Gordon Brown and Alistair Darling have rightly been hammered for their handling of Northern Rock, the non-dom debate and the botched reform of capital gains tax (CGT). I’ve not met anyone in the City over the last few weeks with a single good word to say about either the Prime Minister or the Chancellor. One City bank boss who recently met Darling told me it was like meeting his school geography teacher.
The pair have shown themselves to be indecisive, lacking in judgement and more concerned with short-term political advantage than the long-term interests of the country. Darling in particular looks out of his depth.
But I suspect this problem goes much deeper than simply being about personalities. People can be changed. Ed Balls is respected in the City and would no doubt make a better chancellor than Darling. Perhaps George Osborne might too. But I fear even the most talented chancellor would struggle to overcome the collapse in the credibility of Britain’s financial policy-making institutions – the Treasury, Bank of England and Financial Services Authority. As the UK enters a very tricky period, this is yet another reason to be gloomy about the future.
Take the Treasury. One has to question the quality of advice Darling was receiving from what used to be seen as the Rolls-Royce of Whitehall departments. The most contentious part of the Government’s non-dom tax reform – proposals to tax assets held in offshore trusts – turned out to be a drafting error. Treasury officials hadn’t understood the implications of their own legislation. I suspect the same was true of the CGT reforms, which also looked poorly thought out. Meanwhile the Treasury made such a pig’s ear of Northern Rock that Goldman Sachs had to be drafted in at huge expense to tell it what to do.
It’s hardly surprising the Treasury is no longer fit for purpose. I’m told 50% of its staff have been there less than three years and 80% have only ever known Brown and Darling as chancellor. In line with Labour’s preference for youth over experience, the head of the Treasury is in his mid-40s and his number two is 38. That means the Treasury is worryingly short of grey hair with experience of previous economic downturns; none of its top brass were around for the 1974 banking crisis.
There’s another aspect to this cult of youth: it raises questions over the Treasury’s independence. The Civil Service’s previous approach to promotions was far from perfect, but at least it ensured those at the top were at the end of their career and therefore could hope for nothing more from their political masters than a knighthood. That gave them confidence to stand up to ministers – which is no doubt why Labour got rid of them. The problem with officials who are still mid-career is that they may only tell you what you want to hear.
But if the Treasury is a diminished institution, the Bank of England has fared even worse. In his first act as Chancellor, Brown stripped the Bank of half its role (ending its oversight of the banking system), which, at a stroke, undermined an institution that had served Britain well for 300 years. And although he gave the Bank power to set interest rates, in almost every other respect he treated it with disdain. Top bank jobs were used to park senior Whitehall civil servants with little relevant experience. Sir John Gieve, who ran the Home Office for five years, was put in charge of financial stability – a job that usually went to someone with wide-ranging knowledge of the markets. Posts on the Monetary Policy Committee (MPC) were left vacant for months before being filled with old cronies of Ed Balls. The lack of respect Brown showed for the MPC has made it harder to recruit top economists to the job.
The Financial Services Authority (FSA) never had any prestige in the first place. Cobbled together from other regulators, and with a remit that runs from policing overdraft charges to regulating hedge funds, it has always struggled to recruit people of the calibre needed to regulate an international financial centre – as was clear from the oversights that allowed Northern Rock to blow up. The FSA has been reduced to advertising for a new chairman in national newspapers after all the shortlisted candidates said they didn’t want the job. Apart from new CEO Hector Sants, the FSA has failed to hire any senior figures from the City and was forced to fill Sants’ old job with an internal candidate.
Of course, the Government is not solely to blame for the collapse in the authority of UK institutions. The traditional public service ethos has been on the wane for years, unable to compete with the salaries on offer in the City. And the Government’s preference for youth only reflects changes that had long since taken place in the private sector. Even so, Labour has been extraordinarily careless with institutions whose credibility once lost will be hard to recover. And that – more than individual misjudgements – may be its most pernicious economic legacy.
Simon Nixon is executive editor of Breakingviews.com