Andrew Grice: The ghosts of Old Labour still haunt this Government

Some ministers think Mr Brown should just "go for it" and nationalise the major banks.
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The Independent Online

"We ran for office as New Labour and we will govern as New Labour." Tony Blair's words on the steps of 10 Downing Street after the 1997 landslide looked good at the time. But, when the history books are written, I suspect they will look back on Labour's long spell in power as an opportunity lost by a party which never quite managed to shake off its old ghosts.

New Labour has expended an awful lot of energy on convincing us that it is not Old Labour. It shied away from closing the gap between rich and poor because of its phobia about putting up taxes. It distorted its foreign policy to avoid any hint of past anti-Americanism; that embroiled us in the Iraq disaster. It railroaded through the renewal of the Trident missile system to squash memories of unilateral nuclear disarmament. It dithered for months over nationalising Northern Rock because it needlessly feared echoes of the party's traditional support for publicownership.

In all those areas, the ghosts of Labour past persuaded its new rulers to overcompensate. And, of course, they cuddled up to the City of London. The love affair was mutual. Financial services provided a quarter of tax revenues, allowing Labour to spend more on health and education. In return, Gordon Brown hailed a new "golden age" for the City, Ed Balls trumpeted Labour's "light-touch regulation," non-domiciles kept their protected tax status, tax havens were untouched and the top rate of tax was left at 40p in the pound until there was a deep hole in the public finances.

This week, Labour's affair returned to haunt it too. Two of Mr Brown's many new friends in banking resigned as government advisers, one of them accused of sacking a whistleblower who warned that HBOS was pursing a reckless expansion strategy. The Prime Minister looked powerless to stop bonuses being paid by banks – even when they were owned by the state. The regulatory system he set up in 1997 was called into question after it emerged that the Financial Services Authority did not tell the Treasury it was worried about HBOS.

These events matter because they will make it much harder for Mr Brown to avoid the blame for the economic crisis. So far, the Prime Minister has largely escaped responsibility. Many voters have bought the "made in America" label he is desperate to pin on to the recession. There may be fewer buyers now.

Mr Brown is right about the origins of the financial crisis. But, as time passes, the public will judge him on his response to it. Yesterday, a Populus survey showed that 89 per cent of people believe the Government should have stopped the banks it bailed out paying bonuses; 82 per cent want it to cap bonuses for senior bank staff and 64 per cent want senior bankers who made mistakes to repay their bonuses from previous years.

Despite the severe crisis, the old ghosts still rattle around in Labour's cupboard. Some ministers think Mr Brown should just "go for it" and nationalise the major banks, ensuring they restore lending to business and house-buyers to previous levels and taking control of bonuspayments.

There was a heated debate over what to do at the Cabinet's weekly meeting on Tuesday. Harriet Harman, Labour's deputy leader, argued for the retrospective clawing back of bonuses. In a sign of bad times, other ministers later accused her of positioning herself for a post-election Labour leadership contest – in other words, after a defeat.

In the cabinet meeting, Blairites such as Hazel Blears and John Hutton opposed tearing up bankers' contracts, which could dent Labour's hard-won reputation by penalising enterprise and success. Lord Mandelson said Labour should not be buffeted around by media squalls because people wanted to see steadiness and grip, not a government which arrived at a principled position and was not then pushed from pillar to post, which would lead to a lack of confidence in it.

Mr Brown proposed the compromise he announced on Thursday: no retrospective action on past bonuses but a system for the future under which they could be clawed back if the bankers'long-term performance does not warrant them. That will not stop bad headlines as the Royal Bank of Scotland presses ahead with bonus payments this year, despite intense pressure from the Government to halt them.

A younger generation of Labour ministers is less haunted by the old ghosts. They might be prepared to "go for it" if they were in charge. They say they will try to twist Mr Brown's arm to be more bold. Don't bank on it.