AMERICAN ENTERPRISE INSTITUTE

THE BRITISH RECOVERY: REMARKS BY GEORGE OSBORNE, CHANCELLOR OF THE EXCHEQUER

INTRODUCTION:

KEVIN A. HASSETT, AEI

REMARKS:

GEORGE OSBORNE, CHANCELLOR OF THE EXCHEQUER, UNITED KINGDOM

MODERATOR:

KEVIN A. HASSETT, AEI

1:00 PM – 2:00 PM FRIDAY, APRIL 11, 2014

EVENT PAGE: http://www.aei.org/events/2014/04/11/the-british-recovery-remarks- by-george-osborne-chancellor-of-the-exchequer/

TRANSCRIPT PROVIDED BY: DC Transcription – www.dctmr.com

KEVIN HASSETT: Hi. Welcome to AEI. I’m Kevin Hassett, director of economic policy studies at the American Enterprise Institute. And we’re very thrilled that you’re here today to visit with us and George Osborne.

The Right Honorable George Osborne has been chancellor of the Exchequer and second lord of the Treasury since May 2010, playing a key role in both the formation and execution of the conservative and liberal democratic coalition government. He’s the youngest chancellor since Randolph Churchill in 1886. He was elected a member of parliament for Tatton Cheshire in June, 2001, when he was the youngest conservative MP in the House of Commons. I met him shortly after that at Beaver Creek and ever since he’s been a close friend of AEI’s and a regular attendee of AEI events.

Mr. Osborne was born in London. He was educated at St. Paul’s and Oxford and is living proof that one can get ahead in life without an Ivy League education. Mr. Osborne has been a champion of the view that a credible and sustainable fiscal policy is a prerequisite for economic growth and has been a key target for many on the left who desire ever-larger government.

In 2012, Paul Krugman called Mr. Osborne “Britain’s answer to Paul Ryan,” and I don’t think he meant that as a compliment. Mr. Krugman, in his characteristically understated way, called the plan mad, a mistake, and based upon a policy that has never worked. Yet, just as our own economy never quite reacted to sequestration in a manner that the Keynesians foretold, the U.K. seems to be surprising them as well as Mr. Osborne detailed in today’s Wall Street Journal.

Here to talk about what the economic pessimists are missing and to take questions after his remarks is the right Honorable George Osborne. (Applause.)

GEORGE OSBORNE: Well, Kevin, thank you very much for that. And, ladies and gentlemen, thank you for coming along at this lunchtime. Thank you for reminding me that I’m the youngest chancellor since Randolph Churchill. He was a really lousy chancellor exchequer. (Laughter.) He was one of the very few who never delivered a budget because he made the huge mistake of threatening to resign and the resignation being accepted. But he did leave the world with his son, Winston Churchill, so he made a pretty big contribution to freedom and enterprise around the globe, even if only through his children.

But it is great to be here and it’s particularly a real pleasure for me to come back to the American Enterprise Institute. I remember attending your world forum as a new conservative member of parliament under the watchful eye then of the late President Ford, who used to chair the proceedings in Colorado.

And it’s one of my regrets that you moved the event to Georgia and you moved the time to March and it now clashes with my annual budget and so I don’t get to come anymore, but you’ve continued at the AEI to be generous hosts of many of my friends and colleagues from the United Kingdom. And, indeed, one of your most recent British guests, my colleague Sajid Javid, has this week just been appointed to the cabinet by the prime minister and was at your forum last month.

Now, the work you do here is hugely influential not just in the U.S., but in the U.K. and around the world. And long may you continue to be a source of challenging ideas.

Both the U.K. and U.S. economies are recovering from the biggest financial crisis in living memory and the deep recession that followed it. In the U.K., that recession was almost twice as deep as it was in the United States and was the deepest since the Second World War. But our growth rate has been the fastest in the G-7 over the last year and we’ve seen record rates of job creation. Jobs are also being created in the United States and the pessimistic predictions that fiscal consolidation was incompatible with economic recovery have been proved comprehensively wrong by events. Cutting deficits and controlling spending has not choked off recovery, but has instead laid the foundations for sustainable growth. Many risks remain.

But all this should be a cause for cautious optimism. Nevertheless, many of those same pessimists have now found new grounds to be gloomy about our future. And today, I’d like to consider two new pessimistic predictions that some now make about the prospects for our economies.

The first is that we face a prolonged period of weak growth or secular stagnation, which can only be escaped through large and sustained fiscal stimulus. And the second is that the historic link between economic growth and general prosperity has been broken; that even if growth is sustained, the gains will not be shared by most of our citizens but instead concentrated amongst those at the top of the income distribution.

And, today, I want to explain why I believe both of those predictions will be proved wrong, too, because at heart they both stem from the same mistaken diagnosis, that free markets are the problem and more government spending is the answer. Indeed, sometimes it seems as if the prescription from some quarters is always the same: spend more when times are good because we can afford it; spend more when times are bad because we need to.

And I have a different prescription. My message today at the IMF is this: the pessimists said our plan would not deliver economic growth. Now they say economic growth will not deliver higher living standards. They were wrong about the past and they are now wrong about the future. It is only by continuing to work through our long-term economic plan that we can deliver more economic security and a brighter future for all. If we can control our public finances, strengthen our financial systems and set free the power of human enterprise and innovation, there is no reason why our best days should not be ahead of us for all of us.

Let’s consider first the outlook for economic growth. Now, there is a long history of pessimism in economics, beginning with Thomas Malthus. And the most famous American pessimist of the 20th century was Alvin Hansen, who argued in the 1930s that chronically low economic demand would doom the U.S. economy to long-term secular stagnation. His prescription was large and sustained fiscal stimulus. Of course, the U.S. economy is now well over 10 times larger than it was when he made his prediction. But, in the last year, his argument has been resuscitated and applied to our current circumstances.

My friend and regular critic Larry Summers made this argument just this week in the Financial Times. This theory links the excesses of the last decades to current weakness through the same hypothesis: a steady fall in the equilibrium real interest rate at which demand a sufficient to deliver full employment. In other words, the interest rate required to stimulate enough business investment and household spending has fallen further and further through each economic cycle until it can fall no further and we’ve reached the end of growth, they say. And in this situation, the argument goes, the only thing that can support demand in the economy and prevent a deflationary spiral is further fiscal stimulus in the form of more government spending. But developments over the last year make this argument increasingly difficult to sustain.

To start with, the evidence increasingly shows that monetary policy broadly defined and effectively deployed can work. As unemployment falls and growth picks up, both the Federal Reserve and the Bank of England are in the process of managing the pace and timing of exit from extraordinary monetary stimulus. These are not the actions of central banks full stretch, maxed out on all fronts and still unable to do enough to support demand.

Two important caveats apply here. First, monetary policy can only be fully effective when banks are well capitalized and financial systems are properly functioning. We in the U.K. learned the importance of that caveat during the acute phase of the Eurozone crisis from 2011 to mid-2012. Indeed, independent analysis of forecast errors by the OECD suggest that the impact of the euro crisis on financial conditions was by far the most important explanation for slower than forecast economic growth.

In the U.K., we have worked hard to repair our banking system with credible stress tests and additional capital when needed. But this caveat is still extremely relevant to many countries in the Eurozone, where weak banks and fragmented financial systems still weigh too much on the pace of recovery. And as they conduct a new round of bank stress tests, I know that Mario Draghi and the ECB are very focused on this issue.

The second caveat is that you need credible fiscal policy for monetary policy to be effective. And this is where most of the controversy arises for the main implication of the secular stagnated hypothesis is that large and sustained fiscal stimulus is the only root to sustainable growth. But again recent experience has in fact shown the reverse: Credible fiscal consolidation plans are not only a crucial foundation for effective monetary policy; they are a necessary precondition for sustainable economic recovery.

In the U.S., the resolution at the immediate debate about fiscal policy has lifted a cloud of uncertainty for the U.S. economy and the whole world, and spending cuts have not choked off the U.S. recovery in the way that some feared they might. In the U.K., not only has our growth rate been the fastest in the G-7 over the last year, but it is now forecast by the IMF to be so again in 2014 – all despite warnings from some that our determined pursuit of our economic plan made that impossible.

I know the path of fiscal policy in the U.K. has been the focus of some interest in the U.S. debate, so let me briefly set out our approach and the thinking behind it.

Following our general election in May 2010, we were faced with a record 11 percent budget deficit, a hung parliament, a banking system five times as large as our GDP and none of the advantages that the role of the dollar as the world’s reserve currency provides for the U.S. And what’s more, across the English Channel and the Irish Sea, some of our nearest neighbors were teetering on the brink of a sovereign debt crisis. In these circumstances, fiscal credibility was vital for economic stability, let alone economic recovery. And the alternative did not bear thinking about.

So we moved quickly to set out a multi-year deficit reduction plan; legislated for it. The pace of our fiscal consolidation over the last four years has been steady with an average annual reduction in the cyclically adjusted primary balance of around 1.6 percent of GDP according to the IMF, the largest and most sustained of any major advanced economy. And the composition of the consolidation has been based on careful analysis of the economic evidence.

Eighty percent is being achieved through spending cuts and entitlement reform. Tax rises have mainly been limited to indirect taxes and we’ve protected the most economically valuable spending on science and education.

In response to the acute crisis in the Eurozone, we made no net changes to tax policy or spending plans, so the underlying stance of fiscal policy remained unchanged, but the fiscal credibility we had earned meant that we could safely allow the so-called automatic stabilizers to operate through lower than forecast tax receipts. And growth has picked up strongly following the abatement of the euro crisis, the success of the funding for lending scheme we operated with the Bank of England, reducing bank funding costs, and the subsequent improvement in U.K. financial conditions.

Our macroeconomic approach has been consistent: responsible fiscal policy, activist monetary policy. And the results for job creation over the last four years have been far better than anyone expected, to an extent not fully appreciated by many here in the U.S. Employment is now above its previous peak. Jobs have been created three times faster than any previous U.K. recovery and our employment rate has risen by almost two percentage points since the first quarter of 2010 to the second fastest rise in the G-7. And our recovery has strengthened in the last year so the composition of that recovery has improved; investment spending has grown by 8.8 percent over the past year compared to 2.2 percent in the U.S. And that bodes well for U.K. productivity, though I am the first to say that we still invest too little and export too little.

Unlike in the past, growth has not been fueled by credit. Our household debt-to- income ratios continue to fall to 140 percent down from a peak of around 170 percent. Indeed, the U.K.’s combined public and private debt ratio fell more in the last year than in any other year since data began in 1987.

Many risks remain for the U.K. economy, not least the slow growth of our biggest export market, the Eurozone; the situation in the Ukraine. And I remain resolutely focused on building a resilient economy that can withstand future shocks. But all of this demonstrates that fiscal consolidation and economic recovery go together and it undermines the pessimistic prognosis that only further fiscal stimulus can drive sustainable growth. Indeed, that is precisely the wrong prescription for our economies.

Before the crisis, the U.K. and the U.S. economies were built on a fundamentally flawed economic model. We ran up ever larger debts owed to China and the developing world to buy the things they made for us. Two thousand and eight was a wake-up call for that whole approach. Instead of more debt or more government spending, we need to get our public finances in order, make structural reforms, and compete in the world again.

In the U.K., that means continuing to work through our long-term economic plan, a plan that is working. As the deficit comes down, we can’t afford to let up in our efforts to control spending. We need to get debt falling because the evidence shows that high levels of debt leave a country more exposed to future shocks and crowd out more useful spending due to high-debt interest payments. And for the U.K., I’ve made clear that, in order to reduce our debt levels in a reliable way, we need to deliver an absolute budget surplus in normal times.

But that in itself is not sufficient. We need competitive tax rates and long-term structural reforms to make our economies more productive. And that’s why, at the same time as cutting our budget deficit, I’m cutting business taxes to the lowest rate in the G- 20. Last week, the headline rate of corporation tax in the U.K. fell again to 21 percent. And that’s why we are supporting large infrastructure investment in rail and roads and energy – the largest program of rail investments since the days of Queen Victoria, the biggest investment in our road network for more than 30 years, and fundamental reform of our energy market to encourage large-scale private investment.

Conservatives understand that there is a positive role for government in the economy. It was a Republican president who built the interstate network here in the U.S., and I’m a strong supporter of a new north-south high-speed rail line in the United Kingdom.

The challenge of competing in the world economy is why I’m determined to bring the U.S. shale revolution to the U.K. to support jobs and help bring down energy costs in my country. And it’s why in my budget last month I announced fundamental reform at the support we provide for British exporters. And it’s why we have protected science spending even while other budgets have been cut.

Now, some, like Professor Robert Gordon of Northwestern University argued that science and innovation may be running into diminishing returns. Such predictions have always been proved wrong in the past and I believe they will be proved wrong again.

The statement “everything that could have been invented has been invented,” is often misattributed to the 19th century U.S. Patent Commissioner Charles Holland Duell, but it was a very widely shared view at the time. Now, in fact, to be fair to the patent commissioner, he believed that the discoveries of the time would appear insignificant compared with what was to come, and he was right.

Today, the scientific breakthroughs of the past century have created an explosion of technological applications which are in turn stimulating new advances in fundamental science. Just as improvements in lens technology and better microscopes led to huge leaps in germ theory and medicine, today we cannot even imagine the advances in all areas of science, from genetics to materials, that high-powered computing will make possible in the years ahead.

Now, the challenge for this generation of politicians, business leaders and policymakers is to embrace innovation and make the case for the economic reforms that can harness its potential. So we should encourage the potential of new genetic technologies, not fear them. In Europe, we must the case for GM crops instead of giving in to hostility and protectionism. And all of us need to invest in the application of new discoveries, such as graphene – discovered in the U.K. – instead of allowing our competitors to overtake us.

To believe in secular stagnation is to ignore all of this potential, and, as a result, end up with the wrong prescription: more government spending. Instead, my outlook is fundamentally optimistic. And I have set out a different prescription: fiscal responsibility, effective monetary policy, far-reaching and ambitious supply-side reforms.

In simple terms, I believe that if we reward hard work and support people’s aspirations to provide a better life for their family, then there can be no limit to what human enterprise can achieve. And I bring this same optimism to the second of today’s pessimistic predictions: that even if growth is sustained, the benefits will accrue to the few, not to the many.

This prediction that the link between living standards and economic growth has broken, also leads its proponents to the same prescription: more government spending on welfare and the costs of economic dependency. But it too can be proved wrong if we follow a different approach.

To begin with, this argument about the broken link is not well supported by the facts. As Greg Mankiw has pointed out for the U.S., on a superficial reading, the data appears to show that real median incomes grew by only 3 percent over the entire period from 1979 to 2007. And that sounds like there is a big problem. But in fact, once you take account of changes in household composition, lower taxes, health care benefits and other forms of remuneration, then that number turns into a 37-percent real terms increase.

Of course, that’s not to say that inequality doesn’t matter. It does. The great recession made our countries poorer and times have been difficult for British and American families. But in the U.K., the evidence shows the growth supports rising living standards. Recent work by academics of the London School of Economics and our own analysis at the treasury has found no evidence that employee compensation has become detached from GDP growth in recent decades. Previous results that appear to show a break disappear once you take into account rising pension contributions and my previous – the previous government’s payroll taxes in the U.K. And that is one reason why the labor share of national income in the U.K. has stayed constant over the last decade.

Nor does the evidence support the so-called hollowing out hypothesis in the U.K. – the idea that middle-skill and middle-income jobs are disappearing with most of the growth in employment either at the top or the bottom of the distribution.

While some traditional mid-level occupations have shrunk or moved down the income scale, new ones are being created to take their place. So we have less middle-paid production line and secretarial jobs, but a lot more middle-paid jobs in IT and professional services. Overall, there has been little change in the proportion of people in middle-income jobs in recent years. And after rising during the industrial restructuring of the 1980s, as it did in many countries, the level of inequality in the U.K. has been fairly constant for two decades. And according to the latest data, it’s at its lowest level since 1986.

So the long-term link between economic growth and living standards has not been broken. When the economy shrinks, people get poorer. And the only way to ensure that people are better off is for the economy to grow. But we, nevertheless, face a tremendous challenge: The very legitimacy of our free market depends on the promise that effort is rewarded and prosperity is shared.

In recent decades, the premium earned by highly skilled, highly qualified people has increased even as the number of highly skilled people has increased. And that tells us something important about the insatiable demand for higher skills in the modern global economy. The flipside side of that is that the downside of having low skills has increased, too.

Harvard economist Claudia Goldin and Larry Katz famously posited a race between education and technology. And, more recently, Erik Brynjolfsson and Andrew McAfee have been among those writing about the race against the machine – the risk that increasing deployment of artificial intelligence and driverless cars and other digital technologies will lead to unemployment. And some say that if there are people lacking work, the government should create jobs itself through more spending. If we want a more equal society, they say the answer is a bigger welfare budget.

But it is simply not sustainable to attempt to swim against the tide with ever more government spending. And we’ve seen how that approach sows the seeds of its own destruction not only because the spending becomes unaffordable, but also because it creates dependency and ends up harming the very people it is designed to help.

Instead, we need to equip our citizens to succeed in the world as we find it. In economic terms, we need to increase both their human capital and the returns on that capital. We need to ensure that work always pays by cutting income taxes and reforming welfare. We need to reduce the business taxes and regulatory barriers that hold back the creation of new goods jobs. And most critically of all, we need to make sure that we have the best schools and skills in the world. In other worlds, we need to build a ladder of opportunity for people to climb.

In the U.K., we are putting this approach into practice, trying to build that ladder. We’ve radically cut the tax burden on the low paid. We’ve introduced new conditionality for those who claim benefits. And we’re replacing our complex web of working age entitlements with a single universal credit so that it always pays to work. I also support a restoration of the real value of our minimum wage while cutting costs for businesses at the same time. All of this is about creating enough good jobs and that is why I’ve recently set the U.K. the ambition of full employment with the highest employment rate of any G- 7 economy.

And, at the same time as making work pay, we must ensure that those at the top of our society contribute their fair share, but the way to do that is not punitive and self- defeating taxation. Uncompetitive tax rates are as counterproductive at the top end of the income scale as they are at the bottom end. So we have to – we have cut our top rates of income tax; are doing more than any previous British government to close loopholes and ensure that everyone pays the tax that is due. We’ve also introduced a permanent levy on bank liabilities in order to discourage excessive leverage and reflect the costs of the banking crisis imposed on our economy. And I note the recent tax reform proposals in the U.S. have proposed something similar.

All of these reforms to the tax system, the welfare, the minimum wage, employment have been delivered by a conservative party in government – center-right solutions to deep problems of social justice and social mobility.

And I want to end my remarks today with one area of reform that I believe is more important for our long-term prosperity than all of the rest and that can deliver growth rather than stagnation and simultaneously ensure that the gains from growth are shared, and that is education.

The education policies we’ve been implementing, led by our education secretary and regular AEI participant Michael Gove, have been influenced by and reflect the work of education reformers in the U.S. and elsewhere around the world. The pioneering work of Mike Bloomberg and Joel Klein in New York, Bobby Jindal in Louisiana, Bill Haslam in Tennessee, Mitch Daniels in Indiana and Jeb Bush in Florida have inspired our approach as have the arguments made by Rick Hess and Arthur Brooks. And they have quite rightly identified schools reform as the civil rights issue of our time.

The emphasis the AEI has placed on policies to advance greater social justice is nowhere clearer than in your work on education. In both of our countries, poor children are disproportionately likely to go to poor schools. In both our countries, inequality is perpetuated through a lack of educational opportunity for disadvantaged children.

And, in the United Kingdom, it is conservatives who are creating the British equivalent of charters – academies and free schools, we call them – to provide disadvantages children with greater opportunities than ever before. A majority of our secondary schools broadly equivalent to your high schools are now academies. And even though our nation is a sixth the size of the U.S., we have more students in total in academies and free schools in the U.K. than there are children in charters in the United States. This is a revolutionary breakthrough in extending school autonomy and parental choice. And we’re following in the footsteps of the great work being done in the U.S., from Tennessee to D.C., to ensure that teachers are properly evaluated on the impact they make in the classroom and rewarded for good performance.

What unites all of these reforms is a belief that our nation will only make progress if we make use of every child’s talent and liberate every student’s potential. In all these ways, we can assure that the link between growth and prosperity remains unbroken. I have long argued that this truly progressive end can only sustainably be delivered through conservative means.

Now, today, I’ve tried to set out an optimistic and confident agenda that can do just that. Every generation needs to make the case for free markets, for enterprise and for opportunity afresh. Every generation needs to overcome the forces of stagnation and choose growth instead. Every generation needs to find a way to fulfill the promise of shared prosperity. These are the challenges of our age and the answers to match them are within our reach. The pessimists are on the march again with their predictions of stagnation and falling living standards. We, the optimists, can prove them wrong again. Our two nations’ best days lie ahead of us. Thank you very much. (Applause.)

MR. HASSETT: So, as is our custom, I will moderate the Q&A. I’ll ask the first question and then I will call for questions from the audience. Please try to have the question be about the topic of today’s conversation.

Mr. Osborne, one of the arguments that the secular stagnation folks make is that if you cut business taxes, it won’t matter because there’s no demand and so businesses won’t respond to the lower taxes. And yet you’ve got a crack team at Treasury that’s watching the data come in as the economy expands that’s decided to cut business taxes in the face of a risk of secular stagnation. So what do you see that makes you feel like the argument is incorrect?

MR. OSBORNE: Well, we have cut our headline rate of corporation tax. From the 28 percent we inherited four years ago, we reached 21 percent last week, and it will fall to 20 percent next year. And, look, we have seen both an increase in investment and we’ve seen an increase in investment from around the world, but we’ve also done a detailed analysis of the dynamic effects of the corporation tax reductions. And what they show is that whilst the tax cuts don’t entirely pay for themselves in a kind of classic Treasury sense, you do get around half the revenue back from the increased investment you see from the reduction in the corporation tax rate.

So we have done that detailed economic study of the dynamic effects. You know, the British Treasury operates a very static model where every tax reduction is only calculated for the loss of revenue on paper that it brings about. But we’ve started, and I’ve started this work on the dynamic effects of the corporation tax reduction and now we’re extending that approach to other taxes.

MR. HASSETT: Thanks. We can now go to the floor for questions. Sir, in the front. And please identify yourself for the transcript too.

Q: Hasse Javibi (ph). Chancellor, thank you very much for your exposé. Two questions. The first one is, what are your pension schemes? What were the guiding principles, you know, behind the new pension scheme and how –

MR. OSBORNE: Oh, pension scheme?

Q: The pension scheme in the U.K. So what were the guiding principles and how do those changes, or, as it relates to your objectives, apply to the U.K. recovery?

And the second question is on exports. The OBR has indicated that, unfortunately, Great Britain is going to fall short of its expectations. Taking into account that this inflation in Europe, the Eurostat has 25 out of 28 countries are currently in disinflation, how does that affect and impact the current policy that you’ve got in place in order to jumpstart exports as it relates to the EU?

MR. OSBORNE: Pension reform probably would cause a whole other speech and Q&A, but I’ll try and say just a couple of things briefly.

I mean, first of all, we’ve tried to make our state entitlements for what you would call our senior citizens more affordable. And the way we’ve done that is to link the pension age to rising life expectancy. So our pension age is going to rise from 65 to 66 and then 67. And this is – achieves very substantial savings in public expenditures while at the same time enabling you to go on providing generous retirement benefits.

Now, I know it’s a challenging thing to do in a political system, but I’d say, you know, of all the measures we’ve made to try and save money for the state, the changes to the pension age have been the ones that have delivered the largest savings. And now our political opponents who oppose the changes have had to say, well, let’s stick with them and live with them. So we’ve also achieved a political consensus around them.

Most recently, in the budget, I made changes to private pensions. There were restrictions in the U.K. on what you could do with your pension pot on retirement. You had to buy an annuity, a fixed income for the rest of your life; the state required that as part of – through the tax code. And I’ve done something which is quite radical, which is propose the people have access to their pension pot and if they want to invest it in different ways, they can do so. And, you know, again, this is basically saying – and it’s properly, you know, free market instinct, and an instinct to believing in people making good judgments about their lives – we say, “You’ve saved this money. You’ve done this through your life. You’ve worked hard. And we trust you to make sensible decisions about your retirements without the government trying to be prescriptive of it.” So I announced those changes in the budget just a few weeks ago and they’ve been very warmly supported across the whole country.

Yeah, on exports very briefly. So as I mentioned in the speech, this is a big challenge for the U.K. We don’t export enough. It’s partly because our main export markets have been the European continent and growth in the continent is just weak. I think it’s also the case that the U.K., because of our traditional export markets being North America and Europe, we didn’t make a big enough effort to connect ourselves to the fast-growing, emerging markets around the world. Earlier this week, I was in Brazil, in one of the many steps we’re taking to try and put that right.

MR. HASSETT: Okay, more questions. Back there and then I’ll come over to this side. And please wait for the microphone.

Q: Mr. Osborne, thank you again for taking some time out to speak with us. I just was curious – I know earlier you mentioned that the EU is one of the largest export markets for the U.K., or, you know, one of the larger ones. And I know that you’ve also been vocal about the EU referendum and its relationship with the U.K. And I’m curious as to what you project a referendum would have in terms of the sustainable growth that the U.K. has been facing?

MR. OSBORNE: Well, we’re members of the European Union and the European Union has achieved many things, including entrenching political stability on the continent of Europe after the Second World War and after the fall of the Berlin Wall, and it’s got a big challenge now with the situation in the Ukraine.

But there are – as well as benefits to membership of the European Union, there are costs. And one of the costs is that the regulatory burden that the European Union imposes is a heavy one. And there is a risk that the European Union is pricing itself out of the world market, the world economy.

And so our argument in the U.K. is, let’s reform Europe; let’s make it more competitive; let’s make this the place to do business; let’s make this the place to undertake scientific invention and discovery; let’s conclude free trade agreements with the United States and other important countries around the world; let’s do all these things. And too we’re making a reform, an economic reform argument for the whole of the European Union, because the challenge is the same if you’re the French finance minister or the German finance minister as the British finance minister, you know, how are you going create jobs and make this the go-to place in the world for business.

Alongside that, there are other challenges, which I could go into at length, but just to mention them: we’re not in the euro. We’re in a union where many of the members are now sharing a currency and pursuing deeper fiscal and economic political integration, which we don’t want to be part of, so we need to make sure that the treaty that established the European Union and has been amended since, accommodates that change and protects the interests of non-euro members as well as allowing the euro to work more effectively than it has done. And there are other issues about the rights of national parliaments and the like.

So we’ve got a reform agenda. It’s a reform agenda to create jobs and investment not just in Britain, but across the whole of Europe. And our argument is, let’s make those reforms and then let’s seek democratic support for that in a referendum on Britain’s membership of the European Union by 2017.

So that’s the agenda we’ve set out on. People – when we started this and the prime minister launched this, said, have you got any allies in Europe? Does anyone agree with you? What’s interesting is that over the last year or so, as we’ve started to make this argument, various people on the continent of Europe, various governments have said, well, we too want to see economy reform. We’re not happy with ever closer political union. We’re prepared to contemplate changes to our treaties.

So I’m confident we’re going to achieve the goal of economic reform and then make the arguments of the British people. On that basis we can stay in.

MR. HASSETT: Okay. We have a question over here, John Makin.

Q: Mr. Osborne, this morning in the Wall Street Journal was a preview of your speech. You made an interesting observation that British investment has grown about four times are rapidly as it has in the U.S. Many people here are concerned with the weakness of investment growth in this recovery in the U.S. Do you have any suggestions as to how we might speed it up?

MR. OSBORNE: The first thing I would say is we need to have more investment in the U.K. We’ve had a good 12 months, but, you know, we need to sustain that. And what I’ve tried to do, I think there are a combination of things that help.

I mean, ultimately, business investment flows when people have confidence to put their money into an economy in the belief that they’re going to get a good return on that investment. You know, you get back to the fundamentals here. Now, obviously, economic instability is a complete cost of very heavy pull over any investment. And we learned that again during the recent financial crisis in Europe. So you need economic stability and I think sound public finances are part of delivering economic stability.

You need to have a competitive business tax environment. And you can either do it through investment reliefs or lower headline rates or both, which is what we’re seeking to do in the U.K. so we have lower headline rates, which have benefited some of our larger businesses particularly, but as well as reducing the headline rate for smaller companies but we’ve also just introduced a big investment allowance for smaller companies as well. So I think the tax system is important.

And then, the surrounding infrastructure, by which I mean not just – not just the roads and railways, and broadband and so on but the science, the education, the skills. You know, you’ve got to – these – the way these big companies that can quite literally can choose almost any country in the world to make their investments in, you know, they need to have access to skilled work forces, they need to be able to get the goods or their services in an out of the country easily. They need to make sure they get a good return on their investment.

So, in the U.K., we have a very open economy. We’re probably the most open economy in the – well, certainly in the G-7. And I think one of our big attractions is whoever you are, you know, whoever owns your company, you can come and do business in the U.K. and we’re a good, open economy for that reason. So those will be just some of my thoughts.

MR. HASSETT: Okay. Next question, in the back, and then I’ll come up front again.

Q: Hi. My name is Elvina with Reuters. Just referring to the G-20 statement that just dropped a few – maybe about an hour ago, why did the G-20 drop language in its statement that referred to the need for monetary policy to remain accommodative in advanced economies and then normalize as warranted by inflation and growth outlooks?

MR. OSBORNE: Well, I think – well, there’s a – there’s a fairly simple reason, which is we’re trying to keep the communiqué much shorter than it used to be in the past. And so these things have become quite unwieldy. So I wouldn’t read too much into that. There’s certainly – in the discussions around the table, everyone understands that the Federal Reserve and the Bank of England are now engaged in forward guidance – that they’re effecting an exit from the exceptionally loose monetary policy but that is to a steady timetable. They’re not rushing it. And they need to communicate that in the way that they have been so that people understand where they’re going. And I think Janet Yellen and Mark Carney do that well.

The challenge for the emerging economies, and some of whom have been affected by this, of course, is to continue with the structural reforms. And the differentiated situation you’ve seen in some of these emerging economies suggest that investors are making, are discerning differences in the approaches of these emerging companies. I mean, that said, I would say if you go back three or four months, I think people were more anxious about volatility in the emerging markets than has been the case in the last month or so.

MR. HASSETT: Okay. We had a question up here. And then I’ll go over there.

Q: Good afternoon. Thank you very much for coming here. My name Hamed Velasco (ph). Well, I’m Spanish. And my question has to do with government deficit. As you know, Spain has a very significant deficit problem. And my question would be, would you think that structural reforms are key to reduction of deficit not just in Spain but in every country?

MR. OSBORNE: Well, you know, I think the Spanish government – I mean, the – Spain found itself in a very difficult situation, like the U.K., where you had deep problems in the banking system. There was also on top of that the property crash. And Spain faced an incredibly difficult situation a couple of years ago, but when you look at what the government has done there, basically trying to have a credible fiscal plan, make the banks stronger and with adequate capital and then undertake structural reform, that has meant that people are looking at Spain now, and saying, look, this is a pretty good bet at the moment. This is a good place to invest.

And to pick out one example, the labor market reforms in Spain, which have – you know, which were a real challenge to pass politically, they’re being talked about around the world in boardrooms and by investment committees.

And I would say, you know, if you look at Spain compared to some other countries in Europe, I think Spain is reaping the benefit of going for ambitious structural reform. And as a result, although it’s been through an incredibly difficult period over the last year and a half, people are really talking it up, and it shows that there is a reward. It may not be overnight, but there is a reward to pursuing the right economic policy.

MR. HASSETT: Okay, we have a question over here.

Q: Thank you. My name is Dimitri. I’m an intern at the Cato Institute. I would like to ask you about one policy area which seems to me it’s inconsistent with the general spirit of the conservative party and the free markets and economic openness as immigration policies. Your government, you know, has been – Prime Minister Cameron has made a protectionist pledge to reduce immigration to tens of thousands. You have made it harder for students to stay in the U.K., and renegotiation of the European Union, it seems to me, will be as much about cutting immigration as it is about cutting regulation. So how can you reconcile that with the free market sprit of the party? Thank you.

MR. OSBORNE: Well, immigration has brought benefits to the United Kingdom over many, many decades, but it has happened in recent years at a pace which has put huge pressure on public services and infrastructure. So we’ve had the largest migration in our history over the last decade or so. And, indeed, there are figures out this week again that shows that the scale of it was underappreciated and underestimated.

And in order to maintain confidence in a – have to maintain public confidence in an immigration system, you have to convince the public that you have control of your borders, you know who’s coming into the country, and your public services can cope, and that people are coming for the right reasons. In other words, they want to come and work rather than to claim welfare entitlements. And if you lose that public confidence, then you lose any support for any migration.

So what we are seeking to do is say, look, we have control of our borders. We’re, of course, part of a free movement area in the European Union, but people have to move for work not move to claim entitlements. They have to move to – because they have a job. And we’re also saying that from outside the E.U., you have to show us that you have got a job that you can go to that is – that pays a sufficient wage and the like. And I think these are reasonable things to ask because, obviously, there’s a huge number of people in the world who want to come to the U.K., just like many people want to come to the U.S.

And when it comes to students, you know, we have some great education institutions. I can’t remember exactly where John Harvard went to university but he helped to create the Ivy League.

People want to go to our great universities, and we encourage them, encourage people from around the world. I was just in Brazil, where the U.K. is the second destination in the world for Brazilian students. But we simply say that once you leave college and university, you can stay, provided you’re doing a graduate-level job that – you know, that’s the requirement. But if you’ve got this great graduate degree and you’re doing work at a, you know – and this is over a prolonged period of time, that doesn’t come out at a graduate salary, then I’m sorry you’re not entitled to stay.

And I think that is all just part of trying to get that right balance, commanding – having an open economy but commanding public confidence. And so we are right to say let us reduce our net migration levels and indeed we have had some success in doing that.

MR. HASSETT: Well, Mr. Osborne has a really tight schedule and I’ve got time for one more question. And I guess the person in the back has done the most calisthenics. You’ve been putting your hand up since the beginning so I think you’ve earned the last question.

Q: Thank you. My name is Nathan Chernok (ph) and I was just wondering what you see – if the Scottish referendum is successful in the fall, what would be the fiscal impact of them if they drop the pound and suspended debt payments like they’ve talked about?

And also, as a noted fan of Chelsea, what do you see are Liverpool and Manchester City’s chances against them for the title?

MR. OSBORNE: Was that Chelsea’s chances?

Q: Yes.

MR. OSBORNE: Well, I’m absolutely confident –

MR. HASSETT: Is that Chelsea Clinton?

MR. OSBORNE: No. This is Chelsea, the greatest soccer team in the world – (laughter) – which I’m pretty confident is going to beat Atletico Madrid in a couple of weeks’ time and the two matches we have for the semifinals of the Champions League. And, indeed, I was just discussing with the Spanish finance minister our viewing arrangements for those key matches. He’s an Atletico supporter and I’m a Chelsea supporter.

On Scotland, there is a referendum in Scotland, in September, about whether Scotland wishes to remain part of the United Kingdom or whether to leave. That’s something that is a referendum that has passed through the United Kingdom Parliament. People in Scotland are entitled to make a decision about their future. And they elected as their local government in the Scottish Parliament, the Scottish government a nationalist party that wanted separation. So I think it’s perfectly legitimate in a democracy to say, okay, well, you determine your future.

And I’m confident that – and indeed, you know, the current evidence suggests that the Scottish people will choose to stay in the United Kingdom. And that not only I think will be better for the people of Scotland – that’s their judgment – but I think it will also be better for the people of the rest of the U.K.

And it’s not – you know, it’s not for me to speculate on the impact of Scotland leaving, except to say I don’t think it would be good for the rest of the U.K. and it wouldn’t be good for Scotland. It’s for those who want to undertake this risky exit, who would lose the pound currency if they did so and many of the other benefits that come from being together in the United Kingdom to make their case to the Scottish people and explain why the Scottish people should take this step.

But I am with my colleagues in the other main political parties in Westminster all united in believing that the country is better together. Ultimately though, it will be for the people of Scotland to make that decision.

MR. HASSETT: George Osborne, thank you very much for joining us.

MR. OSBORNE: Thank you very much.

(END)