BBC On The Record - Broadcast: 17.11.02

==================================================================================== NB. THIS TRANSCRIPT WAS TYPED FROM A TRANSCRIPTION UNIT RECORDING AND NOT COPIED FROM AN ORIGINAL SCRIPT; BECAUSE OF THE POSSIBILITY OF MIS-HEARING AND THE DIFFICULTY, IN SOME CASES, OF IDENTIFYING INDIVIDUAL SPEAKERS, THE BBC CANNOT VOUCH FOR ITS ACCURACY ==================================================================================== ON THE RECORD RECORDED FROM TRANSMISSION: BBC ONE DATE: 17.11.02 ==================================================================================== JOHN HUMPHRYS: Good afternoon. Our universities are in crisis. How much more are we going to have to pay to send our children to them? I'll be asking the Minister for Higher Education. Gordon Brown still tells us the economy is sound because he's been so prudent. But is his optimism still justified? We'll be reporting on that ...and on the future of NATO. Does it have one? That's after the news read by Darren Jordon. NEWS HUMPHRYS: Public sector workers want much more money .... How's the Chancellor going to balance the books? NATO troops on exercise ... but critics are asking is there any point to NATO in the new World Order? JOHN HUMPHRYS: Our universities are in crisis. Every lecturer and Vice Chancellor has known that for a long time and now Margaret Hodge, the Minister for Higher Education, has said so herself. The problem is quite simple. More and more young people are going to university. That's been happening for years. But this government has encouraged a massive expansion of university education and hasn't provided the money to pay for it. The amount spent on higher education has gone up, but not by enough. There's also a long-term problem with paying for research and attracting the best brains. It costs money and the money simply isn't there. So the government's solution appears to be students should pay more - top-up fees. That's what's being considered. Make some students meet a much higher proportion of the real cost of their education. The Minister Margaret Hodge is with me. Mrs Hodge, you say a crisis, you say more money is needed. It has to come, does it, from individual students in the shape of top-up fees, that's the way to do it? MARGARET HODGE MP: No, it can come from three sources. We can either get more money from the taxpayer and increase public spending on higher education, we can try and attract more private money from businesses who get a benefit from the research that..and development on the new products that come out of higher education. Or, we can get money from students and their families and the issue we are addressing is how to get the balance right between those three contributors so that we can meet twin objectives which are really tough John to meet. Which is one, to maintain our excellence which we do need because it's the high quality research which will lead to the innovation, which leads to the growth, which leads to the jobs and on the other hand, how we ensure that our most talented young people, from whatever background, are able to access a place at a university without a fear of debt. HUMPHRYS: So top-up fees are in that mix? HODGE: Top-up fees are one of the things that are being considered and in January we will be putting forward our proposals. What we are trying to talk about now is some of the issues that confront us. If I can come to the student side of the formula. We have expanded student numbers, not just this government but the previous government and the previous government cut the unit funding for students, there's over a third cut in the amount of money that now goes to students. That has the implication on teaching standards, on the quality of the infrastructure, the capital buildings, on the facilities, the books that young people get. That is intolerable, so we have to tackle that. If you look at what a student gets out of getting a degree, it is quite...well it's quite good... HUMPHRYS: In terms of higher salary and all the rest of it at the end of it. HODGE: What we had was a recent OECD study which showed at the graduate premium, the extra money that you earn just by virtue of getting a degree, over your lifetime is somewhere in the region of four hundred thousand pounds. Now that's the benefit to the individual, then we have to ask should that individual, with the personal benefit, not contribute more towards the cost of their higher education. HUMPHRYS: If that's the benefit and it has been, some people question that. But nonetheless, let's accept that that's is the case, that there is a big benefit. You do have a manifesto commitment don't you, not to introduce top-up fees during the lifetime of this Parliament. So it cannot happen until we've had a General Election in the next three or four years. HODGE: We do have a manifesto commitment. What the strategy document is doing is looking at the universities over the next decade. I think we all strongly feel, is if we can't get our universities right now, we're at a crossroads, we will all pay the price over the long-term, getting the research right, maintaining the excellence, maintaining the international competitiveness, getting the teaching infrastructure right, so that you grow those skilled and qualified people to contribute to the knowledge economy. Those are really important challenges and we need to get them right now for the long-term future. HUMPHRYS: But you're not going - you say you haven't decided yet and you'll be deciding later. What you will not do though, is allow students, presumably universities rather, to charge students what they like. I mean in the case of Imperial College for instance, it might be fifteen thousand pounds a year, you wouldn't allow that, there would be a cap at some point, I am assuming. HODGE: You are trying to push me on the solutions that we are going.. the proposals we are going to be putting forward in January and I can't John, be drawn on them now. What I can say, is if you look at the figures it appears that students doget a good deal out of university. You also look at the international figures and what's interesting there, is we currently spend far more of our higher education cake on student support than any of our competitor countries, American, Korea and Japan. And Korea is an odd one, because Korea has massive participation and yet spends far, far less on student support. So what then appears to be happening is working class young people don't appear to be put off by the lack of student support in a country like Korea. HUMPHRYS: But if you're no.....just to deal with that fifteen thousand a year that I mentioned from Imperial College. If you are now prepared to rule that out, you will scare people to death. I mean...and certainly working class students and their families, no way could they afford those sorts of fees. HODGE: What I can say to you now, is we want to ensure we have a system in place that makes certain that any young talented person, whatever their background can develop their potential, go to university and contribute back into the economy. One of the scandals of the higher education system, is that from the time you and I went to university, when... HUMPHRYS: Well I didn't actually, I left school at fifteen..but there we are. HODGE: Right, well there you are. Okay, well certainly when I went to university, six or seven per cent of young people went to university. Now we are up to about a third of eighteen year olds, about over forty per cent of under thirty year olds. Yet in all that period, and even going back to these sort of so-called golden era when we had grants and no tuition fees, there has been absolutely no change in the socio-economic composition of those who go to university. HUMPHRYS: Well, there has been a bit hasn't there, there has been a bit. I mean a lot more..the increase in the number of poorer kids going to university was....I'm quoting the chairman..the Vice Chancellor, what used to be called the Vice Chancellor, he says a very clear four fold increase in poorer children and only a two fold increase in better off children. HODGE: Well, the absolute numbers are up, so of course... HUMPHRYS: And proportionately as well... HODGE: No, in the proportionate number it's in the opposite direction. If you look at the number from the top three groups and the proportion of those who went in 1960 and compare that today, and the proportion in the number of the bottom three groups who went in the 1960s and compare that today, that gap has actually grown. Now that's not an indictment of any other previous government. I think it's an indictment of us all. HUMPHRYS; And what's absolutely clear is that if you now start imposing fees it is the working class kids and middle class people with not very much money who are going to suffer the most, that is simply obvious isn't it? HODGE; Well we have to ensure that we have a system in place that again makes sure that no young person with talent is put off going to university because of the cost. But can I just say it is much more complicated John. Were that it was only just money. The real issue about getting more of our talented working class young people into university is as much about keeping them on in full-time education at sixteen rather than going out for a job then, making sure they raise their attainment levels so they get the appropriate qualifications, getting them to aim higher, raise their aspirations. HUMPHRYS; But you won't do that, is my point, if you start imposing these fees, and if you start talking as Stephen Byers, former Education Minister of course did in the Guardian last week, if you start talking about the ceiling being twenty-five thousand, the cut-off point being twenty-five thousand that'll scare an awful lot of people. I mean what is poor - what's your definition of poor. I know you don't want to go down the road of detailing your policies, because you haven't arrived at them yet, but nonetheless when you think about a poor family in relation to this issue, what's poor? Twenty-five thousand and above is not poor, is that what you're saying? HODGE; Well, it depends how much you ask of them, when you ask of them and I think those are the sort of issues that we're attempting to tackle now. We don't want young people to be put off going to university because of money. Let me just again put it into its context. At present nobody whose family income is less than twenty thousand pays even the thousand pound contribution to fees and they get access to a loan which is just under four thousand pounds a year. Between twenty and thirty thousand there's a taper, so actually, only four out of ten current people in the system pay the full contribution to the fees. That's where we are at the moment. Now there are students who do complain as indeed do commentators, that people are leaving university with a debt of in excess of ten thousand. HUMPHRYS; Not just students, Mr Triesman, your own General Secretary of the Labour Party, he complained too, bitterly about top up fees, just a while ago. HODGE: Well, let's put it into its context. Set that money against the four hundred thousand pounds on average that people will earn over their lifetime. Set that money against how we're asking it back, because we don't say to people, give it back straight away. We say when you earn over a certain level, we don't charge a real commercial interest rate on the loan in the way again.... HUMPHRYS; So might you have some sort of graduate tax then, so that they would pay it back out of higher taxation once they're earning the money? HODGE: You don't have to be a Brain of Britain to think of how the options that are on the table..... HUMPHRYS; So that's one of them? HODGE; That - there are a range - you know it's how much you pay, how you pay, when you pay. Those are the sort of things that we are looking at. HUMPHRYS; Okay, but one of the dangers here, a very obvious danger here is that you'll end up with a two-tier system of university education. You'll have the most well off kids being able to go to the, as it were the Ivy League universities, Oxford, Cambridge, Imperial College and so on. The poorer children and working - middle class children as well whose parents can't afford these high fees not being able to go to them, they'll go to the old polytechnics or whatever it happens to be. That's a serious problem isn't it? HODGE: Let me say a number of things on that. First of all universities are different and I think we have to acknowledge that difference. You and I know that, every employer knows that. HUMPHRYS: Absolutely, huge difference. HODGE: Huge differences. So don't let's pretend that a degree in theology perhaps from Luton is the same as a degree in accountancy from Oxford. So there are differences currently in the system. That's the first thing to say. The second, I'm absolutely passionate, John about ensuring that access to all universities, but particularly to our top universities is based on talent and the real difficult issue that we're all trying to tackle is how we protect that passion and that determination together with ensuring that your top universities are properly funded. That's the circle we've go to square. It isn't easy. Why have we've been at it for such a long time? But it's the one that we're determined to find a viable solution. Now I think when we come out with our decision, let me say that, we're not going to keep people - everybody happy, because as I said last week, there's isn't a free lunch in this world around how you properly fund your universities and ensure access for students. There isn't a free lunch in that one. But what we've got to do is try to be fair between the student and their family and between the taxpayer, between the university and the individual. HUMPHRYS; It's an awful lot of people you're not going to be able to keep happy isn't it, including the Chief Secretary to the Treasury, Paul Boateng, your colleague, because he attacked the Tories, I was reading his speech only this morning. Tory policy he said, is to use top-up fees. The result he sent on to say, would be two-tier public services with choice only for the privileged few. So in other words, he thinks you would end up with a two-tier system. HODGE: Well, we're not going to end up with a two-tier system, in terms of ensuring that talented young people from working class backgrounds can't access our top universities. We do have a system where universities are different, have different strengths and I think to pretend that doesn't exist in the current university sector, I think, is a bit na�ve. HUMPHRYS; So you'd accept then that - I mean Tony Blair obviously believes, or says he believes passionately in a meritocracy. The trouble with this system is, it's fine if you have the merit - I mean this proposed system- possibly proposed system, it's fine if you've got merit and money. If you've only got the merit under this top-up system you're going to have to struggle. HODGE: No, if you've got merit and no money we have to find a way of ensuring that merit actually succeeds and money doesn't inhibit. HUMPHYRS: Very difficult to see. HODGE: Very difficult John, and that's why we're spending proper time trying to get a sustainable long term solution. HUMPHRYS; And you accept that the problem applies to middle income people as well as the poorest. In fact in a sense possibly even more if you put a limit on something like twenty-five thousand a year for instance? HODGE: Yes, I mean let me just say one thing to you about... HUMPHRYS; If you would make it fairly brief I'd be most grateful. HODGE: Okay, well, everybody wants to be able to pay, but remember this is terrible British disease. Going to university is seen by us as a cost. It's actually an investment, it's an investment which gets you better jobs, better prospects, much more exciting career opportunities and therefore we've got to persuade middle classes, working classes as well as the traditional elite that this is good for them as well as good for Britain. HUMPHRYS; Margaret Hodge, many thanks. HODGE: Thank you. HUMPHRYS: In a moment we'll be asking whether NATO has a future but first a look at last week's political stories. The Queen unveiled the government's programme for the next year with the usual pomp and circumstance. But Tony Blair had already told us what to expect; lots of measures on crime, nothing on a Euro referendum though and that might be the big story of the parliamentary year. Good news for drinkers, the licencing laws are being changed, pubs will open all day, the culture Secretary Tessa Jowell raised a glass to that. And the government has been doing battle with the fire-fighters, the Green Goddesses have been out on the streets and a fireworks factory went up in flames, a pay deal may be in the offing. Tony Blair warned us that we're all at risk from terrorists, did he know when he said that MI5 were about to uncover suspects in Britain? TONY BLAIR: It is a war I have total confidence we will win, but it will not be without pain or come without a price. HUMPHRYS: Saddam Hussein accepted the UN resolution - no surprise there - but will he really co-operate fully with the arms inspectors, if not, it'll be war. And the quiet man of British politics had a relatively quiet week and cracked a joke at the expense of the Labour MP Oona King. IAIN DUNCAN SMITH: And I gather that when she was a teenager Mr Speaker, she said she wanted to be both prime minister and an air hostess. Well, look, to be fair, there is consistency in her ambition, air hostesses and the prime minister both spend their days repeating the same pre-prepared utterly predictable announcements before jetting off around the world. HUMPHRYS: NATO leaders are holding a summit in Prague this week. For half a century NATO has been credited with keeping the peace in Europe. But now things are changing. The cold war's over and the conventional dangers in Europe have diminished. So there is a different challenge and NATO faces some tough choices. Does it adapt to those new challenges - at vast extra cost to its European members - or does it accept that its role has changed.... and may even have disappeared. As Paola Buonadonna reports, a world without NATO is now seen as a real possibility. PALOA BUONADONNA: The world might soon witness another conflict in the Middle East. American forces are getting ready. But NATO, the alliance which represents Western interests doesn't seem to have much of a role. Its own chief warned that it might sink into oblivion, unless it catches up militarily with its main member and agrees to some pretty radical reforms. NATO's headquarters in Brussels are enormous and the organisation is about to expand dramatically - at a summit in Prague this week it is expected to welcome seven new members from the former Eastern bloc. But the challenges NATO faces are daunting. Even its strongest supporters admit that there is an embarrassing imbalance between American and European defence spending. Members also don't have a clear idea of the aims of the organisation in the post-Cold War scenario. There is no hiding a growing feeling of scepticism in European and American quarters as well as in British political circles about NATO's future as a military organisation. DOUG HENDERSON MP: I think people in Britain support NATO, like I do, and want to see it strengthened but the harsh reality is that in other parts of the world that's not the view- it's not the view now in America and it's not the view in a lot of the European Union countries and therefore we've got to rethink our position to make sure that our security is guaranteed. LORD GILBERT: Well, of course NATO has got a chance but it's not going to happen. I mean, I'd love to sit here and tell you that I was confident that the Europeans would match up to their responsibilities. But I see no signs of it. BUONADONNA: The North Atlantic Treaty Organisation was set up in 1949 as a defensive alliance, to protect Western Europe against a Soviet invasion. The threat was immense but straightforward. Today the main security challenges come not from established power blocs but from terrorism and failed states. Recently NATO engaged in its first ever military operation, in the Balkans, and it knows to remain relevant it must be able to operate out of area, outside the territory of its members. But the gap in defence spending between the US and other allies makes this very difficult. NATO's chief, Lord Robertson once dubbed Europe a 'military pygmy' and it's easy to see why. The United States spends three per cent of GDP on defence, the European members of NATO two point two per cent on average. In 2001 the United States' military spending was three hundred and five point nine billion dollars. Allies in Europe spent little more than half that. But it's not just a question of hard cash, it's what the money is used for. Europe's weapons and strategic assets are hopelessly out of step with the demands of modern warfare. For example, the US has three hundred and seventy-two large strategic transport planes to deploy troops, Europe just four. And while half of the US combat planes can fly at night, the figure is only ten per cent in Europe. NICHOLAS BURNS: No-one is under the illusion that we can close that gap completely. But can we convince some of our European allies to invest in a small range of military technologies that one must have to fight effectively in the 21st Century. These are vital and we need them to keep our country safe, keep Europe and America safe in the 21st Century but you can't do that with words alone, with rhetoric alone: you've got to have the capabilities that come through defence spending and through difficult decisions made by governments and that's what we're hoping some of our European allies will be able to do in the weeks and months ahead. LORD GILBERT: The idea that Western Europe is going to spend hugely more on defence is utterly unrealistic. George Robertson has been telling them to spend more and spend more intelligently for all the time he's been there and his predecessors have been giving the same message for decades. It's simply not going to happen. The reason that's so serious is that even if the Europeans did want to show up and fight, shall we say in Iraq, they are so far behind the Americans in matters of command and control that they would be an embarrassment in the battle space. They get in the way and they would be a danger to themselves and a danger to the Americans. BUONADONNA: The message these defence correspondents are about to get from the French Ambassador to NATO is very different. France's right wing government has heeded calls for more investment in defence and is determined to be taken seriously as a military power. Being excluded from the initial stages of the Afghanistan campaign didn't go down well. BENOIT d'ABOVILLE: It's true that there's been a lot of misunderstanding about the respective roles of the Americans and the Europeans within NATO. Some Americans have been saying that the Europeans are not spending enough and therefore will not be any longer be able to work with them on the military side. Some of them are saying politically the Europeans have a different approach towards the use of force. I think that after some months of confusion post-Afghanistan there is now a convergence which is in the process and in Prague there will be consensus on how to transform an Alliance. BURNS: You remember in the days following September the 11th in 2001, it was really only the United States and the United Kingdom working together that had both the political will and the military capability to strike within three and a half weeks, to strike back at the Taliban and back at al-Qaeda in Afghanistan as we did so successfully in the best tradition of the Anglo-American partnership. We'd actually like to have NATO, with all of its members, to have that capability as well as that political will. BUONADONNA: This Belgian parachute regiment is getting ready to travel to Britain to receive special training. Fostering co-operation between forces is the essence of the alliance but it's clearly not enough anymore. At the Prague summit, NATO members will be encouraged to lease transport and heavy lift equipment when they don't have it and create a NATO rapid reaction force able to deploy twenty one thousand soldiers anywhere within a week. BERNARD JENKIN: Unless NATO develops interoperable communications between its members, out of area capability, the ability to project military force in coalition miles and miles out of traditional area to tackle the sources of international terrorism today well then NATO is on the road to irrelevance. BUONADONNA: But improving military capability is not enough - members of the alliance need to find a unity of purpose once again, not least because NATO still operates by unanimity. But the war against terrorism has deepened the chasm which already existed between the US and some of the European allies. France is more than ever determined to create a strong European defence force, to intervene whenever NATO as a whole is not involved. Tony Blair used to agree but the mood in Britain is changing amid warnings from America that this issue is becoming a distraction and could even jeopardise the future of the alliance. D'ABOVILLE: It's important for Europe to create its own intervention force, which could work either with NATO or in an autonomous manner. We have learned in Bosnia that sometimes the US, the Congress for example, is not likely to consider that some things which are important for Europe should be done by the Americans. HENDERSON: I think there are some circumstances where a European military force could be effective but I don't think that would apply where military aggression was required to counter a threat. I think that would have to be a wider coalition and it would have to probably involve the Americans. BUONADONNA: A low-key peacekeeping operation in Macedonia, involving about two hundred NATO soldiers, could be the trigger for a decisive row on European Defence in the next few weeks. The mission to disarm warring factions is officially over on December 15 but France thinks troops ought to remain in the region under a European banner. D'ABOVILLE: I think it's necessary for the EU to show that it has a commitment to the stability in the whole area. The EU is already taking the biggest part of expenditure, the soldiers in Macedonia under the present NATO flag are all European and therefore there is no reason why we should not be able to try to compensate for the departure of NATO. JENKIN: The problem is what the European Union is now pursuing is an autonomous, entirely autonomous defence capability which is duplicating NATO's structures, the EU has now developed an EU military committee, an EU political and security committee, it is duplicating EU military staff, it is wasting money on duplication and is setting up a rival pole of attraction. Of course we know that countries like France very much want to sideline American influence in European security to project a different European policy. Well, this is very dangerous. BUONADONNA: It's not just Tory politicians who get exercised about the European force. Although the US officially doesn't oppose it, people close to the heart of the administration are not hiding their reservations. RICHARD PERLE: I don't think we should mince words about this - the idea of a separate defence identity for the European union will come at the expense of NATO. And in fact if the members of the European Union become self-absorbed in their defence arrangements in the European Union it will probably destroy NATO. BUONADONNA: But the biggest threat to NATO's credibility as a military organisation might come from its most prominent member. The United States is losing patience with inferior resources of its European allies and after the outrages of September the 11th it needs to be able to take military action fast, unshackled from the need for unanimity. Although individual members of the alliance might be called upon to help in places like Iraq, many predict that the organisation as a whole will be sidelined and will be seen as little more than a diplomatic talking shop. HENDERSON: The US have been pretty quiet recently about their views on NATO but I suspect that their position is that they feel if something needs to be done they'll do it themselves with whichever kind of allies they can put together on a particular project. If that happens to be NATO, fine, but if NATO doesn't fit the bill then they'll create whatever they need in order to deal with a particular situation. BUONADONNA: Of course some prominent American voices have been far from quiet on this issue. They make no bones about placing what they perceive to be the United States' security needs above diplomatic niceties. PERLE: If the only way the United States can defend itself is by appearing to be hawkish, then we're bloody well going to appear to be hawkish! If NATO can't rise to the occasion and regard itself as a political and military institution capable of defending its interests then it will sink into oblivion. BUONADONNA: NATO's chiefs say the alliance is ready to begin its journey towards the 21st Century, with new strategies to bolster its role and effectiveness. But many warn that these changes are coming too late to make an impact. In Britain a Former Defence Minister voices the thought the government can't quite breathe out loud. That NATO might not have a future after all. HENDERSON: I'm sure these concerns that I have now and I know many others have and are also understood in government circles and I think the difficulty for the government is, they don't want to let down their traditional partners in NATO by saying that they're not happy at the way NATO is developing. Therefore they're very reluctant to say anything about that but I'm sure they're looking at what kind of international coalitions are needed in the future because I don't think they will expect NATO to play a very big part. BUONADONNA: NATO's band of brothers has much to be proud of. It successfully accomplished the task it was created for - winning the Cold War for the West without firing a single shot. But in the uneasy World Order that has followed its future role and whether it has one at all, is far less certain. HUMPHRYS: Paola Buonadonna reporting there and by the way, we did ask the NATO Secretary General Lord Robertson to respond to that film or take part in it, but he did not want to. HUMPHRYS: Gordon Brown is about to tell Parliament how he sees the state of the British economy. We can expect him to be less optimistic than he's been in the past. House prices might still be booming but that's about all that is. The only thing that's keeping the economy moving along these days, is consumer confidence. Are we right to feel so up-beat? Well until now, Gordon Brown has managed the trick of spending more on public services without scaring us too much with his tax rises or borrowing too much. But there are some very dark clouds on the economic horizon and he may have to push his hand much deeper into our pockets and borrow billions more. As Paul Wilenius reports, Mr Brown is under a lot of pressure. PAUL WILENIUS: The love affair with prudence has been deep and rewarding for Gordon Brown. Although their relationship has been strained recently, the Chancellor still craves approval for his handling of the economy. That his public spending is justified, his tax rises are stealthy and his borrowing affordable. Now the messages between the two are more chilly and there are fears mounting troubles with the economy could lead to a long term breakdown of their relationship. Here in the Treasury's new home, Gordon Brown is putting the finishing touches to his Pre-Budget Report. But it'll be a far gloomier affair than anything that's gone before. Indeed the Chancellor already knows the British economy has suffered a slowdown and there's nervousness about the global economy. He'll have to borrow more to fund a huge rise in public spending and there's a threat of war with Iraq. And now the delivery of better public services could be undermined if there's an explosion in big public sector pay demands. KENNETH CLARKE MP: All in all we are very complacent in this country at the moment about an economy that is actually in great danger. Not in trouble yet but slowing down, people feel better off and actually the economy is in a very, very risky situation. WILENIUS: The message Gordon Brown has been receiving on the economy recently, hasn't been uplifting. Even if shoppers spend freely at Christmas, and the housing boom continues, overall the economy is slowing down. His last Budget forecast was that the British economy would grow by 2.5 per cent. With manufacturing and parts of the service sector struggling, many experts say this forecast will have to be cut to only 1.5 per cent. That could mean a huge drop in the tax he collects, as business is not making so much money. MARTIN WEALE: The Chancellor had hoped for growth in the range of two to two and a half per cent and it now looks like being only about one and a half per cent. That of course means that tax revenues are weaker than he had hoped, so government borrowing is going to be bigger and it's quite possible that this year current expenditure will be larger than current income. GEORGE COX: A lot of the service sectors are suffering very badly indeed in the city, the merchant banks, the IT industry, advertising. You have an awful lot of sectors there which are doing far worse than manufacturing so we have a multi-speed economy at present. WILENIUS: Here in his new office, Brown will be wondering what can he do to lift economy. Under his leadership the Treasury handed over control of interest rates to the Bank of England and they are already lower than at any time since the 1960s. And the Chancellor can't cut taxes as he needs the money to fund public spending. That leaves a rise in borrowing. JOHN McFALL: He's predicted borrowing of eleven billion pounds this year and some people are suggesting that could go up to 14 billion or perhaps 18 billion, but let's take the worst case scenario, say borrowing does go to twenty billion, he's still well within the 2% of GDP and as you know Maastricht debt criteria was 3% to if he did borrow to that extent, then he's still going to fulfil his debt obligations, remain within the limits in terms of his economic cycle, so borrowing will not be such a bad thing. CLARKE: He is going to borrow like there is no tomorrow and he will say, oh well I can afford to I have been so prudent. Well Nigel Lawson was the last Chancellor who discovered these are big, big figures which can get very good very rapidly while things are going well and then they get very bad very rapidly when things are going wrong. WILENIUS: Brown's Treasury has produced a golden rule. It says he can borrow billions of pounds, as long as he has paid back the same amount over the economic cycle. But that may not be as simple as it sounds. WEALE: In the current economic cycle Gordon Brown has a very large kitty, he's run a surplus of fifty billion pounds so far in the cycle and his rule says that he can borrow that without breaking the rule. Of course the difficulty is that no-one knows when the current economic cycle is going to end, it could end next year, it could end in 2006. If it ends next year and he then goes on having to borrow, he will start running up debt that his rule says he has to repay and no our worry is that with revenue being weak that may get difficult. COX: If you are talking about borrowing fifty or sixty billion then that blows the rule completely out of the water, then you have a serious issue I think. I just don't think we can borrow that kind of money to meet deficits through excess public spending, you just can't do it. WILENIUS: But the alternative is more unpalatable tax rises. However, if the economy keeps falling, the Treasury may in time have to consider such a move to stop a black hole opening up in its finances. COX: He is going to have to curtail public spending which will be very difficult to do politically, or he is going to raise taxes. But if he raises taxes ultimately that is going to affect business because if you simply tax people through income tax then there will be pressure on pay as well. CLARKE: I actually think it is inevitable that he will have to raise taxes, we are talking about when he raises taxes not whether he has to raise taxes. He has already raised taxes on the corporate sector, the burden of taxation in this country as a proportion of GDP has overtaken Germany. We are becoming a high tax country anyway but that has mainly been on business. ACTUALITY: WILENIUS: The prospect of a second Gulf War is another dark cloud hanging over Gordon Brown's relationship with prudence. Wars are unpredictable and can be very costly. There could be a sharp rise in the oil price if there's an invasion of Iraq this winter, and if it goes on a long time it could have a negative impact on Britain's economy and especially on the nation's finances. COX: There could be a protracted conflict. Or you could have a conflict which is also followed by terrorist actions around the world internationally. So I think all of us look forward with some concern about what is going to happen. Uncertainty is a great constraint on business and we are seeing it now, this is what one hopes might be alleviated if we have a speedy and successful resolution but people will hold back in the meantime. McFALL: If there was a protracted war with Iraq then that certainly could have a difference to the global economy and a knock on effect to the United Kingdom economy. WILENIUS: What sort of effect would that have if it does go on for a long time? McFALL: Well it could mean that the consumer loses confidence and if the consumer loses confidence given the two speed economy we have at the moment then a very important engine is taken away from the economy. WILENIUS: A high tech intense war with Iraq won't be cheap and there'll be no multi-billion pound bail out for Britain from the Gulf States this time. CLARKE: No one knows what it costs to start a war. When you start Prime Ministers and the Chiefs of Staff always insist we are going to spend everything that is necessary in order to do this properly and then the unfortunate Chancellor is left facing the effects of the bill and whatever plans he had. So I hope if we do have warfare which I also hope we don't, but if we have warfare I hope it goes well. If we have warfare and its for any length of time or heaven forbid it should start getting bogged down, then Gordon Brown's headaches will be turned into a nightmare. WILENIUS: There's one group who want to celebrate the end of Gordon Brown's affair with prudence: public sector workers. Many London universities were shut last week by a dispute over an extra �4,000 a year to cover the high cost of living in the capital. They are joining a long line of public sector workers following the firemen in a fight for higher wages. There are fears this could lead to a winter of discontent involving nurses, teachers and many others. PAUL MACKNEY: Public services are basically the people who work in the services and they're the people that need investing in. We've never had this degree of unity before, amongst all the staff who work in universities. We are clearly part of a mood which there is in the public sector which is saying, we've been patient long enough, we voted for this government five years ago, we voted again last year, we now expect a decent standard of living. WILENIUS: It's reminiscent of the old days of union strife. And it has alarmed those who want the extra public funds to be channelled into services not pay. McFALL: Already there have been problems with pay regarding firemen and I think one of the messages that the Chancellor will be putting out in his statement will be that there has to be responsibility by public service workers because we have twin aims here of ensuring good public services and good pay and conditions for public workers but if we are excessive in terms of pay and demands then the money that has been set aside for increasing the public services will be put into a black hole. COX: The danger that everyone keeps pushing and leap-frogging the whole bill will grow up and if it is not accompanied by the reform that will be a real problem. And you can see the pressure is rising. CLARKE: The fact is all the trade unions, public sector trade unions are falling over themselves and gearing up their members to persuade themselves that they really are entitled to double figure pay increases all over again. All these people are going to expect and I fear quite a lot of them are going to get dressed up as productivity deals double figured pay increases then you find that, that dribbles away this vast public expenditure without enough to show on the ground by way of raised standards and quality performance. WILENIUS: After the march, the university strikers gather at Congress House in Central London for a rally. ACTUALITY. WILENIUS: With more and more public sector workers like these joining in the rush for higher pay, Gordon Brown is entering a new and more turbulent period of office. The problem is, he's used to living with a golden economic scenario and he's had enough money to look competent and prudent. The big challenge for the Chancellor is how he copes now that the economy and the nation's finances really are entering troubled waters. WEALE: I think he probably does have to get used to the fact that he is likely to become less popular or to be seen as less of a miracle worker, that when the economy is stable it's easy to be a good and popular Chancellor of the Exchequer, when circumstances get difficult then you run the risk either of letting the government's borrowing get into a mess or of making yourself unpopular, and there isn't necessarily a third option, no third way out of that sort of bind. WILENIUS: So Brown doesn't really have much choice. He may have to stop courting prudence, as he's committed to spending more on public services and will probably be forced to borrow tens of billions of pounds more to do so. COX: What I don't expect to see from this Chancellor is a lot of flip flopping back and forth. I think the man sets himself on a path and is going to pursue it. But it is going to be a tough path the next three years. CLARKE: I think we should challenge him more on the economy, he is having a completely free ride it seems to me but that is partly with the commentators in the press as much as with his political opponents in the House of Commons. Poor old prudence has been jilted completely. I mean she is one of the old girlfriends whose letters will not be replied to. He's now taking a totally different view. This is a reckless Chancellor, he's now boldly going out on a different front and spending money on a scale that we really haven't seen in this country for a very long time. WILENIUS: No matter how many messages she sends. No matter how much love he loses among some voters, Brown may not be getting in touch with prudence again, for some time. He can only hope that they can get back together one day. HUMPHRYS: Paul Wilenius playing cupid there. And that's it for this week. Don't forget about our website. We'll be back at half past eleven next Sunday - not twelve o'clock. See you then. Good Afternoon. 17 FoLdEd
NB. This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy.