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Chancellor George Osborne during an interview at the HM Treasury on June 25, 2010 in London. (Anthony Harvey/Anthony Harvey)
Chancellor George Osborne during an interview at the HM Treasury on June 25, 2010 in London. (Anthony Harvey/Anthony Harvey)

Budget cuts paramount: U.K.'s Osborne Add to ...

The major countries of the G20 should put budget cuts ahead of economic recovery because the risk of spiralling debt poses a much greater threat than a return to recession, Britain's new conservative Chancellor of the Exchequer George Osborne said in an interview before flying to Toronto.

Speaking to The Globe and Mail in an exclusive interview at his office in the British Treasury, Mr. Osborne swept aside a warning from U.S. President Barack Obama that immediate budget cuts could cause an economic contraction and trigger another recession.

He also rejected a more modest suggestion from Stephen Harper's government that stimulus spending continue until 2011.

We have looked at all sorts of countries around the world that have undertaken these sorts of exercises successfully, and the striking example is Canada in the 1990s. George Osborne

He suggested that the countries in surplus positions, notably China but presumably also including the Persian Gulf states, should be persuaded to come to the aid of indebted European and North American countries by inflating their currencies and opening their economies further - a reference to China's pledge this week to allow its currency, the renminbi, to inflate slightly.

"What I think we would hope to see come out of Toronto is a co-ordinated approach in the sense of surplus countries supporting countries with very high deficits, doing what they can to reduce those deficits and showing the world that they can live within their means."

He defended the harsh austerity budget he launched this week in defiance of those warnings, cutbacks that came just days after similarly sharp spending reductions by his German and Spanish counterparts.

Read the complete transcript of Doug Saunders' interview with George Osborne

The crisis of national debt is more pressing and potentially destructive than a downturn would be, he said.

"I think the greatest risk, if there is a risk out there, is the sovereign debt risk," he said. "And that's clearly the case in Europe.

So, therefore, the best way of addressing that, and heading it off, is those countries which have very high debts to take action to reassure markets and their own domestic populations that they have the situation in hand."

While he played down suggestions that a rift has opened between austerity-minded European states and North American countries, which are calling for continued stimulus in the short term, he did note that Britain is joining a growing consensus among European Union members that large-scale cuts and tax increases need to be imposed now.

The economist Paul Krugman warned this week that a sudden economic contraction in Europe could trigger a recession that would have no easy remedies, because the traditional fiscal tool of interest-rate cuts has been exhausted, with rates hovering around zero.

"Greece now has a program of debt reduction, and Spain now has a program of debt reduction, and so on," Mr. Osborne said.

"And in the U.K., and we're obviously in a different situation to the euro zone, but nevertheless the U.K. with its very high deficit, the second largest in Europe, has taken action, and I would argue decisive action in the budget this week. So the most obvious risk out there in the global economy is the sovereign debt risk at the moment, and that's what we need to overcome."

Mr. Osborne plans to produce 80 per cent of his debt savings through spending cuts. He modelled his budget-cutting regime after the 1994-1999 cutbacks launched in Canada by then-prime minister Jean Chretien and his finance minister, Paul Martin, in which a government-wide program review was used to eliminate 10 per cent of all government functions, a process that cost almost 20 per cent of federal jobs.

When he was in opposition before the May 6 election that brought his Conservative Party to power in a coalition with the Liberal Democrats, Mr. Osborne had lengthy meetings with officials from the Liberal administration of the 1990s, and learned the details of the Canadian program-review process.

Beginning in October, Britain will undergo a similar process, one that may end up cutting government even more sharply than in Canada, as Britain currently holds higher levels of national debt, largely as a result of bank bailouts, than Canada did in 1994.

"We have looked at all sorts of countries around the world that have undertaken these sorts of exercises successfully, and the striking example is Canada in the 1990s," he said. "The lesson we learned is that you make it the collective work of the government, and you avoid the government splintering into departmental silos, and you make a fundamental examination of the purpose of government, the scope of government, rather than simply trying to salami-slice everything down. … And quite a lot of these ideas of ours have been adapted from what we've seen in countries like Canada doing successfully."

But Mr. Osborne, considered a more centrist Tory of the party's "Notting Hill" faction, differentiates himself from the Thatcherite branch of his party by declining to describe the cuts as a virtuous exercise in smaller government, but as a tragic necessity.

"First of all, it's not an ideological crusade. It's not a question of wanting to, it's a question of having to deal with a very large budget deficit we've inherited. And it's not done with any great relish, or ideological zeal, it's done out of fiscal necessity."

The following is an excerpt from an interview between British Prime Minister David Cameron and the CBC's Peter Mansbridge.

Peter Mansbridge: Two issues that may come up over these next few days that aren't necessarily economic ones, one's Afghanistan, the three major partners in this, the United States, Great Britain and Canada, the U.S. and Canada both set dates already. The U.S. saying they're going to start to withdraw July of next year; Canada saying they're out as of the end of next year. Are you looking at a date?

David Cameron: I haven't named a date in that way but obviously all of us, as I've said many times, we don't want to be in Afghanistan for a day longer than we have to be. As soon as the Afghans can take control of their own security then we should be bringing our troops back home. But do I want to get the troops out? Of course I do.

Mansbridge: Why do you hesitate on a date, when others sound like they're rushing toward one?

Cameron: I accept the time frames that have been set out by President Obama and I'm working very closely with him on a proper review on how we're doing toward the end of this year, the ambition that we should be starting to transition districts and then provinces of Afghanistan to lead Afghan control by the end of this year and into next year and then, yes, the ambition to start bringing some troops home. But I want this to be done as far as possible on the basis of success rather than lines in the sand and dates. I think there are basically three elements: It's making sure the surge works, that the counterinsurgency is going full steam ahead; it's about training up the Afghan army and police; and then, vitally, it's about the political settlement that we need to make with those elements of the Taliban that want to lay down their weapons.

Mansbridge: Last issue, BP is not the British government, but BP is British and there's been a lot of tough talk in the United States as a result of the oil spill. Tough talk from including your summit partner who you will be sitting down to talk to tomorrow, President Obama. How damaging has this been for Britain?

Cameron: I don't think its been damaging for Britain. It's certainly been damaging for BP, which is an important British company and I certainly want it to see, I want it to be, an important and stable company in the future, not just in Britain's interest, but over a million shareholders, 40 per cent in the U.S., 39 per cent in the UK., look at where the jobs are, thousands in the U.K., but even more thousands in the U.S.

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Follow on Twitter: @dougsaunders

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