Dinners with Peter Mandelson

Please note 'The Andrew Marr Show' must be credited if any part of this transcript is used.

We did meet a couple of times admits George Osborne.

ANDREW MARR: 'We will do whatever it takes'. That's been the mantra coming from the Chancellor, Alistair Darling, all week.

But will whatever it takes be enough? In America, the $700 billion rescue package finally passed through on Friday, but so far it's failed to calm the markets there.

And since we couldn't even afford to contemplate anything similar here, what is our plan?

Vince Cable MP

Well in the week that party leaders claim 'we're all in this together', I'll be speaking to the Chancellor of the Exchequer Alistair Darling and also to the Shadow Chancellor George Osborne.

But first, I'm joined by the Liberal Democrat Treasury Spokesman, Vince Cable.

Mr Cable, your latest thought on this is in effect that the Bank of England Monetary Policy Committee authority over interest rates should be sort of put in brackets for a short period and the Chancellor should actually call for a cut in interest rates.

VINCE CABLE: Yes. I mean we're on the cusp of a major economic disaster coming out of the financial disaster.

I mean I've been a very strong advocate of the independence of the Bank of England, supported them throughout the last ten years, and we're going to need an independent bank, but these are very exceptional circumstances and I think the Chancellor is going to have to write to the Governor of the Bank of England and say instead of worrying about whether inflation's 2 or 3%, the issue is the collapse of the financial system and the collapse of confidence.

I mean the Americans have cut interest rates by 2%. I mean arguing here about a quarter or a half is neither here nor there.

ANDREW MARR: You think a big cut?

VINCE CABLE: A big cut is going to have to happen, and the Chancellor of the Exchequer's going to have to clear the way in order to enable them to do it.

ANDREW MARR: And what about the 40 billion plan to help small businesses because it seems that everybody feels that it's corporate Britain and indeed corporate Europe, particularly the smaller businesses are going to be running into cash flow problems. That's the next big issue.

VINCE CABLE: Yes, having you know that initiative is helpful, but I mean the essential ethic - we're just putting money into a European fund and it's coming back out again. I mean it's worthwhile, but it doesn't make an enormous difference.

I mean I think as far as the banks are concerned, instead of seeing it piecemeal, which is the way we've dealt with it so far, and perhaps rightly, it's not a criticism - I think we're going ot have to have a more comprehensive approach.

ANDREW MARR: Because otherwise one bank after another fought over.

VINCE CABLE: Yes, exactly, picked off one after another in the markets. And essentially the banks need capital and they can't raise capital for the markets because confidence is shattered.

So government is actually going to have to help the banks raise capital for the market. That may involve them taking stakes in a whole lot of banks rather in the Swedish model of the early 1990s.

ANDREW MARR: Well let me bring in the Shadow Chancellor, George Osborne, at that point. What do you make of this notion that perhaps interest rates do need to be cut and that politics has to reinsert itself into the Bank of England for a while?

George Osborne MP

GEORGE OSBORNE: I don't agree with Vince on that. I have more sympathy with what he said later, which we can come onto. But you know the whole point of an independent central bank is not that when times are very difficult - as they are now - you somehow override that independence.

I mean obviously it's not really an independent central bank and I think to mess around with something which now works in terms of controlling retail prices would be a big mistake. And in the end the Monetary Policy Committee are as aware as anyone else is of the economic situation, of the impact on home owners and small businesses, of what's happening at the moment in the credit markets, and I'm sure they'll be taking that into account.

ANDREW MARR: But responding to that, Vince Cable, I mean it would be quite a suspension of something that we've now had for, what 11 years - this system where the Monetary Policy Committee is independent of politicians.

Isn't there a danger that once you insert politics back into it once, it just happens again and again?

VINCE CABLE: Well there are dangers...

ANDREW MARR: Yeah.

VINCE CABLE: ... there are risks. You know there's the impact on the exchange rate - I fully acknowledge all that - but it's the sheer severity of the situation. We are in a real, real crisis situation. It's an edge of the cliff environment and...

ANDREW MARR: And how, how, how bad, in your judgement, could it get, is it likely to get?

VINCE CABLE: Well we only have historical precedents, some of which - pre-war - are not encouraging. Japan's another very worrying example. And we could be in that territory, but none of us know, to be frank. We're in unknown territory. And I think something to inject some confidence back into the economy amongst consumers and businesses is needed.

And I agree with you, you know we're in uncharted waters, temporarily suspending the commitments of the Bank of England to monitoring inflation as its primary objective would be a significant step. But if it was clear that it was a one off, it was an emergency measure, I think that would be understood and would have an impact.

ANDREW MARR: Mmn. Just before we return to Mr Osborne for a moment, what about the idea that is floating around - not being much talked about in public, but seems to be seriously considered - of having a plan to nationalise the entire banking system; in effect that this is a kind of last resort plan that's being prepared inside the Treasury, the Bank of England and so on?

VINCE CABLE: Well that does seem a bit extreme. I mean the kind of measure I was talking about would involve the government taking a stake in those banks that need to raise more capital - so the main point about that being that if the government's going to intervene, the taxpayer must take any benefit from any subsequent improvement.

But I think wholesale nationalisation across the board is not what's required. We are moving into a different world of banking. Banking is going to have to be much more tightly regulated, but not necessarily in that form.

ANDREW MARR: Mmn. In this new world, George Osborne, everybody says politicians are going to work together. What's the reality of that? Have you actually had useful private conversations with the government that have... where you've been able to feed in ideas, they've been able to tell you what's going on behind the scenes in perhaps ways that you can't discuss publicly?

GEORGE OSBORNE: Yeah, I think it has been useful, speaking for myself. I mean I went to see Alistair Darling on Tuesday last week and then went back to the Treasury on Friday to talk about banking legislation, which is going to be introduced into the House of Commons next week.

And what the Conservative Party has said is these are very, very difficult times, we're facing enormous economic instability, and it's in everyone's interest that we don't see the kind of American partisan battle that we saw in the last fortnight; that in fact the main political parties try and work together in a constructive fashion. And certainly on the banking legislation, we've got some ideas - raising deposit protection levels, which the government have now adopted; looking at giving the government more options than simply nationalising banks when they fail and the government look like they're going to do that - so you know there are plenty of opportunities for us to work together.

It doesn't mean you know there won't be times when we point out where the government's made mistakes or we won't suspend our critical faculties and we're not going to write them a blank cheque, but I think anyone watching this programme who is going to be extremely anxious about their savings, or if they've got a small business, extremely anxious about renewing the loan on that small business - you know they want to know that their political leaders are trying to work together...

ANDREW MARR: Trying to work together.

GEORGE OSBORNE: ... in exceptionally difficult circumstances.

ANDREW MARR: In your speech to the Conservative Party conference, I mean you painted a pretty brutal picture of the kind of economy that you expect to inherit if you win the General Election.

I wasn't entirely clear from what you said whether the... perhaps politics altering promises you'd made about tax the previous year on stamp duty and inheritance tax and so on, are they now off the board or do they still apply?

GEORGE OSBORNE: No, they still apply because they were really change... putting one tax up on non-domiciles and reducing tax on inheritance and stamp duty, so didn't have an overall impact on the fiscal position.

I mean the point I made is that we are going to have a very serious problem with public borrowing, which is completely out of control, and that will require tough decisions. And I proposed - and I hope the Chancellor does it before I come to office, if I win election - an independent office to ensure that a government is held to its commitment to restore stability and balance the public services... public finances.

ANDREW MARR: I'm just worried because David Cameron, I remember - and I think you said as well - that every single Conservative spokesman has been told to go back and look again at their budgets and see how much they can cut out; where real savings can be made and so on. And as Chancellor, surely you have to do the same with the various fiscal promises that you've made?

GEORGE OSBORNE: Well they... The big judgement call that David Cameron and I had a couple of years ago was whether to promise upfront tax cuts, and you used to quiz me...

ANDREW MARR: I did.

GEORGE OSBORNE: ... on this programme about whether that was sensible. I think we've been vindicated by events. We are not promising big upfront cuts in tax. What we're promising is to try and restore some stability to the public finances.

Now individual tax changes where you put one up and you bring one down and they pay for each other, I think are perfectly sensible measures and I've proposed a two year council tax freeze, for example, for councils that want to take part, so we really help people watching this programme who see all their other bills going up. But the overall shape of the public finances...

ANDREW MARR: Yeah.

GEORGE OSBORNE: ... that requires an independent office and a clear commitment to return to balance over a period of time.

ANDREW MARR: Things like more money for the army, a high speed rail link to the North, more prisons and so on, are they also being revised, looked at again?

GEORGE OSBORNE: Well if you look closely at each commitment. Take the Rail Link. You know I think this would transform the geography of the United Kingdom as an MP...

ANDREW MARR: It may be a very good idea. I'm just wondering whether it's you know...

GEORGE OSBORNE: ... Well as an MP in the North West of England, that would be a huge benefit to the country.

We're not talking about that being built tomorrow - everyone knows that's a long-term commitment - but we've also got to have at the end of this credit crunch, a much more balanced economy, so we're not overly dependent on financial services but we grow manufacturing.

And we have... you know we're not... You can't run an economy on debt and you can't run an economy built on finance, housing and government spending. That's exactly what Gordon Brown did for ten years and look at the mess we're in.

ANDREW MARR: Do you think there's more banks on the edge here?

GEORGE OSBORNE: I think we're in an exceptionally difficult situation and I think the kind of ad hoc approach that we've had from the government, the Chancellor so far, is now coming to an end and we do need to look at a much bigger solution. The Conservative Party is very willing to engage with the government...

ANDREW MARR: By 'much bigger', what do you mean?

GEORGE OSBORNE: ... in a discussion... Well I think the answer is around recapitalisation. These banks are incredibly weak, their balance sheets are weak. You can deal with the symptoms, which is the liquidity problems - and I spoke to Mervyn King last week about that and I know the Governor of the Bank is doing everything he can - but I think there will be a role for creditors, for existing shareholders in recapitalising these banks...

ANDREW MARR: Right.

GEORGE OSBORNE: ... but also potentially for the government. And that is not... You know a Conservative government in Sweden did that fifteen years ago and it may well be the case that...

ANDREW MARR: We have to do it here.

GEORGE OSBORNE: ... that the Labour government here will need Conservative support and involvement in some very big steps. And we stand here willing to talk to the government about this, but at the moment Gordon Brown's approach which is 'look, I'm going to deal with this case by case', I think is probably running out of road.

ANDREW MARR: Okay. Before, before we turn to the Chancellor of the Exchequer, one political question.

Peter Mandelson met a senior Tory, 'dripped pure poison' about Gordon Brown into his ear and said he was 'very, very vulnerable on indebtedness.'

I put it to you that you were the senior Tory; that you met him in Corfu and that's what it's all about.

GEORGE OSBORNE: Well, I did have dinner with Peter Mandelson a couple of times actually recently and I don't think what he told me was any different from what he's been telling anyone who's been having dinner with him in recent months. I'm not going to...

ANDREW MARR: So... But that's, that's not a... that's not an unfair description of what he told you about Gordon Brown.

GEORGE OSBORNE: I, I'm not going to get into the exact private conversation I had with him. Let me just say it's very surprising to hear him say he's 'joined at the hip' with Gordon Brown. And if the problem with this government is it's divided and dysfunctional, bringing Peter Mandelson in is going to make it more dysfunctional and more divided.

ANDREW MARR: Did he tell you that Gordon Brown had a debt problem?

GEORGE OSBORNE: I'm not, Andrew, going to discuss my dinner with Peter Mandelson...

ANDREW MARR: You understand, you understand why people are worried about it. It's, it's kind of a bit like, I don't know, Voldemort and Harry Potter being caught in a Starbucks discussing Dumbledore, isn't it? (laughter) I mean it's a sort of, it's one of those strange moments.

GEORGE OSBORNE: Well I'm always happy to talk to our European commissioners (Marr laughs) and indeed our new DBERR Secretary or whatever he's called. But you know there's a genuine point, which is we need unity.

We need a united government and I can't see how bringing in Peter Mandelson to prop up Gordon Brown is going to do anything more than make that a more divided government. I mean it is a completely desperate act and I think people see it for what it is.

ANDREW MARR: Alright. Well for now, both of you, thank you very much.

INTERVIEW ENDS

Please note "The Andrew Marr Show" must be credited if any part of this transcript is used.

NB: This transcript was typed from a recording and not copied from an original script.

Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy

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