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DERMOT MURNAGHAN: So Britain has been kicked out of one the world’s most exclusive clubs, that of countries with a AAA credit rating. Labour then say it is time for an economic Plan B but would more borrowing really solve the problem? In a moment I’ll speak to the former Chancellor Alistair Darling. Well let’s say a very good morning then to Alistair Darling who joins me now live from Edinburgh. Mr Darling, is there any part of you that feels ever so slightly vindicated by this downgrade in that you’ve been warning about the government’s economic course for so long now?

ALISTAIR DARLING: Well as you know, ever since 2010 I’ve been extremely doubtful of the government’s strategy. I think when they were elected they very unwisely staked their reputation on maintaining the AAA credit rating that they had, they compared us to Greece, they said they could eradicate the structural deficit by 2015 – these were wildly optimistic claims and they were perhaps made because of inexperience and perhaps a touch of recklessness but the result is that they have sustained quite substantial political damage but, more importantly for the country, the economic harm of yet another blow to confidence, I think that is very, very important. They have been following the wrong economic strategy and are paying a very, very heavy price for it.

DM: Well with that analysis, do you share the view being expressed today in some of the papers that this could lead to pressure on sterling?

AD: Well look, I think the markets have been expecting this, it’s been a long time in coming, it was just a matter of when you get the downgrade. I think what you are actually seeing is something more deep seated and in fact more worrying. Over the beginning, since the beginning of this year I think the markets have begun to take the view that the US economy is beginning to emerge from its difficulties and starting to grow and of course President Obama and his team have been following a far better policy in relation to the United States than we have here and also, I think wrongly in my view, they have taken the view that because Europe didn’t collapse again at the beginning of this year that perhaps it’s in better nick than I actually think it is. So I think on both those counts we have been seeing a slight moving away from us but I think the real problem is, if you look at what is happening in the UK at the moment and Moody’s say this, what they see is flatlining growth for years to come. We are actually borrowing more than the Chancellor ever expected, over £200 billion more, so his borrowing is going up and that little wheeze that he had last autumn to bank the sale of the spectrum hasn’t worked out because he didn’t get the money in that he expected. Our debt is going up and that’s why people are taking a dim view of us and that’s why I think there are many people who now say, look, you have to change tack, you have to recognise that a plan to try and slash and burn your way out of this simply will not work.

DM: So it’s your position then listening to that, Mr Darling, given that Labour has always taken the position that these AAA ratings are not necessarily the be all and end all, that if it was going to be put in jeopardy and this has happened, you might as well have done it earlier, borrowed a bit more and we would be growing by now.

AD: Well look, I cannot emphasise enough to you that we are borrowing more now. It’s not as if somehow borrowing is coming down and here is me coming along and saying I want to spoil it all and borrow more, we are borrowing more. Why are we borrowing more? Because our economy is flatlining, we are absolutely stuck, we haven’t had any growth really to speak of for the last couple of years and …

DM: Sorry to interrupt Mr Darling but you were saying if we’d borrowed more earlier we’d have been growing by now. Of course there was growth while you were Chancellor, are you saying that that trajectory if you’d been elected back into power, that that trajectory with a little bit more borrowing, that growth trajectory would have continued?

AD: Well the path that I set the country on was one that we actually had growth by 2010 but I’ve always been clear that of course you need to get your borrowing down and your debt down but you can only do that once you’ve got your economy growing which is something the United States has recognised for example. If you take for example what the government has done in a pretty tepid sort of way in relation to the infrastructure in this country which we desperately need, if they’d got on with that from day one and actually implemented some of the other measures that again they are sort of toying around with by trying to increase lending through the banking system and so on, if they had actually been doing that and taking a far more realistic view as to how fast you could bring down the amount of borrowing then I think there is every chance that our economy would have been growing and certainly wouldn’t have got into a double dip recession let alone talk of maybe a triple dip recession. What has happened is they have sapped confidence and they are pursuing policies that simply don’t work.

DM: But is it all domestic mistakes? Of course the argument that came from you, Gordon Brown, Ed Balls and others in 2008 is that it came from America. Can’t the Chancellor just say that all the problems or many of the problems are coming from the eurozone, America’s fiscal cliff, the Chinese slow down, he has got a lot of external factors to deal with.

AD: Of course and every time I’ve been on this programme I’ve made the point that there are two elements to this, one is what we do here at home and, as I say, I think the government has gone off the rails here but also what is happening in Europe is of critical importance and actually part of the problem in the European Union is that countries are all pursuing a policy of austerity at the same time. What’s happening, growth has been snuffed out there as well. Look at the dire figures that were published last year in relation to the predictions for growth in Europe, or rather lack of growth in Europe, for the next year. You are finding that countries like Spain, even countries like France, big economies like France are going to overshoot their borrowing reduction targets, growth has now disappeared from many of the countries in Europe and this is a huge problem not just for us, it’s a problem for the global economy because the European Union is such a massive economy. What has happened in Europe is that you have got this ridiculous pursuit of policies of austerity that were discredited 70 years ago, that have been practiced now, that are driving Europe into a rut and the longer that it stays in that rut it will of course affect us and it will affect the rest of the world as well. All the more reason for us to be, to have a government here that is pursuing a far more realistic policy but also one that is fully engaged with our European partners because frankly if Europe continues along the road it is going just now it will prolong the misery for millions of people in Europe and this country as well, far longer than is necessary.

DM: Do you think the government is now adopting an unofficial policy of devaluation? We talked earlier about the potential problems there could be from this for sterling and also what we’ve been hearing from the incoming Governor of the Bank of England Mr Carney, he’s been having an effect on sterling before this as well, it’s heading south.

AD: Well look, the British government has for some time, at least since the 1990s, have taken the view that the pound and the value of the pound was very much fixed by the market rather than pursuing a policy though I do notice that Mervyn King, the outgoing Governor, appeared to be trying to talk down the pound. I think in relation to Mark Carney, who I have said before I think is an excellent choice as Governor, he is absolutely right in saying that making sure we keep a grip on inflation is obviously essential in the medium to long term but as far as where we are just now is concerned the central bank does need to be flexible as it has been in the United States and the European Central Bank for that matter but all three of those central banks there are actually targeting a policy that has got more to do with growth rather than it has got to do with controlling inflation but monetary policy, the Bank of England cannot do all this on its own any more than the European Central Bank, it certainly stopped the banking collapse in Europe so far but it can’t do these things on its own, it needs governments policy, the policy on tax and spending, to be complemented by what the central banks are doing, whether it’s an interest rate policy or if they decide to try and put more money into the economy. These things need to be done together, you can’t say well let’s hope the banks can sort us out and hope that something turns up because just at the moment nothing is going to turn up.

DM: So do you think the Chancellor should consider his position given the amount of political damage you described that he’s taken?

AD: I’m sure he will reflect on whether it was wise to go on about the credit rating which he’s been doing since 2009 but it’s not him, it’s the whole government, the whole government is pursuing a misguided policy. The policy that we left, that I set out on which was to reduce spending over a period that was realistic in order to get your borrowing down and at the same time to make sure that you got growth going again, that would have been a far more sensible thing to have done. Unfortunately they decided to go for broke, as I said I think it’s a combination of inexperience and a touch of recklessness, and look what happened. They are wildly off their target just now, they are disappearing into the distance as to when they expect things to get better so it’s not an individual we are on about here. You have another Conservative chancellor and you have exactly the same problems because they all happen to think, wrongly in my view, that all you have to do is to cut public spending and hey-ho, the private sector will take its place. Now most people just don’t believe that. The relationships between public and private sector are much more complex than that. What we need is confidence back, confidence will only return when you have a credible plan to get your borrowing down and your debt down and above all a credible plan to get growth going again because if you don’t get growth you will simply never get your borrowing and your debt down.

DM: Okay, Mr Darling, thank you very much indeed. Alistair Darling there.