the Conservative Party who agree, but those belong largely to the modernising vanguard. Cameron has also sacrificed Chris Grayling for his recent inability to stand up for gay rights, but the most significant concessions involve political reform. Cameron has locked himself and his party into the deal for five years and has promised to deliver a referendum on the Alternate Vote System (although he will campaign for a ‘no’). There is even the suggestion that Proportional Representation will be introduced for the House of Lords.

This constitutional radicalism has earned Cameron comparisons to Disraeli, the Conservative statesman who trumped the Liberals by expanding the franchise further and faster than Gladstone. Cameron will certainly be thinking that the strong share of the vote that the Conservatives have traditionally had in the twentieth century can give them the edge in a more proportional system, and he must be calculating that an alliance between the Conservatives and the Liberal Democrats is a more natural beast than between Labour and the Lib Dems.

It is difficult to say what kind of ideology motivates Cameron. Indeed, he has always given the impression of being a pragmatist – as The Economist approvingly noticed last week. Notably, it was for Clegg to speak at their joint press conference of ‘a radical, reforming government,’ but his affirmation of a common purpose was striking;

This is a government that will last because despite those differences, we are united by a common purpose for the job we want to do in the next five years.

Our ambition is simple and yet profound. Our ambition is to put real power and opportunity into the hands of people, families, and communities to change their lives and our country for the better.

For me, that is what liberalism is all about: ensuring that everyone has the chance, no matter who they are and where they are from, to be the person they want to be. To live the life they want to live.

You can call it fairness. You can call it responsibility. You can call it liberalism. Whatever words you use the change it will make to your life is the same.

(The Guardian bitterly suggested that you might call it wishful thinking).

For Cameron, the government was predictably more about business. His paean to strong government might have come from Hague’s biography of Pitt the Younger, but he also talked of a ‘historic new direction…of hope and unity, conviction and common purpose.’ Cameron has purported to be a One Nation Tory and his government will be measured as much against its social impact as its economic orthodoxy.

For this reason, another significant part of the agreement is ‘the radical devolution of power and greater financial autonomy to local government and community groups.’ This will need to be made accountable and to be properly funded. Margaret Thatcher’s total opposition to local government was at the root of her poll tax and therefore her downfall, but the rumours of a greatly enhanced Office of the Mayor of London and Scottish Parliament promise a more Chamberlainite future.

Will it Last?

Matthew Paris’ sunny dispositon (“I ought to be cynical, I ought to be saying it’s all going to end in tears, but I just sense something good and genuine in the air and it just might work. You almost have a sense of two men staging a coup against the British political system,”) seems typical of the mood at the moment. The two parties have not merged, however, and nor have we necessarily seen a permanent rupture in the British political system. This is a finely negotiated programme for government, as much as a statement of ideals.

Any one of a number of crises or changes in the weather could make this coalition unsustainable. Among the front-running contenders would be a movement for further integration in Europe, war in the Balkans or a breakpoint with Iran. More serious still, perhaps, would be a fall in the standard of living through some further recession or greater unemployment. As a general rule, governments tend to be more unified when they have money to spend, and this Parliament will see little of that. However, Cameron has been smart to ask a Liberal Democrat to be his executioner in the Comprehensive Spending Review.

Political factions will also have a role. Labour lost the election because the feel-good feeling had left them and their rearguard in favour of a ‘Future Fair For All’ seemed hopeless. A rejuvenated party could help to suppress dissent within the coalition, but it could also start to tempt Liberal Democrats away from their current partners. Indeed, the Liberal Democrats claimed that their negotiations collapsed on the basis of ‘deliverability,’ although it looks more like Clegg was forced to make overtures when his party expressed doubts about the Conservative offer on Monday evening. Then again, the Labour and Conservative reactions (David Blunkett likened them to ‘every harlot in history’ and Sir Malcolm Rifkind expressed a sense of betrayal occasioned by Brown’s game-changing resignation) will likely dissuade a precipitate withdrawal.

Then there are Cameron’s back-benchers, and indeed certain of the old-guard within his Cabinet. Ian Duncan Smith’s Work and Pensions brief will pander to Tory (lack of) sympathies to unemployment and William Hague is a noted Eurosceptic and realist in foreign affairs. Some activists have been critical of a lacklustre campaign, which they felt should have been won outright and would have been with good old Conservative values, and plenty of leadership rivals (David Davis and Liam Fox) lurk on the right wing of the party.

Ultimately, ideology is a luxury for any government and despite the fixed term, the fortunes of the coalition, the Prime Minister and his Deputy depend on the perceived likelihood of an electoral success for either party. If things are going badly, the Conservatives will want to shift right, and the Liberal Democrats will want to disinvest themselves of responsibility. This government’s ambition to devolve power will depend on whether people are willing to get involved, and whether public services will improve, but an age of prosperity will certainly not harm its chances.