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DERMOT MURNAGHAN: Earlier in the programme I spoke to former Chancellor Alistair Darling about Britain’s credit rating downgrade, well I’m joined now from Nottingham by another former Chancellor of the Exchequer, Kenneth Clarke, a very good morning to you Mr Clarke, thank you very much indeed for joining us. Now George Osborne said in 2010 that this is one of the benchmarks against which you will be able to judge whether a Conservative government is delivering on this new economic model. Well can we judge then that the government is failing on the new economic model?

KENNETH CLARKE: Well he was judged then very favourably, we won confidence when most European countries lost the confidence of the markets. With the outlook of the global economy then it was perfectly sensible so long as we got on as we did with cutting the deficit and the debt and it seemed perfectly sensible to me at the time. It would now if it were not for the fact that it is quite clear that the global economic and financial crisis is persisting, it’s worse than we thought, several more years are required and I don't think for most people actually in the circumstances of 2013 this change to the credit rating comes as much of a surprise. The Americans have already lost their AAA rating and they, like us, are going to have to persist with sensible policies combining getting rid of debt and deficit, at the same time stimulating growth and having an industrial strategy and it is going to take several more years of this in order to get back not just our credit rating which we’ll get back eventually, but to get back to sensible economic growth.

DM: But the Americans are much less exposed, for obvious reasons – the size of the economy, the dollar as the world’s reserve currency – do you not think that Britain could be in for tougher economic times? You were around in 1992 for all that happened during the ERM when the markets really lost confidence in sterling. KC: Well they did for a time and what’s happening at the moment is that sterling was I think being regarded as a safe haven currency only six months ago and obviously at the moment the euro is strengthening because the immediate danger to the eurozone has been passed but I don’t forecast currency markets, they are not always very rational and I think the thing that will steady the currency markets as far as we’re concerned is a reaffirmation that we are determined to continue for probably another few years of deficit and debt reduction because you can get nowhere with a burden of debt on your back and the long work of structural reform, making sure we have a modern competitive economy that will grow and will continue, which is why we have all the skills training, the apprenticeships schemes, we have the Funding for Lending, we are trying to repair the damage to the banks and restore credit to business and we’re having infrastructure programmes and so on. The idea – I listened to Alistair and he was very forceful and I have more time for Alistair than I have for Ed Balls, I have to admit but Alistair seemed to say well of course we’ve got to get down borrowing but somehow we’re doing it too quickly. He didn’t say we should actually borrow more, we should do it more slowly. I think as an analysis of where we are, with great respect Alistair, that is rather simplistic and rather naïve. We are obviously having to continue to tackle our deficit problem, there are a lot of other things to be done as well to boost the economy, to modernise it, to make it competitive. The idea that you press a button called growth and it works in this international climate is of course nonsense and listening to Alistair as I did, he has no more idea than Ed Balls about which particular button Labour would press. Anyway, that’s our opponents, at least we haven’t got Silvio Berlusconi and a comic, I think we should carry on with the sensible economic policies we’ve got and this reminds the public that we have a serious road to follow and it’s going to take some time yet.

DM: But what about the political damage to the Chancellor himself? As a former incumbent of the role yourself you’ll know it’s never good for a Chancellor to have his words rammed back down his throat and he said we will maintain Britain’s AAA credit rating, it hasn’t happened, should he consider his position?

KC: He actually said that two and a half years ago and he was agreed with by most pundits, most people like myself, it was a sensible thing to say given we put together such an impressive programme of really tackling the deficit which restored confidence in Britain at the time. No one can forecast where you are in two or three years’ time. When I was Chancellor I always treated economic forecasts with some reserve. I wouldn’t forecast with confidence where we will be in two or three years’ time. In the current circumstances where Britain is doing better than most other European countries bar Sweden and Poland and places where they didn’t have Gordon Brown and they didn’t get into debt, but if you look at the troublesome ones, we’re doing better than Italy, we’re doing better than Spain and France is in trouble. You can’t just say well he said three years ago this about the credit rating and three years later … no, you can’t …

DM: Well Mr Clarke, with respect, with respect it wasn’t one amongst a number of vague economic forecasts, it was a flagship economic policy, one of the benchmarks that got the Conservatives into power, into coalition. This was, and the Chancellor, quote unquote, ‘measure us by this’. It hasn’t happened, it has come to pass the other way.

KC: You’ve found a phrase somewhere. The idea that we got back three years ago because we’d given an all-time guarantee that whatever happened to the world economy we keep our AAA credit rating is, with great respect, a slight rewriting of history. We got back because the Labour party had reduced the country to a state of economic ruin, we paid a staggering level of debt and deficit, we said we got on top of that and we would tackle the medium and long term problems of getting better growth as well. We’re on course to do that and in the intervening time lots of people have seen their credit ratings adjusted, we still have AA1 which is actually a high credit rating and so long as we make it clear that we’re not believing all this stuff about just borrow and spend some more money, that will solve all the problems, so long as we make it clear we are sticking to deficit and debt reduction and that we have strong policies for growth alongside them, then we’ll maintain confidence but currency markets are unpredictable, credit ratings change sometimes. The underlying position here is that people have far more confidence in Britain than they have in most of the other Western economics that have got into trouble because of profligacy and irresponsible policy making of the kind that we had.

DM: I want to ask you more about politics. Do you think that given this in the background and given the Eastleigh by-election towards the end of this week, if your party loses is it another big hit or is it something that you can brush by and continue on course and forget all about?

KC: Well it is probably neither but obviously I always prefer to win by-elections. Government’s don’t usually win by-elections but this is an odd one because it is the two coalition parties that are obviously in competition with each other so I hope that we win Eastleigh but you can’t just brush them all off and say that’s just a by-election. On the other hand, if we do lose it, it can hardly be said that it’s too surprising given we are mid-term, facing difficult problems and obviously this is regarded as essentially a Conservative government. I think the policy is just one we have to stick to. I think the way in which we will recover confidence is to make it clear we are a strong, firm government, that the strategy we’re on is the one that is eventually going to get things better and that the alternatives frankly are a bit odd. Either you are going to borrow a lot more, cut a lot of taxes or there is some magic solution which as yet, as far as I can see, our critics on the left and certainly some of our critics on the right, don’t altogether seem to me to have found.

DM: But the candidate in Eastleigh, she’s out of kilter with a lot of your views certainly isn’t she, particularly on Europe and gay marriage, do you think she is an asset to your party?

KC: Well on gay marriage, it was a free vote issue, there is quite a wide range of views inside the Conservative party, it’s no secret that there’s quite a range on other things as well. The Conservative party is a pretty broad, right of centre, party and that’s always been the case. It’s always had a One Nation wing, it’s always had more right wing people. The essential underlying principles of free market economics through an enlightened social conscience and common sense when it comes to running the economy, fiscal discipline, no excessive levels of debt and being pro-business, cutting tax to business, deregulating, doing something about skills and apprenticeship, doing something about our education system to prepare people for the modern world, those are the things which hold the Conservative party together and I hope we do well in Eastleigh.

DM: Yes, well, things that hold you together and things that perhaps don’t hold you together. The issue of Europe, I touched on it there with that candidate, you’ve just accepted on board the Conservative a former member, an MEP from UKIP, it doesn’t seem to me that the party is moving in your direction on Europe, particularly with the Prime Minister promising a referendum.

KC: It bounces around, I accept that, when we were in office before we were always, with Margaret and John Major, a very pro-European government and very successfully so too in my opinion, that’s when we joined the modern world really, from 1979 onwards and made ourselves a powerful political and economic force in the world again. We may sort out Europe I hope over the next two or three years when we now embark, following David Cameron’s speech on the process of modernising it. It does need reform, I think the reform could help us all recover if we really strengthen the single market, have trading agreements with the Americans and the Japanese, which I’m involved actually in trying to further and actually deregulating Europe, as we’re trying to deregulate in the United Kingdom and again make ourselves a more modern, more efficient economy to compete with Asians and others who are our rivals in the future.

DM: But if and when you have a referendum you don’t know what result you’re going to get, we could be leaving.

KC: Well if and when you have a referendum, it is true, referenda have an uncertain quality but I actually do believe that faced with a referendum, faced with the reforms of the European Union which I think are necessary and I think sensible ones could be achieved, then the British people will see that going back to isolationism and believing that we could retain our economic base without the single market or without any influence in the single market and our political voice without being part of the European Union, I think that will be rejected. But that’s not the Eastleigh by-election, that’s four years away at least, if and when we do actually have a referendum which of course will first depend on getting a Conservative government with an absolute majority.

DM: Okay Mr Clarke, thank you very much indeed for your time. Kenneth Clarke, former Chancellor and Justice Secretary of course.