 Yes, I'm here with Chancellor Osborne. We're talking about an idea from you. Mr. Chancellor, thank you for joining us. Thank you very much for having me. Good to see you. So let's first talk about some of the news events that you and your colleagues have been making this week. The Prime Minister, of course, in a major speech discussed the referendum that he has pledged to hold on whether or not the UK should remain in the EU. Do you think that there is a likelihood that the UK would leave the EU? What is the likelihood? Well, our argument is a positive argument that Europe needs to change to meet the aspirations of all its peoples, whichever country they live in. But obviously, we're also making the argument on behalf of the British people that Europe has to become a competitive place where companies can succeed and jobs are created and young people have careers. And that's the change we want to see in the European Union. Now, we want to get that change, and we want to seek democratic consent for a new settlement in Europe, and we want to seek democratic consent from the British people. And we think one of the issues in Europe has been the detachment from the people of the institutions. And a referendum is a way of, as I say, bringing that certainty. And what I want to do is make the argument at the time of the referendum for Britain being in Europe in a reformed and competitive Europe. And we have every confidence that we're going to be able to get there. How do we get there? Talk to us about some of the changes you'd like to see implemented in terms of having a comfort feeling about all of this. Well, I've just been at an event with lots of prime ministers and finance ministers from European countries. We've all got the same issue, which is how can we make sure that we are creating competitive economies in Europe? And so I think the changes that are needed to make Europe the place where innovation happens, where companies grow, are actually relatively straightforward. We need to make sure that we get the institutions of the European Union working to our best advantage, completing that single market, which is perhaps Europe's greatest economic advantage, concluding free trade agreements with the United States and Japan and India, great other trading blocks. Use those institutions of the European Union and in our own countries put our own houses in order, not just in terms of our public finances, but also in terms of having very competitive tax systems and getting the balance right between social protection and having a country where a company can actually hire people and have confidence that they want to grow their workforce. Having the balance, of course, is the critical part of this because many people would say we're waiting on a GDP report tomorrow and we're waiting on more news that perhaps the economy is in an anemic state. And at this anemic moment in time, the austerity may very well worsen things. Now, there was the chief economist of the IMF just yesterday calling for you to slow down the austerity and the spending cuts because things will deteriorate further. What is your response to that? When do you believe it's time to slow up on some of these issues and wait to try to see if we can see growth rather than perhaps putting more pressure on the situation? Well, Britain still has a high budget deficit. I wish it were not the case, but the truth was that like some other countries, in the good years, we borrowed too much and we're having to deal with that overhang. This government, this new government is having to deal with this in the United Kingdom. And we have legislated for and we've put in place what I think is a credible deficit reduction plan. It is credible and it is flexible. And we've already exercised that flexibility. So before Christmas, you know, I made it clear that I would extend the horizon of our debt ambitions in terms of getting debt falling as a percentage of GDP. So you know, I've been prepared to let the automatic stabilizers operate in the UK. But I don't think it's right to abandon a credible deficit plan. The credible deficit plan had that flexibility built into it. And I think the credibility we have, which is evident by the fact that I am able to borrow money more cheaply on global markets than pretty much anyone who's ever done my job before me, that credibility is very hard won and easily lost. And I think it would be a huge mistake to put that at risk. Part of it is really communicating this message to the people so that folks understand why this is the priority now as opposed to the priority being easing up on spending cuts so that perhaps people would not feel as pressured. For example, this is an issue that's going on around the world. You and I spoke on the telephone before this interview and you called it a race to the bottom. Whereas we're seeing this debate about pushing stimulus forward versus spending cuts. So explain what the ramifications are for the UK, for the people, if in fact you don't get your arms around the dead. Well, I would actually, I call it a global race and actually a race to the top, not a race to the bottom, a race to the top of being competitive and an economy where innovation takes place. And you can't do that if people question your ability to pay your way in the world. And I think actually the British public, and I think this is true in other countries, but but I'll speak for Britain, I think the British public understand that too much was borrowed, that we've bought the deficit is too high that has to be dealt with. But that is not the only part of our economic agenda. And and we've never claimed it is we've got other things going on in Britain, we are aggressively reducing our corporate tax. So we have one of the lowest corporate taxes of any country in the developed world. We have taken a difficult and controversial decision to cut our top rate of income tax because actually at 50% our top rate of income tax was uncompetitive, was not raising revenue. That's a difficult political decision, but economically absolutely essential. So we are undertaking pension reform, welfare reform, education reform, higher education reform, all the structural changes that don't yield a benefit overnight, but over a period of years, will transform I think the competitiveness of the British economy to win that global race to be a winner in the global race. And bluntly, I think Western nations face a choice. They're going to either be able to keep up with these extraordinary success stories elsewhere in the world, or they're not. And if they don't keep up and some countries will not keep up, then they are going to see declining living standards, their population is getting poorer and their political system will have failed them. And generations to come will be actually feeling the impact. The generations to come will be feeling the impact. I think it's the crisis of the last five years has accelerated a structural change in the world economy that was taking place and brought it home. And you see it here in the World Economic Forum, the excitement about what's going on in Asia, indeed now in Africa, in Southern America. It's important that Europe, and indeed I would extend this to North America, that our economies respond to that, that we seek to out compete and out innovate and be the best. And there is some good evidence that in Britain we are becoming a more competitive economy. And in the league tables that this organization, the World Economic Forum, produced, we are going into the top ten, we're becoming a more competitive economy. I'd like to talk more about the evidence there, as well as the reception that you're seeing from some of these moves, including the drop-off in corporate taxes. But let's go back in the beginning of your tenure yourself and the Prime Minister, the people bought into your ideas and the people agreed that what your plan was, the goals of your plan, was the path to take. But when the cuts start taking effect and when the people start seeing things that they expected gone, that's when the debate begins. So where are you in the cuts specifically? How much more is to come? How much more pain should the people feel? Well, we do have to go on making reductions in public expenditure and we set out a path to do that over the coming years. A lot of it is now legislated for, so the very difficult political arguments have been had in our parliament. For example, just this week we passed through the House of Commons, a welfare bill, which is going to mean that welfare entitlements only go up by 1% instead of the rate of inflation. That's a difficult measure, but it's going to save a lot of money for the taxpayer. But we've got that through our parliament. And by the way, a parliament where for the first time in 50 years there is not a single party government. So more than 50 years. So I think we've been able to demonstrate that we can do the heavy lifting, get the political agreement. And I would say, of course, if you came to Britain today, there is always going to be on any week a fierce debate about which bits of government should be cut. But I would say there is a broad agreement amongst the public and actually in quite large parts of the political system that wherever you make your choices, the choice has to be made. Savings have to be made. The size of government has to be reduced. The size of the public sector has to be scaled back. And actually that is happening. And by the way, as it's happening, jobs are being created in the private sector. And this week we had a very good jobs report in the UK. So people see that rebalancing is taking place. Let's talk about what the economy feels like right now. You mentioned the jobs report. How would you characterize the economy in the UK right now? Well, let me let me use them since we have a GDP number tomorrow. And, you know, not to give anything away. So I will stick with the language that I used in the autumn statement in December. You know, what I said then and what I've been saying for a couple of years is this, we are walking a difficult road, but we are heading in the right direction. We are making the necessary changes to rebalance our economy. Jobs are being created. Over a million jobs in the private sector, the fastest rate of job creation for over 20 years in the UK. So and indeed the governor of our central bank this week was saying something similar. So, you know, we have still got like many Western economies, plenty of difficult decisions to make to keep the reforms going in our economy. But I think we're heading in the right direction. So you're feeling like it's already taking effect that this is working? Well, I would say the rebalancing is taking place. Look, it's many many Western economies, the US, the UK, alone many continental European economies. You know, we became very unbalanced. And in the end, we were running deficits that gave rise to questions about our ability to pay our way in the world. We had, in certainly the case of the UK, public expenditure was approaching 50% of national income. We had welfare entitlements that the tax-paying public couldn't afford. And actually, you know, our business environment was becoming less competitive. Now, all of those things are changing, and they're all, you know, changing in the right way. What is the timing on seeing substantial numbers in terms of growth? I mean, we know that the IMF cut the 2013 forecast for economic growth to 1%. You instructed your cabinet ministers this week to find further ways to do more with less. And it's understandable. I understand what you're saying. You need to get your arms around the debt in order to truly get back to growth. But people, they want to see it happen and they want to feel like the vision, they understand the vision. So what would you say in terms of the timing to really see some serious numbers in terms of growth in the economy? Well, even on those IMF forecasts, you know, the UK economy, the IMF forecast is for the UK economy to grow this year and next. And indeed, not that it's a cause of celebration, but it's, I would note that we are forecast to grow more than Germany or France. Now, we have a tough situation with our neighborhood, where we have the Eurozone in recession. And that is a major trading partner of the UK. 40% of our exports go to the Eurozone. The good news is that the turbulence in the financial markets has abated a great deal since before Christmas. But we still have a real economic situation in many of these Eurozone countries and that these are, as I say, important export markets for us. But in terms of progress, as I say, the rebalancing is happening, the jobs are being created. And actually, also another encouraging sign is that the rate of new company creation in the UK is at its highest rate on record. So you're also seeing, hopefully, the great success stories of the future being born out of the difficult times of the present. In terms of the programs, is everything on the table, what would be more impactful than others? What programs? In terms of spending? Yeah, spending cuts. We made some decisions to prioritize certain things. I have prioritized the education budget. I have prioritized science spending. So I've made some judgment calls about what are the kind of investments that are going to support the economy. We're also putting more money into infrastructure and roads and the like. But we've taken tough decisions on, as I've just explained, on welfare entitlements and some other areas of government spending. Now, you know, the way this works in the UK is that over the next few months, I'm going to have that collective discussion with other people sitting around the British cabinet table. But everyone knows that we've got to do this. Everyone is signed up to a path of deficit reduction that is collectively agreed across the government. There was always going to be a healthy debate about where exactly you make the savings. But no one doubts that the savings have to be made. And in the meantime, you are faced, as you say, a tough neighborhood faced with an environment, which is also troubling and perhaps uncertain. So, well, first of all, you must feel somewhat vindicated the fact that you did not join the Euro. Well, yeah, I'm relieved, I think, is the way I would put it. There was a big argument in Britain. I think we forget that over a decade ago, there was a whole wealth of opinion that wanted Britain to join the Euro. The Prime Minister at the time, Tony Blair wanted to join the Euro. A lot of the industry bodies, particularly the Confederation British Industry wanted to join, the trade union movement wanted to join. And actually, it was those who stood out against it felt at the time like minority voices. And it only emerged over time that actually, the business community was, there were many more people in the business community who were skeptical about joining the currency. And fun enough, I think you see something similar happening today coming back to your opening question about what we're saying about Europe. A lot of British businesses coming out over the last couple of days, big international businesses saying actually David Cameron and George Osborne and the government are absolutely right to argue for economic change in Europe and seeking consent to that change. So the single currency reminds us that actually Britain can lead in Europe, can make the right decisions for Britain. And a lot of the arguments we made about the single currency at the time, which is fine to join, but if you join, you're going to have to end up having a fiscal union, a financial union, a budget union, all of those things many years later have turned out to be true. And the argument we want to lead in Europe now is another positive one, which is we can make this continental success, but that has to be changed. But is there a downside risk? That's what I was getting at. I mean, we see now what has gone on in terms of the interconnectedness of being a part of the Europe. But if the UK were to leave the EU, is there a downside risk of that independence not having the connectedness and the open trade that comes with the unity of the EU? Well, I'm arguing for reform in Europe and Britain being part of a reformed Europe. That's what I want to see is the outcome of this process. And I think we can deliver that. But in the end, you can't ignore the growing gap between the governed and those who claim to govern. And that has happened in many European countries and in the UK referendums were promised time and again by all political parties and not delivered. And that's one of the things that has contributed to a concern about that democratic deficit. So I think we are right to confront this. And as I say, there's a lot of business support. There's a lot of public support for that as well. What do you think the British people want to see in terms of remaining in the EU? Well, I think Britain wants... Britain is a European country. Of course, we are. We, you know, our entire history has been tied up with the continent of Europe. But we want the institutions of the European Union to work for us and our economy and for all of the economies of Europe. You know, we we cooperate in the European Union. Let me give you a very good specific example, which is not doesn't feature the World Economic Forum, but it certainly features in discussions at the moment of the European Union. In Mali, the French have had to act very quickly to deal with the threat of Islamist rebels in the north of Mali. Now, which was the first country in the world to step in and offer logistical support and get aircraft out there to help the French? That was Britain. And on foreign and security matters, I would say the leading countries in the European Union, the ones who don't have a problem about getting involved to confront an issue are France and Britain. So there is a relationship which works very well and you see in practice today. We're not, however, part of the single currency. And we are skeptical about the ever closer union that we were asked to be part of. We say, look, you've created your currency. You have to do a number of things, which we suggested you might have to do and we would have to do if we joined to make that currency work. But we don't want to be part of it because we're not tied to your currency. And and so this was precisely the point that David Cameron was raising in his speech this week that you can have a European Union of flexible member states and nation states working together and cooperating in different ways. So we cooperate more closely with the French on defense than the Germans do. But clearly the French and the Germans work more closely on their currency than we do with them. But I mean, on the other side of the coin, I mean, what happens to the engines of the UK economy? If, in fact, the UK is now part of the EU. Well, as I say, we are making the argument for Britain being in a reformed European Union. And the single market is the enormous is enormously beneficial, not just to Britain, but to many other European states. I mean, you know, Germany is Germany is sells its BMW cars into Britain and is going to want to want to go on doing that. And and and in fact, one of the striking things about the British economy, I think some somewhat sets it apart from other Western economies. I think we are very, very open to external investment. We've had a Chinese sovereign wealth fund investing in the London water supply. Now, you're an American. I've been an interesting question, at least, to pose what would happen if the Chinese sovereign wealth fund want to do invest in the New York water supply. You know, we, you know, we, we are open to investment. Our airports, our utilities are often owned and operated by foreign companies. You know, I think that is one of the great benefits of the UK to any investor watching this. You know you can come to the UK. It's a completely open economy. You will be treated completely fairly. There is an absolute level playing field with any domestic competitor. So in that sense, you know, and London has become, in many ways, the most international city in the world and has very large numbers of people from continental Europe living in it. So, you know, I think, you know, we can demonstrate the kind of flexible, competitive Europe that we want to be part of. And we should point out that you're seeing this foreign direct investment and foreign investment coming in as a result of some of the changes that you've put in place to make it to make it more attractive. I want to ask you about the banking sector. And again, this is something that is going on all around the world. The structure of the banks and this push to separate investment banking type activities from plain vanilla banking. Where are we in that? And do you think that there should be a global standard or can the UK or even the EU do this to the banks there and not necessarily see the same change overseas, for example, in the United States? Well, financial services is an incredibly important industry for the UK. It's the largest private sector employer in Britain. And it's not just the city of London. If you went across the UK, you'd find that banking and other forms of financial services are big employers across the whole country. So it's a very important industry for us. And London, I think, is the preeminent global financial centre and leads the league tables that are produced that suggest that. But of course, if you're the finance minister and particularly after all we've been through in the last five years, where we have the biggest single bank bailout of anywhere in the world, including the US, you've got to have a banking system that, when it falls over, does not bring down the British economy with it. And we are still dealing five years on with the consequences for the real economy and for people who didn't ever work anywhere near the city of London with what went wrong. So I want a competitive banking sector and a competitive financial sector, which includes a whole load of industries that don't get a huge amount of coverage, like insurance and the like. But I also want to make sure that there are protections. So we are changing this year. The regulator, the Bank of England, is going to come in as the prudential regulator of our banking system. We are asking the Parliament to approve structural changes to our banks, so that we ring fence the retail banking operation. That makes it much easier to resolve if one of these large banks fails and doesn't mean that the person doing my job, you know, hopefully never, but maybe in years to come has to bail out an entire universal bank all across the world in order to save the British economy, which is what my predecessor had to do with the Royal Bank of Scotland. So the retail ring fencing allows us to protect the essential payment services and the essential banking system without standing behind the entirety of the investment banking operation and gives the person doing my job, you know, on that weekend where they have to make that terrible decision about whether or not to bail out the bank. You know, some options, which sadly my predecessor didn't have. So, you know, I think these reforms, these structural reforms, they come out of a lot of work done by someone called John Vickers, an eminent economist. He was supported by people like Bill Winters, who had real practical experience at JP Morgan. So we were, you know, we were using industry experience. We've come up with these reforms. And the final point I make is that actually what's striking is that the European Union and the Finnish central bank governor was asked to look at reforms for the whole of Europe has come up with a very similar idea for the rest of Europe. So we would certainly be encouraging the rest of Europe to take on those reforms. The subject of bank reform and splitting the activities has been a big topic of discussion here in Davos. And I just wonder, is there a point that the regulatory environment becomes too onerous? This is obviously what the bankers will say, that having so many different regulations and so many different regulators is hampering their ability to grow and their ability to lend. It also seems to me that if the financial services industry is so important to the UK and to Europe, the way it is to, for example, New York, you would expect the leadership to want to boost that sector, speak well of that sector. Now, no argument that the banks have made tremendous mistakes and the population is upset and bringing down entire economies is obviously something to discuss. But it would seem to me that you would want to protect that position rather than having sort of an anti-business sentiment. Well, I certainly agree with you. An anti-business sentiment would be a bad thing for Britain and a bad thing for any Western democracy. And we have to, of course, fight those who use the excuse of what happened over the last five years as an argument that actually we should have a much bigger public sector and a much smaller private sector and to beat up on profit-making and corporate success. I completely agree with you about that. When it comes specifically to financial services, I think it's perfectly reasonable to say, and indeed a very, very free market and capitalist thing to say, that when you make mistakes, you have to pay for those mistakes and you can't expect that the government and the taxpayers are going to come in and bail you out. Now, I want to get to the situation where those are real options for the government. And we are making all these changes to bail in, to the regulatory regime, to the ring fencing of the retail bank to precisely give us those options to do the very free market thing, which is let the market punish failure. Now, when it comes to the rest of the financial services, you know, I go out of my way and the government goes out of its way to encourage businesses to come to the UK. A lot of insurance businesses are moving to London at the moment. A, on a big Chicago-based insurer, has just moved to the UK. The RMB market, offshore market, is flourishing in London and the very first Chinese bonds have been issued outside of Hong Kong and China in London. So, you know, I see that the city of London is more than the four or five large domestic banks we have. Those domestic banks are incredibly important and I want to get them into a state where they're super competitive and safe for the UK. So you're seeing signs, you're seeing signs already that these moves have been having an impact. You're seeing the jobs numbers improve. You're seeing foreigners come in and invest in the country. What do you need to see in order to have a comfort feeling that you are, in fact, almost done with the cuts? Well, I'm afraid that is, you know, we're not about to bring that program to an end. So, you know, we have set out, to the year 2017, you know, a program of deficit reduction. I've got to fill in very specific departmental spending plans, you know, between the different government departments for the year 2015. So, you know, we still got work to do on that front. But in term, you know, it all fits within a framework of credibility and, you know, a confidence, actually, that the UK, and I would apply this, I hope, to the rest of Europe and indeed the west of the western world, that, you know, to use a phrase from America that, when you look at what's going on in China and India and Indonesia and Malaysia and all these other exciting places in Latin America, you know, and we see them doing those things, we don't sit there and say, that used to be us. We actually say, that can be us again. And that's what I said, you know, I have young children, that is what I want to say to my children, that you don't feel that this is the place where the future isn't happening. And, you know, I'm excited about a lot of the innovation happening in Britain, a lot of the, you know, we have a fantastic tech business growing in Britain. I'm excited that Europe is the place where a lot of scientific discovery is happening. I was reminded at lunch by someone today that the Higgs-Boson passcode was discovered in Europe, not in some other part of the world. So, I mean, you know, I'm excited by all of that. But, you know, government and the European Union has to get behind that and help it, not hinder it. Where would you say the job opportunities and the growth is in the UK right now? Recognizing that the numbers are not where you want them to be. Where is the growth? Where are the job opportunities? Well, I think we are seeing some sectors that are emerging as, you know, real world beaters. I mean, we talked about financial services, that's always going to remain really important for the UK. But, you know, probably even in this audience, people wouldn't know that we have the second largest aerospace industry in the world. And that aerospace is something where we absolutely are world beaters. And there, because you're dealing often with very large companies and contracts with governments, actually there is a role for the state and for the government. And, you know, I've been able to put money behind research and development in aerospace. In pharmaceuticals, we have from April this year a new tax regime that's going to make it really competitive to innovate and create patents in the UK. And I'd say our creative industry, we're doing a media show here, you know, our creative industry is incredibly successful. A lot of films now, a lot of Hollywood movies are now being made in Britain. And again, from April, we've got new tax breaks to take the success in films to scripted television production. So, you know, I'm not afraid, I mean, this is a British debate that's been had for many years, which is governments shouldn't pick winners. And it is certainly true that Britain got itself in a mess in the 1970s when it tried to support companies that were fundamentally, you know, not making things that the world wanted. But I think it's perfectly right in the world of today for government to back sectors that we know we have a lead in. Now, that doesn't mean we're not also open to new disruptive technologies, but they don't tend to, you know, that'd be probably a mistake for government to try and spot those. But everyone's going to be wanting to fly on planes for the foreseeable future. So, you know, that's an industry that we will get behind in the same as true of the others I mentioned. As a final note, if there is a skeptic who is out there watching and uneasy with some of the spending cuts, is there a final message that you would like to convey in terms of why this is so critical to put deficit and debt reduction as a priority over the priority of more stimulus in an anemic growth story? Well, I wouldn't, I don't see it as two sides, I see it as two sides of the same coin from, you know, competing tensions. You cannot have a successful competitive economy which people want to come and invest in if they think you can't pay your way. You know, that is the bottom line. And by the way, we have learned that the very hard way in on the continent of Europe over the last two years. So, you know, my neighbors have demonstrated or some of them have demonstrated that that is the case. So, you know, I think that is part of a program of making Britain competitive. But what I hope I've shown you today is that with tax reform and welfare reform and education reform, actually there's a lot else going on in the UK and we're the place to come and do business. Mr. Chancellor, thank you very much for this exclusive CNBC interview. Thank you. We appreciate your time. Thanks everyone. Thank you.