Nick Clegg to put a stay on cutting an £80 million loan for Sheffield Forgemasters in his constituency, promised by Labour in March, to enable the company to continue manufacturing. Determined to show that he is sharing the pain, Clegg waives his offer. Clegg’s decision causes considerable upheaval in his constituency.
On 24 May, Osborne and Laws announce Plan A’s hors d’oeuvre, the initial £6.2 billion of immediate, in-year cuts.6 These had been foreshadowed in the Conservative manifesto, and the Treasury has been working on them during the campaign, so they are processed smoothly through the machine. The precise figure emerged after Darling’s last Budget in March 2010: it was needed to pay for reversing the jobs tax and to be seen to be ‘robust but not reckless’. One of the officials working on the cuts is Chris Martin, who later succeeds Heywood at Number 10, his deft work having impressed Osborne. Peter Mandelson, éminence grise to both Brown and Blair, cautioned against the risky strategy of announcing immediate cuts: but Cameron and Osborne are very sure they want to be upfront and explicit about precise figures in the general election.
Cameron and Osborne approve of the input of Laws over their first taster of cuts. Osborne misses Hammond, though finds Laws as ‘dry as a bone’ and ‘more fiscally conservative’ than any of them. Laws deals firmly with the unprotected departments including the Department for Communities and Local Government (DCLG), Culture, Media and Sport (DCMS), Work and Pensions (DWP), and above all with the Home Office. After long torrid discussions, Home Secretary Theresa May settles in the nick of time – at 11 p.m. on Friday 21 May.7 Laws dispels altogether any apprehensions that the Lib Dems cannot take the heat of delivering Plan A on the ground. ‘Lib Dem support for fiscal consolidation was important, because it broadened the legitimacy for the strong action that was taken and it underpinned the whole government,’ says a senior Treasury official.
Things are going well for Osborne. Treasury officials are seriously warming to their new chancellor. After thirteen years of being dictated to, some say bullied, by Brown and Balls, they now have a chancellor who is powerful, but also an agreeable colleague: ‘We were very excited by the new atmosphere. Osborne wanted to know what we thought and was genuinely interested. He was comfortable with us disagreeing with his arguments and being challenged on his thinking. It was pretty refreshing after what had come before,’ says one senior mandarin.
On 29 May, with discussions in full swing, David Laws resigns following revelations in the Daily Telegraph that he claimed £40,000 of parliamentary expenses to pay rent to his partner.8 This is a major blow to Osborne: he has lost Hammond and now Laws within the space of a month. Laws is promptly replaced as Chief Secretary by Danny Alexander, chief of staff to Clegg in the run-up to the general election. He had been appointed Secretary of State for Scotland after the election but serves for just seventeen days. Rather than a fatal blow to the coalition’s economic policy and to the cohesion of the two parties, it proves heaven-sent serendipity. Alexander soon proves as dry as Laws, some think even drier, and combines toughness with humanity. He rapidly forms a close relationship with Osborne and Oliver Letwin; a relationship which proves of enduring value – existential value, perhaps – to the coalition over the years.
Within hours of his joining, the Treasury inform Alexander that there is more scope for cuts, so eager are they to show the financial markets that the government is prudent and serious, while Alexander initially argues for fewer. They settle closer to the Treasury end of the argument. O’Donnell is rare amongst officials in cautioning against too big cuts because of his scepticism about government’s capability to deliver them. A series of meetings of the big four – Cameron, Clegg, Osborne and Alexander, later to be institutionalised in an arrangement unforeseen by the Coalition Agreement as ‘the Quad’ – finalises the decisions in the run-up to the Budget.
Osborne and his team are eager to get on with reforming the banking system. In their pre-election discussions with Macpherson, however, they decide to hold back from immediate implementation, and to produce a White Paper on financial reforms that leaves the door open. After discussion with Mervyn King and others, Osborne convinces Lib Dem Business Secretary Vince Cable that the Bank of England must have oversight of the banking system and that there is increasing recognition across the world that banks of last resort have to be in the same body as central banks. ‘The return of all those powers to the Bank was quite striking,’ says the former deputy governor Paul Tucker. ‘It was to become more powerful than it had been for eighty years. Constraints and good design were therefore imperative.’9 On 16 June, Osborne announces that he will set up the Independent Commission on Banking under the chairmanship of Sir John Vickers. The Treasury, nervous that the new government might be overly quick to regulate the City, thereby damaging its competitiveness, are happy with the delay.
The Conservatives had promised the Emergency Budget within fifty days. It comes on 22 June, after just forty-one days. The key announcement is the commitment to a clear deficit reduction plan over the life of the parliament, and the confirmation of what the figure will be. Officials in the Treasury and Cabinet Office continue to be struck by the readiness of the prime minister to be so supportive of the chancellor and Treasury. Back in mid-May, the Treasury had presented their proposals for the pace at which the deficit should be reduced, offering Osborne a set menu of cuts. The Budget presented on 22 June is almost identical to recommendations laid out in the Treasury’s initial papers.
The Quad proves its worth in the run-up to the Budget. Under normal conditions, the chancellor and the Chief Secretary, with the PM, are the figures who sign off on the details of the Budget: not even the Cabinet are told until the day the speech is delivered. But Britain now has a coalition, and the Chief Secretary is from another party, as is the deputy prime minister. The Quad therefore remains after the Budget, and reaches maturity during the Autumn Statement. It does indeed become the key buckle binding the coalition together.
Clegg worries that the cuts might compromise the delivery of public services: Alexander reassures him that quality will not be compromised.10 Osborne takes his Treasury team away to Dorneywood, the eighteenth-century Georgian house used by the chancellor, to analyse the proposals. They realise that they are about to be the authors of the toughest deficit-reduction plan ever enacted in peacetime Britain. It is unknowable how it will work out in practice, whether the country will accept it, and whether they are cutting too quickly or whether they should be going even further.
Savings are to be found mainly through cuts, but the Emergency Budget also brings in tax increases (80% of the deficit reduction is to come from cuts, 20% from tax increases). Prime amongst them is the plan to raise VAT from 17.5% to 20%. This is potentially very difficult. The Lib Dems are worried, as the change is regressive. ‘It’s difficult and damaging,’ Clegg tells Osborne, ‘but I can see that it has to be done.’11 Further debates take place on whether the VAT increase should come into force immediately: the decision is taken to delay it to January 2011, principally for administrative reasons. The Treasury is surprised by how political Osborne is. ‘It is clear that they don’t have much time for tax credits,’ says an official. Osborne and his team indeed regard Gordon Brown’s innovation as overly complex and riddled with perverse incentives. They decree that they will be much less generous. Housing benefit equally will be hit, the Treasury believes for political reasons again. The Conservatives are clear, however, that they will not touch pensioners.
Osborne wants to insert the controversial line into his speech, ‘when we say we are all in this together, we mean it’, a phrase he had used in October 2009. The Treasury accept that Osborne is serious about not hurting the poor more than the rich. Teams are tasked to model the impact of the policy changes, though they must rely heavily on guesswork. The day before the Budget, Osborne, Hancock, Harrison and Treasury civil servants work late into the night. Officials have a palpable sense that history is being made, and that they are now in a completely different era from New Labour.
That morning, 22 June, the newspapers make their predictions about the Budget. ‘The most draconian in thirty