Ian Aitken – Rattling the bars
THREE cheers for Alistair Darling. Last week, he refused to follow his pettifogging civil servants at the Treasury and cheerfully confirmed that he – and they – were considering ways of re-writing Gordon Brown’s notorious “golden rules” for the management of public finances.
True to Whitehall’s obscurantist traditions, unnamed Treasury officials had responded to a Financial Times report on the subject with denials and accusations of “speculative journalism”. Despite his reputation for dead-bat dealings with the media, Darling would have none of that. Within 24 hours, he had personally confirmed that just such a review of the rules was under way in his department.
Good for him – and not just because his public admission struck a blow for greater openness in Whitehall. Even more welcome was the confirmation that something like Keynesian common sense was beginning to penetrate the corridors of the Treasury after years of Thatcherism and post-Thatcherism. Let there be no mistake: Gordon Brown’s regime in Great George Street was essentially a continuation of Thatcherism by other means.
That, in essence, was the whole point of the golden rules. Coupled with Brown’s surrender of control over interest rates to the Bank of England, their purpose was to reassure the City by tying the hands of future Labour Chancellors in matters of public spending and borrowing. Rule one – the original “golden rule” – decreed that the Government should borrow only to finance capital investment. Rule two said that borrowing should never exceed 40 per cent of national income.
The imposition of this stern regime brought Brown a chorus of admiring approval from the sort of people whom a Labour Chancellor ought instinctively to shun. This was especially the case with his alleged “stroke of brilliance” in granting independence to the Bank of England. Tories such as former Chancellor Nigel Lawson said they would have loved to have done that themselves, but hadn’t dared. Rupert Murdoch’s newspapers thought it was wonderful. The City bestowed its surprised approval.
The trades unions, however, had serious doubts. So did a number of leftish Keynesian economists and City journalists, such as The Guardian’s Larry Elliott and The Observer’s Bill Keegan. They were joined by a few newspaper columnists, among whom, I am happy to say, was yours truly.
My view then, as now, was that it was morally wrong to surrender a crucial instrument of economic policy to an unelected institution – and all the more so when that institution was being directed to use interest rates as an instrument to control inflation rather than protect people’s jobs. Most socialists had long been bitterly critical of the European Central Bank’s obsession with inflation at the expense of employment. Now a Labour Chancellor was imposing the same Thatcherite priority on Britain’s banking system.
The rule about borrowing only for investment is relatively insignificant, since it is hard to be sure whether it is being fulfilled or not. But what underlies it and the 40 per cent rule is a pernicious assumption that public borrowing is inflationary and therefore bad, while private borrowing – even for the same objects – is non-inflationary and therefore good. I have never been able to understand the basis for this reasoning. Why, for instance, is it inflationary to empower a hospital trust to borrow on the open market in order to build a new hospital, when it isn’t inflationary if a private firm borrows exactly the same money from the same people and for the same purpose?
Yet this piece of book-keeping mumbo-jumbo has been wheeled out as the intellectual basis for Brown’s disastrous programme of private finance initiatives in the National Health Service and his even more disastrous public-private partnership on the London Underground. We are repeatedly told that these schemes have given us new hospitals and schools which would never have been built without them. But why? Only because the Treasury’s accountancy rules have decreed, quite arbitrarily, that they couldn’t be built with public money.
If these are the rules that Darling is busy rewriting, then hip-hip hurrah and about time, too. But I fear there is unlikely to be a reversal of the outsourcing of interest rates to the Bank of England – too much of Gordon Brown’s moral and intellectual capital has been invested in that bit of showmanship for him to allow his understrapper to chuck it all away now.
Nevertheless, I would willingly bet my last fiver that both the Prime Minister and the Chancellor profoundly wish they still had the power to cut interest rates at a time when the Bank’s monetary policy committee seems so reluctant to do so. The trouble is that the members of the committee are proving to be distressingly loyal to the instructions which Brown laid down all those years ago. If only they could be – well, just a little less prudent.
But, of course, the implicit foundation of the original move was an acknowledgement that politicians were not to be trusted with anything as sensitive as fixing interest rates. Brown was saying, in effect, that even God-fearing sons of the manse like himself might be tempted to stray from the paths of righteousness if there were votes at stake at a time of looming economic crisis. And he was absolutely right – as he is now learning all over again with a general election approaching.
So what can we expect from the Treasury’s review of its rules? I have no evidence, but I suspect there will be some relaxation of the 40 per cent ceiling on borrowing to bring us more into line with practice in the rest of the world. And I also have strong hopes that there will be a change in the instructions to the Bank to require the monetary policy committee to pay more attention to the threat to jobs and a bit less to inflation risks.
It’s not the revolution, I know. But it’s a start towards getting something a bit more like a Labour Government. And, you never know, it might make Labour’s defeat at the next general election a little less likely.
About The Author
