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Chancellor on the charge

The Libor scandal has energised George Osborne – and he’s going for Labour’s jugular

7 July 2012

6:00 AM

7 July 2012

6:00 AM

Walk into George Osborne’s suite of offices in the Treasury and you are struck straightaway by a new excited mood. People who a month ago looked worn down by the burdens of office are now full of life. 

In no one has the transformation been more dramatic than the Chancellor himself. He strides out of his room, shoulders back, a smile playing across his face, and says, ‘Come on, stop gossiping with the political advisers. Let’s get on with it.’ It is remarkable to think that just a few weeks ago colleagues were discussing whether his enthusiasm had been permanently dented by events.

This new enthusiasm is the result  of the Libor scandal. For many chancellors, a City scam coming on top of the eurozone crisis and a stagnant economy would be just another cross to bear. But office has not dulled Osborne’s political instincts. He saw almost instantly that a story that started with 14 big boys at Barclays trying to make a profit by hook or by crook could fast turn into something that threatens to destroy reputations in Westminster as well as the City. For this Libor scam is not only about spivs in trading rooms but also about what the powers that be did to keep the average lending rate so low during the worst days of the financial crisis.

To Osborne, for whom the political and the economic come together, the course was clear. Deal with the regulatory impact of the scandal and then exonerate the Bank of England, which Barclays was trying to implicate, and point the finger of blame at the last Labour government, which was in power when these abuses took place.

Osborne, who prides himself on having put the Bank of England in charge of financial regulation, is keen to defend the Old Lady of Threadneedle Street’s honour against Bob Diamond’s accusation that she urged Barclays to get its Libor down. Leaning forward in his government-issue red ministerial armchair, he stresses that this charge has been ‘specifically addressed, not just by our own investigators at the Financial Services Authority but also in the US Department of Justice. And they are not people who will pull their punches, and they’re very clear that the Bank did not issue instructions to Barclays to cut its Libor rate.’

If exonerating the Bank is his first priority, his second is tying this scandal to the last government. He starts by blaming the regulatory system devised by Brown and Balls for allowing these abuses to happen. But suddenly, and far more explosively, he moves on to the political efforts to keep Libor low during the financial crisis of 2008. ‘As for the role of the Labour government and the people around Gordon Brown — well I think there are questions to be asked of them,’ he says. He starts to discuss reports that those in the Brown circle were pressuring Barclays to manipulate the Libor rate it was paying. Then he drops a bombshell: ‘They were clearly involved and we just haven’t heard the full facts, I don’t think, of who knew what when.’

For Osborne to declare that those around Brown were involved in the efforts to keep Libor down is a remarkable charge, one sure to pour petrol on the political fire raging after it was revealed that ‘senior Whitehall sources’ were behind the pressure on Barclays over Libor. But Osborne doesn’t stop there.

He continues, ‘My opposite number was the City minister for part of this period and Gordon Brown’s right hand man for all of it. So he has questions to answer as well. That’s Ed Balls, by the way.’

This last line is delivered straight into the microphone — a classic Osborne twist of the knife. He knows that this scandal presents a chance to destroy Balls’s reputation, to remind everyone of his role in the failures of the Labour government. One wonders if it is also intended to bring into question Balls’s defence that he couldn’t have known about any rate-fixing as he was Secretary of State for Children at the time.


This isn’t just the usual political point-scoring. Reminding the public that Balls was central to the financial and economics failures of the last Labour government is crucial to Osborne’s electoral ambitions. When conversation turns to the next election, the Chancellor — who remains his party’s chief electoral strategist — confidently remarks that the Tories ‘will have a really simple message, which is: don’t let Ed Balls and Ed Miliband bankrupt the country again’. Indeed, Osborne’s political and economic mission is perhaps best understood as an attempt to undo what Brown and Balls did in their 13 years in power.

There are those on the right who worry that these constant scandals involving bankers will undermine the public’s confidence in free-market solutions and make Ed Miliband’s call for a new type of capitalism sound more appealing. But Osborne is more optimistic. He believes that his party’s traditions can guide Britain through the current crisis. ‘There’s a strong Tory radical argument that says you are on the side of people who want transparency, who are against cartels, against monopolies, against manipulation by the big guys.’

Unlike Miliband and Vince Cable — the Business Secretary who called the City a ‘massive cesspit’ — Osborne has not been put off financial services more generally by these latest revelations. He boasts that, ‘In the last year we have actually increased the gap between us and the number two financial centre in the world league tables.’ He is clear that if the Europeans and the Americans were to try a regulatory pincer movement on London, ‘we should certainly resist it’. He is also quick to point out that, ‘There are lots of people around the world who are jealous of London and the UK because of its pre-eminence as a global financial centre.’

For Osborne, the aim is something one might characterise as a third way for the City. He wants to balance ‘Britain being the pre-eminent wholesale financial services centre while at the same time protecting the British taxpayer when things go wrong’. The structural changes he’s introducing are, he says, meant to ensure that ‘the banks are big enough to fail’; a play on the idea that some financial institutions are too important to the financial health of the nation to be allowed to go down.

Before this scandal broke, the Chancellor was defending the government’s decision to scrap the 3p rise in fuel duty planned for August. There were many, including the former chancellor Lord Lawson, who thought this was a U-turn too far. Osborne, though, is adamant that it wasn’t even a U-turn. ‘I’d always planned at the Budget — rather than making any announcement then — that I would wait till closer to August to see what happened to petrol prices. And they were still at an historically very high level.’ Hence the decision to postpone the duty increase. The explanation would be more persuasive if the Chancellor had stated this plan clearly back in March.

But Osborne is in no mood to be apologetic. He describes the government’s record on the economy as ‘a pretty remarkable set of achievements’. These are then rattled off in a voice that brooks no interruption. Strikingly, the cut in the top rate of tax features prominently in the list.

When I put it to the Chancellor that, despite all of his measures, the tax take is down on last month, state spending is up and the national debt’s still growing, he parries: ‘This is one of the most difficult [situations] that a Chancellor has had to face.’

He is still putting his faith in monetary rather than fiscal policy — money-lending rather than tax cutting. In the next few weeks, he says, a string of government guarantees for housing and infrastructure
projects will be announced to ‘allow the full fire power of monetary activism to take its effect’.

Osborne shows little enthusiasm for the idea of trying to stimulate the economy through more tax cuts. ‘It’s too easy for Conservatives to just say cut taxes and they will pay for themselves,’ he says. ‘It’s the flip side of the Labour people who say spending will pay for itself.’

If that answer irritates some on the right, what should cheer them is Osborne’s contention that ‘the political tide is moving in the centre right’s direction’. For example, he says, the Tories were defensive about welfare when he started in politics; and now that’s ‘one of our strongest issues’. Education is another area in which Osborne maintains the Tories are winning the intellectual battle.

To him, the great left-right divide that many thought had run its course with the end of the Cold War is coursing through politics again. ‘Back now are some of the biggest questions facing our country, about whether you’re happy to have half of the national income taken by the state and half of some people’s incomes taken in tax. Or whether you’re not happy to have that and you want to see the state consume less and taxes come down.’ These sentences are delivered with real conviction. The contrast with early Cameronism, with its belief that the economic argument was over, could not be more stark.

But for many — and particularly for many Tories — the biggest question facing the country is its membership of the European Union. Osborne is regarded as more Eurosceptic than Cameron. But when I ask him about it, he simply repeats the Prime Minister’s new line that ‘a fresh settlement in Europe is an opportunity to ask for fresh consent from the British people’.

This is the new Cameroon code for renegotiation followed by a referendum. But Osborne won’t be drawn on the details, saying he’s ‘not getting into the specifics of what that new relationship should look like’. Shifting in his seat, he warns: ‘There is a danger of having the entire discussion now when actually it is going to unfold over the next few years.’

The aim of any renegotiation, he says, is ‘having a better relationship with the rest of the European Union that the British people are comfortable with’. He adds immediately that ‘it’s quite striking how uncomfortable most British people feel’ about the current terms of this country’s membership of the EU. This line is followed by a meaningful glance; the implication is that he wouldn’t just be looking to let the NHS opt out from the working time directive. Instead, he wants ‘a relationship where the British people feel that more decisions are taken by them and their representatives rather than in Brussels’.

As we get closer to four o’clock, aides knock on the door to tell him he has to leave for his afternoon meeting in 10 Downing Street. As we get up to leave, I notice that he has the same photograph on the wall of his office as William Hague has in his: an image in which the Prime Minister stands in between the two men, his arms draped over their shoulders, half in triumph, half in exhaustion. 

It was taken, Osborne says, an hour after Cameron had first entered Downing Street as Prime Minister. After days of coalition negotiations, the three of them felt — and looked — knackered. The challenge for Osborne, both as Chancellor and Tory strategist, is to ensure that after the next election, there is no need for any negotiations before Cameron returns to Downing Street.


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