Captioning sponsored by Rose Communications from our studios in new york city, this is charlie rose. Rose George Osborne is here. He is britains chancellor of the exchequer. He has been called the austerity chancellor. He continues to lead the increasingly controversial austerity process. In a piece called god sieve the british economy in the upcoming New York Times magazine Adam Davidson writes in the past two years the United States has experienced a steep downturn followed by steady though horrendously slow upturn. The british economy, however, is profoundly stuck. The u. K. Has been put on negative watch on three largest Credit Rating agencies. The European Union is britains largest trading partner, europes economy remains on prepares you footing despite several months of relative calm and theres a growing debate about whether the u. K. Should lead the e. U. Earlier this month we covered the economist magazine read goodbye europe, look what happened when britain left the e. U. Im pleased to have George Osborne back on this program and back at this table. Thank you very much. Rose youre in new york city for a speech at the Manhattan Institute. I did that last night and had some meetings on wall street, seeing them there later. Rose so whats your message about the british economy to Manhattan Institute as well as the mayor and wall street . Well, the basic message is britain is open for business. If you want to come and invest in a country that is dealing with its problems, cutting its business taxes, providing opportunities for companys to go britain is the place. I think were doing better. Rose you do . I certainly do. Rose the numbers dont look like that. Well, actually, look at the u. K. Compared to many western economies, we are getting our deficit down, its fallen by 25 in the last couple years. Unemployment is falling. Rose falling . Well, the last four rose in the last year . Its fallen below 8 in the last year. And the last monthly fall was the largest single monthly fall of unemployment in over a decade. So weve still got a long road to go. Its a difficult road to walk. Ive inherited a set of problems that many western economies face but i would say britain is confronting those problems in a more headon way than most countries. Rose including the United States . Well, i think in the u. S. Obviously youve got your own decisions to make about your fiscal problems and your issues and obviously your president and congress are engaging in that at the moment. But in the u. K. We have done that, we have got ahead of the curve and you can see in measures, for example, of how competitive the economies are, the you can is steadily becoming more and more competitive. Rose theres also this, the United States is engaged in this great debate thats going on in the white house with speaker of the house john boehner and the president of the United States, barack obama. What would be the optimal outcome of that debate as you look at it as a man whos dealing with the same kinds of problems . Id say two things. One is we do need a resolution of this problem. I think the most immediate shortterm problem facing the World Economy i stress the word short term is the u. S. Fiscal cliff. I think if that is not resolved that is going to cause considerable problem for the world and indeed for the u. S. Economy and its already had some impact on the u. S. Economy because its delayed investment decisions. I think second its entirely up to the elected representatives in the congress and the president to decide how they want to go about it. Personally speaking, my personal view, i thought the plan that bowles and simpson put together looked pretty balanced. Its actually strikingly similar in many components to the british plan, about the same balanced tax and spending and about the same very similar proposals and Corporate Tax reform. So i think i dont think you can do you can deal with these large deficits solely by spending cuts. I think there has to be a tax element but i think you make the tax element too big then you damage the competitiveness of the country and we in britain, about 80 of the effort has come through spending cuts and entitlement reform and 20 has been tax through a consumption tax increase. Rose where did you get the entitlement reform . What did you do . We did a couple things. First of all, we had reforms on disability benefits to make sure there are tougher medical tests to get on to those disability benefits. Many western countries find more and more people claiming these benefits. We took the decision to just recently to underrate the benefits, the general working age benefits so that working age welfare so it doesnt rise with inflation. Its going to go up by 1 for the next three years. We take a very difficult decision to increase the pension age from 65 to 66. So weve made some tough decisions but if youre not tackling entitlement reform and the cost to government, if youre not tackling the structural cost of these things then i think youre delaying the difficult decisions. Rose have you threaded the social contract . I dont think so at all. I think we can still say to people look, we are help you when you are in need. We will certainly provide for you in your retirement but the cost of doing these things has to be addressed. People are living longer to theyre still offering a generous pension, you just have to youre going to have to work here an extra year before you get it or an extra couple years. When it comes to the working age benefits, well demand more conditionality. Were going to say look, you have to show us youre looking for work. I mean, some of these things, by the way, the u. S. Did back in the 1990s with your welfare pact. Rose the welfare reform act under president clinton. So we had to catch up in some respects. But were doing that and the British Government, certainly in my lifetime, the first time weve aggressively tackled the rising cost of entitlement. Rose have you done it and someone said i think writing about you that at least it stopped digging. Meaning that you made the cuts but they realized that to make more cuts would be dangerous. I would say were climbing out of a hole that britain fell into. Were again, other countries had to do it. Very hi def it is, a rising that needed to be tackled and its taken longer than we hope because of the International Economic situation, the euro zone and, indeed, some of the issues weve had in our own Banking System but we are doing it. Look at britain. Britain has faced up to its problems, its got a political system that can deliver answers and were doing in the a way that is unashamedly probusiness pro the private sector. Rose the theory of the case from the chancellor of the exchequer is get government out of the way . I wouldnt say get government out of the way. Rose if you can get investment and private sector to create jobs. I wouldnt put it as i wouldnt say get government out of the way. There are some places where you want government involved actually to help, for example, science investment, transport infrastructure. Were building high speed rail. The largest Infrastructure Project in the western world is a new train line going underneath the city of london. So government has a role so i wouldnt characterize it as get out of the way. But i would say government get its costs under control. Government understands because when its consuming as it was when i became a chancellor, close to 48 of National Income, thats simply unaffordable. And unless youre prepared to tackle the cost of government, the cost of individual programs, the cost of entitlements than, frankly, you are just delaying and making worse the resolution of a countrys problems. Rose five years from now you have have the debt under control . Well, the deficit is coming down. We hope to have the debt falling as a percentage of National Income by 2016, and we are aiming to get the budget into into balance 2017. Now, of course i would like all this to happen sooner but one of the things ive always sought to do is not be inflexible about this, not be ideological about this but say, look, weve been hit by an external shock, we were hit by the euro zone crisis thats where 40 of our exports go and instead of ignoring that allow our stabilize the top rate, as long as you are committed to your plan of spending reduction, structural reform, entitlement reform, as long as youre getting that deficit down rose i thought you said that when you came to government that it would take you five years. Well, thats what we had hoped it would take. Rose youre beyond that now. Its taking longer. Rose how long . As i say, weve got a prom out to 2017. Rose british people, by 2017 we can get it done . The budget will be in balance. Look, for world has proved a more difficult place in the last two years. Weve had an external shock like the oil price shock, we have the euro zone problems. And all western economies have to understand that recovery from a banking process is more painful, more difficult more drown out than anyone would have hoped and tom reinhart rose who was on last night. Well, i think hes very smart when he talks about the process of deleveraging and repair you have to go through when youve experienced the kind of financial shock that the u. S. Or the u. K. Experiences. Rose so the United States has to get through the same kind of deleveraging project rose well, the u. S. Has gone through that. You know what happened to your house prices. At least in the u. S. Your Banking Sector was not such a significant part of your g. D. P. , a significant portion of your multiple of your g. D. P. As it was in the u. K. My message is that the u. K. Is dealing with these problems and is a competitive and attractive place to do business. Ive done in the a way that i hope is the least economically risky or damage by, for example, the same protecting science and spending and education spending. And when it comes to taxes instead of increasing business taxes im actually cutting the main rate of Corporation Tax in the u. K. From 28 to 21 which is the steepest fall of any country in the world. Rose hoping that it will bring investment into the country . Yeah, and i think it sends a message to people whether theyre in shanghai or texas that britain is open for business. Rose why then is there almost a consensus of opinion that austerity is not working . I dont agree theres a consensus of opinion. There are a group of people who always argued for more spending in good times and bad im not talking about pundits im talking about nonprofit and people like that, even economists. But both of them i mean the whole seems to me Financial Institutions including the i. M. F. Have raised questions about whether austerity has gone too far. Well, i think there is people have said that us a stirty is not enough. You have to have structural reform. But i dont think theres anyone out there any more saying that we should have some big fiscal stimulus. When i started two years ago the big one of the challenges was what you should do even though youre sitting on 11. 5 deficit there was an argument in the u. S. As well and it was striking during the recent president ial election. I dont think the word stimulus was mentioned was. Rose well, ill tell you what was mentioned, growth. Growth was mentioned a lot. Everyone wants growth. Rose and most argue that austerity programs do not enhance growth well, if you think growth comes from government then you would be. Rose well thats not borrowing and making the fiscal situation worse. If you believe growth comes from the competitive private sector that has confidence has its debts under control and Interest Rates are low then you would see i think in the program were following the right ingredients. Rose the argument goes a Stimulus Program can create demand and creating demand is essential to get the private sector going well, of course you need demand in the economy. And demand can be provided in part by very low Interest Rates and Monetary Policy. But that Monetary Policy cant be that way if people have concerns about your fiscal policy. So i would say partly having a credible fiscal policy anchors a Monetary Policy which is what the bank of england and others have been pursuing. Rose theyve basically said that its to make sure theres a decline in the unemployment numbers. That would be an idea. Monetary policy . Keeping it Interest Rates low. I think its very interesting what theyve done and there is a debate in britain about whether we should go beyond what we have now. I think theres a very high hurdle to be crossed before you do that before you move away from an inflation regime that has anchored stability. But we have a new central bank goern coming, mark carney, whos the governor of the bank of canada and we had the best person in the world. He has talked about what hes done in canada setting out a medium term path of guidance for Interest Rates. Now, these are going to be Interest Rate decisions but it shows theres a debate to be had about the Monetary Policy game which i think should be led by academics. Led by economics profession. Governments can develop it happening. Rose is britain going to leave the European Union . I certainly hope not. And its my intention to make sure it does not. I absolutely believe britains future lies being a member of the European Union but it has to be a relationship with the European Union that the British Public are happy with. Rose what would make them happy . I think you can best sum it up in a campaigning slogan that were used in politics in the last part of the 1990s which is britains want to be in europe but not run by europe and that basically sums up the british attitude. If anything the euro zone is doing more to integrate, to have common fiscal and banking policies provides an opportunity for the u. K. To say you do that, you need to do that that to make your currency work. Were happy to be part of a single market, were happy to be part of a free trading zone. Were happy to have the policies that come around and other policies that are part of the European Union but we are not part of the single currency. And there are some things wed like back. Thats a debate thats just starting the n britain. Its just starting in the rest of europe. And i think britain is a very good argument to make that we can be active contributors to the European Union but that does not mean signing up to everything that comes out of brussels. Rose would you support that as the main idea . Well, hes certainly done a lot to help calm the european economy. I think the weve been doing this interview in june or july i think you will have been asking me quite rightly about whether the hes about to cut off his own and have some kind of financial crisis or bank failure weve removed along the tail risk of a bank failure and his program is the program he sketched out which hasnt come into operation but the program he sketched out of how there used to be help euro zone countries in trouble has done a lot to reassure the market that he says he will do and the European Central bank will do whatever it takes to protect their currency. Rose has your attitude about whats necessary for britain changed since you have been in the office at 11 downing . I think ive become more conscious than perhaps i was two years ago that britain was in a global race. Economic power has fundamentally shifted in our world and western economies face this duel decline choice do you do whats necessary to take advantage of these great new markets in asia and africa and the americas or do you basically surrender to decline . And i think that requires some very tough choices about retirement ages and Education Systems and welfare systems and being not prepared to tolerate poor performance. Now i think actually my appetite for confronting those things has grown since ive been doing this job. Rose explain what you mean. I think, for example rose your appetite for confronting these questions has grown . Yes, so lets take education. Each Education System is different but basically the u. K. Like other countries, face this is choice which is is our School System producing the kids with the right skills to do the jobs that are going to make the things that the chinese want to buy rather than be outcome peted by the chinese and other countries. Now that means confronting teaching unions, vested interest local education bureaucracies, a culture where people all of us win prizes weve got to confront all of that. This government in britain is doing that. In welfare you have to confront the fact that the country cant afford to carry very large numbers of people in households who dont have opportunities who are basically trapped in a system where it pays not to work. We cant afford that anymore as a country. Rose and what happens to them . Well, what we want to do is help them into work and help them get the skills they need to be part of that Global Economy rather than being left behind by it. But i do think the crash, the recession, the banking crisis, all this has actually accelerated a structural change that was happening anyway and i want to make sure that we get off the plane in shanghai and you feel this is a really exciting plac