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Osborne takes a break from the campaign trail to talk to the City

LAST YEAR, the future looked very different for George Osborne. With the Tories enjoying a seemingly unassailable lead in the polls, few doubted he would become the next chancellor. Privately, Tory strategists even whispered the word “landslide”.

Now nearly all the polls point at a hung parliament and Osborne, who is also the Tories’ election coordinator, has been forced to change campaign tactics at the last minute.

Looking out across the River Thames from the boardroom of City A.M.’s seventh-floor offices next to Monument, he is trying to remain positive: “I think the most likely outcome of the election is a Conservative majority – but we’ve got to fight for it.”

Such optimism will serve him well if he does get the keys to Number 11, because the job of repairing the parlous public finances will make the campaign seem like a distant memory.

The Institute of Fiscal Studies (IFS) thinks the next government will have to cut spending by some £47bn by 2014-15. That means departmental budgets will be slashed by between 20 and 25 per cent, assuming the Tories protect the NHS and foreign aid budgets.

Cuts of this magnitude will attract huge criticism, and Osborne is hoping he can deflect some of it by setting up an Office of Budget Responsibility (OBR). Led in the first instance by Sir Alan Budd, the former chief adviser to the Treasury, the body will set independent growth forecasts that will “hold politicians to account, hold their feet to the fire”.

“It’s a complete revolution in the way the Budget is put together,” says Osborne, who explains that while the watchdog won’t be able to influence tax and spend plans, it will pass public comment on whether a Budget is credible or not.

“I’m deliberately creating something I know is going to be a rod for my own back. It will also be a useful weapon in my armoury to get control of spending, because I’ll be able to say to colleagues and other parties: ‘Look, we’re being told by the OBR that we have a hole in the public finances of X bequeathed to us by our predecessors and we have to do Y to close it.’”

Getting the civil service to implement the cuts will be difficult: it’s a bit like asking Turkeys to vote for Christmas. But by changing the incentives so they “reward civil servants who get better value for money” rather than those who design expensive spending projects, Osborne thinks he can bring down public spending without having to rely on “management consultants or strategy firms”.

OSBORNE’S relationship with the City hasn’t always been harmonious, but he has made a point of taking the time out of a gruelling 24/7 campaign schedule to visit the Square Mile for this interview. He says he wants London to be the “centre of wholesale funding” but warns he will not be a “cheerleader” for the financial services sector.

Osborne is also adamant that executive remuneration in financial services is simply too high. “I’ll say this to City A.M., just as I say it to everyone else. The levels of pay in finance have got completely out of kilter with the rest of society. So you have a heart surgeon that is paid a 30th or 40th of what someone is paid at the top of financial services. That is quite difficult to justify when you have an implicit state guarantee as you do in the banking sector.”

His was the first party to commit to a unilateral levy on British banks and he also supports President Barack Obama’s plan to ban banks from proprietary trading or owning hedge funds: “In my view, we need to look at whether high street banking sits easily with the riskier end of investment banking”. However, he admits that such a measure wouldn’t have saved any of the British banks that fell into difficulty.

When we ask him if he supports IMF plans to impose a levy on the profits and remuneration of all financial institutions – including insurers and fund managers, not just banks – as well as a levy on all finance companies to pay for future bailouts, he replies: “Look I don’t rule it out, but I’m not ruling it in either.”

Yet unlike Vince Cable, the Liberal Democrat Treasury spokesman that Osborne clearly has little time for, he doesn’t want to see the financial services sector shrink. “Look, I want a private sector recovery. I want all parts of the private sector to grow,” he says.

But Osborne thinks that failed industrial policy in the 1970s forced successive governments, both Tory and Labour, to become too reliant on financial services. That’s something he wants to change. “When a head of an investment bank wanted to lobby the government, they were ushered into the chancellor and they were able to make their case directly to him. Whereas the head of the pharmaceuticals company or an aerospace company was told to go and see a junior minister.

“That has to change. John Rose, who runs Rolls Royce… has found it much easier to invest not just in Singapore but in Germany and Virginia. And if we can’t compete against Virginia, then we really are in trouble.”

The shadow chancellor has no wish return to the days when the government picked “winners and losers”, but he does want to change the tax system so it rewards businesses that might relocate elsewhere. “Some countries like Holland and Belgium have made changes to their corporate tax regime that have encouraged pharmaceutical businesses to locate intellectual property out of the UK. It’s one thing asking: ‘Can Britain compete against China in low cost manufacturing?’ But it’s another asking ‘can we compete against Holland and Belgium over intellectual property?’ You bet we can.”

Business leaders from manufacturing, as well as those from financial services, will be hoping that the Tories scrap the 50p top rate of tax. Osborne admits “high marginal rates of tax can have an impact on where people want to locate themselves and on entrepreneurial activity”.

But while the public finances are in intensive care, he has no plans to repeal it: “I’ve got a string of Labour tax rises either just come into force or about to, and I’ve had to set out my priorities. My priority has been to reduce the tax rise on the many, the National Insurance rise, ahead of the tax on the few. I couldn’t even think about getting rid of the 50p rate while we’re asking people in our society to take part in some tough decisions, like for example freezing most public sector pay.”

After an hour, Osborne’s press adviser taps his watch and says it’s time for them to hit the campaign trail again. Having come from an interview with six black cab drivers, he’s off to give a hastily-arranged press conference on the dangers of a hung parliament. He’ll be praying that voters heed his warnings. If they don’t, his dream of becoming chancellor could remain just that.

CV | GEORGE OSBORNE

Age: 38

Marital Status: Married with two children.

Education: Educated in London. Studied modern history at Oxford University.

Career: 1995, special adviser at the Ministry of Agriculture, Fisheries and Food; 1997, political secretary to the leader of the opposition and secretary to the shadow cabinet; 2001, Member of Parliament for Tatton; 2004, Shadow Chief Secretary to the Treasury; 2005, Shadow Chancellor. He has also served as Shadow Economic Secretary and Shadow Work and Pensions Minister.

Other: Worked as a freelance journalist before moving into politics.