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DERMOT MURNAGHAN: Before the last election George Osborne said we should judge him on the government’s economic performance and keeping Britain’s AAA credit rating was central to that. Well now it’s gone so has Plan A failed or are the ratings agencies wrong? Well in a moment I’ll speak to the former Chancellor, Lord Lawson. Well I’m joined now from Sussex by the former Chancellor of the Exchequer, Lord Lawson, a very good morning to you Lord Lawson. Now it is never good, as you know yourself, for any Chancellor being forced to eat his words, how much authority do you feel that the Chancellor has lost?

LORD LAWSON: I don't think he’s lost any authority at all. I think that this is a dramatic headline but it really doesn’t affect anything in the real world very much indeed so therefore I don't think he’s lost any authority at all.

DM: Except for the fact that he made it so central, one of the benchmarks he said that you should judge this government by, going around almost boasting about Britain holding on to its AAA credit rating whilst others lost theirs. Well no, we’ve followed suit.

LL: Well politicians say things at a particular time which are relevant at that time. At the time, which is what, three years ago I think, he was trying to make it absolutely clear that he was determined to pursue a tough, unpopular but necessary policy to get the huge deficit which the present coalition inherited, to get it down and eliminate it over time and it was important for him to establish that credibility but now, three years later, I think he has established that credibility by sticking to Plan A. It is absolutely true that it’s taking a lot longer and this is happening for other countries too, taking a lot long to turn the economy round than he had hoped and I think than everybody in this country had hoped but I think that now his credibility is fully established so I don't think this – which was expected anyway, they put the United Kingdom on negative watch as they call it some months back.

DM: Okay, so you think he has not taken an authority hit on this one, of course he has seen another recession occur on his watch and we are teetering on the brink of a second one, which would make it a triple dip recession. At what point does he become a liability to the government?

LL: No, just to be accurate, we’re not teetering on any brink at all. What is happening is that we are bumping along the bottom. The British economy went into recession some time back and since then it has been bumping along the bottom and sometimes the quarterly figures, which are always revised anyway, show a small plus sign, sometimes they show a small minus sign, but what is actually happening is we are bumping along the bottom but I don't think that there are signs now that very slowly, all too slowly, it’s a pity it’s so slow but we are gradually coming out of this recession but it’s going to be a very slow, very long, very painful process I’m afraid and I think what is absolutely clear is that he has to stick to the policy that he has been pursuing. There may be one or two other things that he can do to improve it but not to change the basic thrust of the policy.

DM: So you firmly, just to underline this, you are firmly of the opinion and the position that George Osborne is a positive asset to the government at the moment because there are voices coming out, indeed from within the Conservative party, that are saying well, he’s taken several hits to his position with the recession as I mentioned, this AAA credit rating and there could be more to come if there’s a run on sterling.

LL: Well look, I hope that there won’t be a run on sterling and I think it would be a very big mistake if anybody in the government or indeed in the Bank of England gave the impression that they would like to see a further depreciation of sterling, that would not be clever, that would not be sensible, that would not be helpful and it would not be helpful in the financial markets but I don't think that George Osborne wants that and I know from experience that being Chancellor of the Exchequer is not an easy job and it is a particularly difficult job at the moment with the huge problems that there are in the eurozone which is our biggest single export market. So the important thing is, is he pursuing the right policies and I believe that he is pursuing the right policies, I believe that if he were to make a change, to go to a Plan B then he really would lose financial market credibility which would be very costly for this country. As I say, there are one or two things he could do, I think there are further measures of deregulation that would be highly desirable particularly to get the building and construction industry moving. I think also he needs to look at the Royal Bank of Scotland which is over 80% owned by the state and to get that in a position where it can do more lending to small businesses, that sort of thing but the broad lines of strategy that he’s pursuing I think are right and therefore there is no case whatever for making a change at Number 11 Downing Street.

DM: But couldn’t he become more radical within the Conservative playbook so to speak and cut taxes a bit more aggressively? Okay that 50p rate is going down to 45p, opposing the Mansion tax but what about really going for it and trying stimulus that way?

LL: Well I think he can only do that if he can find savings in public expenditure to match it so that he is not causing the country to have to borrow any more. We are borrowing far too much as it is, he is getting the borrowing down, that is the right strategy. It is taking much longer than he hoped and that is unfortunate but the circumstances are clear why that is so but he can only cut taxes, and there is a case for cutting some taxes, if you can match it by cuts in public expenditure and that is easier said than done because of political problems if you attack some forms of public expenditure. So I think standing firm is a pretty good policy at the present time.

DM: Okay. How do you assess the importance of the Eastleigh by-election in terms of the Conservative party’s troubles, coming up? So we’ve had this AAA rating going for the Chancellor of course, they are joined at the hip, the Chancellor and the Prime Minister, do you think that Eastleigh, if it’s lost for the Conservatives, is a blow to the party or can you move on instantly?

LL: Well I’m not going to speculate on the result of Eastleigh, I haven’t the faintest idea what’s going to happen in Eastleigh but by-elections are curious things, they always have been and they always will be. I think that what is more important is not the by-election but the relationship between the two parties in the coalition. In many ways that is very unsatisfactory at the present time and I hope that after the Eastleigh by-election by parties will pull themselves together and insist on the coalition working better than it has been in the recent past.

DM: Okay, Lord Lawson, thank you very much indeed for those thoughts, Lord Lawson there.