The man who crafted Labour’s economic miracle used to be famous for being unknown. Now he’s emerged from the shadows to become an MP, he tells Building why a housing recession is not imminent and how he still has the ear of the chancellor.

John Smith liked whisky – so did Robin Cook actually – and Gordon likes his wine.” Not many Englishmen can demonstrate such intimate knowledge of three of the great Scotsmen to have dominated the Labour party over the past 15 years. But Ed Balls has himself been one of the country’s most powerful people since his mid 20s.

In 1994, Balls was plucked by Gordon Brown from the obscurity of leader writer at the Financial Times to be Brown’s chief economic adviser, a position he held for a decade. He was the economic brain to Brown’s political brawn, and when Labour was in opposition, the Conservative party tried to present him as a geek, largely on the basis of the reference to “post-neoclassical endogenous growth theory” that he inserted into a Brown speech, and which has since become his catchphrase. Michael Heseltine quipped of the speech: “It’s not Brown’s, it’s Balls.” To be insulted by the deputy prime minister at the age of 28 is a compliment indeed.

Less than a year later, Balls was striding the corridors of the Treasury, his lavish office the gateway to the chancellor. From that office he drove three landmark policies of modern political economy: the independence of the Bank of England, tax credits and the formation of Regional Development Agencies. He also helped develop the PFI.

Last year he decided to follow the two great influences in his life, Brown and his wife – housing minister Yvette Cooper – into the House of Commons. The Oxford and Harvard educated-Balls is now MP for the formercoal-mining seat of Normanton in West Yorkshire. Since joining he has been keeping a low profile, and claims that he has been learning the ropes by setting up constituency surgeries and understanding “the mood changes” that occur in debates in the Commons.

At the same time, Balls does seem to remain part of Brown’s inner circle. As he puts it: “Gordon is very assiduous in keeping up past friendships. With conference speeches and international initiatives he’ll turn to people he’s spoken to before. It would be bit strange if he suddenly didn’t take their views.”

Balls might be being a little modest here. A friend says: “The way Gordon writes speeches is very collegiate. Ed is certainly sent drafts of them and is certainly in good contact, probably daily. What Ed’s been doing is being quite careful not to make any mistakes or be presumptuous – there had been talk that he’d walk straight into a ministerial position.”

Ed’s been being careful not to make any mistakes – there had been talk that he’d walk straight into a ministerial position

It seems probable that Balls will secure a junior ministerial post in any reshuffle next year, much as David Miliband, his equally high-flying contemporary, did after the 2001 election. But for now, Balls is acting every bit the committed back-bencher: he has a creditable 87% voting record – 100% with the government.

Unsurprisingly, he speaks mainly in economic debates and is insistent that the economy is performing well, despite the oil problems and a recent warning from the chairman of Wilson Bowden that the housing market is in recession. Balls says: “If you go back to when I left the Treasury 15 months ago, there were fears that house prices were rising, that consumers had over-extended. There was going to be crash and a recession. It’s understandable that people would think like that, as since the war, boom has always followed collapse. I’m not saying it’s not tough for housebuilders, but I haven’t seen a benign slowdown like this in my lifetime.”

Balls argues that his treasured policy of making the Bank of England independent – the first act of the first Labour government back in 1997 – was a vital step. The Bank has kept interest rates below 5% throughout the slowdown, but was able to make small pre-emptive rises to dampen inflationary pressure. In the hands of politicians, interest rate rises were political poison: “When we arrived at the Treasury, civil servants feared inflation was set to rise to 4% in a year to a year-and-a-half because necessary interest rate decisions hadn’t been made. Important decisions that needed to be made weren’t.”

Balls says that even the most pessimistic forecasters predict economic growth of 2% – “They aren’t talking of recession.” His own prediction is that house prices will remain steady for a while and then grow again. Balls thinks that there is still real demand for housing because Britain enjoys low inflation and full employment, and so the price surge of the past few years was not a symptom of an economy slipping out of control.

Discussion moves to the Barker Review, last year’s Treasury-sponsored document that looked at why Britain wasn’t building more homes. The principal criticism within the industry is that its recommendations have taken too long to implement.

“Housing is a very difficult and contentious issue. We need time to build a consensus – not just housebuilders, but the CBI and the chambers of commerce. Remember, Kate Barker reported a year before an election. If we were really in the business of delay, we could have said: ‘Thanks Kate, but we think you need another year to mull this over’. Of course there are some who think we could have moved faster. But there are some parts of the housing world that think there’s not a case for building more houses. I think in five years time the Barker Review will be looked at as a fundamental change to our economy.”

Of course there are some who think we could have moved faster. But I think the Barker Review will mark a fundamental change to our economy

Balls was deeply involved in the Northern Way, the strategy to reduce the £30bn output gap between the North and the South, as the chancellor’s representative on its steering group. This includes the demolition of empty homes and the construction of modern infrastructure. By contrast, the South is earmarked for 120,000 new homes in the Thames Gateway alone. The cynics argue that the South gets homes whereas the North gets strategy.

Balls disagrees: “The government is improving performance on brownfield development in the northern regions. In order to meet housing objectives maybe it’s sensible to treat the North differently to the South. The problems in the North are low productivity, poor transport infrastructure and employment – people who lost jobs in the 1980s and 1990s are still struggling.”

Balls isn’t always on the defensive. He hints that there is some truth in the rumour that at government departments used the PFI to keep capital spending off their balance sheets. “Most outstanding PFI projects are on balance sheet now because risk has passed back from the private to the public sector. If anyone looked at the PFI to get money through the back door, that was a bad decision.”

He then offers the familiar statistics that less than a quarter of PFI schemes are late or overbudget, compared with more than 70% previously. But he admits that there have been failings – certain projects were too small for private contractors to make money from, government has not always been a good client – and there is one big change he would like to make. “I’d build in enough time at the beginning to get design right.” He argues that designs tend to be rushed to get things done by a certain date, and too often, they have to be renegotiated.

This means adding more time before a project goes to market and at preferred bidder stage. The shortlisting phase, where so much of the heavy bid costs for contractors occur, would therefore be shortened.

Balls says he reached this conclusion since becoming an MP, as he now gets more direct access to PFI practitioners than when he was a policy wonk at the Treasury. But he is badly missed there.

Many articles and books have been written about how Brown brought in a swath of advisers in 1997, distrusting the civil servants who’d served through 18 years of Tory rule. At the time, the talk was that the civil service was rankled by this, but one official who was there at that time disagrees. “It’s slightly misunderstood,” he says. “We were not used to that number of special advisers, but people realised quite soon that Ed was the link. You would send Ed advice that was going to the chancellor, and he would alter it so that it would go down better with Brown. The issue is, what does the Treasury do in his absence?”

Firm friends: Brown and Balls

  • Gordon Brown and Ed Balls share backgrounds in journalism. The chancellor was current affairs editor at STV between 1980-83 and Balls was a Financial Times leader writer in the early 90s.
  • Both were academic high-flyers. Balls attended Keble College Oxford and Harvard; Brown went to university at 16 and gained a first despite going through the trauma of losing an eye.
  • The two are renowned for their love of sport. Brown has a glass eye as a result of a rugby accident and Balls is a keen Norwich City Football Club fan.
  • Their shared economic beliefs were shaped by the US Democrat political and economic movement led by Bill Clinton in the late 80s.