This is an edited transcript of an interview conducted on May 20 2010 between Chris Giles, George Parker and Alex Barker of the Financial Times and David Laws, chief secretary to the Treasury.
FT: I just want to ask you about why you took this job. There were a few people in the Lib Dems before the election who said chief secretary was the one job you wouldn’t want in a coalition; being George Osborne’s hatchet man. Why did you take it?
David Laws: Yes. You’re right that I haven’t quite worked out whether this is a dream or a nightmare. In one sense, this is the department and job that I was built for as an individual, having done economics at university, having had experience in the City, having held the shadow job in the Lib Dems and being incredibly interested in issues to do with public spending and public services.
In another sense, you’re right that many people might have thought that this was a bit of a hospital pass at a time when we’re going to have to carry out a very big fiscal consolidation. But actually I wanted this job and I had a conversation with Nick and said that I thought that if the offer of this job came up, it was one that the Lib Dems should step up to, for two reasons. One is that I think it would just be impossible for this coalition to work unless there was joint ownership of the deficit reduction process, unless we were both involved in taking the hard decisions about public spending. Otherwise you’d end up with one party who seem to be in charge of the Treasury and the other party, you know, throwing increasingly large numbers of stones from outside the building as all the tough decisions had to be made.
So we have always viewed it as being right for both the country and the party that this coalition should last and if the coalition is to last then it’s got to be on the basis of a shared ownership of the tough decisions.
And the second thing is that I think we’ve got a very good coalition agreement. I think that we made a lot of progress on things like our Lib Dem tax policy, getting agreement on that, on the pupil premium, on the approach to the economy. And if we did not have a voice within the Treasury to ensure that we were involved in the decisions over those things, there is obviously more of a delivery risk. And therefore being in the Treasury gives us an opportunity to make sure that the Liberal Democrat voice is heard, that we do our best to safeguard those parts of the public services that we have a particularly significant commitment to, and also that we can make sure that the deficit reduction is carried out in a way that’s consistent with our values and seeks to protect those people on the lowest incomes.
When I went back to my constituency a couple of days after the coalition agreement, we had a thank-you party for all the members in Yeovil constituency, which had a rather higher turnout than it normally does, and not just because we had a good result in Yeovil to celebrate, but because I think they were rather mystified at having a cabinet minister. And although there were a couple of people who asked questions about the coalition; actually, the vast number were very supportive of it and actually were supportive of the idea of having a Lib Dem in the Treasury and thought it was a good idea.
And what they left me with is this thing, which I’m told is a knife-sharpening device but with a Lib Dem rosette on it and so what they said is, you sharpen your knife for public spending reductions but when you’re making those choices, remember what our values are, remember what our priorities are. So I said, I promise I will take that back to my office in the Treasury and as we make these tough choices, I’ll remember what we stand for as a party.
And that won’t be easy because some of the decisions that have got to be made, particularly in the spending review later on this year, are going to be a choice between the unpalatable and the disastrous. I think Phillip Stephens in your paper was saying, in relation to the choices he faced after the election, that they might be between the unpalatable and the disastrous and they are certainly going to be in the spending review.
So I’m under no illusions that there won’t be some really quite tough decisions to take but there are still ways of protecting the services that you believe in passionately and also protecting people on low incomes. And actually my conversations with George so far indicate he’s very much on the same wavelength in terms of carrying out the fiscal consolidation but doing so in a way where we’re fair as well as tough.
FT: Are you mentally prepared for the idea of becoming the most unpopular man in Britain?
David Laws: I’m mentally prepared for getting a lot of representations from angry people about reductions in budgets and I’m mentally prepared for having to go out and sell the decisions that we make to people in this country who are going to find some of the things we do very challenging and some of those things are going to be unpopular in my own constituency as well as across the rest of the country. But I do think that people, on the whole, will understand that the public finances are in a complete mess, that we can’t just go on building up debt, not only because it risks the economy but it lands on future generations. And I think people understand that there are no easy choices and while people won’t want to see big cuts in certain areas of public spending, they don’t want to see vast increases in taxation either so they understand that George and I and the Government have got a really difficult job to do, to reconcile these things. And I recognise that this job is not only going to be a matter of making the right choices but actually going out and selling those choices to the country and making them confront the fact that we have a range of choices, none of which are easy or popular over the short term.
FT: Before we get into the detail, our readers will be interested in why you decided to give up quite a lucrative life in the City and go into politics and what your experience of the City has taught you in terms of the job you’re doing now.
David Laws: The experience in the City has been incredibly useful because it means that I have been looking closely at Budgets since the mid-1980s. I don’t think I’ve missed a budget statement – it’s a sad thing to have to admit to but – I’ve probably seen about the last 25 budget statements live from being in a City dealing room in the 1980s when Nigel Lawson reduced the upper rate of tax from 60% to 40%. I’ve seen the recession linked in to that, to some of the toughest budgets at the end of the Labour period in office. And understanding the way monetary policy and fiscal policy work, the way the markets work, the scepticism of the markets towards the things the politicians say but don’t necessarily demonstrate, the way economic data works; that’s all in my blood and it’s an advantage to have that coming into the Treasury because I don’t have to re-learn that. There’s enough to learn as it is without having to learn everything.
But I went into politics because, from a very early age, I was very passionate about politics and making the country a fairer place because I’m a Liberal who does believe in liberal economics but also believes that that can be complemented with a social liberalism which tackles problems which surround the inequality of opportunity, making sure that there is a strong safety net underneath everybody and trying to tackle some of the injustices that there are in capitalist societies.
And although free market economics, up until recently, has made big gains in terms of its acceptance throughout politics, I think one of the areas where the strongest advocates of free market economics have shown to be completely wrong is in the area of assuming that a meritocratic society would be one in which there was opportunity for everybody. And societies like Britain and America are meritocracies where the chances of acquiring merit are very unequal. And I think one of the things that I’m most passionate about is trying to, in a free society and in a liberal, free market economy, trying to take action through Government that gives everybody a chance and doesn’t mean that the inequality that arises from freedom is embedded in inequality of opportunities.
FT: Looking ahead to the Monday announcement, how are you getting on in identifying £6bn of cuts?
David Laws: Incredibly well. We are very close to agreeing all of the details. We had a very good meeting with the Prime Minister and the Chancellor yesterday to discuss the package as it is to date. We have ministers rushing to sign up as rapidly as possible to their own departmental numbers. I can tell you that a former Chancellor, Mr. Clarke, was first to come back and agree his within, I think, hours of us sending out the number. We signed up to the principle very strongly at the Cabinet meeting on Monday. And all of the cabinet were very strongly behind the idea. And then I said to them that I wouldn’t want to blacken their names with the detail of the numbers at the meeting but that my office would be in touch to confirm all the details afterwards. And yes, they’re all coming back and agreeing the figures.
FT: So how have you done it? Have you just allocated a number to every department?
David Laws: Well, there has been a process of, there’s been cooperation between the department and the treasury on it. Obviously the treasury has had some clear views about driving our efficiency savings, and a lot of work has been going on, including over the last couple of months, I guess, from the scope of making savings in all of the key areas of consultancy and advertising and IT, property, basic efficiencies in the department. And there’s been quite a detailed analysis of how much departments should be able to drive out those efficiency savings.
Departments, at the same time, have obviously known that this is likely to be coming up, that there is the commitment to the six billion that was in the Conservative manifesto, that that possibly would be implemented. And they’ve also, obviously, been looking forward at a period when budgets are going to be in a big squeeze. So there’s been a lot of work going on from both sides. And the issue now really is to make sure that our view of what should be happening is reconciled with the departments. And we’re going to give the departments as much freedom and flexibility as possible. We really don’t want this, we need to deliver the spending reductions and we need to make sure they’re delivering it in a way that’s tackling inefficiency. That’s the priority rather than taking easy choices not to drive out the efficiency. So, but ultimately it must be for the departments to decide how they deliver the efficiency savings. They’re the ones who have the detailed expertise and we want to give them as much flexibility as possible to actually deliver on the numbers.
FT: So on Monday you will give the departmental totals. That will be the announcement, essentially, and then it will be up to the departments themselves to say what they’re going to do?
David Laws: Yes, that’s broadly the case. I hope as well as giving the actual DEL reductions by department that we’ll also be able to make some wider comments about the categories of savings that we anticipate being driven out. And there are still some discussions on going about the degree to which we might want to exercise some central oversight and stimulus in relation to that. There’s a balance to be struck. At the moment, a lot of the six billion is about driving out efficiencies in government and getting rid of waste before the serious review starts. And we really want to make sure that by the time you get to the serious spending review, departments have tackled the easy low hanging fruit and the efficiency savings and the waste in government and the reduction of cabinet ministers’ salaries. We need to deal with that because we don’t want to end up in a situation where we’re doing the main spending review and people are able to say oh, you haven’t tackled IT, you haven’t tacked waste and you haven’t tackled all sorts of extravagance that could have been dealt with. So we’ve got to get rid of that and departments have got to be able to prove that they’ve tackled those things before they start taking really tough decisions that will follow the spending review.
FT: Are the numbers quite similar across departments, so roughly it will be the same 3 per cent cut in departments?
David Laws: They do vary a little bit in that we could obviously have taken some of the protected areas like health and then simply ended up with a figure and applied that across every single department. But actually that probably would have been a bit blunt because the nature of each department’s budget is obviously slightly different and the scope for driving out efficiency savings is slightly different. So they won’t be precisely the same figure for every single department but there’s been a more discretionary process that’s taken into account individual departmental capabilities.
FT: There will be, presumably, job posts lost through this process as well.
David Laws: That will depend a lot on the decisions that are made by individual departments. And obviously they will have to strike the right balance between looking at any savings from existing staff and for easing the future recruitment. And they will have to consider quite carefully the cost implications of both. Obviously in the short term it reduces your savings if you’re having to remove existing staff, but in the longer term, there will have to be some decisions about staffing levels across the whole of the public sector if we’re to secure the types of savings that will be necessary in the spending review by which we map out the budget.
FT: What attitude will you take to departments who want to spend some of their accumulated end-year flexibility which is now £20bn or so in the coming years?
David Laws: Yes, we will want departments to manage that extremely carefully given the current state of the public finances and the potential for excessive claims on the reserve. And we will also want departments to bear in mind that we are now moving from an age of plenty to an age of austerity in the public finances. We will make that austerity as progressive as we can by protecting the things and the people who need protecting. But we are moving to that age of austerity and no department should be spending money on projects which would have looked good in the years of plenty but which would just not look like priorities in the period that we’re entering into. And it also would be ridiculous for departments to be spending huge amounts of money on pilot schemes for projects that are just never going to be affordable.
FT: It’s interesting to hear you talk about the age of austerity - a phrase that didn’t cross any Tory lips during the campaign.
David Laws: Well, it was actually, Nick Clegg, I think spoke about progressive austerity at the conference last year. I’ve never been too sure whether he was being polite that austerity will progress forever or, but what he meant by it, I think, was that there will be tough decisions to make on public spending.
But actually we also want to make that from the perspective of being a progressive party and a progressive government. And in all of the decisions that we take on public sector pay, on pensions, no spending, on the welfare budget, both the chancellor and I are determined to be looking at the impact of those on people who are the most vulnerable members of society. And we’ve got to make sure that those people are protected as far as they reasonably can be from the tough action that’s going to have to be taken. And some of the things that we managed to agree in the coalition document will help in that because we agreed that the priority on tax, essentially the overriding priority will be the delivery of a higher personal allowance which will help people on lower incomes and those on middle incomes. So, but we will need to look at the same issues when we come to pay, when we come to pensions and everything. And all of this work is already being rapidly commissioned because the earlier we can make decisions on all of these matters, the easier it will be to secure the fiscal consolidation that’s going to be necessary, particularly that we make on 2011 and onwards.
FT: Were you ever happy with the £6bn figure, and how much of that is actually going to come off the deficit and how much is going to be recycled?
David Laws: George said in the announcement earlier on that the great majority of the six billion will be going straight through into deficit reduction, and that’s certainly the situation. The great majority is the figure that we’ll announce on Monday. But it is a great majority. But there will be some that will be aimed at helping to secure economic recovery.
There are still quite active discussions going on between the treasury, business department and other departments including the Prime Minister’s for what the priorities should be. We haven’t reached a conclusion on that. Our priority in the treasury has been to get the money and, it’s what I said yesterday when we had a mini-meeting in 10 Downing Street, I’m really finding it quite difficult to get my mind in train to spend any money. I need to save it. So I’ve contracted out the job of spending out to the deputy Prime Minister and the Prime Minister and Vince, and I’m concentrating on saving the money before we spend it.
FT: Looking ahead to 2011, the spending review period, it is clear that the numbers, even in the Budget document and before additional spending reductions are pretty brutal if they come off departments alone. Does that mean the welfare budget is really going to be part of the…?
David Laws: We obviously haven’t made any of those judgements yet, but you can see here the shape of things. We can see that it’s very tough and can see that the more things you say you’re going to protect, the more challenging it is for everything else and, at some stage, challenging could become almost undeliverable if we’re not careful. So we are going to need to try to avoid making any automatic assumptions about additional things that would be protected. This, for me, has been the major priority in the last week since the new government was formed, most of my time has gone into this £6 billion exercise and establishing some of the groundwork for the budget and the spending review, but without going into the micro details at this stage.
But as soon as the £6bn process is finished, then it will allow me certainly – and obviously George has loads of other responsibilities within the government to deal with – but it will certainly allow me then to focus almost completely on all the spending issues relating to the budget, which will be setting the right TME levels, the action that we’re going to need to take over pay and pensions, the way in which we’re going to make those decision. And we will have to do a lot of work on that prior to the budget because although the spending review is also going to be a hugely important exercise and will determine all the detail, we will have to give some eye to that while we set the TME figures in the budget.
If there’s no relationship at all between the deliverabilty of the spending review which comes after the budget and what’s in the budget documents, then there would be an issue arising fairly rapidly and everybody in the Treasury is conscious of that. so although we won’t be able to go through and do a kind of ultra fast track spending review in detail, we will have to form a judgement about what sort of savings are available in different areas if we’re to set the right figure for TME
FT: Will there be a breakdown in the Budget? You’ll certainly have a broad sense of debt interest?
David Laws: I don’t know how much George will want to break down the thing, but obviously in the budget he’s already said that Sir Alan Budd is going to revise the budget judgements and make sure that the fiscal forecasts are right, so we’ll have a new set of assumption, assuming he changes anything on growth and other economic indicators, we’ll have a new set of deficit figures that fall out of those assumptions, which we’ll have to make sure we use in the budget. We will then have the targets that George will have to set for the reduction of the deficit over whatever time horizon he thinks is appropriate, which is going to bring down the structural deficit more rapidly than at present. We’ll have to set the TME figures for overall spending.
And obviously, coming out of those conclusions, we’ll have to consider whether there are any tax implications which at the moment we can’t consider because we don’t know… the other things have got to fall into place first and as both parties committing to bearing as much of the burden as is possible, we won’t even look at tax issues until we’ve made a judgement about how much can reasonably be borne through spending. But that will need a detailed look at a Treasury level before the main spending review starts in earnest after the budget. Actually, in reality, all departments are looking at it now, but the detail of it will accelerate after the budget. But what we are committed to overall, I think 22nd June is going to be, certainly for the Treasury, the most important date in this entire parliament and possibly for the government.
And I think that Nick was right in the election campaign when he said that, actually, fiscal consolidation is going to be much easier with a coalition government that’s got broad support than if one party was seeking to do this by itself, because it is going to be very tough and it will need a lot of public understanding of what we’ve got to do. But I think that there is a determination of provided the economic recovery is continuing in the way we expect it to be, then the actions that we’ve taken in the budget is going to have to set out in a really credible and decisive and aggressive way the action that we’re going to have to take to reduce the deficit.
And we are determined to be able to assure the country and the markets when they see the budget on 22nd June that we have a credible plan that is going to deliver in a very decisive way the deficit reduction that we need. And obviously individual decisions about implementation will follow that from the spending review and so forth, but I think it will absolutely clear when we make the budget announcements, just the scale of the consolidation tat we’re talking about and our determination to achieve that and some of the tough decisions that are going to be necessary.
FT: Is there a case for a longer spending review than the traditional three years, given the coalition has five, and you might want to bind it in for a longer period?
David Laws: I’ve always been a big believer in having longer term spending plans in order to give some kind of certainty and allow the departments to plan in an intelligent way. And you could argue that that is particularly necessary now with such capital expenditure otherwise you can just end up shunting decisions forward into the future. So I think that while there could be pressure to have much shorter-term budgeting because of the economic environment, actually I think that there is still a very good place to be made for long-term planning on public spending. And because the fiscal consolidation is going to take the parliament – you’re right that there’s an issue for us now on whether there should be even longer term plans for public spending and I know that the IFS were proposing something like that in a briefing that your colleagues did yesterday. And we certainly need to seriously consider that option in the Treasury but a decision hasn’t been taken on it.
FT: There were a lot of commitments made during the campaign to protect the pensions winter fuel payments secure bus fares, child benefit, by the Tories. Do they still stand or is the coalition…?
David Laws: I think you’ll find that in the coalition document that’s been published this morning. I mean we took all the hardest decisions in the actual original coalition agreement, but this one bulks out all the other key policies. And I think I’m right in saying that it repeats some of the key pledges that were made by the Conservatives particularly during the campaign in some of those areas. And it is important that what was said during the campaign is respected on some of those pledges because if people feel that we’re not keeping the promises – it’s already going to be difficult enough keeping all the promises that were made in manifestos, given the fiscal situation, but we obviously want to avoid going back on things that were very specifically said. And I think you’ll see in the coalition agreement some commitments that were made in some of those areas.
FT: One final question. George Osborne said he thought the benefits of this fiscal consolidation would start to come through quicker than people expected. How do you map out the route from the intense pain early on to electoral gain at the end of the 2015 election?
David Laws: I think that there’s a lot of understanding among the public that there is a big fiscal hole and that politicians have to deal with it, and although the full flood of letters about what we’re going to do hasn’t yet quite come through, all the letters that I’ve had so far from both constituents and members of the public really reflect the sense that there is a economic crisis [and] that the political parties didn’t go far enough during the election campaign to spell out all of the details of what we should be doing. And I think that there is quite a strong public understanding that appetite might be going a little bit too, but public understanding that there are now some very difficult choices.
So some of what we do isn’t as controversial as it could be because people understand that we absolutely have to do it and they understand that if we don’t do some of the things we’re going to have to do, we simply have to take other hard decisions on either public spending or tax. But I think that what we have to be able to do is firstly get to the end of the parliament having shown that we have carried out this fiscal consolidation and that we’ve delivered on those promises. Secondly, we show that we’ve done that in a way that hasn’t endangered the economic recovery, and I think everything that we’re doing so far shows at we’re not going to endanger recovery. Thirdly, we’ve got to deliver it in a progressive way where we protect those people on lower incomes who could otherwise be victims of this, where we protect some of the key public services that we believe in very passionately.
And I think the fourth thing by the end of the parliament, the last thing which is really important, is that we’ve got to go beyond showing that this is a government of competent accountants and show that it’s not just a government of accountants who are caring, but actually it’s a government which has a longer term vision for tackling the quality of opportunity, for improving the education system, for reforming welfare, for delivering improvements in the NHS that are not dependent simply on more money going in. And what I think the last government were good at in the Treasury until everything unravelled at the end was in showing that from the Treasury there is an ability to knit together all of the different aspirations of the government on the environment, on public services, on the economy, on welfare, and show that there was a big long-term vision and a big long-term strategy.
And I think George’s main job and mine is, once the deficit reduction programme is seriously under way, is to make sure that we have a longer term vision that we’re pursuing even through the next few difficult years that gives something positive to offer the country other than just years of pain. And it’s difficult to do that when you’re having to cut so many things and take so many difficult decisions, but I think that that’s really going to be crucial for both parties when it comes to the next general election campaign, to offer some hope as well as some tough decisions.
FT: Thank you very much.