Britain And The World Economy In 2014

The Rt Honourable George Osborne is the UK Conservative MP for Tatton. He became UK Chancellor of the Exchequer in May 2010. Osborne entered Westminster as the youngest Conservative MP in the House of Commons, went on to serve on the Public Accounts Committee and hold a number of shadow ministerial posts before being appointed Shadow Chancellor in 2005. In Sydney for the G20 Finance Ministers and Central Bank Governors meetings, on Friday 21 February 2014, George Osborne spoke at The Sydney Institute in conversation with its executive director Gerard Henderson, answering a wide range of questions dealing with matters as diverse as Britain’s economy and the Scottish referendum on independence to discussion of the world economy and Britain’s relations with Australia.

BRITAIN AND THE WORLD ECONOMY IN 2014

GEORGE OSBORNE

Gerard Henderson: Chancellor, welcome to Australia in general, Sydney in particular, and exclusively to The Sydney Institute. We know why you’re here. Have you been here before?

George Osborne: I came a few years ago to a Liberal Party convention in Brisbane with my then boss, William Hague, who is now our Foreign Secretary. He probably still thinks he’s my boss, but we’re partners in the Cabinet. He came to speak after which we had a day in Sydney. I’ve never spent too long here but it’s a beautiful city and a beautiful day to be here.

Gerard Henderson: Well, you must come back. Tell me, what’s the message you’re going to bring to the G20 finance meeting when it gets under way? You’re going to tell us something about Britain and I guess you’re going to have some idea about what Australia might be doing in the G20. What’s your message to our Treasurer Joe Hockey?

George Osborne: I saw Joe Hockey this morning and he and the government have a great agenda for the G20. The G20 is one of those groups you can’t compel to do anything. You have to work by consensus.It consists of the leading economies of the world and if you’ve got a clear agenda and you know what you want to achieve, which the Australians seem to know, it can be a really successful forum. Countries act out of self-interest. What you have to do is co-ordinate the reforms and changes being made, in order to improve the resilience of the global economy. Over the years I’ve been to such meetings where Europe or the United States have been in the frame because of its budget difficulties. There will be questions around emerging markets experiencing difficult times. The role for the G20 is to say, “Let’s co-ordinate what we can do nationally to make ourselves stronger, because that will make the world stronger?”

Gerard Henderson: And Australia’s particular role? Anything special about that, or is it just our turn?

George Osborne: Each chair brings something particular. We had the Russians last time and the Mexicans before that. The Australians want a particular focus on infrastructure, which is a domestic focus of Prime Minister Abbott and the Treasurer. There is much we can learn from each other about infrastructure – often these are global sources of money. We have Australian pension funds investing in infrastructure in the UK. These are global flows of capital and we can learn from each other. The G20 has an important role in trying to work out how to increase our infrastructure investment, particularly among the Western economies. The advanced economies, which have perhaps neglected infrastructure over the years and paid a price for that.

There are, though, important things on the agenda – tax evasion and avoidance will be something that we’ll be talking about because, increasingly, there is a sense we need international rules for the new economy to make sure tax is collected. You’ll also see discussion of financial reforms. Mark Carney is the Governor of the Bank of England, and a Canadian. He also chairs the Financial Stability Board, which is the overall body central bankers work within. There are important reforms needed to the banking systems, although these are probably less of an urgent priority for Australia because your banking system did better than ours or the American banking system, in the recent financial crisis. But this is a priority for others round the table.

Gerard Henderson: And tell us a bit about your message in relation to Britain. When Anne and I were last in London, a bit over a year ago, we caught up with your offsider Sajid Javid and we spoke to other people. Sajid Javid was relatively optimistic. But the general view in Britain was one of rather substantial pessimism about the economy. That’s over a year ago now and the results in recent times have been quite good, haven’t they? How do you see the current state of the British recovery?

George Osborne: The first thing I’d say is that Sajid Javid is the Financial Secretary, and so is my number two conservative in the Treasury. He’s a really smart, new MP, one to mark his card and watch his progress. He, by the way, recommended I come and speak here.

Gerard Henderson: Well he’s obviously a good judge.

George Osborne: So we’ve got him to thank. But Britain was one of the countries most affected by the great recession of 2008; we had a bigger fall in GDP than almost any economy, the single biggest bank bailout in the world, bigger even than the American bailouts. The Royal Bank of Scotland, at the time it failed, was the largest bank in the world. We also had a load of issues that we’d stored up and not really confronted, not least of which was that we had the largest budget deficit.

The new government came in to pick up the pieces. We set out a pretty tough, decisive, long-term economic plan. We said we had to confront our problems, we had to control spending, we had to get the deficit down, we had to make our economy more competitive, and fix the banks. Many were saying we should pursue a different course, to borrow more, expand the size of government, spend more, that it was time for bigger government. We said no to that and it was a controversial course we set upon.

It was bitterly contested in the British domestic political scene. But four years on, almost, you can see the fruits of what I believe we did. You can see the British economy now growing faster than any in Europe and faster than most advanced economies in the world. Our unemployment has come down very sharply. We’re also a fiercely competitive place to do business. I’ve given the United Kingdom the lowest corporation tax of any country in the G20, through steady reductions even in difficult times. We set out a decisive course, took some very controversial decisions around pension ages and entitlements and the like, but that hard work, and the hard work of the British people, is starting to pay off.

Gerard Henderson: You have also held your coalition with the Lib Dems – was that difficult?

George Osborne: Well there’s no history of coalition really in Britain. The last time there was a coalition was in the Second World War and that was a coalition of national unity. It wasn’t forced on the parties at the time by the situation in the House of Commons; it was because of the war. So the last time we had a coalition of necessity in Britain was in the 1930s and there was no received wisdom about how you did these things. There were no set rules, Britain was very much used to one-party government, as indeed were the parties used to one-party government. We faced a choice on the night of the general election when the outcome made it clear that the Conservatives, whilst they clearly had won many more seats than the Labour Party and millions more votes, had not won enough to form a majority.

We could have tried to be a minority government, but in our system you wouldn’t last long as a minority government. You would be defeated time and time again in the House of Commons. So we went for a coalition with the third party in British politics, the Liberal Democrats, the centre-left party. People questioned whether it was going to work. And we had reasonable questions about how long it could be sustained. But it’s proved very enduring. It has provided political stability at a time when we most needed it, because of the economic problems facing the UK.

The Conservatives and the Liberal Democrats are two parties with two different political philosophies. And I shall be doing everything I can to kick the Liberal Democrats out of government next year, when we have an election. No hard feelings but business is business. But we’ve worked to produce this plan. Inevitably, there have been compromises. But with the central challenge, our condition for forming a coalition, to get the budget deficit under control, that was acceded to.

Gerard Henderson: So you got the centre-left party to go with you on the economic reform process. But not the Labour Party.

George Osborne: No.

Gerard Henderson: They’re advocating increased personal taxation now?

George Osborne: Well, they can answer for themselves. Basically they would want to borrow more and spend more – have a bigger government. The current leadership of the Labour Party is probably the most left-wing leadership the Labour Party’s had since the 1980s. They have actively repudiated the Tony Blair agenda. As part of that, they are quite aggressively in favour of higher personal taxes, and higher business taxes. It’s not dissimilar to what the French Socialist Party has done in France. I don’t think this stance will prove very appealing because, in my view, it would clearly put our recovery at risk. And the public will see that.

Gerard Henderson: We’re going to go to our audience in a minute, but just a couple of specific issues. You made a statement last weekend that if Scotland leaves the United Kingdom that they’ll have to find their own currency. Since then, you’ve got some kind of support from David Bowie and Kate Moss. But not so much in the polls. What’s the problem with Scotland remaining with the pound if it goes its own way at the referendum?

George Osborne: The first thing I’d say is – and many people understand the context of this – obviously there’s been a Scottish Nationalist movement for many, many decades. But the people of Scotland voted for a Scottish Nationalist government a couple of years ago, with a clear overall majority. That government was elected on a platform of having a referendum on the question of Scotland’s membership of the United Kingdom.

In the Westminster parliament, the three main parties are absolutely united in the view that we should keep Scotland in the United Kingdom. But we had a choice. We could resist that desire for a referendum and come up with all sorts of obstacles – legal, constitutional obstacles as to why that referendum couldn’t be held. Our collective view was that would just breed more resentment and more sense that Scotland was not having a chance to express its view about its future. Alternatively, we could agree to a referendum. So the referendum is happening in September.

It’s obviously a huge event for our country. At the moment the polls would suggest that the people of Scotland are going to vote to stay in the United Kingdom. And there’s been no polling evidence to the contrary. Part of our job, for those of us who aren’t in Scotland, is to point out some of the consequences of independence. One of them is this question about the use of the pound, the Pound Sterling.

Alex Salmond, the leader of the Scottish Nationalist movement, says Scotland will have a currency union with the rest of the UK, and will share the pound. Last week, my Labour opposite number, the Shadow Chancellor, and the Liberal Democrats along with other forces around the UK such as the first minister of Wales, all agreed with me that is not possible. A currency union would not be sustainable. For very similar reasons why, actually, the Euro’s proved a difficult currency union. Personally and passionately, I want Scotland to remain in the United Kingdom. Not only would it be good for Scotland, but it will be best for the rest of the UK as well. It’s also incumbent to point out some of the consequences and decisions that will face the Scottish people if they choose to be independent.

Gerard Henderson: Early this morning, those of us who turned on the news heard sad stories out of Ukraine. Ukraine, of course, is not a big economy within Europe. But it’s a very significant part of Europe, as you know. It does sit between Russia and the EU. Do you see the outcome in Ukraine as having an impact – any civic impact – on the European economy and consequently the British economy?

George Osborne: I don’t think there’d necessarily be a significant economic impact, particularly on the UK. We don’t have a huge amount of trade with Ukraine. And for most of the European continent, that’s not really the issue. The issue is the political consequence. There are people on the streets of Kiev who are trying to establish the case for human rights, freedom and democracy. Ukraine is part of the family of European nations. European foreign ministers have, in the last day, demonstrated their support by imposing these sanctions. We want the violence to end; we want the talking to start. It’s a very significant moment. It’s a country trying to wrestle with its destiny, All that follows should be done in as peaceful and democratic way as possible. And not with the violence we’ve seen.

Nick Johnson: In 2010, Labour leader Ed Miliband talked of you “taking the biggest gamble in a generation with growth, people’s jobs and people’s livelihoods”. As you say, the UK has settled faster than any EU country. You said, in your talk, that Labour is the high taxing party. Do you think Ed Miliband, and Labour generally, accept the fact that debt ceiling is important? Or will they just revert to high spending and high taxing and increasing debt? What lesson have they learned?

George Osborne: Labour has suffered a very heavy defeat. It was partly a consequence of our electoral system that the Conservatives didn’t win a majority. But Labour got the lowest vote share it has had since the 1920s. Normally, when parties suffer heavy defeats – in this country as well as the UK – they tend to go through a period of reflection. They try to work out what went wrong. Political parties need a period of renewal.

Labour has not done that at all. Partly because the party leader, Ed Miliband, won the leadership through the old guard previously in office, and they’re in denial. They don’t think they did anything wrong. They believe Britain can run a much higher budget deficit, and that the British state can be bigger. They are profoundly wrong about that. They’re wrong in believing this is how to respond to the financial crisis.

There’s a broader argument here too, about how are advanced economies like our own, like Australia’s, will be able to compete in the modern world, will be able to create jobs in the modern world, and create careers for people in the modern world. When I hear Joe Hockey talking about ending the age of entitlement and challenging the idea that government will get ever bigger, I’ve a huge amount of sympathy for what he’s saying. All advanced economies face this challenge. How can we look our children and grandchildren in the eyes and say that we’re going to make this a place where there will be jobs in 10, 20, 30 years time.

Anthony Benscher: I’d like to ask a question about welfare reform. There were reports this morning of recent commentary on the government’s welfare reform program. I was wondering if you could share with us which of the welfare reforms being proposed or implemented by your government are your favourite, and why?

George Osborne: Because the welfare budget has got too big, it has to be controlled. Some of what we’re doing is also about making sure that we change the incentives in our welfare system. At the moment, this would be true of many other welfare systems. There are very few incentives to work. Marginal tax rates can sometimes of be 96-97 per cent for every extra pound you earn. Welfare dependency saps people’s confidence, it undermines people’s economic security, and it does enormous damage to society. It traps people in poverty. Prime Minister David Cameron was talking about this earlier in the week. We have a moral mission here, in welfare reform, to make welfare systems do what they’re designed to do, which is to help people out of dependency and into work. One of the biggest changes we’re undertaking at the moment is to bring the myriad of benefits into a single benefit called Universal Credit where you will always know that you will get to keep extra income you earn because of the simplicity of the single benefit. That is probably the most exciting of the welfare reforms that we are promoting here at the moment.

Question: Two questions. I know you’re an advocate of a flat tax system. Is that something that you see occurring in the medium term future at all in the UK? Secondly, as you mentioned before, your new Bank of England governor is a Canadian. Is this about picking the best for the job?

George Osborne: I am for flatter and simpler taxes. Countries with developed tax systems, like Australia and Britain, cannot move in one bound for a flat tax. Because we have built up, over many years, incentives and reliefs that people come to depend on – saving for a pension would be a good example. I don’t think a pure flat tax is possible, unless you’re prepared to change a lot of basic assumptions people have, about the way they can save for their retirement, or the way they would give money to charity. But it is incumbent on us to try and create simpler taxes and flatter taxes. I would talk more of it as a direction of travel than a realistic endpoint.

On Mark Carney, the appointment of the Governor of the Bank of England is one of the most important decisions a Chancellor of the Exchequer will make. I did want the very best. Mark Carney had impressed me at the Bank of Canada and I set out to get my man. I pursued him, basically, at a series of G20 meetings around the world. To be fair, he was very keen on the job. And this made me quite proud of my country. There was a moment when maybe only a dozen people in Britain knew that we were going to approach him, including the Queen, a small group. I didn’t know how the British people would react when it was announced. And people welcomed it without question. They could see he was the best person for the job. Britain has taken to Mark Carney and listened to him, and he’s never had a question about his nationality. There was an amusing moment when the press releases came out from the Bank of Canada and the Bank of England. One said the Queen was pleased to appoint Mark Carney to the Bank of England, and the other said the Queen was sad to see him departing the Bank of Canada.

Question: So why haven’t you made more reforms more than you currently have?

George Osborne: I’ll answer the question this way. The fiscal reforms that we’re introducing and, indeed, the new government in Australia are making are very important. You’ve got to have supply side reforms and that’s a big part of what we’re doing. Malcolm Turnbull has the broadband scheme, and it is being rolled out – a really important part of the infrastructure of the future. In terms of improving production and supplies, that is really important. On financial markets, what we have learnt in the last few years is that we’re so interconnected that failures in one market can have massive shock effects on others. This makes the case for global standards and global recollection.

Malcolm Turnbull: Chancellor, you talked about tax avoidance by multi-nationals in the digital economy. Tony Abbott adverted to that in his speech at Davos recently. What are the measures you think could be deployed to ensure that big over-the-top players, like Google, pay their fair share of tax in countries like Australia and the UK where they actually generate, ultimately, most of their profit.

George Osborne: Well, this is a big challenge for the international community. The first thing I would say is that these companies have been a huge force for improving productivity in our world, and for improving the consumer experience in our world. I want more of the Google, Apple and the like’s research and the technology to happen in the United Kingdom. Big companies attract smaller companies around them; they create tech clusters. Now, they have responsibilities that go with that – big responsibilities. There are issues like pornography. And there are responsibilities when it comes to taxation.

The world tax system, the double taxation agreements and the like, were designed for a world where there was a limited amount of trade and capital flow. Treasury and exchequers could keep an eye on what was happening. Our corporate tax system developed to facilitate that trade so that you weren’t being taxed on the same transaction twice in two different countries. But that system has not kept up with what you see now. Now there is a case for a twenty-first century tax code.

It’s all to do with profit shifting. Base erosion is the technical term here, which means that people move the revenues in their companies to the lowest tax jurisdiction. The basic principle we want to hold to is that companies should be taxed where the revenue is generated, where the real economic activity takes place. Obviously this is much easier said than done. Secondly, you have to make sure that you don’t try to go alone as a country. If Australia tried to introduce these tax changes alone, the world economy in these companies would just flow around that. That’s why there’s a role for the G20 and we’ve tasked the OECD to come up with new, international tax standards.So, I hope there’s a real prospect, over this year, building up to the big leaders’ summit in Brisbane, that we can get substantive global achievement. You do need the world’s 20 largest economies to sign up to this to make it work.

Question: The political scene in recent years has changed with the rise of UKip which, looking at the latest polls, is now just behind the Liberal Dems. Obviously, anti-European sentiment is on the rise in Britain, so what are the prospects of Britain vis a vis the EU in all this?

George Osborne: UKip have quite a high poll rating. They’ve become the repository party of protest because the Liberal Democrats are now with the government. So, you’re seeing a bit of that. At the same time, the European issue has become more salient in British politics, partly because of the economic consequence of the problems in EU for the British economy in recent years. It’s gone from being just a constitutional issue to also a very profound economic issue. Our approach is to trust the people.

David Cameron has said that the Conservatives will seek to renegotiate our terms of membership of the European Union to reflect the fact that Britain is not in the Euro. The UK does not want to join the Euro. There are other issues which I would go into if we had time. But, of major importance is that we seek to renegotiate our terms of membership and will then put that membership to the British people in a referendum no later than 2017. What David Cameron wants to achieve, what I want to achieve, is Britain’s membership of a reformed European Union. Ultimately that won’t be our decision, but the decision of the British people.

Question: With the election coming up next year, how important, is it to secure the absentee vote.

George Osborne: It’s very important. Australia’ is home, probably, to the largest UK ex-pat community, although there are a lot of Britons living abroad in other countries. And they’re entitled to a vote. There is the issue of information. People often don’t really realise they can still vote in the country they came from. We’ve also made it easier for that to happen. But, you know, all power to Conservatives abroad to get those million votes.

Question: Australia’s treasurer, Joe Hockey, said that he wants the G20 leaders to agree on a hard, global growth forecast. There are noises from Germany that they’re against that. Where do you stand on the issue?

George Osborne: Well, I’m with Joe. That’s the simple answer to that. He’s right to tell us all to halve our ambitions, and to develop investments and infrastructure, to sort out our public finances so that we are competitive and can increase growth for a very good purpose. GDP is not just a number; it’s about economic security for hardworking Australians and Britons. If we can come to an agreement on a target, or an aspiration, that will be a good thing. I suspect it will be one of the big issues over the next couple of days.

Question: Can we have your thoughts about Joe Hockey’s comments on tapering and his calling quantitative easing the morphine that the US must be weaning itself off. Do you share those sentiments?

George Osborne: Well, look, the very loose monetary policy, which has been run in many Western economies, cannot be there for all time. And no one ever said it would be. The forward guidance that the Bank of England has issued, the tapering that the Federal Reserve has advanced on, is all to attempt an indication of the future path of interest rates, or the future direction of the quantitative easing program. So, that’s just a statement of fact.

What Joe Hockey said in his remarks, and where I absolutely agree, is that sometimes such tapering, and the impact that has had on the rest of the world – particularly on emerging markets – has been used by some countries as an excuse to explain why they’ve struggled in recent months. If you look at the emerging markets, some have done much better than others, and some have struggled much less than others. Those countries that have made reforms, taken the hard decisions, put themselves in better shape, that have not been so affected by tapering are the better off now. Ultimately, tapering is a sign of economic success. It’s a sign of the US economy growing. It’s a sign of jobs being created. I remember sitting around the G20 table, a couple of years ago, when the countries that are now complaining about the withdrawal, or the tapering off, of QE were the same countries complaining about the introduction of another round of QEs.

Question: What did you make of the report in The Spectator UK last week that the floods in Britain had nothing whatsoever to do with climate change, but were more to do with left-wing councils not doing the appropriate dredging of the Thames and allowing the flood lands in Somerset to be flooded. I’ve seen similar things here in Australia. What do you make of that?

George Osborne: I really enjoy reading The Spectator – although I don’t always agree with the views of The Spectator. I don’t want this to sound too parochial as you’ve had huge challenges with floods here over the years in Australia. But what The Spectator was alluding to is that, in Britain, the environmental movement won the argument about the dredging of rivers and the dredging of canals in order to protect the local habitat. The result is that canals and rivers have since not been particularly effective at draining flood waters. They’ve got a good point there. Now, I’m not someone who doesn’t think climate change is happening. Climate change is happening and the most likely explanation is that it’s caused by human beings. We need to take steps to deal with that as a world and we need to take steps to try and mitigate it. But, we should do this in as cost effective way as possible.

Where I part company from many environmentalists is their opposition to nuclear power, their opposition to fracking for shale oil and shale gas, particularly shale gas. Shale gas has made dramatic changes to US carbon emissions; equally civil nuclear power is about the lowest form of carbon generation you can find. There are solutions that, for various theological reasons, environmentalists seem to oppose. That’s a mistake. Ultimately the consumer is not going to be prepared to pay the high cost of some of the other technologies indefinitely.

Question: The Bank of England has started to indicate that interest rates may rise next year. Do you agree with that, Chancellor?

George Osborne: Well I take the vow of silence on interest rates. We have an independent central bank. So my job is to find the central bank governor and his job is to get on and do his job. But he’s doing very effectively.

Gerard Henderson: Just finally, as you know, the finance ministers’ meeting used to be at the G20. Now it’s the leaders’ meeting as well. Do you think the finance ministers’ meeting still has the clout that it had when it was the G20 alone?

George Osborne: The finance ministers have a very good role to play, basically in preparing the ground for the big leaders’ summit. When the President of China and the President of the United States attend meetings, there are some things you can do at the last moment. But you need these agreed before they arrive. With the finance ministers, because there’s less focus on them in the gaze of the media, there is a chance to thrash through the agenda, and come up with substantive things. There will be a forcing moment, because everyone knows the leaders are coming to Brisbane. The Australians will want a successful G20 presidency that puts the pressure on us all to deliver the goods. And I’m pretty confident, having seen the agenda, that Joe Hockey and the team here will deliver the goods.

Gerard Henderson: Carol Kay, from The Sydney Institute Board will thank our speaker. Before she does, thanks to Stephen Price and Corrs Chambers Westgarth for use of this great facility.

George Osborne: Designed by a great British architect as well.

Carol Kay: Chancellor, that was a fabulous presentation with very interesting insights. And, having worked for a number of years in the City of London, I will have to confess a soft spot for economic commentary delivered with British accent. So, thank you.

Thank you also for your very frank insights today. It was particularly interesting to hear your thoughts on Britain and its economy. Through strong, fiscal discipline, you and your government are to be commended for your commitment to lifting Britain out of very challenging economic circumstances to become, as you pointed out today, one of the fastest growing economic environments in the world, and the fastest growing economy in Europe. So congratulations to you for that. I know that you say that the job’s not done but you certainly must be pleased with some of the recent economic data. We all wish you well for the G20 finance ministers’ meeting here in Sydney. And we certainly hope that your collective wisdom will generate some effective outcomes for global future stability and prosperity. Chancellor, thank you very much.

George Osborne: Thank you.