At a sparsely attended committee hearing this morning I heard Stephen Timms, Treasury minister, admit that public sector pay might have to be frozen. At least he said that the Treasury had not ruled this out.

“It’s certain the case that our pay policy needs to reflect the wider economic circumstances…we will be deciding on pay policy over the next few weeks, the policy has got to be fair to people who work in the public sector just as we have to be fair to everybody else. The suggestion by Steve Bundred has made is certainly one we will reflect on but the details on that will be made over the next few weeks.”

You may remember that Bundred’s suggestion - made in the Observer on Sunday - was that there should be a freeze in public sector pay or at least severe pay restraint.

There were subsequent suggestions that the Labour government would not reopen existing pay deals.

But what about new ones? Some form of pay restraint is one of the few obvious tools open to minister as they try to tackle a budget deficit heading towards £175bn this year. Over the past five years, the public sector wage bill of £158bn has risen by an average of £7bn a year.

Carl Emmerson, deputy director of the Institute for Fiscal Studies, recently told the FT that since the total accounted for roughly one pound in every four spent by the Treasury, “it would be a bit weird if none [of the planned reductions in public spending] came from remuneration, either on wages or employment“.

For now though no party leader has dared to voice the pay freeze argument (Cameron says the issue should go to independent pay bodies). The political hazards are pretty obvious.

UPDATE

An eagle-eyed reader points out that teachers have been told they will get a 2.3 per cent rise in September and again next year. Ed Balls, schools secretary, has confirmed this today. But that is only one corner of Britain’s vast public sector.

Attempts to clean up the financial system have become more urgent given reports of the banking world returning to normal.

There are suggestions that Goldman Sachs and Morgan Stanley could agree to pay out $34bn of bonuses between them later this year. I caught up with a friend at the weekend who works for a bank in the US: “Everyone is expecting a bumper bonus season, it’s going to be hugely controversial when this comes out,” he told me.

Of course lending has not yet returned to normal. But banks have been able to profit from recovery surges in some markets, for example stock markets outside Europe and the US. Soon it will be champagne time on some trading desks.

Today’s white paper on banking - issued by the Treasury - doesn’t seem to be greatly radical despite its broadly sensible tone.

1] It urges more sensible remuneration practices but fails to specify how pay and perks should be curtailed in any detail. The paper says “the FSA now has powers to penalise banks if their pay policies create unnecessary risk“. Every year the City watchdog will have to report on how banks are complying with a remuneration code of practice.

It will also “integrate oversight of remuneration policies into overall assessments of risk.” The Treasury is briefing that this means that banks with over-generous pay packages will have to hold higher levels of capital.

But how will they define “unnecessarily risky” pay packages? Herein likes the difficulty. I’m told the Treasury discussed the idea of a “maximum wage” and quickly realised it was unworkable. Let’s wait to see how this works in practice.

2] Alistair Darling (here is his speech today) will give the FSA a new statutory responsibility for financial stability but will otherwise leave the tripartite regime (Bank of England, FSA, Treasury) intact.

3] There will be a new “Council for Financial Stability” which will supervise meetings, three or four times a year, between representatives of the three bodies (who already meet regularly). These gatherings will be minuted and those minutes will be made public.

4] The FSA is strengthening rules to make sure banks hold enough capital as a buffer against losses.

Andrew Tyrie, a Tory MP on the Treasury select committee, said the white paper was “Rearranging the three key deckchairs on the Titanic”. There were questions as to why Mervyn King (governor of the Bank) only saw the report last week.

It was Lord Myners who hit the nail on the head when he told the committee this afternoon: “No amount of supervision will guarantee that you will make up for poor governance, poor management and a poor culture (at banks)”.

It is a difficult circle to square:

Ministers want banks to be responsible and risk-averse. They also want them to provide more loans for families and businesses.

The two are contradictory.

We had another insight into this puzzle this morning when the FSA, Lord Myners and John Healey (housing minister) were up in front of the Treasury Select Committee.

You may remember that Gordon Brown wants to ban 100 per cent mortgages. (”A new era of responsible lending“). The prime minister has asked the FSA to examine the issue. The watchdog is putting out a paper in the autumn examining whether mortgage restrictions are a good idea.

But the FSA executives who appeared this morning at the committee seemed far from enthusiastic about setting restrictions on loan-to-value or loan-to-income ratios.

Jon Pain, managing director of retail markets for the City watchdog, said that imposing “caps or collars” on mortgage lending based on income or deposit ratios could be a crude tool for measuring affordability.

Instead, lenders had more sophisticated ways to work out whether a household could repay a home loan, Mr Pain said. Assessing a loan on the basis of income versus mortgage was a “superficial” ratio, he said.

Mr Pain said that the level of a household’s disposal income - after paying mortgage payments - was a more appropriate figure than loan to value or loan to income ratios. (An argument used by many lenders in recent years to justify their more “liberal” lending practices).

Meanwhile another FSA executive, Leslie Titcomb, argued there were concerns about the potential impact on first time buyers.

“We are also concerned that having a fairly blunt tool like a cap on loan to values could have an effect of denying first time buyers access to the market, which would be unfortunate,” she told the committee.

Maybe I’m over-interpreting here but that seems pretty clear…..no ban on 100 per cent mortgages or banks lending six times your salary.

Sally Keeble, a Labour member of the Treasury select committee, said the comments proved that there was a “clash” between the two arguments.

“I’m fairly certain there is a clash about what the government wants to do,” she told the FT. “On the one hand, they want to see prudent lending, which argues for tight controls on loan to value ratios, on the other, they want people to be able to get loans.”

From my Notebook column in today’s FT:

Shaun Woodward: Our new secret formula is a great success. The public love it.

Gordon Brown: Higher spending and investment until the end of time.

Ed Balls: Unlike the Tories’ 10 per cent spending cuts.

Alistair Darling: Aren’t they Labour cuts?

Gordon Brown: Not since our rebranding exercise. Now it is the Conservatives who will wrest vital funding from the hands of policemen and lollipop ladies.

Alistair Darling: Surely if we win the general election this will come back to haunt us?

Cabinet ( together ): We won’t.

Shaun Woodward: I still think we need something stronger.

Peter Hain: The Tories will institute compulsory Morris dancing?

Andy Burnham: They will murder the first-born of every household?

Peter Hain: They’ll ban Britain’s got Talent .

Gordon Brown: That’s more like it.

One of the riddles of Gordon Brown’s regime is the exact role played by Shaun Woodward, Northern Ireland secretary. Some sense Woodward’s hand in the crude claim that Labour will increase investment while the Tories will cut spending. After all, he was John Major’s head of press during the - successful - “Labour Tax Bombshell” campaign in 1992.

Is Woodward now a crucial adviser to Brown? Lord Mandelson waspishly told the FT on Monday: “I don’t know. What is the advice being dispensed by Mr Woodward?” The former Tory MP has been regularly tipped in the media for promotion to higher office - wrongly.

Yet Woodward is not short of ambition. Alastair Campbell wrote in his diaries of Woodward’s defection in 1999: “He made clear again, less subtly than before, that he felt he was seen by some in the Tory party as a possible future leader.”

Incidentally, Woodward used to work on That’s Life with Esther Rantzen, who sang a song at his stag party, having gate-crashed it. “Do not in any circumstances ask what I was wearing,” she says. “Although a close friend was a gorilla.”

I ask Rantzen if her old friend was annoyed with her proposal to stand in Labour-held Luton. “It’s really unfortunate because the sleaze is evenly distributed,” she admits.

The charge against Gordon Brown is that his promise of future investment - instead of cuts - is cloud cuckoo land given the grim public finances. You may think this unfair.

But here is the verdict of the governor of the Bank of England today when asked about the national deficit:

Mervyn King:

“The speed of which the fiscal stimulus should be withdrawn has to depend on the state of the economy. …The scale of the deficit is truly extraordinary. 12.5 percent of GDP is not something that anybody would have anticipated even a year or two ago. And this reflects the scale of the global downturn.

But it also reflects the fact that we came into this crisis with fiscal policy itself on a path that wasn’t itself sustainable and a correction was needed.

There will certainly need to be a plan for the lifetime of the next parliament, contingent on the state of the economy, to show how those deficits will be brought down if the economy recovers to reach levels of deficits below those which were shown in the budget figures.”

How did they all do? Marks out of 10 are for the speech - not the chances of success:

(2.30pm)

Margaret Beckett: 5/10

Thin gruel from the Labour former minister and bookies’ favourite. Admits that public confidence in the Commons is lost and says she will “facilitate desired change”. Agrees that an independent financial regulator (for MPs) would be a good idea…but the “devil is in the detail”.

No-nonsense style. Says she has chaired lots of committees and bodies. “I have never been afraid to speak truth to power, wherever power been found. I have always been my own woman.” Points out that the Speaker has historically always been from the ruling party: Betty Boothroyd was the exception to the rule. A bit humourless.

Sir George Young: 8/10

Tory grandee points out that he has relevant experience as chair of the Standards and Privileges Committee. That proves his independence and strength of mind. Gives backbenchers reassurance by indicating that he won’t join the “bidding war to be tough” on MPs. Points out that many innocent members, “those who did no wrong”, were “caught in the backlash” of the expenses scandal. Has a good line comparing the financial crisis with the political crisis: both now need “recapitalisation”.

Says he wants to tilt power back from the executive to Parliament. Calls for: more “brisk” Parliamentary debates; cut back on pointless opposition day debates; call MPs by relevant experience rather than seniority; let chairs of select committees announce their reports in the chamber.

Ann Widdecombe: 6/10

A well-received speech, despite the unfortunate vocal delivery. Says she will only be an interim Speaker, retiring at the next general election. Her purpose would be to oversee rapid reform and restoring public faith in the Commons. Wouldn’t spend her whole time parading up and down in the country in TV studios, she assures the House. But admits in so many words that her main selling point is public popularity. Makes the serious point that legislation is not sufficiently scrutinised in the House.

Continue reading "Speaker speeches: a brief summary"

1800 Our hunch about Hoon seems to be correct. He is not a rebel. Instead there are plans afoot to give him a job in the EU within a year.

1730 John Healey is the new housing minister

1709 Caroline Flint resigns after not winning a promotion. Sour grapes?

1643 Lord Adonis to transport. Flint gets nothing. Bradshaw to culture. Liam Byrne is chief secretary of the Treasury. Jim Knight becomes employment minister. Beckett and McNulty leave.

1617 Labour lose all their county councils. Continue reading "The reshuffle"

Hazel Blears has become the second cabinet minister to resign in 24 hours. She is skipping PMQs and heading home to Salford this morning to spend more time with “her people” ahead of tomorrow’s local/European elections.

A friend says that the communities secretary felt “briefed against and picked on” by Gordon Brown’s allies. However, the person denied that Blears knew that she would be demoted in the imminent reshuffle: “We didn’t know what was going to happen.”

Blears’ allies deny that she had co-ordinated events with Bev Hughes, Jacqui Smith and Pat Hewitt, all of which said yesterday they were resigning. Others have their doubts.

Events are moving quickly and the pressure on the prime minister is growing by the hour. His ability to control events is diminished by the resignations.

Apparently Alistair Darling, David Miliband, James Purnell and Geoff Hoon are all reluctant to move post; would they outright refuse to move to new jobs?

Even the Guardian now thinks the prime minister should quit. Watch this space.

UPDATE

One former minister - and ally of Blears - says the Salford MP has been treated badly by the party. “There has been all kinds of mistakes made in the way No 10 have dealt with this ghastly crisis over expenses and the treatment of Hazel compared to other cabinet minister has left a sour taste in many people’s minds.”

FURTHER UPDATE

Rumours swirling around about Caroline Flint, Europe minister and Jane Kennedy, farming minister, following suit. I wouldn’t give these too much credence: at this point.

Labourlist repeats the Flint rumour. And it has the entire Blears statement for your perusal.

AND

If Brown is still standing next week - after what are expected to be grim results in Thursday’s elections - he faces what is effectively a motion of no confidence tabled by the Celtic nationalist parties.

The SNP and Plaid Cymru are holding an opposition day motion declaring: “This house requests the prime minister to seek the dissolution of the present Parliament.” How the Tories and Lib Dems act, and vote, will be fascinating.

Mike Weir, SNP member for Angus, is in line to ask a question at PMQs and will throw down this gauntlet towards the PM.