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Britain Wields Austerity Axe; France Vows to Push Ahead With Pension Reform; Major Government Overhaul in Spain

Aired October 20, 2010 - 14:00:00   ET


RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Britain wields the austerity axe. Will it kill or will it cure?

France vows to push ahead with pension reform in the face of huge protests.

And in Spain a major government overhaul. The prime minister says reforms, recovery and employment are his priority.

I'm Richard Quest. I mean business.

Good evening.

Britain today joining the austerity club and making the deepest spending cuts in decades. In a bid to reduce the heaviest debt burden in Europe. The U.K. Finance Minister George Osborne outlined his plans to British lawmakers in Westminster earlier. He says he plans to save more than $130 billion over the next four years. The same as slashing the budget of every government department by an average of 19 percent.

Mr. Osborne says he'll do it by cutting waste and reforming the welfare system. But he warned it takes time to turn around what he calls the debt supertanker. And here is where the axe will fall. First of all, nearly half a million public sector jobs are to go over the next four years. The government is also cutting welfare spending by an extra $11 billion a year. That is on top of $17 billion of savings already announced. And the state welfare pension will rise from 65-the age at which it will be collectable-from 65 to 66. That starts in 2018.

Households with the top rate of income tax, the taxpayer, will no longer be able to claim child benefit. This has been one of the most controversial of all the reforms.

The Home Office, the Ministry of Justice, will each have to find savings of at least 6 percent a year. The British chancellor said the proposals were tough but rational decisions.


GEORGE OSBORNE, U.K. FINANCE MINISTER: The decisions we have taken today bring sanity to our public finances and stability to our government.


They deal decisively with the largest budget deficit this House of Commons has ever had to face, outside of a war time. We have had to make choices, choices about the things we support. And today I have announced real increases in the NHS budget and the resources of schools, as well as new investments in the economic infrastructure of our economy. And I have announced real reductions in waste and reforms to welfare.


QUEST: The number two at the U.K. Treasury is Daniel Alexander, the chief secretary to the Treasury. Earlier I asked him if there was a risk the cuts would make things worse. And lead to the dreaded double dip.


DANIEL ALEXANDER, CHIEF SECRETARY TO THE U.K. TREASURY: There is not a choice, I don't think, between deficit reduction and growing the economy. The two go hand in hand. It is essential as we have the largest budget deficit in Europe, that we sort that problem out, so we can grow the economy going forward. We're also taking steps today in terms of supporting infrastructure investment, support economic growth in this country in the future.

QUEST: But back to my point, is there a risk of a double dip, or at least a serious contraction as a result of these cuts?

ALEXANDER: I think the single biggest risk to this would be if we didn't go ahead with the deficit reduction that we are planning. When we came into office we inherited a country that was on the brink of bankruptcy. Where people were asking questions about our country, because of the size of our deficit, the largest in Europe, which we had to answer to answer with a firmer, faster plan; if we came off that plan I think that would be the biggest single risk to our economy going forward, by far.

QUEST: So as you look, tonight, and people looking at Britain, tonight, may well say, good grief, they've cut the defense forces. They have cut the budget in swinging cuts, there is a crisis in Britain. They'd be right.

ALEXANDER: People should look at Britain and say this is a country that is taking responsibility for sorting out and a very major economic problem. The largest budget deficit in Europe, the worst fiscal position this country has had for decades. We have a government that is taking responsibility and in doing so still supporting the things that matter most to our country, educating our children, supporting the disadvantaged to improve their life chances, and investing in the vital infrastructure of the country going forward.

QUEST: In a final thought, in a European context now, you have made the sort of cut-you are now the poster child, the poster boy, as the Americans would say, for austerity and deficit reduction. What will you be telling your counterpart at EU council meetings?

ALEXANDER: Well, it is not for me or anyone else to tell other countries how to run their economies. I think what we'll be explaining is why we have chosen to do what we are doing. The reason we have chosen to do what we doing is because we believe that reducing the deficit, eliminating the structural deficit, over the fiscal mandate that was set out, is essential for supporting economic growth going forward.

This country has had a very, very major economic problem. We have to balance the books. We have got to do so in a way that is sustainable so that we can support economic growth going forward. The future of the country in terms of prosperity and fairness starts here and it starts today.


QUEST: The chief secretary to the U.K. Treasury.

Alistair Darling is the former U.K. finance minister and George Osborne's predecessor. Mr. Osborne blamed the previous government for Britain's financial straits. Saying the current coalition was faced with the worse economic inheritance in history.

Alistair Darling joins me now.

Let me begin by asking you the question, which I don't think Mr. Alexander answered, to me. Do you believe that the cuts that the cuts announced today greatly increase the chance of a double dip recession in Britain?

ALISTAIR DARLING, FMR. U.K. FINANCE MINISTER: I think the greater chance is that the economy simply bumps along the bottom for some years. And, you know, we're not alone in that. I think that my fear is that in the United States and Europe, Britain included-although there were signs earlier this year that recovery was becoming established and underway. I think there is a fear now that the economy-none of these economies are going to grow in the way that we thought they were. So, I think the greater fear is bumping along the bottom, rather than, you know, double dip.

QUEST: Right, but when George Osborne says that the country was on the brink of bankruptcy, that these were unavoidable decisions to be made, you were the man that took the decisions that might have-I can see, you obviously had this thrown at you all day, many times.


QUEST: But are you the man that bears the blame?

DARLING: Well, look, I'll say two things to you. The Conservatives supported what we -our spending, until the end of 2008. The liberal ministry you have just heard, actually supported our policies until the weekend after general election here, just five months ago. These guys are simply making a virtue of dressing up ideology as a necessity.

This country was not in a crisis. We are in a fundamentally different position to some of the weaker European economies. We did need to get the borrowing done. There is no doubt about that. Why did the borrowing go up? Because we had no alternative, as other countries did, but to support our economy to stop us going into recession, and recession turning into depression.

QUEST: I mean, we don't necessarily want to rehash how we go to where we are.

DARLING: But since they spent so much time-

QUEST: I agree.

DARLING: You know-

QUEST: OK, but the largest deficit.


QUEST: 12 percent, 13 percent, the largest deficit, which had to come down. But what the fundamental argument about, now, is whether it is too far and too fast?

DARLING: Yes, we do have a large deficit. And principally because we are a very open economy, we have a very large financial sector, as people know. But the argument now is, you are right, it is not whether or not you reduce borrowing. It is the rate at which you do it. Now the risk is that if you cut borrowing, by a very, very large amount. This is the largest cut in public spending we have seen for a long time.

If the private sector doesn't come in and take its place, then you run the risk of derailing that recovery. You loose jobs. Lost opportunities and actually cost you more, because it takes you longer to get your borrowing done.


QUEST: You would agree, though, surely, that if borrowing is brought under control, very fast, and the markets regain good confidence, then actually the plan put forward today might-

DARLING: Well, firstly, I think markets have every reason to be confident and always have had done, in the United Kingdom. We are a country that honors or obligations. You know, our government, as much as this government, would want to get its borrowing done. I think the risk that the U.K. government is taking is that, you know, partly the Conservative side, the British Conservatives, for ideological reasons, are really hacking into a lot of these services. But I think the risk is that you take so much of that money out of the economy-

QUEST: A real risk?

DARLING: I think it is a very real risk. That you end up with years of the economy simply bumping along the bottom, as I say, and that makes getting borrowing down becomes more difficult.

QUEST: I would just like to take into your Europe, if I may?


QUEST: Because France has got strikes tonight. You have heard Spain is going to-I mean, you have sat at Echofin (ph) you have seen the looks into the whites of the eyes of the other people there. How different is Britain to the position faced by the other countries. And what Britain is now facing will the others face soon?

DARLING: I think you have got to differentiate here. There are countries, you know, like Greece and Spain and Portugal, that have got particular problems and particular weaknesses. You know, Germany is perhaps at the opposite extreme. You know, Germany has a pretty strong economy there. It is their growth that makes European figures look respectable. France is obviously struggling to make-do reforms where in this country we take for granted. You know, people can't retire at 62 in this country.

So Europe is a pretty mixed picture. The one thing it has got in common though is, as with this country, as with the United States, where is the growth going to come from? That should worry any policymaker and that is what I think we ought to be focusing on.

QUEST: Alistair Darling, many thanks.

DARLING: Thank you.

QUEST: Thanks indeed.

Now protests are erupting outside the offices of the prime minister in Downing Street this evening. Max Foster, our correspondent, is there for us tonight. Joins me now.

Max, how loud? How bad? How big? How noisy?

MAX FOSTER, CNN CORRESPONDENT: I think you can probably hear it. And that is where George Osborne lives. That is where David Cameron lives. Demonstrations down there, they are pretty hard to make out. There are police lines at the end of Downing Street and I'd say 2,000, 3,000 demonstrators out there. There were a few scuffles.

Crucially, some very senior union leaders, the head of the Transport and General Workers Union, the public sector union, we had Jessie Jackson out there as well. Tony Bren (ph), you'll know, a senior left-wing politician, all calling for national strikes. They haven't got that yet. They haven't got the backing of the Trades Union Congress, but one of the common phrases you are hearing in that crowd, is viva la France, viva la France. A reference there, Richard, to what is going on in France and encouragement for workers here to do the same.

QUEST: Max Foster, who is outside the chancellor's residence in No. 10 Downing Street.

Now, Jessie Jackson, as we are hearing, has been talking about the need for reform and the possible repercussions. Earlier, outside Westminster, I was joined by Reverend Jackson of the United States and I put it to him, just what were we seeing in Britain today?


JESSIE JACKSON, PRESIDENT, RAINBOW PUSH COALITION: It is time to look at why we are being forced to cut. Today, Britain is paying for the Iraq war. It is paying for corporations that are offshore, don't pay their taxes. It is paying for protecting the wealthy citizens and now it is laying off 500,000 citizens. That means 500,000 jobs, 500,000 house notes, 500,000 people behind costs (ph). It is a huge price to pay for priorities.


QUEST: Reverend Jessie Jackson talking to me earlier.

When we come back in just a moment it isn't just the U.K., as you have already been hearing. In France they are problems and the president, Nicolas Sarkozy, sends in the police to clear blockades at the country's fuel depots. We're live in Paris. We'll assess the latest move and examine how far the protests will go to get their message across. QUEST MEANS BUSINESS, good evening.



QUEST: The French President Nicolas Sarkozy today deployed police to keep fuel supplies flowing as protestors hit the streets of France for a seventh day. They are striking against changes to the country's pension laws, and increase in the retirement age. You were hearing about that a moment ago. There is also growing public anger over government plans to slash spending by $62 billion over the next three years.

Jim Bittermann-Jim, you and I have-is in Paris-Jim, you and have spent the last couple of days talking about this. The fuel crisis, but the decision to send in the police escalates it to a new level?

JIM BITTERMANN, CNN SENIOR INTERNATIONAL CORRESPONDENT: Well, exactly. And I think it has led to some hard reactions from the other side, from the union side, in particular.

The police went in and opened up the three or four of the fuel depots around the country, hoping to get transport trucks, tanker trucks, in to resupply the gasoline stations. And it looks like to some extent that has worked during the day, because the number of gasoline stations without petrol, without diesel fuel has dropped from about one-third to about one quarter. Still, there is not very much of a decrease.

On other fronts here, there is a change, too, though. And that is the number of striking workers seems to have diminished. For instance, most of the civil servants were working today. And in the transport sector there are more trains running and more trains predicted for tomorrow. So, the picture does seem to be gradually improving as far as the government is concerned. But it is in very, very small increments, Richard.

QUEST: All right. Jim Bittermann, live tonight for us in Paris, who will continue to watch these crisis in the (INAUDIBLE). Many thanks.

The strikes in France, they are the biggest and most persistent challenge to the economic reforms and austerity measures being introduced across Europe. But then, of course, it is early days in other countries. Let's stay in France. Our Correspondent Phil Black has been keeping a video diary of today's clashes between the police and protestors. He now reports from Paris.


PHIL BLACK, CNN INTERNATIONAL CORRESPONDENT (On camera): We are just near the French senate where protestors have been clashing with police. They are here to send a message to the politicians inside, who are still debating, arguing this country's change to pension laws.

Actually, the police have been using some sort of pepper spray.

The protestors here are determined to send their message despite the fact the politicians say these laws are going to happen by the end of the week.


BLACK: President Sarkozy says, you must retire two years later.


BLACK: Why is that a bad thing? If it is only two years and the rest of the world already does this?

UNIDENTIFIED FEMALE: Because we know that for now it is two years, but it is going to be four years, and then six years. And it is always like that.

UNIDENTIFIED MALE: Because it is a right. It is social. And the fact of my father, my one father.


BLACK: Another day of clashes and standoffs between the police here in Paris and students from a high school, in Montare (ph) a Parisian suburb. This has been going on for several days now as it has in a number of towns and cities across Paris, as students protest their anger over the plans to change the country's pension system.

Here we have the police, who have been pretty reserved so far. Although they have been using tear gas quite liberally, and then up here, several hundred students have been throwing rocks, smashing up local property, windows, cars, that sort of thing. It is probably fair to say that much of those students do not care too much for the detail of pension reform, the students that have been involved in these sorts of protests have been divided into two groups. Those who feel genuinely politically connected and those for whom this seems to be a pretty good excuse to generally show some anger. And they are usually in disaffected areas, like here in Montare (ph).

The French government hopes that when the pension reforms are passed by the senate this week these sorts of clashes, the strikes, the fuel blockades that this country has been dealing with over the last week or so, they hope it will all go away as people accept those laws as a reality.

Phil Black, CNN, Paris.


QUEST: So far this evening we have been in the U.K., with their budget austerity. You have heard about the strikes and the violence in France. Now to Spain where the embattled prime minister has announced the biggest shuffle of his cabinet since coming to power six years ago. The move is to boost the government's plummeting popularity, after Spanish austerity measures meant to combat the economic crisis. Unemployment in Spain, you will be aware, is over 20 percent.

The changes include a new foreign minister and a new deputy prime minister. Al Goodman is our correspondent. He is in Madrid tonight.

We know the austerity measures through parliament, we know they are taking affect. How much of this is political window dressing to try and soothe public opinion?


Well, the cabinet-the analysts here say if you look down the number of portfolios that he has changed, he has moved the government back to the left base. Back to his traditional left base, especially after those strikes. The general strike just a few weeks ago last month by his traditional allies, the unions. So he is doing-he is trying to do so many things at the same time. You know, he doesn't even have an absolute majority in the parliament. He had to get two smaller parties to help guarantee that he will even have a budget for next year. And after he got that in place, then he announced these surprise changes. This is how he put it.


JOSE LUIS RODRIGUEZ ZAPATERO, PRIME MINISTER OF SPAIN (through translator): This government will include new blood, people with a clear political objective, with loads of experience and positions of responsibility. And who have great ability to communicate and to explain to the Spanish people what we are trying to accomplish. That way, we can all participate and work together to survive the economic crisis.

This is a government with strong political strength to take on a big challenge. This, in effect, will be a government of reforms, economic recovery, and jobs.


GOODMAN: Richard, there isn't much time. He's badly trailing the opposition conservative candidate in the polls and elections must be held in a year and a half time at the latest by the spring of 2012, Richard.

QUEST: Al Goodman, joining us tonight from Madrid.

So, you are getting a picture now of what is happening in Europe tonight. In just a second we will look at the business aspects of Britain's austerity measures. The government revealed what is getting the chop a former minister of state betrayed, we'll discuss (ph) why business actually quite likes it.


QUEST: Well, the axe has fallen. The U.K. Finance Minster George Osborne outlined the public sector cuts. It is designed to say $130 billion over the next four years. Digby Jones was a former minister of state for trade in the previous Labour government, a major member of the business community in the U.K., and leading light. I asked him what he made of the cuts.


DIGBY JONES, FMR. U.K. MINISTER OF STATE FOR TRADE: I actually think it is important. The sign goes up around the world that the British economy is under fair management and actually is providing a very good basis for investment. It is 500,000 public sector jobs, over four years, this isn't all in one year. And at the same time it will impact on GDP probably no more than 0.05 a percent, and the economy is going to grow about 1.5, 2 percent this year. So, it actually lays the foundation for low interest rates and a good quality environment for investment. The private sector then has to, has to step up to this plan, yes.

QUEST: See, that is the real problem, isn't it? Is there sufficient momentum in the economy, in the private sector, to pick up the slack yet?

JONES: I think there is. I think today leaving education alone was important. It means the skills keep coming through. And we do, at this moment, have a very good export story to tell. What we need, of course, is a growing economy, so over four years, as these people come out of the public sector, they are mopped up by the private sector.

QUEST: Can that happen?

JONES: Oh, yes, it can happen, but not in one year. There is not way this could happen in one year. But it could happen over four years.

QUEST: And if we take a look at how Britain now stands within Europe, we know France has got strikes at the moment. Germany has got another austerity, Greece-why is it the perception that Britain has been more badly hit than the others-or is that a truth?

JONES: Well, I think what the truth is that we created a bigger deficit than the others. I mean, we were spending 4 pounds, and only earning 3, and borrowing the difference. In your business or mine, that would be route to misery. So, I think it is not just perception, it is reality. Where also there is the perception, I know, is that we are very- were very dependent on financial services. And, of course, that is a very globalized business.


QUEST: Whenever we need some good common sense to make it clear, what we have been talking about, we know we can turn to David Buik, of BGC Partners.

DAVID BUIK, BGC PARTNERS: Richard, greetings.

QUEST: Well, what a day. What a day?

BUIK: It was an incredible day. For those working in the public sector it was a horrific day of reckoning. But the government had a fantastic day.

QUEST: Now, come on.

BUIK: Let me try and explain why. First and foremost, you have listened to Danny Alexander before. You have heard Alistair Darling. The fact remains that the cost of servicing our debt in interest alone, Richard, is 43 billion pounds a year. Since the Conservative government came in, and this is not a party political broadcast, they have shown intent to cut. And that has taken the cost of borrowing down substantially.

QUEST: But isn't the argument-uh, what Alistair Darling says, it is not that the deficit had to come down, it was how far and how fast? I mean, in the city, are you not worried this could be cutting an artery of growth?

BUIK: No. I personally think that because of the reckless profligacy of the previous administration, who spent money like a man with no arms and legs, which is ridiculous. That we have now to face that the chickens have come home to roost. And this debt is unsustainable and we will end up having higher and higher taxation, which really will lead us back into recession.

QUEST: The market, at the moment is very, it is betwixt and between, isn't it? We know there is a lot of cash out there. We know that companies are doing deals. And in a third quarter earnings seemed to be OK.

BUIK: Marginally better than expected, yes.

QUEST: Right, but as we go into the fourth quarter, David, and as we now sort of face these cuts, what do you think happens to equities?

BUIK: I think we have a slight blip on the pound and the FTSE 100 today because everybody is saying, OK, we've had the stick, where is the carrot?

QUEST: There isn't one!

BUIK: Hang on. There is a little bit of a carrot, and that was infrastructure. The cross rail, the M25, transport going up-


QUEST: Right, right, major infrastructure projects going forward.

BUIK: That is important, that employs a lot of people. The other area where I think he has done well, is 75,000 apprentice jobs created. And you can see that is a bit peripheral it will take two or three years to deliver. But what he's got to do is set an agenda where the confidence returns, because we have very good industries for export, if we actually bothered to stimulate them. We've got fantastic technology. And all these areas with the reciprocity that we get from the Far East, from South America, to a lesser degree from the United States because the-



BUIK: Come on?

QUEST: Well, as you sit in your dealing room and you talk to the traders and you hear what they are saying, and you put Britain and the London markets and the city into the context of Europe, is tonight, Britain better off, do you think, or worse off? In a stronger, or weaker position?

BUIK: As long as you don't have to think there is any correlation to the stock market and what is going in the real world, that's fine. FTSE 100 is an international index, it gets 70 percent of its earnings from abroad, has no correlation with what has happened today, at all. Nor will it do so, in the next two years, in my very humble opinion. What I find completely unacceptable is the fact that there is a possibility of 490, 000 people in the public sector losing their job, but in the last year we have created 350,000 jobs in the private sector, and 178,000 of those in the last quarter.

We need to be uplifted and we need to be stimulated. And, therefore, the only thing that I would criticize the chancellor today for, I think, his obsession with larruping the banks is so short-sighted, because if they were taxed in a regular manner, then they would create the incentives that are required -- I don't agree with people avoiding taxes. That's wrong.

QUEST: Right.

BUIK: But...


BUIK: Get to them and you are going to stunt growth. Please don't to it, Chancellor.

QUEST: David...

BUIK: Thank you.

QUEST: More common sense (INAUDIBLE).

BUIK: Thank you, Richard.

QUEST: Many thanks, indeed.

When we come back, we will hear from one of the governor's and the president of the Federal Reserve in the United States, where the Fed, of course, is expected to introduce further quantitative easing. A rare interview in just a moment.


QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS.

This is CNN. And on this network, the news always comes first.

I need to tell you, the U.S. State Department is confirming a $60 billion arms deal with Saudi Arabia. Now, the deal will take place over the next 15 to 20 years. It includes fighter jets and combat helicopters. One official told reporters the White House doesn't expect any objections to the sale from Israel.

French police have now forced open three fuel depots on orders from President Nicolas Sarkozy. They were shut down in protest over -- by the strikers against government plans to raise the retirement age to 62. The strikes have entered a second week and new clashes broke out on Wednesday. Mr. Sarkozy is vowing to carry out the pension reforms at the end of the week.

Afghanistan's Independent Election Commission has tossed out about 23 percent of the ballots from September's parliamentary vote. The group says that's due to widespread fraud. The announcement came after weeks of complaints about ballot box stuffing and bribery.

Next month, the U.S. Federal Reserve in Washington is expected to announce it may launch QE2. It's not -- not the luxury liner, it is, of course, a second round of quantitative easing. Not all are in agreement that it is the right tactic to help support growth. It is a straightforward argument between inflationary expectations and growth, between interest rates and what's happening in the wider economy.

For insight into what the U.S. central bank may have in store, CNN's Felicia Taylor spoke to Richard Fisher, the president of the Dallas Fed, and asked him why U.S. companies are stashing cash rather than hiring new employees.


RICHARD FISHER, PRESIDENT, DALLAS FEDERAL RESERVE: One of the key inhibitors is the fact that all the new regulations or the existing regulations and questions about future taxation inhibit or disincentivize them from hiring new workers. So they're sitting on a lot of liquidity, a lot of cash.

Now, many U.S. corporations are taking that and either buying in their shares are paying out more dividends or investing overseas, because in those overseas environments, they feel, I'm hearing from these people that are making these decisions, they feel a little bit more certain about taxation and regulation than they do here in the United States.

FELICIA TAYLOR, CNN CORRESPONDENT: If we put more gas in the tank -- obviously, I'm talking about quantitative easing...


TAYLOR: -- and not...

FISHER: -- in other words, QE2, not the ship.


TAYLOR: No, not the ship, far from it.

FISHER: Right.

TAYLOR: But if we put more gas in the tank, is that going to be enough to free up the liquidity?

And the markets themselves have already priced it in.

FISHER: Just so you know, we -- we haven't made that decision. We meet as a committee. The only person who is able and empowered to speak on behalf of all of us is our chairman, Ben Bernanke. And...

TAYLOR: If you did put...

FISHER: -- and we have not yet...

TAYLOR: -- money in, though...

FISHER: -- we've not made...

TAYLOR: Will it work?

FISHER: -- we have not yet made that decision.

TAYLOR: Do you think it will work?

FISHER: This is one of the debates we're having. We have reliquified the tanks. We may have to do more or we may not.

But the real question is, how does it take and how can we grow again?

And the purpose of growing, of course, is to enhance the living standards of Americans. That can only be done by employing more people. So...


FISHER: -- I don't know the answer, but I do know that our policies would be even more effective than they have been if we were able to dovetail with more incentivizing fiscal behavior.

TAYLOR: What if it doesn't work?

What happens then?

FISHER: You know, the markets like to create excitement about what we do. Obviously, we're the central bank in the most powerful country in the world and the largest economy in the world. It's not unimportant. I'm not denigrating the markets. But markets are manic depressive mechanisms. Our job is not to be worried about what the markets are going to react with, unless they go haywire because we make a silly decision. Our job is to get it right for the purposes of the economy.

TAYLOR: So narrow it down for me...

FISHER: -- whatever the limits.

TAYLOR: -- though, because we're sort of walking around the idea of what's possible.

FISHER: We will have low interest rates for quite some time now. And then the market imputes how long there's likely to be and makes long-term investment decisions or short-term trading decisions on that basis. And this is how the -- the central banks function. You know, the...

TAYLOR: I know how they function, but I still want to know what the ammunition is.

FISHER: Well, the ammunition is either we can adjust the Fed funds rate, we pay interest on reserves now for banks that have over a trillion dollars in excess reserves on our balance sheet. We can move that rate around. We have the equivalent of a time deposit that is deposited with us for longer periods. We can move that interest rate around. We can engage in what are known as the repo markets, the tri-party repo markets.

We've been developing all these different tools in the last year-and- a-half that allows us to affect what's going on in the marketplace. Or we can just buy things outright and put more money into the system.

So there are bullets in our holster.


QUEST: The president of the Dallas Fed. And I just love listening to him speak, because, frankly, you really do you have to read the tea leaves as to what they think on monetary policy.

More U.K. government spending cuts and reaction, in a moment.


QUEST: So the U.K. finance minister, George Osborne, has now outlined the country's deepest spending cuts since World War II. Osborne blamed Labour, the previous government, for the worst economic inheritance in modern history.

Earlier in the program, you heard from Daniel Alexander, the current number two, chief secretary. Well, his predecessor is Stephen Timms, the Labour financial secretary to the treasury.

He is being blamed, along with the rest of them.

What does he make of being blamed for the mess?


STEPHEN TIMMS, FORMER FINANCIAL SECRETARY TO THE TREASURY: Of course, that's not true. And Alan Johnson was absolutely right in his response today, to point out that George Osborne had chided us for not spending enough at the time of the last spending review. He certainly was not calling then for big spending cuts.

What happened was there was a -- a big crisis in the world economy, the biggest worldwide crisis since the 1930s. That shrunk the U.K. economy and now an adjustment is needed. But that certainly was not because the previous government was spending any more than the Conservatives would have spent at the time...

QUEST: So...

TIMMS: -- as they made clear.

QUEST: -- so why does it appear, at least from the outside looking in, that the U.K. is in a worse position than, say, Germany, France, Italy or Spain?

TIMMS: Well, we've got a big exposure to financial services in the U.K. and that's really where the problem has hit and the consequence of banks making less money has been a big reduction in -- in tax revenue. So we've been particularly exposed.

But my worry, in the announcements today, is about what it means for employment in the U.K. in the future and growth in the future that could be -- the chancellor confirmed half a million public sector jobs to go. The assessment is that there will be an additional half a million private sector jobs -- so a million jobs and no plan for -- for growth to replace that employment in the next few years.

QUEST: You obviously know the numbers. It's less than six months since you were looking at the books.

As a result of what you've heard today, do you -- are you prepared to say that a double dip recession in Britain is more likely?

TIMMS: I think the risk is undoubtedly greater as a result of the announcements that have been made today. And that's my big worry. And what we require is a plan for growth in the economy to create new jobs.

Just one example. Yesterday, the government announced investment in new nuclear power stations and yet they canceled the loan to Sheffield Forgemasters that would have meant the forgings for those could have been made in Sheffield. Instead, they'll be made in Japan or Korea.

Now, that's -- that's folly. There should be a -- a plan to maximize benefits for the U.K. from green investment, energy investment and other projects that we know are ahead.


QUEST: One man who knows exactly what it's like to make these cuts and to have to make the tough decisions is Norman Lamont.

He served as the U.K.'s finance minister in -- in the early '90s in the Conservative government.

I asked Lord Lamont how the cuts imposed back then compared to those we saw today.


NORMAN LAMONT, FORMER U.K. FINANCE MINISTER: It is a different league. It's probably the biggest public expenditure cuts in decades.

Having said all that, money public expenditure is still increasing. At the year 2014-15, public spending measured in pounds, will be higher than it is today or last year. It's a cut in real terms, not in money terms.

It's tough. It had to be done. It's cruel necessity. But I thought the chancellor managed to spread it evenly and he also managed to make some positive announcements in among the difficult ones, such as the increased expenditure on roads, transport, infrastructure, preservation of the science budget -- all that designed to emphasize it's all for long-term growth.

QUEST: What does it say about Britain tonight, a country that was just about bankrupt, that was facing a financial catastrophe?

LAMONT: Well, we've drawn back from the abyss. I mean spending -- having a deficit of 150 billion pounds a year is quite something, 10 percent of GDP. That was a hemorrhage that had to be stopped. And you don't stop it, unfortunately, overnight. And our national debt was in danger of getting somewhat out of control, simply because the level of the annual deficit was adding to it so quickly each year.

QUEST: What about those who say that these cuts are so deep and so severe that it risks throwing the British economy back into a double dip recession?

LAMONT: I don't believe that it will cause a double dip recession. The recovery has plainly begun. Obviously, the recovery may slow down, but that's rather different from a double dip recession. These cuts are over four years.

How long do people want, 10 years?

You can't go on adding to national debt annually at the rate at which we are adding. We have the largest structural deficit in Europe. We have the largest structural deficit of any advanced industrialized country in the G7.


QUEST: Lord Lamont talking to me earlier.

And that's QUEST MEANS BUSINESS tonight.

Whatever you're up to in the hours ahead, I hope it's profitable.