George Osborne, the UK's chancellor of the exchequer, urges all countries to play their part in redressing the global imbalances that allowed the credit crisis to happen. Interview by Courtney Fingar.

Boarding a flight from London to Washington, DC, in October for his first International Monetary Fund (IMF) and World Bank annual meetings as the UK's chancellor of the exchequer, a position he assumed in late spring, George Osborne appeared relaxed. And at the next morning's press briefing, he came off as confident, bordering on breezy, possibly because matters of the international political economy could hardly be any more vexing than the domestic ones he is facing as wielder of the axe in the governing Conservative-Liberal Democrat coalition's drive to slash the UK's massive budget deficit.

Kicking off proceedings at his briefing by outlining the UK's line on the big questions that dominated the global gathering, Mr Osborne started with global imbalances. "The big theme here is already apparent, of course, and that is global growth and global rebalancing, and I would argue that the UK is playing its part dealing with its own imbalances and seeking to promote exports. Clearly, this is a role not just for the IMF but also for the G-20. What we want is all countries to play their part in addressing that rebalancing," he says.

"As we pass beyond the global banking crisis, we need to start addressing the fundamental causes of the events of the past couple of years, and I would argue that those were fundamental imbalances in the world," he says. "Even in my relatively brief time as a chancellor in the past few months, I've noticed the conversation moving much more to discussion about global imbalances. That was the case, for example, in the G-20 meetings I attended in South Korea and Canada."

Mr Osborne has also detected an increasing interest on the global circuit in talking about free trade, despite the fits and starts of the painfully slow Doha world trade round negotiations that have dragged on for years. "[Trade] is starting to appear more in the conversations that are being had as people look for some global answers to how you structurally improve growth rates," he says.

"It is worth noting that the EU is busily pursuing its own free-trade agreements, having recently approved the bond with South Korea that we believe will add about £500m [$790m] a year to UK GDP [gross domestic product], and [the EU] is now pursuing free-trade agreements with India, Brazil and Argentina," he says. "For a big open economy like the UK, it is an important objective. It is something [prime minister] David Cameron raises in his meetings. I do as well. And it's something where we think we can be a leader of the world debate."

Global coordination

'Currency wars' were a hot topic of conversation and source of some consternation in Washington, and while Mr Osborne would not be drawn on his own currency or any specific foreign currencies and their need to revalue, he says: "We need to move towards market-orientated exchange rates that reflect fundamentals, and I think the G-20 and IMF have a role in making that come about, as well as addressing other imbalances. It is a big topic of discussion here and I've heard a genuine desire to try to achieve some global coordination on this."

Again, it comes back to addressing the imbalances, and exchange rates are just one part of that more complex puzzle. "It was the accumulation of these imbalances transmitted through the financial system that was the cause of the credit crunch and what happened in the past couple of years. We have to use the memory of that to address these imbalances, and I think it's also essential for sustained growth over the coming years," he says.

Closer to home, Mr Osborne is also seeking to address lingering liquidity issues for UK businesses - and perhaps score some political points - by warning banks that it was their "economic obligation" to lend to business. He says the government "will not tolerate banks piling the pressure" on small businesses that are facing credit shortages in the wake of the crisis. At the Conservative party conference, he reiterated that the government will not stand for bankers pocketing large bonuses while businesses still struggle to find credit.

Asked about this threat in Washington, he does not mince his words. "The banks would do good to play close attention to what I have said, and indeed what David Cameron said in his speech, which was very similar. We are very clear that you have to address this problem of the failure to get credit flowing to small and medium-sized businesses. The banks have received that message, both in public and in private."

Box of tricks: chancellor of the exchequer George Osborne has overhauled the UK tax system in an effort to deal with the UK's growing debt mountain Box of tricks: chancellor of the exchequer George Osborne has overhauled the UK tax system in an effort to deal with the UK's growing debt mountain

Taxing issues

Having delivered painful but necessary austerity measures in the face of popular protest, Mr Osborne now navigates a difficult line in shoring up public finances while also keeping the UK in a competitive position with regards to taxes. He intends to bring the UK's corporation tax rate down over the next four years by 1% a year. The headline rate is currently 28%.

A recent survey by the World Bank and PricewaterhouseCoopers warned that the UK is sliding down the list of the best tax systems in the world for business. It placed the UK 16th out of 183 in the survey released in November, compared with 11th position in 2009. The report said that despite the headline rate having been decreased from its previous 30%, this advantage was negated by a restriction in tax allowances for capital expenditure. The treatment of controlled foreign companies (CFCs) in the tax code attracts particular ire. (This applies, broadly, to companies controlled in the UK but resident in an overseas territory in which they are subject to a lower level of tax. Exemptions apply, but where a company is deemed a CFC, the relevant portion of its profits is brought into UK tax in the computations of its UK resident corporate shareholders.)

"That is a good headline rate and good for the UK but I think we also have to address the problem of the controlled companies regime, which has clearly been the cause of concern for some companies, and indeed led directly to some companies leaving the UK," Mr Osborne tells The Banker.

"It is a very, very complex regime and there isn't a straightforward answer, but we are engaging with it and have explicitly put it on the table. It was in our manifesto as something we wanted to address and we hope that over the next few months we will build up to the next budget and can get an answer [on CFC rules] that not only stops international businesses moving out of the UK but actually starts to attract some of them back."

Questions of tax and spend are as complicated and emotive in the UK as anywhere else in the world post-crisis, and certainly there are few simple answers. Mr Osborne defends the decision to stick to an increase in value-added tax (VAT) levied by the previous UK administration at the beginning of the year, as well as a rise in the top band of personal income tax to a rate of 50%, the latter of which has been criticised for potentially driving wealth-creators and international talent out of the country. As a Conservative Party chancellor, Mr Osborne must protect his right flank and keep business leaders happy while not leaving himself open to charges of protecting the rich at the expense of public services or low earners.

"Although it wasn't at the centre of political debate, there was a fiscal tightening by an increase in taxes," he says, citing VAT and income rate rises for high earners.

"As a new government, we found savings of £6bn in public spending and so I don't think you could point to a material impact on the UK economy this year," he says. "When it comes to next year, if you look at all the available evidence I have seen and all the international advice and best practice, it suggests, going back to fiscal consolidation, [that a government should] increase consumption taxes and reduce corporate taxes, and try to focus public expenditure savings on welfare and transfer payments. In that sense we are doing it by the book."

George Osborne is the UK's chancellor of the exchequer

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