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ON THE RECORD
JOHN MACGREGOR INTERVIEW
RECORDED FROM TRANSMISSION: BBC-1 DATE: 11.10.92
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JONATHAN DIMBLEBY: Secretary of State, the debate, a great
deal of the debate about what happens now in the context of Black Wednesday is
about ERM, attitudes towards the ERM, when we should go back in, whether we
should go back in. Now, they say that one of the reasons why you're tipped as
the next Chancellor is that you are agnostic about the ERM - are you?
JOHN MACGREGOR MP: Well first of all forget the point about
being tipped as the next Chancellor, I've got a big job of work to do at
Transport. As far as the ERM is concerned, I've always made my position clear,
I was a strong advocate of going in, not least because I spend a great deal of
my time with industry and commerce and industry and commerce you will remember
were those who wanted the currency stability we got from the ERM. And, also,
because it was undoubtedly a great help in bearing down on inflation. So I was
a strong advocate.
I don't think that the Chancellor had
any other choice but to pull out in the wake of the huge currency inflows,
quite around the world that we were seeing - the attacks on one currency after
the other, quite unprecedented. But I do feel that once we have sorted out
what needs to be done to produce an ERM or a post ERM that will assist the
Community in dealing with those currency flows, then we should be back in it.
DIMBLEBY: Are you with Mr Clarke. He said on this
programme last week that it was a disastrous set-back, although he gave exactly
the same interpretation of events as you....had to leave.
MACGREGOR: I certainly think it was a great pity,
but you will know of course that one other country has come out of the ERM,
another has re-introduced foreign exchange controls. So it's by no means only
ourselves. I mean, France very nearly, I think France was fortunate in coming
at the end of all of this, France very nearly...the French Franc very nearly
got into real difficulties. So there's no doubt that there are now strains
within the ERM because of the huge amount of currency that can move around the
world.
DIMBLEBY: Would you be in favour, not only of
going back in when those conditions that have been suggested are in place, but
doing that straight away, as soon as they are in place?
MACGREGOR; No. I think Norman Lamont is right that
it will take some time before the conditions are right and one of the issues, I
mean, we have an awful habit in this country of focusing only on our own
internal domestic situation. One of the issues undoubtedly is the costs to the
German economy of dealing with reunification which are going to be colossal and
of course one of the factors that really pushed German interest rates up and
caused some of the strains. Now, that was unpredicted really three or four
years ago when the main argument was going on about the ERM.
DIMBLEBY: I understand that but..
MACGREGOR: And I think that will take some time to
work itself through.
DIMBLEBY: I understand that it may take time. My
question is: would you go back in AS SOON AS the conditions are right and do
you hope that those conditions will be reached sooner rather than later?
MACGREGOR: I think it will be some what of a
different form of ERM because discussions are now going on and I think they
will take some time to see how you actually can have an ERM that can cope with
the kind of turbulence that we saw a few weeks ago. So I think that will take
some time. But, yes, as a long term aim, as a long to medium term aim, I would
be in favour of Britain re-joining, very clearly. But I do not myself believe
that that's a pre-cursor to an economic and monetary union. I think that's
going to take..I mean, I think that's not an issue for this decade.
DIMBLEBY: I wasn't even going to pursue down that
territory but you would be in favour of going back into the ERM, you'd
prefer to be in the ERM if the conditions are right.
MACGREGOR: If the conditions are right.
DIMBLEBY: And when they're right, and you hope
they will be right, you will be saying "yes, let's go back in".
MACGREGOR: And the reason for that is quite simple,
that the vast majority of British industry and commerce knows that it's in our
interests. It was they who were pressing for it and they who still hope - I
think most of them recognise that the Chancellor was right - but they still
hope that it will be possible to re-join something of that sort.
DIMBLEBY: Meanwhile, we're outside, without that,
the discipline. "Cobbling together" is the phrase most economists are using, a
strategy which makes - may I put it to you - that makes all those fine words
about conquering inflation sound now, like so much hot air.
MACGREGOR: But I think this is so much nonsense,
this "cobbling together". I mean it's taken other governments and previous
Chancellors some time to formulate the complete strategy and I'll give you some
of the reasons, that some of the decisions that have to be taken couldn't be
taken before the Party Conference and before his speech. But let me just
outline them, I think he's been absolutely clear about our determination to
deal with inflation, he has got interest rates down again, we're now down from
fifteen to nine per cent. I think one of the reasons why that's now yet having
its full effect on the economy is the huge debt overhang that there are...that
there is for many people in many companies. We have..
DIMBLEBY: Those people who have borrowed very,
very heavily, borrowed and now want to lower that level of borrowing rather
than spending.
MACGREGOR: I actually believe that this is
different from previous recessions for that reason, that there are a lot of
people who borrowed very heavily in '87 and '88 and a lot of companies and that
has caused their determination to save or repay debt and that is undoubtedly a
major factor in my view in why we haven't moved more earlier and is the reason
why you can't be certain exactly when interest rates will bring about the
change. But there are other things too Jonathan, I mean public expenditure,
we've made our position very clear on that, but the Chancellor has to go
through all the detailed discussions that we're having at the moment and will
make that..the outcome clear in his autumn statement.
DIMBLEBY: Okay.
MACGREGOR: In the usual way. Public sector pay
we've been very clear about. The anxiety to achieve a successful outcome of
GATT, we have a substantial capital infrastructure spending going on at the
moment, our industry is much more competitive. There are a lot of issues
there that are already in place.
DIMBLEBY: All those things take time, one or two
of these things we're going to return to very soon. But meanwhile, you say the
Chancellor made it very clear, his attitude to inflation, I seem to remember
that just before Black Wednesday the goal was zero inflation, now the goalposts
have shifted, it's no longer zero inflation, it's between one and four, maybe
two if we can get there.
MACGREGOR: But it still keeps us at the real goal
and the real goal is to have our inflation in line with our major competitors.
We achieved a lot of progress in doing that throughout nine out of the ten
years of the eighties. We have now seen a considerable success in coming down
from eleven per cent to below four per cent and we must maintain that and I
believe that's absolutely vital because if your inflation is out of line with
your major competitors you become uncompetitive.
DIMBLEBY: But you're a man of clear economic
vision, you would recognise the distinction between the goal of zero inflation
and the goal of low inflation?
MACGREGOR: But I would also say that the goal of
inflation we're setting ourselves is better than the achievements we've had
over the years and in particular in the seventies and it remains an absolutely
vital goal.
DIMBLEBY: Absolutely but let's just be very clear
about this, the goal..it's better than. What you're saying is before we were
after zero inflation, we didn't want to get pregnant at all, now we're after
low inflation, a little bit of pregnancy is what we've got but that's better
than an awful lot of pregnancy.
MACGREGOR: I don't know how you make the analogy
carry on but I think our level of pregnancy ought to be seen..(both talking at
once)...as other people who are pregnant if I can put it that way.
DIMBLEBY: John Major reiterated in that CBI speech
in Scotland "I want to see zero inflation, low inflation is not enough" he
said. Now, if low inflation was not enough before Black Wednesday, why is low
inflation quite enough now?
MACGREGOR: Because I think it's a realistic target
to set ourselves in the current situation and it is still extremely important
that we hold to it.
DIMBLEBY: But of course you say it's important to
hold to it, but what you've actually done is got a nice little get-out clause -
it may go up a little bit from time to time.
MACGREGOR: Because of movements and international
prices..
DIMBLEBY: Circumstances beyond our control, we've
been there before haven't we too?
MACGREGOR: But I think that's realistic but
nevertheless the target is clear and let's be clear about this, in terms of
interest rates. I think one of the inter-relationships between interest rates
and the position in the exchange rate is that as we know there can be,
particulary in periods of substantial growth, a real inflationary effect of a
falling exchange rate. Now, the Chancellor has to make judgements all the time
between interest rates and exchange rates in order to ensure that that doesn't
happen.
DIMBLEBY: And I want to pick up on that in just a
moment too, but on this particular point, can you tell me what the Chancellor
would say when we get up to as some predict five or six per cent - I'm not
saying you will - do you then say "we've been blown off course a little, or
it's a blip". What do we call it when we got up above the four per cent which
is the top end of target?
MACGREGOR: Well if you're talking four point one or
four point two, it can be a blip but I think we've got to do everything..
DIMBLEBY: If it's five or six what is it then?
MACGREGOR: Everything possible..
DIMBLEBY: What is it when it's five or six..
MACGREGOR: Everything possible within the terms of
the policy instruments that you have available to you to avoid that.
DIMBLEBY: Of course, but as Mr Lamont said "we
have to acknowledge that we may go temporarily outside that range". What is it
if it gets to five or six per cent which the markets, some of them are saying,
is going to happen?
MACGREGOR: If that happens and as you rightly say
it's entirely hypothetical and you're got to take action to deal with it.
DIMBLEBY: And is that being blown off course, or a
blip, when it reaches that level?
MACGREGOR: I think you're being extremely
hypothetical now.
DIMBLEBY: Okay. You said, and I just want to
clarify finally on this point, in general, moving the target from zero to low
would you describe that as the end of a dream or the rebirth of reality?
MACGREGOR: I've actually always thought that the
most important point is to get inflation down to the level of our major
competitors and keep it there and that's what that target range should enable
us to do.
DIMBLEBY: Now, I want to put a proposition to you
if I may, it's this: that what you're really saying, what's really going on
here, despite the words is - that given the depth of the recession and to
re-formulate a familiar phrase, what you're really saying is - inflation now,
in these circumstances, a little bit of it, is a price well worth paying?
MACGREGOR: I know that there are some people,
particulary those who've got themselves locked into a heavy debt situation, who
would argue for that and there are some who would argue that that would enable
house prices to start moving again and so on. But I think that's a very
short sighted view. I think the crucial thing is to maintain the attack on
inflation because experience over most of my political lifetime has shown that
when our inflation is well above our competitors our economy suffers.
DIMBLEBY: But you have, at the moment, a
devaluation, depending where you go from, ten per cent upwards, you have a cut
in interest rates and you have a projected, statistically projected increase in
public spending. Now, that may be very desirable in the way that you've just
described but let me suggest to you that by your own lights this is an
incredible way of saying "we're going to bear down on inflation".
MACGREGOR: Well we still have interest rates at
nine per cent and we have seen movements in the exchange rate up as well as
down. I notice that usually the attention is when it goes down and not too
much when they go up, the position of the Deutschmark has improved considerably
during the week of the Conservative Party Conference....
DIMBLEBY: What I think one economist..(both
talking at once)...it goes down, then it goes boom and falls down again.
MACGREGOR: He likes it when it goes down but
doesn't like it so much when it goes up. But I think the important..there are
two points I would make here, in terms of import prices the exchange rate
against the dollar is an important one, now the dollar was very weak in August
and I think that the pound..our dollar exchange rate then was unrealistic but
it's now back at levels that it's been for some considerable time. The second
point I wish to make is that there are a lot of pressures in the economy at the
moment pressing downward on prices and so, whereas if we were in a high growth
situation you would be right in saying that a falling pound against the dollar
has real inflationary pressures built in, I don't think that's there at the
moment.
DIMBLEBY: But you would be with Ken Clarke and
Michael Heseltine and, indeed, in that film Judith Chaplin, very concerned to
ensure that those inflationary pressures of devaluation aren't allowed to feed
into the economy because the real risk of that has to be there because it's
biult in.
MACGREFOR: Absoltely correct.
DIMBLEBY: And would you also say therefore that
those who look forward to early deep cuts in interest rates in your judgement -
whether they're right or wrong is another matter - in your judgement are out to
lunch economically doesn't
MACGREGOR: Well I think there was a sort of
euphoria among those who were against the ERM in thinking that this would..that
coming out would be an easy alternative and they've very rapidly learnt that it
isn't. I believe that we have to, of course in terms of (break in tape) look
at international interest rates at the moment too and that's relevant to
perceptions of the exchange rate and it's significant that our interest rate at
nine per cent is about the same as Germany, in France it's roughly about
thirteen per cent, in Spain it's fourteen per cent, in Italy it's sixteen per
cent. So, in fact, we are really, if you exclude America and Japan and the
drop in interest rates there hasn't really helped the American economy, we are
in the lower league and that point has to be taken into account as well.
DIMBLEBY: Yes.
MACGREGOR: Therefore I think that the Chancellor
has to make his judgement as the economy and international events move on, he
has to make his judgement as to what he does with interest rates.
DIMBLEBY: As he starts working out which levers to
pull accordingly and how to pull them let's just get absolutely clear where we
are, you are amongst the first to acknowledge that devaluation in itself has
inflationary pressures, that interest rates cuts of themselves have
inflationary pressures and they have to be countered. Now, let me come to the
general drive of what I'm saying to you again and it's this: that what you
intend to counter these inflationary pressures with public spending, but not
cuts we now recognise but public spending increases.
MACGREGOR: But, Jonathan, that is of course one of
the many ingredients in the policy and by no means the only one. But if I can
turn now to public spending, it's been known for some time of course that our
target this year was two hundred and forty-four point five billion and
therefore markets have known that perfectly well and of course - why - because
there are so many things in the economy that we seek to do and so many people
who are actually at the Tory Party Conference pressing us to do those sort of
things.
DIMBLEBY: No I won't stop you in the argument -
just on that point. The markets - just a minute, cos it's a complicated
matter.
MACGREGOR: I haven't quite finished.
DIMBLEBY: I'm going to absolutely encourage you to
go on, because I am very interested in it. But, this, the markets you say knew
that public spending figure, that target figure, but they did not know that the
pound was going to be devalued. We're talking in a different world now.
MACGREGOR: Well, I think that all of these mixes
have to be judged at any one point in time, but can I just carry on with my
public expenditure argument because there are many very important things that
are happening at the moment in terms of our current spending programme.
I entirely agree with Judith Chaplin
when she said that it's rather odd to have an increase in public spending
described as cuts, but the important things are. Like the road programme - in
my own field the road programme is at record levels and we see examples of that
all over the country and that's all directed to improving economic
performance. Similarly with rail, similarly in many other areas.
Now I think that the issue for the
moment, as far as everyone, including markets, is concerned, is this - there
were fears in July that we would be exceeding that public spending target, and
certainly - and I speak as a former Chief Secretary - I know that the formal
way of doing public expenditure negotiations was that there was always an
upward ratchet in the system, because everyone always came in with bids.
Now that system has been changed, and
that's another big mark-up to Norman Lamont's credit. He's changed the system.
I wholly approve of the change he has made, and that means that we are now
having to undertake difficult negotiations to ensure that we get the right
priorities and keep our public spending within the limits we've already set.
DIMBLEBY: But we're in this bizarre situation now.
He have the Cabinet talking all over the place, leaking all over the place from
Departments about the severity of the cuts - there's blood over every
departmental carpet, blood in the Treasury, blood at Number Ten - what do we
actually....and you've just yourself described it - in real terms there is an
increase (and just to remind ourselves of the figure), a real term increase if
you hit the target, get down to the target, a real term increase of eight and a
half thousand million pounds.
Maybe very desirable in the way that you
said. It may indeed be necessary given the level of the recession, the horrors
of unemployment, bankruptcies and so on. But by no stretch of any political or
economic imagination is that a cut.
MACGREGOR: No, but that was known in the public
expenditure programme last autumn.
DIMBLEBY: Where's the pressure downwards?
MACGREGOR: Can I just say this, Jonathan, because
you said that we're full of stories at the moment about Cabinet Ministers going
out and talking about cuts and blood on the carpet and all that sort of thing.
I'm a pretty old hand at these public expenditure games and I actually don't
remember a year in which there've been fewer of those stories than there are
this year.
There are a number of journalists going
out trying to create stories, but they're not getting any of it from us, and
there is a determination...
DIMBLEBY: I heard, I heard you on that film there,
and it was from the Conference. You, Redwood, Lilley - the three of you
saying - you, in the kind of language that you characteristically use - we have
to restrain our ambition. The point is that what is being talked up is cuts,
whereas what is really happening (and that's for the markets benefit) what is
really happening is increases and that's for the public benefit.
MACGREGOR: But there will have to be cuts in some
programmes in order to keep within the target level and to meet unavoidable
increases in others, and we all recognise that and that is why we've been
talking about restraining our ambitions. But what you do have to recognise is
that the Cabinet completely is united on this policy of hitting this target.
DIMBLEBY: I understand that, but my suggestion to
you is that with...
MACGREGOR: I know what you're saying. You're
saying we should below two hundred and forty four point five....
DIMBLEBY: ....yes, what I'm saying to you is for
you to be consistent by your own lights and credible with the markets. If you
don't find somewhere to bear down then you're going to be in trouble and the
pound's going to be in serious trouble. What you've got is a devalued pound,
you've got interest rate cuts and you're proposing public spending increases.
What are you going to do - put taxes up?
MACGREGOR: I come back to the point that the public
spending increases are already known, but I think the whole drive ...
DIMBLEBY: But I put that to you, just on that one
point - they are already known but they were known, as you know, in a very
different economic context, without the devaluation. With the devaluation we
inhabit a different world and the question that the markets want answered, and
you heard part of it coming up in that film...., is where is the pressure
downwards on inflation in that package.
MACGREGOR: Well, the pressure is going to come
downwards on, for example, public sector pay. I think we're going to be very
tough on public sector pay this year and I think that's absolutely right. One
of the difficult choices that you always have in Government on public
expenditure is the options between current and capital spending.
Now I think it's important that we
maintain as much of our capital spending programmes as we can. But if you're
working within an overall limit - again I know as Chief Secretary that you
sometimes have wholly unavoidable increases in programmes beyond what you've
set last year - and this is where I think a lot of the difficult choices are
going to be made and if we make them I believe the markets will see that we're
being determined.
DIMBLEBY: John, in a moment I want to come to
these projects that you speak of, but just one more thing on this. However you
assess or judge it, you acknowledge that there is a real increase in public
spending, would be if you ...
(TALKING TOGETHER)
DIMBLEBY: Let me put it to you that in the eye of
the markets, you saying you're bearing down on inflation under those
circumstances is about as convincing as an alcoholic saying "I'll just have one
more drink".
MACGREGOR: I think you'd better wait and see the
autumn statement, because that's when it will all come together. But you must
allow me to make just one other point and that is that I've been looking very
carefully at all alternatives that people have been putting forward. In fact,
there aren't very many.
The only real alternatives that have
been put forward are from Gordon Brown who is arguing that we must have (and
it's becoming a gramophone record) we must have a programme that deals with
employment, that deals with housing, that deals with investment and so on, and
all he can mean by that is a substantial increase in spending, although he
won't quantify.
DIMBLEBY: I'll doubtless have a chance to talk to
him a before long about that. Let's come back to you. Let me suggest to you
....
MACGREGOR: We're avoiding all of that.
DIMBLEBY: Let me, let me suggest to you - I
wonder whether you agree that you are caught between a rock and a hard place,
because the deeper the cuts that you impose to reassure the markets the more
pain (and it's now really serious pain that people watching this programme out
there are enduring) the more pain there is going to be.
MACGREGOR: I don't think you can have it all ways
in your argument. Can I just put it this way - that throughout Europe,
throughout the Community, Governments are having to make difficult choices at
the present time. We know that industries are under pressure - I've just been
reading this morning in the Sunday newspapers articles about the German economy
- so there are difficult choices to be made and this is the time when you have
to be steadfast and prepared to take them.
Now in terms of public expenditure, I
hope that we can maintain as many of our capital programmes as possible, but I
do recognise that within the targets and within the inevitable increases that
you find in some of the Social Welfare and Unemployment Benefit programmes, we
will have to make some decisions that involve putting some projects off from
this year to later years.
DIMBLEBY: You want to hold on to your capital...
MACGREGOR: That's where I think we're going to have
to take some of the pain. I hope as little as possible because I'm very much
aware of the state of the construction industry at the moment.
DIMBLEBY: Well, you're aware of the state of the
construction industry, you're aware of the needs of infrastructure. The reason
why you want to hold on to your capital projects - and you're being
particularly involved in this as Transport Minister - is not because there's
some self-indulgent pleasure in spending other people's money, it's because
you think it's vital to a sound recovery. Is that right.
MACGREGOR: That's correct. And a very important
point here, Jonathan, is that in fact the road programme (if I take that alone)
is up forty per cent in real terms compared with 1989, so we are actually
spending a very great deal of money and with very great economic and
environmental benefits as well.
DIMBLEBY: But if you lose, if you lose your
projects in this spending round - let us say whether it's the Jubilee Line -
which everyone says you're going to lose, and some people say a jolly good
think too, others say you ought to keep it, if you lsoe so many roads, ditto -
you believe, and you have to argue that Britain will suffer as a consequence.
MACGREGOR: The point I'm trying to make is that
we've already increased these programmes very considerably. Now, of course it
matters - it matters that we continue over, to fulfil our long-term commitment
on the road programme. But the other point we have to take into account and
hear what you say about recent events in the currency markets and their impact
on our economy, is right.
The other point we have to take into
account is that if the public sector borrowing requirement is too high, that
puts upward pressure on interest rates and that will certainly not help the
private sector and all the companies that I am keen to see through this period,
and so that you have to again make a balanced judgement on these matters.
DIMBLEBY: And in this balance if something has to
give - even if I'm suggesting it's not as much as the markets would like - you
believe that, am I right, that capital projects ought not to give, and however
painful it might be, spending projects on public, public sector wages, even if
that's nurses, on invalidity allowances, something has to give there.
MACGREGOR: Yes, and I think public sector pay
certainly is one area. I do think that some of the demands that are being made
by some of the public sector unions are just wholly unrealistic and it's very
important to bear in mind what's happening in the private sector to wages as
well as to jobs at the present time. So there has to be restraint in public
sector pay - I have no doubt about that whatever.
DIMBLEBY: So if capital spending has to come as a
priority because of the needs of the economy, what you have to be prepared to
say, and what you want the Chancellor to say afterwards to the British people
is "Yes, we are in the depths of a recession, but I'm sorry we're going to bear
down, freeze public sector pay, whatever it might be. We're going to bear down
on nurses' pay, we're going to bear down on housing benefit, bear down on
family credit, bear down on maternity benefit". Is that what you're after?
MACGREGOR: Now you're putting words into my mouth.
These are all decisions, these are all decisions we're going to have to take in
the next month, but what I am saying is that we have to meet the targets, we
have to restrain public sector pay and I think most people recognise the
importance of that when there are other people losing their jobs and having
very, very low increases in pay, if at all. But we have - and there are
obviously areas, such as the ones you mention: housing benefits, social
security payments, where we are a compassionate society and we have to meet our
commitments.
DIMBLEBY: But those, Mr. Macgregor, but those are
porecisely the current spending areas that you referred to when you said,
persuasively from your own point of view, that capital spending was in the
order of priorities that you would like to see, and you said unambiguously -
save capital spending at the expense of current spending.
MACGREGOR: Can I just make it absolutely clear.
What I said was that capital expenditure is very important for the economy, but
in a situation like this, and we are by no means alone (most other countries
are in the same position) you have ...
DIMBLEBY: That's not much comfort to anyone.
MACGREGOR: No, but it's a fact. You have to
contain your ambitions, you can't do everything at once. You may not be able
to achieve all the projects, to set out on all the projects that you want to do
this year, but the programme remains and, therefore, there will have to be some
restraint on all sides, but the precise details I think are still to be
negotiated and the outcome will be clear in the autumn statement.
DIMBLEBY: Let me summarise. The more persuasive
you are in bearing down on inflation, given this real increase in public
spending, the more you've got to try and limit that real increase, the more
pain you have got to impose. The more people that have to be out of work, the
more redundancies there have to be, the more bankruptcies, the more ...
MACGREGOR: You really can't have it all ways,
Jonathan. Not at all. The..of course,
DIMBLEBY: This is your predicament..
(TALKING TOGETHER)
MACGREGOR: Can I just make another point to you,
because when you refer to inflation coming down, of course, that's another
important factor that's got to be taken into account in relation to pay. It
also is a factor that this has to be taken into account in a lot of the Social
Security and other benefits and if you get inflation down, therefore, you don't
have the same huge increases as we sometimes have in high inflation periods
..(break in tape) social spending.
But when you talk about pay, the fact of
the matter is that if the public sector borrowing requirement is too high - I
repeat this is a very important message to all those who are in difficulties in
the private sector at the moment - if it's too high then that puts an upward
pressure on interest rates, which is the last thing that they want to see at
the present time.
DIMBLEBY: Secretary of State, you have
participated in a description of what is a pretty grisly prospect one way or
the other. Would you really like to be Chancellor?
MACGREGOR: I think that the Chancellor is doing an
extremely good job in very difficult circumstances, as other Finance Ministers
are finding, and I repeat, I have very important work to do in Transport.
DIMBLEBY: But you wouldn't say no if asked?
MACGREGOR: That's not a fair question to ask me
because I'm very happy to be doing what I'm doing in Transport.
DIMBLEBY: I'll give a fair answer - which is
thank you very much Secretary of State.
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