“He’s got the generals in”, was the reasonable explanation proffered for the delay in Tribune’s appointment with the Chancellor of the Exchequer. A fresh front had been opened in the stand-off between the military chiefs and the Government over helicopters in Helmand with an appearance on that morning’s BBC Today programme by head of the British Army, General Sir Richard Dannatt, warning that he had a “shopping list” to deliver to Gordon Brown.
It was dangerously close to the military playing politics and the Treasury was getting the blame for blocking cash for vital weapons and more troops. Alistair Darling called in the top brass to set a few facts straight. Neither he nor his ever-loyal staff would risk upping the stakes by characterising the meeting as a dressing down; no breaking of ceremonial swords over knees. However, if the answers later given to Tribune reflected the tone of the meeting, it must have amounted to a clear warning – neither the helicopters or additional troops had been asked for when the generals said they could execute the operation in Helmand: “So far as we are concerned, the troops are doing a job of work in Helmand province, the army has said this is what we want in terms of troops and equipment and we have provided that and financed it.”
Had Darling ever been made aware, at any time, that the troop numbers were inadequate for the job? The answer is oblique, but the message is transparent. “I am very clear that if you ask troops to go and do something, especially in the face of acute danger in somewhere like Afghanistan, you have to make sure there are sufficient troops and that those troops are sufficiently equipped to do what is asked of them.”
On the broader range of spending on defence, the Government recently announced a new strategic review, insisting that Trident would not be part of it. But it has been confirmed that the design contract for the proposed new submarines is to be delayed. Is that a further indication that, given the review and cost of Trident, it may be included in the review after all?
“We have to look at the next 20 years and ask ourselves what are we going to be doing and, by definition, what are we not going to be doing. On Trident, as the Prime Minister has made clear, the Government’s position is that we do replace Trident. Nothing’s changed. Policy on Trident has not changed. It is our policy to maintain the deterrent.”
For a politician who has just had what can only have been a difficult meeting with Britain’s top military, Darling appears completely at ease and cool-headed as he talks about coming out of the biggest financial crisis in the past 60 years, what to do about the banks and rising unemployment.
The interim Walker report on bonuses and working practices in the banks has just been published. Doesn’t he agree that it merely tells the bankers to do the jobs for which they are already paid?
“It’s a bit more than that. One of the causes of the trouble is that they were not doing what they were supposed do be doing. Too many of them patently didn’t even understand what was going on in their own banks. Walker’s first point is people ought to do their jobs, as I’ve said before, people in boardrooms ought to do the jobs they are paid to do. Investors who own these banks should start asking serious questions. He went on to make some points about the qualifications of people who sit in bank boardrooms, because it was not altogether clear that everyone had the experience appropriate to be running a bank.”
But it’s not very transparent when disclosure of bonuses stops short at identifying who, precisely, is getting them.
“No, he doesn’t suggest that. I can see the difficulties if you name someone and then put a large number against them. Obviously, things can flow from that. For their own security, I can see that they would have to be careful.”
But others, such as the Co-op have transparency without any apparent problems.
“They have chosen to do that. Walker is an interim report which does shine a lot more light on things. I think we just have to be careful about that. What’s important is to try and bring about a cultural change and to impress on people that things have changed. A lot of these people have got to realise they just would not be working today if they did not have the insurance policy provided by the British and American taxpayers and others. That’s why it is right that the Financial Standards Authority now has the power to say to a bank that they don’t like the pay structure of a bank, it’s too risky, you can’t do it. It’s an interim report and a lot of people will say you need to go further. A lot of bankers, naturally, are saying you’ve gone too far.”
But the Walker report proposes a voluntary, not a statutory, regime. Is the Chancellor happy with that?
“We have gone beyond that with the FSA and its new power to say we don’t like your pay structure, it’s too risky. That’s not voluntary, because ultimately the FSA can put you off the road.”
This answer underlines the difference between the Government and the Tory proposals to abolish the FSA and hand regulatory powers to the Bank of England. But why is there no more radical reform of the bonus culture, which is threatening to make a comeback?
“Two things. First, we do have restrictions on the banks we own in terms of bonuses; they can’t get cash bonuses this year, it’s got to be deferred, it’s got to be capable of being clawed back, the people who failed can’t get rewards and they always have to be linked to long-term success.
“I think, in relation to telling the banks what to do, there is a broader question. At the moment, a commercial bank makes decisions on whether to lend you and me money and at what rate to lend to a business. There are some people who say: you should tell them to lend – in other words, the Government accepts all the risk and the bank is simply an agent. The downside of that is if you start to tell banks to lend willy-nilly, the risk comes back on the taxpayer. If you want to lend money directly into the economy, governments can do that perfectly well. I think, in the long term, governments can’t and shouldn’t run the banking sector and it is our policy to return the banks to a properly supervised and regulated private sector.
“I also have another objective, which is to get individual credit going and that’s why we have legally-binding agreements to make sure the banks do lend money. There is separate view, which is not the Government view, that we keep hold of the banks and make them an instrument of Government lending. That is a wholly different exercise. What you are saying then is: we, the Government, are taking the risk on lending. It’s like China, with all the banks being told to lend money. Some of them will be fine, but sooner or later some of them will not be fine. The risk doesn’t fall on the Chinese bank; the risk falls on the Chinese government.
“If you want to run a state-run bank in which you are simply transferring funds out of the Government into people’s hands, it’s a different exercise. That’s because you are either having people sitting in that state-run bank saying ‘you are not a good risk, but you over there are’ – in which case, actually what’s the difference between them and any other state-run bank? Or you say we actually want this money into the economy and we are less bothered about its safety in the future. I just see difficulties if we put money out the door now, because you might be storing up massive problems for the future.”
The recent white paper on strengthening the financial system spoke of boosting the mutual sector. However, Darling’s emphasis is on creating the right competitive market to allow more “entrants” into the lending market, rather than holding mutuality up as a best practice model for existing banks to follow.
“I think it might be difficult to do that. When the likes of Barclays and HSBC are owned by somebody else, you don’t have the power to do that. I would make the point that, in the present downturn, mutuality doesn’t mean not exposed to some difficulty. Dunfermline was a mutual.”
What about a national maximum wage? Darling’s jaw drops discernibly amid a slight shudder: “People who call for these things are the same people who argued against a national pay maximum in the 1970s. I don’t think pay restraint or arbitrary controls work.”
But we have pay restraint in the public sector…
“We don’t have maximum pay policy in the public sector – although, of course, we have a policy in terms of awards should be in line with inflation. In relation to banking, what will happen is that bankers will say, ‘if we can only be paid so much, we will decamp and operate somewhere else’. [In the public sector] we have a policy of making sure that pay is fair and reflects current conditions. In particular, this reflects the fact that inflation at the moment is low and pay awards ought to reflect that.”
Why don’t the trade unions have a formal role on, say, the Council for Financial Stability, as they had a prominent role in the 1930s? Where do the unions fit in?
“Unions contribute in all sorts of different ways. They contribute to the election of a Labour Government. I meet Brendan Barber and other union leaders from time to time, so does the Prime Minister. But we do not have a formal mechanism in this country. I think Neddy was the last formal mechanism and that wound up in the early 1980s. People turned up, they talked and they went away again. I think most people would prefer a model where we [identify] a job, you get people round a table to discuss it and get on with it.”
The International Monetary Fund has predicted that the Government will have to inject more cash into the banking system to stave off a renewed financial crisis. Darling is adamant: “What they are saying is that all countries need to be vigilant. We have done what we need to do and have no plans to do anything further on capital. We’ve a clearly set out programme and we are seeing that through. And the IMF does not have the detailed knowledge of our banks that we do.”
So he is confident about the future?
“I remain confident the economy will carry on recovering and that we will see growth at the turn of the year. That’s encouraging, but there are still a lot of hurdles to clear and one of them is the fact that unemployment will continue to rise this year and it will rise into next year – although the rate of increase in the June figures was lower if you look at the three-month increase and that is significant.”
On public spending, he believes the Tories are using the downturn as a cover for what they would do anyway: year-on-year deep cuts. But isn‘t that what we can expect under Labour?
“I have been saying for some time that, in next few years, public spending will be much tighter. That means there are some things you may have to do at a slower pace and there are some things you decide, after all, that you are not going to do. But, critically, we have to set our priorities and make our choices, underpinned by the values we hold. We have not spent the past 12 years building up the health service simply to say: that’s it – we are going to walk away. The same with education.”
Whatever is to go more slowly or be ditched will remain secrets to be mulled over during Darling’s forthcoming return to his Highland bolt-hole. “This time I won’t be taking a journalist”, he jokes. That’s at least one lesson learnt.
