Lawson: The Tories need to find the bottle to cut public spending

FORMER chancellor Lord Lawson is feeling hot under the collar. It’s not just because he’s finished delivering a lecture in a stuffy, airless room at the London Stock Exchange. He’s also fed up with travelling on the underground in the sweltering heat. “The problem with the tube is not so much the heat,” he tells me “but the fact that when it’s rush hour and someone’s gripping on to the rail, their armpit really smells”.

Speaking after a seminar on regulation organised by Europe Arab Bank (EAB), Lawson also says he is furious that his legacy is being dismantled. As chancellor in Margaret Thatcher’s government between 1983 and 1989, he is remembered for his seminal decision to reduce the top rate of tax to 40 per cent in 1988. Alistair Darling reversed that decision in his most recent budget, upping the rate of tax on people earning £150,000 or more to 50 per cent.

“I’m very disappointed to see it undone, after it lasted so long,” Lawson says, sipping from a glass of red wine. “It lasted for over twenty years and it has been a pledge in each Labour manifesto. I very much regret they did change it – it’s purely a gesture, it’s not going to do any good. It will actually do harm to this country, in my opinion. It’s not going to make any money.”

Before Darling increased the top tax rate, every government – Tory and Labour – has accepted that Lawson’s decision was good for the economy. In fact, he was one of the most redistributive chancellors in British history. According to HMRC, in 1986 – the year before Lawson cut the top rate – the highest earning one per cent paid 14 per cent of total income tax collected. In 2008-09, when Lawson’s 40p legacy was still in place, that figure rose to 23 per cent. Economists say it is now likely to fall again.

Although 77, Lawson’s anger towards Gordon Brown hasn’t mellowed with age. He says that Brown knows the 50p rate will hurt the economy in the long run, and that he instigated the change for short-term political gain. “I don’t think he can think he’s going to raise any extra revenue,” Lawson reasons. “It was a symbol, he was in trouble politically and he felt – at a time of financial and economic difficulty – he needed to try and show the rich were suffering.”

Surprisingly, Lawson doesn’t think the Tories should cut the top rate of tax immediately if they take power next year. “I believe that would show the wrong sense of priority,” he says. Instead, David Cameron and George Osborne should turn their attention to the gaping hole in the public finances. “The number one priority is to get the public finances in order, because we now have the most alarming, appalling budget deficit – worse than we’ve ever had before.”

The former chancellor is unequivocal about what the Tories need to do to fix the economy. “This has to be done by bearing down very hard on government spending. Look at how the private sector is operating during this recession. What are they doing? In order to survive, they’re cutting costs all over the place – the public sector has got to do the same.”

He also thinks the Tories are right to take Labour to task over their promises to raise public spending after the next election – despite government figures which show that it will fall. “I don’t think Labour are getting away with claims that public spending will rise,” he says “There’s been a real loss of credibility. When you have independent and well-respected institutions like the Institute of Fiscal Studies saying that claims of rising spending are nonsense then I don’t think that they have much credibility.”

When I ask if he has confidence in the Tory leadership, Lawson sidesteps the question like a true politician. “What I’m absolutely sure of is that this government has to go. We have to have a new government to sort it out and I think increasingly Cameron and Osborne are starting to say the sorts of things that need to be said. The question is whether they will do the things that need to be done – I hope they have the bottle required for spending cuts, but we can’t be sure until they’re in.” Do they still ask him for advice? “I do talk to them from time to time but I’m not at the centre of things any more.”

Osborne would do well to heed Lawson’s opinions on the European Commission’s attempt to crack down on hedge funds and others in the alternative investment industry. “We need to fight this legislation,” he says. “Hedge funds do take risks but it is striking that while everyone is worried about them – largely because they don’t understand them – hedge funds haven’t had a problem throughout this.”

According to Lawson, the real reason France and Germany are so keen to see heavy regulation of the industry is because they are resentful. “This is being done from a European perspective because we have in London 80 to 90 per cent of total hedge fund business in the whole of the European Union. They are jealous of that success.”

One thing the shadow chancellor has borrowed from Lawson is his zeal for a British version of the now-defunct US Glass-Steagall act, which forced a separation of commercial and investment banks. “If Glass-Steagall was in the UK, it would have made what we’ve seen in the economy much less likely to happen,” argues Lawson.

“Investment banks are much riskier. They not only serve clients but they gamble on their own account. It is dangerous to have an investment bank as part of a universal group because, if risks go wrong, it can damage the core banks that people rely on for savings and borrowing. We have to have a separation between the ‘utility’ and the ‘casino’.”

Lawson struggles to name a single bank that wouldn’t have fallen into difficulty if Glass-Steagall-type legislation had been in place, however. Would HBOS or Northern Rock, who made huge losses on risky consumer and corporate lending, have survived? What about Lehman Brothers? When pressed, he starts to get tetchy. “There’s no one silver bullet here, no one answer, there are a number of things you have to do – this one of them.”

Clearly irritated by the line of questioning, Lawson cuts the interview short and goes to find the BBC’s John Humphrys, who is hosting the event, to complain about the fact he wasn’t invited on to the Today programme to discuss his sceptical book on climate change. Having given the presenter a rare dressing down, he goes to meet his car. At least he doesn’t have to get the tube.

• The next EAB seminar on regulation is at the London Stock Exchange on 15 October between 12pm and 3pm. For details and a video of Lawson’s speech go to

Baron Lawson of Blaby began his professional life as a financial journalist, rising to edit the Spectator before entering politics in 1974. He was appointed to the Treasury as Margaret Thatcher’s Tories swept to power in 1979, and succeeded Geoffrey Howe as chancellor of the exchequer in 1983, a position he held until October 1989. Lawson was credited with the financial deregulation that fuelled the financial markets boom of the 1980s but clashed with Thatcher over the poll tax. After retiring from front-line politics, Lawson fought a public battle with his weight. He lost five stone in less than a year and went on to release a best-selling diet book.