A Conversation With George Osborne

Monday, December 7, 2015
George Osborne

Chancellor of the Exchequer, United Kingdom of Great Britain & Northern Ireland

Stephen J. Friedman

Chairman, Stone Point Capital

George Osborne lays out his roadmap for the future of the UK economy and argues that Britain and its allies must continue to play a major role in the Middle East and elsewhere around the world. 

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

FRIEDMAN: Welcome. We’re privileged and honored to have a meeting with Chancellor George Osborne. This meeting is part of the Peter McColough International Economics Forum. And I’m going to first briefly introduce the chancellor. You all have his resume in your published material. But the only thing I would add is that he has been either chancellor or shadow chancellor since 2005. So vast experience in his role. And if you get your political predictions, as I do, from the British bookies, he is highly likely to be around for a long time to come in his and possibly even more senior position. So we’re very honored to hear from Chancellor Osborne. And after he speaks, we’ll have a chance for conversation and then questions from the floor. Sir.

OSBORNE: Well, Steve and members, first of all, thank you very much for inviting me along to this distinguished Council. And for me, trips to New York are a bit like waiting for a bus. I haven’t been for a while, because I had to get myself reelected. And then I’m planning on coming next week as well because, for the first time in its history amazingly, the United Nations Security Council is meeting, as finance ministers, to discuss terrorist financing. But it’s fantastic to be here at the Council. Fantastic to be here in this warm and sunny New York City.

I don’t want to say very much by way of opening remarks, because I think it’ll probably be most interesting for everyone, not least myself, if we get some questions going. But I just wanted to say a few opening remarks to sort of set the context. We’ve had a number of important events in Britain in the last few months which I think speak a lot to our economic security and our national security. There has been an election, a general election. And the Conservative Party, which was part of a coalition, is now governing alone under the premiership of David Cameron. I’ve set out a budget and a spending plan for the next four years. That was completed just a week or two ago. As part of that, we set our defense expenditure and security plans for the next four or five years. And then just last week in House of Commons, as you all I’m sure will have noticed, the House of Commons voted to take part in airstrikes in Syria.

And I think all of those things are significant, and speak to a Britain that is reasserting itself on the world stage. Now, I’m from the political generation of the Iraq War. So I was a member of parliament in 2003. I voted for the Iraq War. I was a relatively young and new member of parliament. And the Iraq War has cast an enormous shadow of British politics, just as it has over American politics. And compounded with the Great Recession, which came some years afterwards, it has caused my country, and indeed, I’d argue the United States, to look within itself somewhat and to withdraw a little from the world as it sought to deal with its own problems.

Now, the first and foremost of those problems was the state of our economy. Like the United States, we were badly affected by the financial crash. The U.K. is, of course, particularly dependent on financial services. Our public finances weren’t in great shape going into that crash. And as a result, not only did we suffer a loss of output equivalent to the loss of output suffered by us in the Great Depression, but also we had an 11 percent budget deficit and we didn’t have a reserve currency. And that was the immediate challenge thrown at me when I became the country’s finance minister in 2010. We pursued an aggressive plan to reduce our budget deficit, to make our economy more competitive by cutting business taxes, to reduce welfare spending, all at the same time supported by accommodative and loose monetary policy set by our independent central bank.

And the result of all of that is that after a difficult period recovering from this economic trauma, our country has been the fastest growing of the major Western economies, of the G-7 economies, this year and last year, and is set to grow as strongly as the United States next year. And it’s interesting, in many of the debates and discussions I’ve had in the United States over the last five years, I’ve been—sometimes see Britain as this sort of proxy war for the fight that’s happened here between those who are in favor of fiscal stimulus and those who weren’t. But actually, the U.S. and U.K. economies have grown by almost exactly the same amount since 2010, by 12 ½ percent. And that is considerably more than most other Western economies. So we have pursued a policy that has been labeled by some austerity. I prefer to say it is a country seeking to live within its means.

And I’ve just set out plans that will deliver a budget surplus for the United Kingdom by the end of the decade with further difficult decisions to control public expenditure, reduce welfare, spend on our priorities, and make sure we’re in a position where we can really bear down on our national debt. That economic strength has allowed us to increase our defense and security spending. And that was set out just a couple of weeks ago. The United Kingdom is the only country in the world that is spending 2 percent of its national income on defense, and 0.7 percent of its national income on overseas development. And we are very proud of both.

The hard power that—thank you. (Laughter.) It’s good to—the hard power that comes from a very capable military—obviously not the same size or reach as the United States—but second to the United States, I think the most deployable and capable military in the world is getting a big increase in its budget. We are building new aircraft carriers. We are buying the new fifth generation of fighters. We are building new submarines. We are expanding our ISTAR, our surveillance and the like. We’re increasing our special forces. Our intelligence agencies, which of course are such close partners of their equivalents in the United States, are seeing big increases in their budgets too. In other words, Britain is ready to protect itself and project its values overseas with its allies.

And, at the same time, we are spending a huge amount on overseas development in a way that I think supports our national interests, indeed, directing more and more of that budget towards the failing states on Europe’s borders, which are causing such a strain on European public services and politics at the moment, alongside other manifestations of British soft power, like the British Council and the BBC World Service. So Britain is out there asserting itself in the world. And the final thing I want to say is that we also now have the political will to make use of that hard and that soft power.

I referred to the Iraq War. And in 2013, the House of Commons had a vote on whether we should get involved in the Syrian civil war, and made good our threat, our red line that we had drawn, along with others, that if President Assad used chemical weapons there would be a military response. But the House of Commons did not agree with the proposition that David Cameron and myself and my colleagues in the Conservative leadership put forward. And it was quite a striking moment. It was a moment when Britain was unable to follow the lead asked of it by our prime minister and the government.

And what was interesting, although there were many critics on the left of British politics who didn’t want to get involved, and the Labour Party who didn’t want to get involved, there were also Conservatives who didn’t want to get involved and said we had had enough of foreign entanglements. It is, for me, a source of real pride that actually a couple years later the House of Commons has voted by a big majority to take part in the action already being directed against this terrorist organization, ISIS or Daesh, in Syria. We were already part of the operations in Iraq.

I don’t think anyone thinks that airstrikes alone are the answer, but they will help degrade this organization that either through its direct planning or through its inspiration, if you can call it that, is leading to attacks from everywhere from San Bernardino to Paris. It also will help us deprive this organization of a place on the map from which it can create its so-called caliphate and try and inspire its followers. I think there are other things we need to do. We’re passing new legislation in the United Kingdom to give our security agencies the powers they need to intercept and discover the communications of those who are doing wrong to us.

In the history of the United Kingdom under the rule of law and under proper oversight we’ve always been able to intercept communications of people who want to do us home, whether it’s by letter, or by telephone, or mobile phone, or email. It seems to me bizarre for a country to suddenly decide there are certain communications it’s not going to try and intercept just because of the technology. This, of course, all, as I say, properly done under the rule of law. So we’re taking action to deprive these people who wish us ill of their space on the internet. We’re seeking to deprive them of their financing. I mentioned a meeting in the United Nations next week. And I think collectively, we also need to deprive them of the wider ideology of extremism, which provides some comfort and excuse for their behavior. And that is a generational effort from the mosque, to the school, to the community center.

All of this we do in partnership with you, our great friends and allies in the United States. But my message on this visit to New York is that Britain has got its mojo back—(laughter)—and we are going to—we are going to be with you as we reassert Western values, confident that our best days lie ahead. Thank you. (Applause.)

FRIEDMAN: Thank you so much, Chancellor, for those remarks. Many of the things spelled out in your op-ed in this morning’s Wall Street Journal. Let me first touch on some issues where the U.K. and the U.S. may share some common challenges. As you pointed out, both economics have recovered from the crisis better than, for instance, the eurozone, but we have challenges. I think you have commented on productivity gaps in your country, and certainly that’s been said in the U.S. Do you want to go into your diagnosis of the issue, and what you see as the longer-term fixes?

OSBORNE: Yeah, I mean, the U.K. has historically had a productivity challenge. And productivity has not improved since the Great Recession. Now, I’ll be absolutely blunt, I’d rather have a productivity problem than an unemployment problem. And, you know, one of the real success stories of the British economy has been the job creation that has taken place, unemployment low, but also the participation rate going up and employment rate going up. And I think that’s driven by, you know, a combination of competitive business taxes and welfare reforms that have encouraged people into work.

But nevertheless, we do have this productivity challenge. The more recent data has been a little bit more encouraging. I think there’s no real substitute to trying to make the investments in the infrastructure, the reforms to your higher education and secondary education systems, and the support for a sort of science and research and development that are just essential for the long-term health of a complex, advanced economy.

I think one final thing I would observe is a number of nations and a number of states and cities are making decisions at that moment about whether they want to shut themselves off from new technology and new consumer choice enabled through the Internet. And what we’re trying to do Britain is make sure that we are the country open to innovation, open to new business practices, open to new financial technology, open to things like driverless cars and the like, so that we are receptors of the productivity improvements that technology drives.

Which, by the way, I don’t think are necessarily being well-captured by the existing methods we have in our countries for calculating things like GDP. And we are, in Britain, reviewing now we do that independently, to make sure that the very obvious productivity improvements we’ve all experienced in our own lives through things like smartphones are properly captured in our economic data.

FRIEDMAN: Housing is constantly referred to as one your challenges. And that’s maybe a little askew from our experience here, but could you comment on that?

OSBORNE: You know, housing is a perennial British challenge. I mean, there is a—because we’re an island and because over many centuries, you know, our property law and the like have entrenched the rights of homeowners, it is quite difficult to build homes in Britain. And you know, everyone’s in theory in favor of them, but no one wants them anywhere near themselves. And so we have never in recent decades been able to have housing supply match housing demand. And that has, you know, contributed to increases in house prices. Ultimately, the answer is going to be trying to get more homes built. And at the moment, we’re undertaking quite a set of reforms, which I won’t go into detail here, to try and get the supply of housing up.

What I don’t want to do is give up on the aspiration of homeowners. I think there are quite a lot of people alone saying in Britain, you know, maybe we should settle for an economy where there’s a very large private rental sector, and people no longer aspire to own their own home. You know, I don’t think we should accept that. I think it’s a very strong aspiration in our culture that people own their own family home, and we should do what we can to try and support that.

At the same time, I should say one other thing, I think probably our most interesting monetary experiment at the moment is we have given our central bank what are called macro-prudential powers. Now, that’s a long way of saying they’ve got specific instruments to deal with things like a housing boom if they saw one developing. And our central bank has, in one of its committees, not its monetary policy committee, but in a financial monetary committee which we’ve created, a set of independent people who have the power to, for example, tighten mortgage standards and, you know, to use that kind of famous American phrase, take the punchbowl away when the party gets going.

That’s really a new—I think we lead the world, certainly for a large economy, in having this central bank with these new macro-prudential powers. And there is some evidence, particularly as the London housing market got very heated last year and they stepped in to, you know, turn the gas down, that it was successful. But it’s still very early days.

FRIEDMAN: That’s very interesting because, as you know, there’s been a lot of controversy about using monetary policy for that taking the punchbowl away. So you—

OSBORNE: Well, it gives the central bank instruments with which to deal with things like asset bubbles whilst at the same time they can be given an inflation target which they—which they really can target.

FRIEDMAN: Right, right. Politicians tend to focus on near-term budget issues and policy wonks focus on discounted future values of entitlements, as we call them, in this country. Politicians tend to kick the problem—can down the road. The odds are very good you’ll be there down at the end of the road. So when you look at your pensions issues for government employees and for retirees, and health care, they are very, very large sums. They dwarf, really, your funded debt. What do you see is the long-term solution to that?

OSBORNE: I think the most straightforward answer to pension entitlements is making sure that your pension age keeps track with demographics. So we have increased—our pension age was 65, and is currently 65—but is about to increase to 66. And we’ve already—by the end of this decade. And then it’s set to go to 67 in the middle part of the next decade. And we got a review of the moment, in the next, you know, coming year, into when it should increase to 68. So that enables you to continue to provide, you know, generous pensionary entitlements, but control the costs. And that single act of increasing the pension age was the single biggest saving I’ve made to the government’s long-term budget. So I think that is the answer on—that’s the answer on pensionary entitlements.

Now, health care we could be here for a long time. We have free at the point of use health care system. And, you know, what we are doing is funding a big efficiency plan to try and deliver the savings required to go on meeting that demand. More broadly in welfare, look, I think Western economies do face a choice. You know, if you take the U.K., we’re 1 percent of the world’s population, 4 percent of the world’s economy—sorry, 1 percent of the world’s population, 4 percent of the world’s economy, 7 percent of the world’s welfare entitlement spending. And that is not sustainable. But I would say that the reforms we’ve undertaken, which have been very controversial, have led to more people taking part in the labor market, and the percentage of our national income being spent on welfare is currently falling. And I think that is the right direction for a Western democracy.

FRIEDMAN: Let me switch to common challenges our nations face in defense. We now have British Tornadoes bombing ISIS. Welcome. But, as you have said, very few if any think that that is ultimately going to solve the problem. When you strategically think longer term, you mention other things we can be doing, what is the case for and the case against boots on the ground, U.S.-U.K.-French, how do you—how do you visualize us conducting longer-term operations against ISIS?

OSBORNE: Well, the first thing I’d say is that whilst air power is not by itself enough, it can be pretty effective at degrading ISIS and its leadership, just as air power and drone strikes have been pretty effective at degrading the Pakistan-based al-Qaida leadership. So it shouldn’t be underestimated in the impact it can have, particularly when it’s support of ground forces, as it has been in Iraq with the Iraqi army. And there, you know, it’s not widely reported, but ISIS’s territorial grip of the country has been reduced by 30 percent in Iraq through a combination of Western air power and Iraqi ground forces.

Of course, in Syria, there’s not—you know, there’s not a Syrian army that the West can deal with. I hope we get to a point where there is a Syrian army we can deal with. And that requires this transition that the Vienna peace talks are helping to try and arrange. In the meantime, you know, we do have partners on the ground—the Syrian Free Army and other groups that the United States, and Britain, and others have supported. And we can back them up in their advances.

Do I think deploying American combat troops, British combat troops, and the like is an answer? No, I don’t. I don’t think it would, as I understand it, help the situation on the ground. It would, you know, potentially form a—be a cause of further radicalization and grievance. And second, look, I’m being also very frank. I just don’t think—my reading of the American political system, certainly my understanding of the British political system is, there is absolutely no appetite for that. And you know, we are not willing and not ready to deploy combat troops. So we’ve ruled it out and been very explicit. As I say, the best thing would be to get a partner on the ground, like the Syrian army. To do that, we need the political transition that is being discussed at the moment.

FRIEDMAN: Chancellor, let’s switch to some uniquely U.K.-related things. And here’s something very unique to the U.K. Could you describe the Little Red Book episode in Parliament some weeks ago?

OSBORNE: Right. Yeah, yes, well, that was—I’m not sure this will be explicable to the audience. It certainly wasn’t explicable to most of the British people. But the—my political opponent produced—the Labour Party leadership is—the Labour Party has elected a hard left leadership. And my political opponents, known as the shadow chancellor, produced Mao’s Little Red Book in the House of Commons debate and started reading from it, to the complete astonishment, not least of many Labour MPs. (Laughter.) And then he threw it at me.

You know it was rather—right, I know your Congress is all very quiet and stately and all that. (Laughter.) And you know, you have one or two people speaking and that’s about it. But the—but ours comes a bit more rambunctious, you know? The mother country hasn’t forgotten her good, vibrant democracy. But anyway, he threw the—he threw red book at me, and then I picked it up and pointed out it was probably his own personal inscribed copy. (Laughter.)

FRIEDMAN: Well, the audience is old enough to remember in the early ’80s a—after Labour’s manifesto came out—a Labour parliamentarian said it was the longest suicide note in history, so. (Laughter.)

OSBORNE: Well, the best is Winston Churchill said the problem with committing political suicide is you live to regret it. (Laughter.)

FRIEDMAN: He always had the last word. (Laughter.) Let’s go to the EU. The EU’s oft-voiced mantra is ever-close union. Describe your bargaining list and what you regard as the timing and how that fits in with the referendum that you, and the prime minister, have committed to?

OSBORNE: Well, Britain is going to have a referendum on its membership in the European Union at some point in the next two years, by the end of 2017. And that’s now enshrined in a law which is about to complete its passage through parliament and it was a centerpiece of our general election. And what we’re trying to say to the British people is: You decide our future. We are going to seek a better relationship that works better for Britain with the European Union. And if we get a good deal, we will put it to the British people and recommend that we remain in the European Union. And we’re in the process of having that conversation with our European partners. Indeed, today we received an interim report back from them on where things have got to. And it shows that we have made quite a lot of progress.

Essentially Britain’s argument is this: First of all, the European Union has to work economically for all its citizens, including British citizens, and is not doing that at the moment as well as it should. And we need to make it more competitive. We can’t allow our continent to price itself out of the world economy. So we’ve set out a number of things that need to change to make the continent of Europe, Britain included, a more competitive place to do business and create jobs.

Second, we’ve made the argument that, you know, Britain is not part of some of these central EU projects, like the single currency, the euro, nor indeed the common border area. And the European Union, as devised, does not really provide for a large member state, the second-biggest economy in Europe, the second-biggest contributor to the EU budget, sitting outside of these central arrangements. And yet, that’s the settled will of the British people.

So we need to make sure these arrangements work better for Britain and, indeed, work better for those who are trying to make their currency, the euro stronger. And essentially, there’s a deal to be struck where they can create the political and fiscal and financial union that they need to create. And Britain can remain in the European Union whilst having its interests protected and not being discriminated against, and not being part of the ever-closer union.

One of those consequences of differential economic reforms between the U.K. and the continent of Europe, there’s been a lot of inward migration from European Union citizens. And we are saying, look, while we respect the principle of free movement of people, you cannot simply come to this country to claim welfare payments and benefit from our generous in-work welfare system. And so we’re also seeking changes to that.

And so, look, it’s a—it’s a complicated and robust negotiation, but the information that’s been released today by the European Council shows we’re making much more progress than people would have imagined in getting agreement across member states to address these British issues. As I say, ultimately it will be for the British people to decide in a referendum.

FRIEDMAN: Let me switch to another referendum. Scottish referendum, which after you won a strong victory—something like 55/45, as I recall—the mood in Scotland seemed to become even more secessionist. When are they likely to ask for another referendum? And what—as you strategize about this—what do you see the path ahead for your government?

OSBORNE: Well, Scotland has been part of the United Kingdom since the early 18th century, and is a very important part of the U.K. And I think it would be a real tragedy of Scotland left the United Kingdom. Thankfully, the Scottish people, by a majority, chose not to do that in the referendum. And the reason there was a referendum is because they have elected a nationalist party to represent them in their devolved administration in Edinburgh, and that nationalist government was demanding a referendum. And we could have either had a protracted constitutional row about that, or we could have said let’s have a referendum—a free, fair, open referendum—and let’s see the result. We had that and we got a clear result.

Now, subsequent to that—actually, public opinion in Scotland has not vastly shifted on whether this country should remain part of the U.K., but what has happened is that the representation they send to the House of Commons is now overwhelmingly nationalist. A dramatic feature of the British general election in May was that the Labour Party, which was created in Scotland by someone called Keir Hardie a century ago, was wiped out in Scotland, and Scottish nationalists have taken their seats. And these are industrial seats or former industrial seats that, you know, have always—you know, certainly in living memory—be represented by the Labour Party, now represented by Scottish nationalists.

And so they are a—you know, a noisy and, you know, aggressive bloc in the House of Commons, that are not trying to be part of the U.K. government. And that is a departure. Now, whether that ends up being some kind of settled position in Scotland, and they elect a nationalist but don’t, you know, want to leave the U.K., I don’t know. Certainly, if anything, it’s an opportunity for the Conservative Party to rebuild itself in Scotland a little. But in terms of the referendum, the Scottish nationalists are not asking for another referendum. And it was agreed before we had the referendum that this would be—you know, that the outcome would be decisive and that would settle the issue, at least for a generation if not for people’s lifetimes. And as far as I’m concerned, the deal done before the referendum is the deal that should stay after the referendum.

FRIEDMAN: Thank you. Before we turn it over to the members, let me ask you the standard ending of a due diligence question. Other than the topics we’ve discussed, what does the chancellor—(laughter)—what keeps the chancellor awake at night, and what are your worries?

OSBORNE: Look, I mean, I think obviously these national security issues are all to the fore at the moment. You know, the world will always throw at you economic shocks. And I think we just have to be ready for them. I think, you know, the—it will be up to the Federal Reserve as and when it does this—but the exit from loose monetary policy in the United States and in Britain—interestingly, of course, in the eurozone they’re heading in the opposite direction—but in the United States and in Britain will pose some big challenges for the emerging markets. And although they’re quite well-advertised and, you know, foreshadowed, that doesn’t mean they’re going to be particularly easy to deal with when they come. And I would—you know, the overhang of debt in these emerging markets is quite a challenge.

You know, what happens to the oil price going forward and the problem that’s posed, although it’s broadly speaking a big positive benefit to economies like ours, the problem it produces both to our oil and gas industries in our countries, but also to these states dependent on oil and gas revenues I think is yet to play out. And you have to be ever-vigilant about, you know, what’s going on in your financial system and the like, although, as I said, I think we’re in a much stronger position than we were. So you know, I always think, you know, we haven’t come to the end of economic history, of course. So I’m not sure that that means I have to stay awake every night. It means I have to go to bed making reasonably sure that we’ve taken steps to better protect ourselves.

FRIEDMAN: Good answer. You’re certainly in command of your brief.

We’ll now turn it over to the members. A reminder, this meeting is on the record, so if you’d please raise your hand and wait from the microphone and speak directly in and, as always, state your name and affiliation. And please limit to one concise question.


Q: Good afternoon, and welcome to New York. You mentioned Mao’s Little Red Book, but we didn’t really have a chance to discuss the changes in U.K.-China policy. One of them that would certainly worry me is China’s state-run media has praised you for downgrading human rights, at a time when China is in the worst crackdown since 1989. Can you talk us through what your human rights policy has been, and especially with the crisis in China and Hong Kong for human rights? Are there any successes that you can point to? And why isn’t the U.K. forcefully, as you say, asserting yourself on human rights.

Q: (Off mic.)

Q: Oh, Minky Worden from Human Rights Watch. Thank you. Sorry, Peggy.

OSBORNE: Yeah, I mean, Britain, you know, yields to no one in its defense of human rights, in its advocacy of human rights. With countries like the United States we helped put in place the international architecture to try and protect human rights. And we raise human rights in all the meetings we have with the Chinese and others. But I don’t think that is—human rights abuses and a lack of democracy is not a reason not to have a conversation with other countries.

And there was an interesting—I’ll come specifically onto China in a moment—but it just so happened in the space of a couple of weeks we had the Chinese president in town, we had the president of Egypt, and we also had the prime minister of India in town. And in all three cases, there was strong arguments made that David Cameron, and myself, and others should not meet any of these individuals. China, because of its human rights, and abuses, a lack of democracy. Egypt, because of its human rights abuses. India, because of the prime minister’s record in Gujarat.

If you really are in a situation where you’re not allowed to and cannot meet with, and cannot discuss things with the Chinese president and the Indian prime minister, you are not having a conversation with a third of the world’s population. So I’m a strong believer that the best way to have a conversation about human rights is to engage with people and try and understand their issues, and raise your issues, and raise the abuses, you know, as and when you see them, not just generic, but specific to individuals.

If I can use that then as a reason to say something more broadly about China. China is a very powerful force in our world. It’s the second-largest economy. On current projections—we don’t know whether this is true or not—but on current projections it’s going to be the world’s largest economy in my lifetime. And in my view, it is overwhelming in our interest—in Britain’s interest, in America’s interest, and others—to bring China into, and bind China into a multilateral world, a world that, by the way, Britons and Americans who no doubt spoke at this Council 50 or 60 years ago, helped to create.

And if, you know, China wants large representation at the IMF because it’s got a bigger economy, then we should work to give China that larger representation. And actually, it’s a tragedy that an agreement reached across all the members of the IMF, including by the U.S. administration, is currently being blocked by one legislature in the world, which is the U.S. Congress. If you take another example, China wants its currencies to be part of the basket of currencies in the IMFs SDR. Now, for me, that is a perfectly legitimate channel for their ambitions. And, by the way, for us, I would say a relatively benign channel for their ambitions, that they want their currency included in the IMF’s SDR basket.

Does that mean we’re going to have disputes with them or have issues with them? Of course we are. It’s not the same political system as ours. And we need to make change—for example, pluralism, and security, and sovereignty—in the South China Sea. But I think the best way to engage China on all these issues is to become a proper partner in a discussion with them, rather than thinking you can exclude them or isolate them. And I also think, speaking for Britain but I’m sure this is true of the United States as well, it’s overwhelmingly in Britain’s economic interests to broaden its export markets, its sources of investment beyond what at the moment are rather narrowly European and North American sources to the wide world.

So that’s the approach we take to China. Does it mean we’re going to agree on everything? No. Does it mean we have different political systems? Yes. Does it mean we raise human rights issues? Yes, we do. And I have myself, as has our prime minister. But does it mean we should be trying to make them feel more welcome in the international community and make sure they actually shoulder all of their responsibilities—for climate change, for the situation in the Middle East and Central Asia, for tackling global poverty, for dealing with air pollution? Yes, we should. And you know, I hear from this Chinese government actually a willingness to take that bigger role on the world stage.

FRIEDMAN: Thank you, Chancellor.


Q: Stephen Schwebel.

It used to be said that Great Britain punched above its weight. But in more recent years, it might be said that Great Britain was punching below its weight. Now, you’ve stated, refreshingly, that that tilt has been reversed. And my question is, has it been reversed enough not only in respect of defense, where there seems to be a long way to go, but in matters like funding the diplomatic services, the reach of the BBC, and so on?

OSBORNE: Yeah. Look, I think—I wanted in my opening remarks to set this in the context because I think the same, you know, issues sort of face America. The problems with the Iraq War, and arguably what went on Afghanistan as well, the Great Recession, I mean, all of these things led to American and British and other European politicians to say, you know, we don’t want to get involved in anyone else’s wars anymore. And we all turned inwards a little. And that’s what happens when you have an economic recession. And that’s what happens when you have an unsuccessful overseas conflict.

But just as we know the price of war, we are coming to learn the price of the absence of war—in other words, the absence of getting involved, the price you pay for not getting in there and asserting your values and trying to make sure that the situation is more stable. And the price of not getting involved in the Syrian civil war at an earlier stage is very apparent to people. And yet, of course, at the time, people saying, don’t—let’s not take part. So, you know, I think in Britain we are ready to take the—you know, play a bigger role. And we always have done it, so it’s true to our sort of history and values.

We now have, you know, the military that is able to do that. This development budget is a very significant adjunct now to British influence and the projection of British values and, indeed, Western values around the world. I have increased the funding of our foreign office at a time when I’m cutting the funding of other departments. And we’re also increasing the funding of the BBC World Service, and indeed opening up new services in areas like Eastern Europe and, indeed, in Iran.

So we’re absolutely seeking to project ourselves and our values and the Western values we help represent. And there was an interesting poll recently that put the U.K. as the number-one nation in the world for its soft power. And I think that’s something we can be quite proud of.

FRIEDMAN: Very good.

Let’s go to the back of the room. Sir.

Q: Bob Kaiser, retired from The Washington Post.

Inequality is a word we haven’t heard. I think you rival us how for inequality in the industrial world. How do you see that problem and what can be done about it?

OSBORNE: Yeah. Well, Britain has an inequality problem which is a little bit different from the United States, although it’s often bandied together. We haven’t quite had that challenge that you have of the kind of hollowing out of the middle classes, which is written about and disputed a lot in American politics. But we clearly do have a challenge of a—you know, of a section of our population who have lacked educational opportunity, lacked employment, and stuck in kind of welfare dependency, and the like.

And I would say the somewhat more encouraging news, but there’s a huge amount more to be done, is that all the evidence is those—the achievements—the educational achievements of those people is improving at the moment, partly because we’ve undertaken quite a radical school reform, which is very similar in type to the charter school movement you’ve seen here in New York and in some other U.S. states. We have a national education system. We’ve been able to do that on a national level.

The welfare reform which, you know, involves some pretty tough conditionality about receiving welfare, has led to the fewest number of people receiving unemployment benefits as a percentage since 1975. So reversing a big uptick in that. And a set of other reforms which have, for example, seen participation in our universities go up for people from disadvantaged backgrounds.

I mean, one interesting reform we’re undertaking at the moment is prisons, which is again, you know, a very sort of backwater area of public policy debate in our country. But our prisons, many of them, are, you know, completely unsuitable for rehabilitation. They were built, many of them, in the Victorian age, in the 19th century. They sit in the middle of our central—in the middle of our cities. And you know, frankly, their conditions are not appropriate. And we are just now—in the last couple weeks I’ve authorized a massive prison rebuilding program where we’re going to pull these prisoners down, move them to more appropriate locations on the outskirts of the town, and the cities like London, and have much better conditions.

Now, I would say, you know, I’m a Conservative politics. We are proud, as British Conservatives, to be leading the way on prison reform. And it’s not what conservatives always do. And the same is true with education reform, which I just mentioned, for the low-income groups. So I think you can have, as a Conservative, a progressive social reform program, and not assume that, you know, these areas of concern should just be left to our political opponents on the left.

FRIEDMAN: As a follow up to your educational reform remarks, what steps have you taken about enhancing teacher caliber?

OSBORNE: Well, we have—we’ve essentially done two things. First of all, we have a pretty rigorous, now, system of inspection that goes into schools to measure teacher quality. And second, we have taken steps to improve teacher training. I mean, there are a lot of extremely capable and hardworking teachers in our system. But it shouldn’t be an excuse for a poor teacher, frankly, being carried by their colleagues and failing their classes. And it’s, you know, a very tricky issue, but if you’re ultimately—you care about the education of the children in your schools you have to address it.

FRIEDMAN: So let’s—sir.

Q: Yes. Bill Luers. Welcome to New York, Mr. Chancellor.

You and I have had the occasion to talk on Iran a number of times. One of the political parties in the United States says that if they get into office they will want to go back—either break away from the agreement that was reached with the P5+1, or they would go back for a better deal. Can you give us your judgement on what you would say, or your prime minister would say, were the next president of the United States to come and say: We’ve decided we want a better deal out of Iran. We want you to join us.

OSBORNE: Well, we’d always want to work very closely with whoever the president of the United States is. And you’ve got some good candidates and some even better candidates. (Laughter.) On Iran, I think it’s a good deal, the Iranian deal. Do I think it’s perfect? Of course not. But I think the essential deal, which is we bring Iran in from the cold, with proper verification, in return for them, you know, not realizing their ambition to create a nuclear bomb is a good deal for the international community. Of course, everything is in its execution now. But I think it would be better if we focused on implementing that deal and delivering the deal, rather than going back to the drawing board.

FRIEDMAN: I see a white paper up there in a hand.

Q: Herbert Levin, Council member.

I think your description of U.K. China policy is the same as American China policy, and the presidents of both parties, even though the left and the right in the U.S. snipe at it. But the reason I put up my flag was that after one has bombed Syria and Iraq for a while, running out of targets, then one has achieved what was achieved in Somalia and Libya. And does one just let them continue to fight it on indefinitely and cope with the refugees, which might be a wise thing to do? Or does one think of actually going in there, spending billions and trillions, and trying to build countries? We had learned to live with mass killings going on in the Congo and elsewhere. And will we just learn to live with these killings going on?

OSBORNE: Well, I don’t think we should. And I agree with you that a big rebuilding effort is going to be required in Syria when that terrible conflict comes to an end. I think there is a difference. I mean, in Libya, the action taken was to prevent an imminent massacre of people in Benghazi. So there was—you know, we were in days of, or less than days of, a real tragedy. And France and Britain got involved and then that became part of a broader campaign. But the problem in Libya, and this, of course, remains a huge source of concern, is that there was really no apparatus of a state. It was a kind of one-person dictatorship.

In Syria and in Iraq, different countries, but in both countries there are the—you know, there’s the apparatus of a state. And however bad Assad is, if he were to be removed I think you could work with what remains of the Syrian state, although, you know, somewhat, to put it mildly, degraded as a consequence of the civil war. So I think you would want to put as much effort into using what remains of the Syrian state and trying to build that up. And Britain has made a big commitment to—you know, to a future effort there. And of course, you’d want to try and bring in the various participants—the more moderate participants in that war. Equally in Iraq, you know, we want to use the apparatus of the Iraqi state, which American soldiers and British soldiers fought and lost their lives to both—to establish.

So, you know, I think the lesson is let’s not try a kind of de-Baathification or a sort of modern version of Denazification. You know, that’s not what we’re trying to do here. You know, we’re trying to create a stable situation on the ground. It is difficult to see how Syria can have any long-term future with Assad there as president. Many people would never return to that country if that were the case. But that doesn’t mean that the entire Syrian regime has to go.

FRIEDMAN: Yeah, let’s go to this side of the room now. Sir.

Q: Earl Carr, representing Momentum Advisors. Thank you for your remarks.

 There’s been a lot of criticism with respect to the U.K.’s role in supporting the international refugee—the refugees crisis in Europe. How do you respond to those criticisms? Is Europe—is the U.K. doing enough to support the international refugees?

OSBORNE: Well, I think we are. I mean, Britain is not part of the—what’s called the Schengen Area, the common borders of Europe. So we’re not part of the single currency, people know that, but we’re also not part of the common borders. So there is a U.K. border and you have to show a passport to cross it. And so I don’t think it’s appropriate for Britain to say we will take thousands of refugees out of Slovakia, or Austria, or Germany. You know, that’s essentially a challenge of their common border area. We think our best effort comes from taking people directly from the refugee camps. And we’re going to take 20,000 people directly for the refugee camps. You know, we can work with the aid agencies and aid charities to identify who they are, and the United Nations, and give them the best possible home—support and a home in the United Kingdom.

I think if we were just to take a load of people out of the middle of Europe, frankly, we would be contributing to the pull factor that is bringing many tens of thousands or hundreds of thousands more across the Mediterranean Sea and through these dangerous land routes to try and get themselves to Europe. You know, we have to reestablish in Europe, in my view, the external border that is properly policed. And whilst we’ll always give a home to proper asylum seekers, people who are genuinely refugees, Europe cannot be a home to anyone who wants a better life because it’s just not big enough to take the many millions of people who would respond to that invitation.

FRIEDMAN: Just a follow up. If you were to take in a lot more than you have already agreed go, wouldn’t that also substantially weaken your support for the ultimate referendum in the European zone?

OSBORNE: Well, I think the issue in Britain around migration, actually, is different than the issue in many of the continental countries. It’s about European migration. It’s about people making use of the free movement within the European Union to come to Britain and, in particular, the claiming of benefits is seen by the British people as an abuse. And that’s what we’re seeking to address. Whereas, actually, Britons have always been willing to take kind of genuine refugees. And we, of course, have lots of—you know, we welcome economic migrants, provided they’re properly assessed and applying the normal way and so on.

 FRIEDMAN: So let’s go to—let’s see, did you have someone back there? OK. The hand way back there.

Q: Hi. Lynsea Garrison with the BBC.

I know you’re here to talk about more—you know, wider issues, but I’m hoping that you will entertain a couple about Heathrow Airport. (Laughter.) Sorry. We understand the decision to build a third runway has been delayed—has been pushed back. Will a decision come before Christmas? And also, what would you say to businesses who are concerned about that delay?

OSBORNE: Well, look, the government’s position is—and one I strong agree with—is that we will need additional runway capacity in the southeast of England. Where that is, is something we have yet to announce. And I’m afraid the BBC, like everyone else, will just have to wait for the government to make its formal announcement. (Laughter.)


Q: Hi. Juan Ocampo, Trajectory Investments. Chancellor, thank you for being with us.

We’re going to have an election here very soon. Regardless of who wins, we’ll have a change of administration. What one or two new policies would you like to see adopted that would help Britain and help ourselves?

OSBORNE: Oh, that’s a—(laughter)—that’s a leading question. You know, I—oh, let me—let me think of a clever way to answer that without getting myself into trouble. (Laughter.) And, look, you know, the United States is such an important leader in the world. And I know it can be tiring, and it can be draining, and it can try the patience of the American people. But I would say, don’t give up on that leadership role, because the world needs you. And as I was saying, we all know the price of intervention, all right? We lived through costly interventions in Iraq and Afghanistan. But we are also learning the price of nonintervention. And that does come with a price. It’s not as obvious. It’s not as televisual. But it doesn’t mean it’s not as dear. And I think whoever’s the next president of the United States will have to shoulder, I’m afraid, the responsibilities that come from being an exceptional nation.

Q: Oh, bravo. (Laughter.)

FRIEDMAN: I think we may be heading to pretty much my last two questions, if we can make them very concise. Sir.

Q: Thank you. Malcom Wiener. I’m now an historian.

Chancellor, the LIBOR interest rate fixing scandal, followed by the foreign exchange rate fixing scandal has raised some skepticism about London banking and London financial regulation, partly because of the vast scope and amounts involved, but also in some quarters because of the feeling that so many people move back and forth between the London banks, the Treasury, and the Bank of England that there must have been people in fairly high places who knew something about what was going on. I wonder if you’d be willing to comment.

OSBORNE: Well, I think—well, the fixing of the LIBOR rate and the foreign exchange rates was completely wrong. And unfortunately, our legal system, you know, was not—you know, didn’t have the right offenses on the statute books to deal with that. And we’ve undertaken major changes to introduce new laws, introduce new criminal offenses, and provide people assurance that there is transparency and rigor in the London foreign exchange and interest markets.

I think the kind of second question asked is something that has, you know, been subject to a lot of inquiry and investigation by parliamentary committees and so on. And of course, you know, you would not condone any wrongdoing in any of our institutions. I know this was before I got this job, but the people who came before me—you know, I was not the chancellor during the crash of 2008. I think the one thing I would say is that in that period there were days when it looked like the entire financial system was going to fall apart. And, you know, extraordinary measures were taken. As I say, it doesn’t excuse illegal behavior, but it does excuse exceptional behavior to try to keep those financial markets going.

FRIEDMAN: A very good answer. And I think this has been a wonderful presentation by the chancellor, for which we thank you. (Applause.)

OSBORNE: Thank you.

FRIEDMAN: Well done.


This is an uncorrected transcript.

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