show you british political programming in this time slot. tonight, british prime minister gordon brown receives questions. questions are not shown in advance. he answered a range of questions on the british economy, the banking crisis and foreign affairs. this is about two hours. . .

>> steve hester's .6 million pounds is very similar to the nigh contract with real madrid. is this business as usual where , like recalledo they are running rings and the regulator? >> no. we just published this morning the first report of the walker commission into the governs of banks. he makes some very clear recommendations which i believe will be adopted. the first thing is that

remuneration has got to be long term. in other words, it is only on the basis of long term performance that we can guarantee the system that is to be in being in the future. and he is recommending that remuneration should be over a five-year period. the second thing is transparency, that there has to be far greater transparency so the public is aware of what is happening. that leads to the third conclusion, and that is the regulator system has got to take into account banks that are prepared to pay high remuneration. but that has got to be a factor in the regulation of the banks. so the finance service it is authority will be issuing a revised accord on the standards of remuneration. the combination of what the walker review is recommending this morning, and he talks

about severe excesses in the city that have got to be dealt with, and he talks about board room failures in the city. the combination of walker and what he is recommending and what the f.s.a. is prepared to do i think fundamentally changes the environment in which bonus payments are made. if i am clear, there have been excesses. it is seen by the public as irresponsible and unfair. we have got to take the action, and the action is being taken through both regulatory means and others. >> the horse has bolted because the matter is the gold medal sacks has given an average of a half million pounds for bonuses.

it seems to me very hard to call that back now. >> any excessive payments are unacceptable. remuneration has to be based on long term performance. if it is based on short-term deal-making, then the nikely hood the financial system is put at risk. there has to be long ter basis for remuneration, and the ability to take action when necessary. i repeat the action we are proposing to take is designed to deal with many of these problems. >> when the governor of the bank was before the committee june 24, he stated he had not been consulted on the white paper or on financial regulation, and he stated there had been no meeting of the three principles of the

authority. that was just a week before the paper came out. do you have a fwrip on this situation? >> well, i am not a member of the group. but it is going to be formalized on to a legistlative basis, and it is going to become the board. and the treasury is a member, the bank of england is a member, and the financial authority is a member. now that is the right thing. these three organizations have to be able to meet together, and they have to be able to discuss the issues that have come up, and they have to be able to discuss immediate problems like the health or stability of a bank. when i was with the treasury, that is the way we did things, and the way things are done now. but to put it on more solid footing for the future is the best thing to do. you cannot have one institution only. all three institutions have to work together. >> but the governor said a week before the paper was due out that he had not been consulted

and the paper then get delayed. has the government become a loose cannon? >> no. the government -- the governor does a good job and people recognize his talents. that is why he was appointed a as a second term of governor. the important thing to recognize is you will always have to have a system, and they are recognizing in america as well, where the regulatory authority, the central bank and the finance ministry have to work together. otherwise, you cab not deal with the problems that arise. some affect individual institutions, and some affect public fbses. the basis of our system, i believe is the one that will be followed around the world. it is not that we are moving from the previous system. we are trying to make it even stronger in the relationships

that have to develop in the future. >> it doesn't seem like there is the cohesion. it seems that is the message you should be taking back. >> as far as this financial crisis is concerned, it is very hard indeed because we have a very strong financial sector in the economy. i think around the world people appreciate that britain took the lead in dealing with many of the problems of the financial system. it was us that first recognized the need to recapitalize the banks and that simply providing lick witity was not going to be enough. and it was us who recognized that we would have to take shares in the banks as well if we were going to deep the financial system moving forward. i think you will find a lot of countries have been following what britain did. we should not get into a debate here when this is a global economy. we have to consult with other countries as well as britain, and the system in britain is one that is actually relevant

to other countries around the world. >> we did a lot for recapitalization of the banks. but independent of the bank of england was a major selling point for the government in 1997. has it ended up with a two-edge sword for the government right now? >> not at all. i think we need a history book perspective. inflation was the major problem we faced for 50 years. every government, whether labor or conservative, was bedeviled by the problem of inflation. it got up to double digits physician as a result of the problem. in 1997 when we made the bank of england independent, immediately long term interest rates came down and the record of the monetary system has been good in controlling inflation. inflation has been half what it was the previous decade, and you know inflation has been far less of a problem in the last

10 years than any previous decade. that is the success of making the bank of eek land independent in a monday tore and fiscal framework based on accountability and having clear objectives. the bank of eek land has always had a role in financial stability. i was involved in agreeing with the first memorandum of understanding between the bank of england and the other authorities. the first crisis i think i dealt with was in korea. then we had to deal with the russian crisis. the bank of england is always involved in issues affecting stability. but the regulation of institution, as people have come to recognize, is better done by a regulating authority like the financial services authority. america is trying to bring them together so at least they operate under one umbrella in america. in britain we have gone further and made it one separate organization that of course is

able to deal with individual institutions and end the self regulation that we had in the past. now that is something that you can build on, but that is the right model for the future. >> prime minister, i am a member of the treasurely select committee when you first appeared before it as chancellor, having made the bank of england independent, something you refused to discuss in the previous election. you have just announced this as a great success, but we have just witnessed the single greatest banking collapse since the 1930's, but the government has refused to contemplate to separate the high risk banking away from the other banking. can you explain to the satisfaction of the british people what measures you have now put in place, having had this disaster to stop it happening again? >> first of all, i was talking about inflation. there is no doubt that our inflation record compared with other country and decades is

substantially better. remember the problems we had with bursts of inflation, followed by wage inflation, and we had classic cycles of that, which were inflationary problems that had to be dealt with. as far as the regulatory system, the whole world has to change its approach. i have been saying for years we have a global fppings system, and we have to have a global means of supervising it. most of the problems that have hit british banking have been from the overseas assets and interests that they have actually held. that is one of the problems in a global economy. if you have one country et cetera banks operating in another country, you have to have some convergence in the regulatory process. you talked about the issue of investment banks, and i believe your view is that you should separate the two again. let's be absolutely clear that

we have had a crisis in investment banks and other banks. not one group of banks was immune from this crisis. what you have to deal with is the high impact banks. this is what the government's proposal is. where a bank has got such resources and such potential risks for the financial stability of the country, then the regulatory measures you have to take have got to be stronger in the future. and you have to have a better grasp of what it is doing in other countries. if you take the royal bank of scotland, its main problems arose from what it bought in the neither land. so there has to be a tougher system of regulation applied to the bigger institutions. the ones with impact in stability. that is what we are going to do in the future. they will probably have to hold more capital as a result of there being a possibility that they are at greater risk to the financial system as a whole. and these are the measures that

darling is bringing forward. >> that is part of the answer. i don't necessarily say you have to separate them. you certainly have to provide risk coverage and transparency. looking at global regulation, when loids wants to take over hvoc, you wanted to set aside the rules. to the detriment of lloyds, do you acknowledge that has led to a severe reduction in the choice of competition in the british banking system, which means that many business is are not getting access to finances to keep themselves going? that is sound and viable business. and how do you respond to the competition commissioner saying that effectively the size of the royal bank of scotland and the competition implications will have to be revisited and that britain cannot expect to be immune from competition

rules. is it not the case that r.b.s. may have to be broken up and hvos would have to be floated again? >> hvos would have collapsed without lloyds stepping it. let us be clear. secondly, there are bound to be fewer banks operating in this country now because the biggest loss has not been -- to competition has not been to lloyds. it is the loss of foreign banks which was doing half the lending in britain in the last 10 years. if you like a withdrawal to home base of large number of foreign banks that were operating around the world. irish banks, icelandic banks and other banks operating in britain giving loans to

businesses have withdrawn. that has been the biggest loss to competition. what has to be remembered is that there are financial stability issues as well as competition issues. of course we want to see the maximum amount of competition in our banking sector, and that must be our policy for the long run. >> what about the european point? you are in favor of more european or less? your answer seems to be contradictory. on the one hand you seem to be saying keep it out, and on the other, we need more. >> we have to look at financial issues as well as competition issues. we cannot have big banks a lot risk of collapse at this point. it has always been understood that competition has to work effectively. but in the banking sector we have to also assure stability. secondly, as a result of european stability, which is under the financial stability

regime until the irish commissioner, there we support the new rule book that is going to be drawn up by the european banking system. we will be part of that system, and rightly so. individual institutions will be regulated by our own financial services authority. but i think it is right, not just throughout europe, but throughout the world to seek a common set of global rules and standards, that financial institutions operate in many countries have got to follow. we are right to be part of the europe january system, but we want to see it as part of a global system in future years. >> it seems to be forgotten that the cancer in the banking crisis, which destroyed confidence in the system itself

, in attempting to rebuild it, can you reasure the ordinary citizen that refashioning the banking system will result in one in which people do have trust and confidence in that system but also feel they are getting a fair deal from it, which they do not feel at the moment? >> i understand that. the behavior of banks in the way they became speculators and steward of people's money was irresponsible and unfair to the people of this country. what we had to do was make sure we protected the savings of ordinary families, and that i believe we have managed to do. equally, we have to restructure the banking system of the future around sound principles that assure that while we are part of a global economy, the integrity exists in every part

of that system. is that why we are involved in international discussions and also we have made these changes in britain. i repeat, to deal with the excess board room practices that have shocked and appalled people, and made me angry as well, we are bringing in these new rules first of all about the long terminate of remuneration and reward, and secondly, about proper transparency and if necessary, regulation of the banking system where there are short-term deals getting remuneration that seems june justified. >> you are quite capable of performing financial markets did not >> that was the old job. >> sorry. i was doing well until then. [laughter] >> reforming the financial markets. the white paper seems to rebrand the try par tied authority as a council of financial stability, yet the new body has been given no new tools. why don't you follow the governor's advice and create the tools first and then do the

institutions thereafter? >> i think we are following the governor's void and the advice of lloyd turner. the torii-party system is the way forward. self regulation is out for financial institutions. that is why a body like the financial service it is authority is important. you have to involve three institutions, and the bank of england has a major role to play. the reason that the group is formalized in this way is to recognize the importance of the three institutions being able to work more formally and institutionally together in the future, and that is the basis of the next stage of our financial stm. i believe other countries will follow us. >> you referred to the walker report, and you did so in the context of the action we intend to take.

does this mean you accept it in its entire entirity, or do you have reservation sns if you have resslations, what are those reservations? >> ult ware has done a report with 3 recommendations. we will have to look at every one in detail, but the general recommendation that the role of chairman and the roll of executive directors and non-executive directors in particular have got to change. that is one we support whole-heartedly. you cannot have non-executive directors in institutions that do not understand the risks they're company is taken. his proposal that remuneration be on a five-year basis where it affects bonuses on a long-term basis is one that we would favor. and equally, the greater transparency and accountability

he is demanding is something that i personally would support. >> in the last hearing you referred to ucla-back? >> that is something we have proposed. there are various ways. if you have a five-year agreement, you can do it. you can pay plea and hold things back. so it does have an important part to play and i think is something that is important to the proper sanctions, disprince and rewards of the financial system of the future. >> do you see it as being pract cal? >> yes. >> thank you. >> we mover now on to the second theme, recovery from the recession, led by edward lee. >> we all hope that next spring we will indeed be recovering from the recession. but we will be be faced with some very difficult choices because we will have a budget deficit of 14%.

for every four pounds that we spend, we will be borrowing one pound. so some very difficult choices will have to be made. do you not think that we should have an open debate now about what we intend to do with our public services, and in particular, about where cuts should fall? >> well, first of all, we've got to get back to growth, and we've got to get back to employment in the economy. the major determinant of our deficit and debt is the level of growth and indirectly, the level of employment in the economy. so the first priority is to get growth and employment into the economy. and that is why we are spending additional money now to make sure that we come out of recession, and the additional money is to create jobs. i think you have seen from the unemployment physician yesterday that the rate is slowing. the creation of jobs is part of

that. >> for the sake of the argument, i accept everything you are doing on spending to get us out of recession is right. we have had that debate. what would be disastrous for the civil service is that no proper planning now so that rash and hurried decision are being made. i know you can't believe ferings the newspapers say, but the sunday times say secret doomsday plan for 20% cuts in spending are being prepared by civil servants who have failed to discuss the back hole. is this going on? >> edward, i think you must believe everything you read in the papers. >> no, i don't. so this is not true? >> no. it is quite ridiculous. there is uncertainty about what is going to happen in the increases few months to year to the economy, and cannot predict absolutely what your level is going to be and therefore what

resources are going to be available for public spending two years from now. we are only 15 months into a three-year spending reissue. the previous one was 2004. we started this spending review in april of last year. we are only 15 months into it. you have got the great uncertainties of not being absolutely sure what is going to happen to the world economy and then to the british economy. to ideologyly predetermine what is going to be allocated to a particular service now for something that is going to happen in 2011, 2012 or 2013 is a mistake. it cannot be done. there may be more certainty now. >> where was he wrong when he send there will be spending choices and the greater need for more efficiency across the board and less spending in some programs. he is your right-hand man. what does he mean about less

spending in some programs, what was he talking about? >> i said is you cannot predetermine alcs occasions. we have had to take additional money to take this country out of recession. we have had some success in doing that, and i hope you will acknowledge that. therefore the profile of spending in the coming months will be different. there are real choices that have to be made about how to get more efficiency, how you can change the balance of priorities in your public services, how we enact the program of asset sales that we have got. and yes, there are tough choices to be made, and yes, it is right to say that we are spending money now to take us out of recession, and therefore the profile of capital spending is going to be different in the years to come. but you cannot in my view say that in july of 2009 that you know depactly what the grote level of your economy is going

to be in 2011 or what your level of downemployment is going to be. it will become clearer that the actions we have taken are having an effect, but you cannot say now what you think the right level of allocation for a particular level of service is going to be. >> i don't want to get involved in the grant strategy of afghanistan, but how much are we spending in afghanistan this year? >> i would say in afghanistan we are spending about three billion pounds in addition to the defense budget. >> when we work out what we can do or not do? apparently we bought up the entire poppy crob in 2002 at a cost of 1 million pound. i'm told you cannot by an afghan, but can only rent him. are there other choices that can be made apardon from an expensive military program. are we looking at other things? i know you don't want to get into the details. i'm just giving you one example

, about some debate about where we may be thinking of spending money. >> but the debate is clear. one is we are seeking major efficiencies from the different departments, and we have identified i think nine billion of savings we want from the department. if you look back room services, it can save money so we can spend money on front line services. we have announced a program of asset sales and will continue to look at what assets are no longer priorities for the governments to hold but that we can pass over. we are determined to get the money to the front line services. our tough choices are about how to get money to the front line services. let's be honest. we have already made announcements about our deficit reduction plan, and that includes tax rises we have been prepared to athird downs so that we can deal with the issue of both financing public services and deficit reduction.

>> but that is totally vague. in your own budget. total government is 4.51%. capital spending is going to be half. your red book indicates a drop from 2010 from 530 billion to 496 billion. these are the facts and physician. shouldn't we have an open debate about these things? you can't say everything we met by efficiency standard. >> if i may say so, when our troops are in a very difficult mission in afghanistan. this would be the worst time to say let's get out of afghanistan. >> i'm not having that debate with you. i'm talking about spending efficiency and how to pay for it. >> as far as the choices that we are prepared to make. we have announced measures to reduce the deficit by half over the next five years.

these are measures that include the tax measures we have announced and the restrictions on capital spending. and the reason we are able to do that in capital spending is we have built or renovated 3,000 schools. we have opened 110 hospitaling. we have done a huge amount of capital investment already. so it is possible to stage or capital spending this year so there is more this year to help us through the recession and less in the future. but to predetermine an allegation to a department in a period of economic uncertainty is a wrong thing. there will be tough choices, and we will make them. >> and now we move on to immigration. >> prime minister, what are the implications on the government's policy of economic migration. >> as you know, we have got a po