Danny Alexander: 'Tomorrow is government’s last big economic event'

Mr Alexander provided what will presumably be tomorrow's defence of why public-sector borrowing has not been falling in the way the government hoped

In advance of an Autumn Statement tomorrow which will confirm that, not for the first time, the government's deficit isn't falling as fast as it would like, I interviewed the Chief Secretary to the Treasury, the Liberal Democrat Danny Alexander.

Naturally he would not be drawn on the content of tomorrow's important statement by the chancellor on the health of the public sector's finances and of the economy.

But he provided what will presumably also be tomorrow's defence of why public-sector borrowing has not been falling in the way the government hoped, in spite of the economy growing faster than any other developed economy.

He also said that growing divisions between Tories and Lib Dems in the coalition mean that the Autumn Statement will be the last big economic policymaking event of this government - because by the time of the Budget immediately before the election next May, the political differences will be so wide that there is little prospect of agreement on any substantial economic initiatives.

Finally he poured cold water on reports that the government is planning to legislate to bind the next government to meet the ambition of both Lib Dems and Tories for the deficit to be eliminated by 2017-18 on a so-called cyclically adjusted basis (or what is known as the structural portion of the deficit, unrelated to the swings caused by the economic cycle).

Here are some excerpts of my interview with him.

Robert Peston: Why is public sector borrowing in the first seven months of the year 6% higher than in the comparable period of last year, when the Office for Budget Responsibility forecast a fall of 11%? What has gone wrong?

Danny Alexander: Firstly I will say to you that the Office of Budget Responsibility will set out their new forecast tomorrow. It's not for me to comment on that in any way. Secondly I would caution you against taking seven months' figures and reading into that for the whole year because you see lumpiness in those figures. For example, self-assessment tax returns don't come until January and that's a major part of tax income.

RP: But it's inconceivable that the deficit will fall this year by 11%, inconceivable.

DA: Well, what we have seen in our economy this year is strong economic growth but we haven't seen tax receipts - particularly income tax receipts - grow as strongly as was forecast. We are seeing a lot more people entering the labour market, a lot of young people entering the labour market, who inevitably start on lower wages… That means income tax receipts are weaker.

RP: But isn't it an indictment of your economic policy that this is such a low-wage recovery?

DA: Hold on a second, our policy has led Britain, which was one of countries hardest hit by the financial crisis, to have the strongest recovery in the European Union, the best recovery in the G7, the best job creation in Europe, more jobs created in the United Kingdom than in the whole of the rest of the European Union combined. So yes, of course we need to see wages improve over the years to come, it is very very important to make sure the benefits of this recovery are shared. But I'd much rather be in the position of the United Kingdom than in the position of the many other European countries right now.

RP: Is more relentless austerity the answer?

DA: I think as you go into the next parliament you will see big differences emerging between the Liberal Democrats and Conservatives. We both agree that we have to finish the job of dealing with the structural deficit by 2017-18, that means ten of billions of pounds more deficit reduction.

RP: So you will legislate for that?

DA: What we set out is that we meet our goal of eliminating the structural deficit in 2017-18.

RP: But this idea of legislation for that…

DA: We have never proposed to put that into law. The OBR [Office for Budget Responsibility] has a mandate which is voted on by Parliament that is regularly updated.

RP: But there has been a lot of talk about it being enshrined in law.

DA: That's not come from the government, we've never talked about a new law. What we talked about is strengthening the mandate the OBR has to monitor our progress on finishing the job.

Where the difference lies [between Conservatives and Lib Dems] is how we finish the job. The Conservatives want to only reduce public expenditure… I reject that. I think that we have to finish the job of deficit reduction and we have to do it fairly. That means tax rises, focused on the wealthiest of the society, have to play a role. Otherwise we will not be doing this job in a fair way.

RP: how important should we see the Autumn Statement, given the divisions between you and the Conservatives. Is this the last big economic moment for the government?

DA: By the time we get to the budget, it's going to be much closer to the election. It will be much harder for us to have coalition agreements on all sorts of new policies. I think you should focus on the Autumn Statement as being the big event in economic policy for the coalition for the remainder of this parliament.

RP: So your entente with George Osborne on how to mend the public finances is over?

DA: Liberal Democrats and Conservatives agree that we have to finish the job of deficit reduction by 2017/18. There's a big difference about how we are going about doing that, and after this I think there is quite a big difference. We want to ensure we get our debt down as a share of our GDP to sustainable levels over time, but within that, we want to have the space to borrow a bit more to fund the most productive capital investment. This week we set out a big plan for investments in roads and flood defences. There is more in that we could do that would lift our economy. And I think once the structural deficit is dealt with and you can get the debt down, you can release more resources for infrastructure. That's what I would do.