Chancellor, in your Mansion House speech you said we must reduce government
debt rapidly to prepare for an uncertain future. What uncertain future do you
have in mind.
Osborne. As my
colleague the Prime Minister put it just six months ago, red warning lights
are once again flashing on the dashboard of the global economy. There is
Greece, the Middle East, and Ukraine.
Chancellor, economists are agreed that any imminent global downturn will be
more difficult to deal with if fiscal austerity is also being a drag on growth.
Osborne. I am
confident that the Bank of England can deal with any immediate threats to the
with interest rates already near zero?
Osborne. As the
Governor has often said, he has the tools to do the job.
Interviewer. Is that
why inflation is currently negative?
Osborne. As you know
that has a great deal to do with the fall in oil prices. More generally I think
we should celebrate the fact that prices have stopped
rising so that real wages and living standards can at last increase.
isn’t core inflation, that excludes oil prices, at 0.8%? The 2% inflation
target is yours, Chancellor. Mark Carney has also said that reducing fiscal
deficits will be a drag on growth.
Osborne. To repeat, I
have complete confidence in the Governor of the Bank of England to keep the
economy on track. I have not been disappointed in my choice of Governor so far,
but if I need to reprimand him for any failures in the future I will not shirk
from that responsibility.
back to the proposed legislation to outlaw deficits, you have also made
election commitments to cut some taxes, and intend to legislate to outlaw
raising others. That means that public spending will have to be cut to achieve
these surpluses. Some people have suggested these laws are just a backdoor
means to achieve an ideological objective of a smaller state.
Osborne. That is
nonsense. I just think it is important not to place any further burden on this
country’s hard working families. These families also know that you cannot go on
people borrow for years to buy a house, and many successful companies continue
to borrow to grow. These companies also know that it is best to borrow when
interest rates are low, and interest rates on UK government debt are currently
Osborne. And I will never stop trying to take credit for that. But as a prudent
Chancellor, I need to ensure we have room to run deficits safely in abnormal
Interviewer. Is that
to enable the government to undertake fiscal stimulus to support the economy
during a major recession?
Osborne. No, that
would not be appropriate, as I said in 2009. But as I have also said many
times, it is important to allow the automatic stabilisers to operate.
automatic stabilisers operate even during mild economic downturns, because low
growth reduces tax revenues for example. So does your definition of abnormal
simply mean when growth would be below average?
Osborne. No, I am
talking about more serious events than that, but I will leave the experts at
the OBR to decide precisely what is abnormal.
Interviewer. I am
sure they would welcome your guidance. But if abnormal does not include mild
downturns, and you want to make it a legal requirement to run surpluses during
those times as well, that will require either switching the automatic
stabilisers off during these mild downturns, or running pretty large surpluses
when the economy is on track so as to avoid going into deficit if a negative
shock of the normal kind hits.
Osborne. As I said, I
think it is important to allow the automatic stabilisers to operate.
Chancellor, I may be being stupid here, but why is it important to allow taxes
to fall automatically in a recession, but wrong to actually cut taxes further
to help bring the recession to an end quickly, particularly if interest rates
are stuck at zero?
Osborne. I think the
experience of 2010 shows us the limits of what governments should do. It was
right to let the automatic stabilisers increase the deficit following the 2009
recession, but any action by the government to increase those deficits puts our
credibility at risk.
Interviewer. Now I’m
a little confused. You and your colleagues said repeatedly during the recent election
that the deficit in 2010 was so large due to the profligacy of the last Labour
government, and not because of the recession. Austerity was because you had to
clear up the mess that Labour created. It also seems that a significant
proportion of the public sees it that way too. Are you now saying that is
Osborne. Look, no one
is denying that 2008 saw a global financial crisis. It is to prepare for that
kind of event that we need to run surpluses, perhaps as you suggest quite large
surpluses when the economy is growing normally, to get debt down quickly.
Interviewer. So we
need to bring debt down rapidly so that we can afford to bail out the banks
again when the next financial crisis hits. I thought you had taken the measures
necessary to prevent us having to rescue the banks again.
Osborne. We have done
what we can, but it is important to maintain London as the leading financial
centre, which means keeping banks profitable and allowing them to pay large
bonuses to attract the best international talent. We do not want to impose
regulations so severe that these banks and other financial companies go elsewhere. We made these points many times before 2008.
you, Chancellor. That has been very helpful in understanding why you believe we
need to legislate for budget surpluses. One last question if I may. Can you
tell me what percentage of donations to the Conservative party come from the