Any quotes used must be attributed to Sky News, Murnaghan 

DERMOT MURNAGHAN:

Well now, when the Chancellor outlined his tough plans to cut the deficit in his autumn statement he insisted that there was no Plan B.  Well five months later George Osborne is now faced with lower growth than expected, rising inflation and a predicted rise in interest rates and of course the Middle East crisis pushing up fuel prices.   Well when I met the Chancellor at the Conservative Spring Conference in Cardiff I asked him if he was planning to change course.   We’ll have that interview in a moment but watching the interview for us and giving us their views via Twitter are our experts, former Labour Treasury Minister Kitty Usher who is now Director of the think tank Demos, Mark Littlewood who is Director General of the Institute of Economic Affairs and Sam Coates, who is Deputy Political Editor at the Times and you can see their reactions, their views, they appear on our side panels if you are watching on HD.  You can also follow it on our website, Skynews.com and of course feel free to join in.

Well thanks for joining us Chancellor.  Intrigued by the idea of enterprise zones.  Now you have been criticised in the past of having no vision for growth by the CBI and obviously by the opposition, is this in part an attempt to counter that, that you really do have ideas to foster growth?

GEORGE OSBORNE:

Well I think as a new government we faced an immediate task which was rescuing Britain from the financial danger zone that Greece was in, that Ireland was in, because of the very large hole in our public finances and I think the steps we’ve taken have very convincingly done that and you can see it in our interest rates compared to those of countries like Portugal but the next stage, and this is the next budget if you like, is to unleash the forces of enterprise, the forces of aspiration, remove the barriers that stand in the way of businesses growing and jobs being created.  We took some steps already in the last ten months cutting taxes for businesses, taking a lot of low income people out of tax, making it easier to employ people, cheaper to employ people in terms of employment tax but there is a whole lot more we’ve got to do and that is what this second budget is for.

DERMOT MURNAGHAN:

So the idea of enterprise zones, but in terms of your Conservative principles, I mean you obviously believe it is entrepreneurs that start businesses not governments.  Governments can create certain environments in which they may or may not prosper but an enterprise zone, hasn’t past experience told us that in reality what they do is just suck in people who are after the tax breaks and in actual fact you replace jobs elsewhere?

GEORGE OSBORNE:

I think a big difference between Conservatives and socialists if you like is that Conservatives don’t believe that governments alone create growth.  Governments create a climate in which the ambitions and aspirations and dreams of people are realised when they start their own small business and so on.  Now there are so many obstacles in the path of people wanting to do that today.  If someone listening to this programme wanted to go out and set up their own small business tomorrow, they would find the paperwork overwhelming, they would find it difficult to get planning permission, they’d have to start paying business rates almost from day one and I think enterprise zones are just one way of helping them.  I’m not saying it is the only answer but in those parts of the country that haven’t done so well in the Labour years, places outside the City of London and the south east, those parts of the country, if we can find areas in our cities and elsewhere where we say, do you know it is going to be particularly easy to set up a business here and there is going to be particular tax relief if you do, then I think that would be a great thing.  I don’t see how anyone could be against it.  What you would say is let’s have as much of that as possible round the country, for sure.

DERMOT MURNAGHAN:

It is also very Thatcherite as well isn’t it?  Echoes of the 1980s.  You’ve got these enterprise zones, people are drawing those parallels, we’re in a depression, VAT has gone up, all very similar to those Thatcher years. 

GEORGE OSBORNE:

First of all I don’t think we’re in a depression frankly but yes, of course, like many western countries we have got challenging economic circumstances and that’s partly about where Britain has come from with these very, very big budget problems, the fact that over the last ten years we gambled everything on the City of London under the last Labour government.  So yes, we’ve got to take steps but enterprise zones, they are used in many other countries, used in France for example, they have been used successfully at different times in different guises in our history, used by other countries that want to particularly take areas that have been left behind.  I think a striking fact about the last ten years was that for every ten jobs created by businesses in the south of England, only one was created by businesses in the north and the Midlands.  Now that is an unsustainable economy for a country to have, as we eventually found out, and what we have got to do as the new government is get growth and enterprise going across the whole country, here in Wales where I am today, but across the whole country.

DERMOT MURNAGHAN:

What are the biggest challenges?  You talk about the challenging economic times ahead, what are the biggest challenges out there?  We’ve obviously got the oil price going up, inflation above where you’d like it to be, unemployment still growing, there are a huge number of economic pointers pointing in the wrong direction.

GEORGE OSBORNE:

I would say we have to be realistic about where we’ve come from and optimistic about where we can get to.  We have got to be realistic, we are coming out of the biggest recession since the 1930s, the biggest banking crisis arguably in our history, we’ve got the largest budget deficit of any major country in the world, so those are the obvious problems.  We have also got added onto it now the rise in the world oil price which has been caused partly by events in Libya, partly by actually the growth of China and the more oil that countries …

DERMOT MURNAGHAN:

But what about the increase in the price of oil, I’ve heard say it can go to $200, $250 a barrel in which case we’d be paying £2 a litre.

GEORGE OSBORNE:

Well the government does make and will do in the budget an independent estimate, done by our new independent Office for Budget Responsibility, on the oil price.  The point I’m making is it has clearly gone up very considerably in the last couple of months, partly as I say due to the events that we see on our TV screens every day, in Libya and Egypt and so on.  That’s a big challenge, not just for Britain, we’re not unique in this but for every industrialised country and it just adds to the challenges.  It reminds you how frustrating it was that Britain didn’t fix the roof when the sun was shining so we were better prepared for dealing with difficult economic conditions.  Unfortunately we’re not but there is now a new government and we are putting in place the steps that will make Britain able to deal with whatever the world throws at us.

DERMOT MURNAGHAN:

Do you accept then that there is a squeezed middle?  Now you’ve more or less mocked Ed Miliband in terms of his definition of the squeezed middle but families out there are hurting with wages that have been falling for six years, that’s the most consistent fall since the 1920s as  the Governor of the Bank of England has told us.  Families are in trouble, are they squeezed, are they in the middle?

GEORGE OSBORNE:

I'm not sure if it is the middle or the bottom, I think all families are squeezed by the high price of food and the high price of petrol, here in this country and elsewhere, I am very, very conscious of that.   I hear what people are saying to me and I am very, very aware of the challenge and as the governor of the bank, who you mentioned, correctly says we are partly paying the price of what went wrong in our economy over the last ten years under the previous government but we have also got to deal with these current problems and I’ve got, I’m anticipating your next question probably, I’ve got a judgement to make about the coming increase in fuel duty that the Labour party planned for the beginning of April.  Of course I have got to do two jobs, I’ve got to help families and I’ve also got to make sure that the nation’s finances are secure or else all families will suffer, and getting that balance right is I guess what I’m paid for and the budget will be a moment for me to address these issues.

DERMOT MURNAGHAN:

You mentioned fuel, Ed Balls your opposite number of course, wants you to go further and says some of the rise is self induced, VAT, put it up as well.

GEORGE OSBORNE:

Ed Balls, this is the man who actually ran the British economy for the last ten years. We are basically as a country dealing with the mess he created and the fuel duty increases in January, the one coming in April, they were planned by Ed Balls and his Labour colleagues so I find it …

DERMOT MURNAGHAN:

Not the VAT rise. 

GEORGE OSBORNE:

I completely understand when families come to me and ask me to do something, I completely understand where they are coming from, of course as I said I will do whatever I can to help consistent with the stability of the economy but frankly the one person I am not prepared to take a lecture from is the man who actually planned the fuel duty increases, Ed Balls. 

DERMOT MURNAGHAN:

You want to help, the fuel stabiliser, you’ve talked about it a lot, the Prime Minister has talked about it, what are the difficulties in bringing in something which could I suppose flatten out the price of fuel and stop those bumps?

GEORGE OSBORNE:

The basic idea is quite straightforward which is when the oil price goes up, obviously families face additional pressure, the price of petrol goes up, the main increase in the price of petrol recently has come from the increase in the price of oil so that’s the one side of the equation.  On the other side of the equation people argue that the government gets in more revenues from the North Sea for example because we tax oil companies in the North Sea, so you get those two things confronting the Chancellor of the Exchequer.  The oil price means higher taxes from the North Sea but it also means that families are facing the squeeze, that people use their car less and the impact on the oil price has a dampening effect on the economy and on all taxes.  That’s the sort of basic idea, the question is how can you actually protect families in that environment and that is what we are working very hard on, looking to see whether some kind of stabiliser could work.  My first priority for everyone’s sake has got to be the stability of the national economy, because then we really would be in a mess if I don’t keep an eye out for that, but I’ve also as I said, I’m very, very aware of the pressure that families are under at the moment from the rising cost of oil. 

DERMOT MURNAGHAN:

There you are, you are nuancing things, you are reacting to events, we couldn’t see what was going to happen to the oil price, we couldn’t see Libya coming a few months ago, all the problems in the Middle East, you are reacting here but you tell us time and again that there is no Plan B, there is no changing the course when it comes to cuts but other things could occur out there couldn’t they?  I am not going to ask you about a Plan B but could you adapt your strategy if unemployment hits three million, if inflation hits 10%?  And if you don’t, what’s the point of having you as Chancellor?

GEORGE OSBORNE:

First of all, the job I’ve got is to make sure that the British economy is ship shape in stormy waters and is able to help people.  Let’s not forget that at the beginning of April I’m freezing people’s council tax bills, taking 23 million people, helping 23 million people with income tax cuts and new Child Tax credit payments to some of the low paid, so there are specific steps we can take.  You ask about a Plan B, I think a good test of any recommendation made to me and this one is made by my political opponents, is what would happen if I actually did it, if I stand up on the 23rd March and said do you know what, I'm abandoning Britain’s plan to deal with its debts and its deficit, I’m putting it all on ice …

DERMOT MURNAGHAN:

It is not about abandoning it, it’s about altering it.  For example the Institute for Fiscal Studies said you could alter the trajectory …

GEORGE OSBORNE:

So say I said the plan we’ve put in place that has brought us stability, that has got the international markets off our back, that has enabled us to keep interest rates pretty similar to Germany’s rather than similar to Spain’s or Portugal’s, let’s say I said do you know what, we’re abandoning that plan.  There would be panic the next day, the markets would crash, the credit rating would be downgraded, our interest rates would rocket for families and for businesses, investment would be cancelled, businesses would go bust, jobs would be lost.  That is what would happen and …

DERMOT MURNAGHAN:

We don’t know where the oil price will go, if the oil price goes to $200 a barrel, we get into a double-dip recession and you keep cutting?

GEORGE OSBORNE:

As I said, what we have bought for ourselves with the very large mess in the public finances that I’ve inherited, is a breathing space, stability, the things that frankly the things that the people of Ireland and Greece don’t enjoy at the moment and have the problems we can see there.  We have bought ourselves stability, we have got a plan that is credible, almost every international organisation in the world that you can think of supports what we are doing so we’ve got that but what we now need to do is ensure that the forces of enterprise and aspiration are unleashed, that all the barriers that stop companies growing and creating jobs are removed.

GEORGE OSBORNE:

I understand that but my question, Chancellor, was what about the Donald Rumsfeld, the known unknowns, things that can happen.  We’ve looked, we’ve been discussing the global outlook and bad things can happen in the economy, are you a Chancellor then who is prepared to react to those bad things and change course even if it is ever so slightly, or is this it, we’re on auto pilot?

GEORGE OSBORNE:

Well we’ve got a plan to deal with the public finances, if we backed off that plan then actually interest rates all other things being equal would be higher and the squeeze on people would be greater so I’m not sure that’s frankly the right route to go down.  What I would say is, of course when it comes to specific challenges like the oil price, I’ve said I’m looking at that, I’m looking at the April increase in fuel duty and of course I’m doing that because I can see what’s happening out there for families, I can see the pressure they’re under and in that sense I am hearing what people are saying to me and of course working very hard to be able to help them on budget day. 

DERMOT MURNAGHAN:

You are watching Murnaghan here on Sky News, stay with us for more from that interview as George Osborne denies reports of a cabinet rift over Libya.

DERMOT MURNAGHAN:

Welcome back, you’re watching Sky News.  Now when I met the Chancellor at the Conservative Spring Conference in Cardiff, I also asked him about the government’s response to the crisis in Libya.

We have mentioned Libya a lot in relation to the oil price, what about the political situation there, what do you think Britain can do actively to foster change there now that we know and all hope that Colonel Gaddafi will eventually go?

GEORGE OSBORNE:

Well I think of it really in a couple of phases.  The first phase was to get our British citizens out and I think a very good operation was done there, it is incredibly difficult to get people out of small camps in the desert, out of cities that were under rebellion.  We’ve done that, the next phase has been to tighten the net around Gaddafi.  I’ve been involved as Chancellor freezing the assets of …

DERMOT MURNAGHAN:

About those assets, what happens to that money?  When there is a change of regime do you make sure that money goes back to the people of Libya?

GEORGE OSBORNE:

Yes, absolutely, this is not money we seize, this is money we freeze, it’s the reason it’s called a freeze, and we are able to hand it back to the Libyan people after the Gaddafi regime has gone, after the UN Resolution is lifted.  The interesting thing about the UN Resolution which we’ve implemented is it is very specifically about Gaddafi and his henchmen, it is not about the people of Libya and so the net has tightened on him, an international criminal court is launching an investigation and people in Libya connected with the Gaddafi regime should be very, very aware of that.  We’ve stopped bank notes going out and indeed coins from the Royal Mint near here going out to Libya, so we’ve put the pressure on the Libyan regime, the net is closing in on them like that and of course, as the Prime Minister has said and the President of the United States has said and others, we’ve got to prepare for other eventualities.

DERMOT MURNAGHAN:

It is said the cabinet is divided into doves and hawks on this issue of intervention, where do you stand?  Are you with Michael Gove or with the Foreign Secretary in the sense that you think we can do something and should do something to intervene in countries like this?

GEORGE OSBORNE:

I don’t accept that the cabinet is divided.  I have sat through many, many cabinet discussions in the last two weeks on Libya, either the full cabinet or a sub-group of it, and as it happens Michael Gove and William Hague are two of my closest friends and colleagues since you mention them by name.  Everyone is clear that we had to get the British citizens out, we have to close the net in on Gaddafi, we have to prepare for the future and whatever might be needed in the future.  What I’m clear is what the people of Libya want, what the people of Egypt want, what the people of Tunisia want is the same thing as the people of Britain want, which is freedom.  In the end freedom and stability are not mutually incompatible things, they are indivisible and I think those are the values that underpin our country and underpin our foreign policy.

DERMOT MURNAGHAN:

Presumably you’d agree then that the people of Saudi Arabia and indeed the people of China want those kind of freedoms as well, are we prepared to stand up to them?

GEORGE OSBORNE:

As I was saying at the speech I gave here at the Conservative Spring Conference, you don’t have one model for every single country and every single time but I personally believe that freedom and the desire of people to have control over their own lives and the desire of people to have a better life for their children, are the most basic human instincts, universal around the world and Britain should be on the side of people who want to express themselves.

DERMOT MURNAGHAN:

What is your view on the number of mainly august academic institutions who seem to have cosied up rather too much to these global despots and taken their money, do you think they have acted in too much haste?

GEORGE OSBORNE:

Well I think frankly some of them were a bit foolish, to put it mildly, made the wrong judgement.  The head of the London School of Economics I think actually did the right thing and resigned and I think he did that with great dignity and said I’ve made a mistake. 

DERMOT MURNAGHAN:

Any number of colleges and universities have taken Saudi money and things like that.

GEORGE OSBORNE:

I don't think you can compare the Saudi regimes to Colonel Gaddafi and the murderous thugs around him.

DERMOT MURNAGHAN:

So you think it is fine to take money from the Saudi princes?

GEORGE OSBORNE:

Of course, look, every institution needs to make its own judgements but be aware, as in the case of Colonel Gaddafi, it’s not as if the man didn’t have a past, so I think perhaps not enough discretion and caution was exercised and people are being held accountable for that now.

DERMOT MURNAGHAN:

Lastly, Chancellor, the Governor of the Bank of England Mervyn King talking the other day about, well we’re not out the woods really he seemed to be saying with our banks, that things could go wrong again because of the way the banks are still configured and because of the way they treat their customers, both corporate and individuals.  Do you agree with the governor?

GEORGE OSBORNE:

Well I think one of the biggest challenges facing the British economy at the moment is clearing up from the banking crisis and we put all our chips on the City of London and that blew up and we’re all, as a country, paying the price for the mistakes made by my predecessors but what I’m clear is, and here is where I absolutely agree with Mervyn King, the system of regulation completely failed, it needs to be completely changed.  I am actually putting him and the Bank of England in charge now of regulating our banks and I wouldn’t be doing that if I didn’t broadly agree with his concerns.   I am also very particularly looking at the issue which he correctly raises which is how do we deal with the ‘too important to fail’ problem?  In other words, you have a bank that is so important in the economy that when it hits the buffers, when it gets into a crisis, the person doing my job says we’d better bail it out with tax payers money because we can’t face the consequences of it going under.  That's what happened with the Royal Bank of Scotland and HBOS and so on, so I want to get a system where actually the Chancellor of the Exchequer of the day doesn’t have to make that decision with people’s money.   I have set up an independent commission with Mervyn King’s support, who are very specifically looking at the ‘too important to fail’ problem if you like and also looking at competition on the high street, competition in the banking sector, so customers are treated fairly.  They are going to report later this summer but if you set up an independent commission it is not really right to try and pre-judge them when it is just a few months before they publish their report.

DERMOT MURNAGHAN:

It was just also quite extraordinary the cultural aspect I suppose he touched on, I mentioned it in the previous question about the way they treat their customers, both corporate and individuals.  I know it is something we are all very concerned about in terms of seed corn for businesses but it is extraordinary given the amount of help that the banks have had that they are still acting, and the Governor of the Bank of England says they are still acting in this almost cavalier fashion.

GEORGE OSBORNE:

Well I think they need to be better regulated. There was  a system of regulation that I inherited, I am scrapping that, putting the Bank of England in charge …

DERMOT MURNAGHAN:

But you can’t force them to be nice to their customers.

GEORGE OSBORNE:

Well I am creating a new powerful consumer body, I’ve also got agreements out of the banks that I’ve wrought out of them to lend more, particularly to small businesses who have been I think, have got a very rough end of the deal and we need our small businesses to grow to create jobs.  So yes, change the banking system and the way it is regulated, that’s what we’re doing, improve the service they offer to customers, get them lending to small businesses – I completely agree with all of this and that is exactly why I have embarked on the steps I’ve taken over the last ten months.

DERMOT MURNAGHAN:

But they keep their bonuses.

GEORGE OSBORNE:

Well the bonuses are lower than they were under the last Labour government.   I’m not saying that is perfect and for most people the sums of money that the bankers pay themselves are inconceivably large but I’ve got the bonuses down, my biggest priority however – and by the way we get our taxes out of them and one of the things I’m doing is clamping down on tax avoidance so we get the money out of the bankers in terms of the fair taxes they pay – but my biggest priority has been to get them lending to small businesses again because in the end what really, really matters in our country is that we get those jobs, get that growth, get a banking system that supports our economy instead of bringing down the economy. 

DERMOT MURNAGHAN:

Chancellor, thank you very much indeed for your time.

GEORGE OSBORNE:

Thank you.