Sunday, May 14, 2006; B01

With Britain's Labor Party in crisis after a poor showing in local elections, Prime Minister Tony Blair faced mounting calls to set a date for leaving office and handing over power to his likely successor, Chancellor of the Exchequer Gordon Brown. During the crisis, Brown sat down with Newsweek-Washington Post's Lally Weymouth.

Many in the Labor Party say Blair should announce a date to leave office. Your response?

We have just had very difficult elections. People want to look at how the Labor Party can best prepare for the future. Tony Blair has said he does not wish to stand at the next election and that he wants to organize a stable and orderly transition. Tony and I, despite what people say, get on extremely well. We talk almost every day -- sometimes a few times a day.

Are you satisfied with the way Blair is handling the transition?

You've got term limits in the U.S. We have no term limits. It's a matter for him and the Labor Party. It's not really a matter for me at all.

It's reported that when you talked about "renewal" of the Labor Party, you meant "renewal" without Blair.

No, I didn't. The next stage of the Labor Party's development will be Tony Blair, myself and other people working together. We've been working with each other for more than 20 years. We came into parliament together, worked on the creation of "New Labor" together and formulated many government policies together. I've been chancellor while he's been prime minister for nine years -- and we continue to work together. Any party that has been in power for a long time has got to prove by its actions that it can renew itself while still in power. We've done very well to win three elections. But to win another, we've got to prove that we can face the challenges of the next 10 years.

How would you do that?

Clearly, we have new issues: security and terrorism. I think that the electorate feels more insecure and wants to be sure that their security is being properly taken into account. The challenge of the next 10 years is how an immense industrial economy copes with global competition. Products, from computers to toys, that are sold in Britain are produced in China. If you do not explain to people what's happening, they will resort to protectionism.

So how do you respond?

We've got to respond by having open markets and free trade. We've got to invest in science, technology and creative industries -- in the skills of our people.

You don't sound like the socialist you are portrayed to be.

I'm a free trader. I'm pro-open markets. I'm anti-protectionism. I believe that we must have far greater flexibility in the labor markets and in capital markets. I believe that we must combine that flexibility with investment in science and in education. We have got to have a more skilled, more educated, better-trained workforce.

So when people say you represent a return to "Old Labor," are they wrong?

Totally wrong. And the economy that I admire most is the American economy. There's obviously an interest in my opponents saying that I'm not what I am, but I've worked to create New Labor with Tony Blair, and I've said that what we need to do is broaden the New Labor coalition over the next few years.

How would you broaden it?

By winning people who didn't vote for us in 2005. We've got to convince people in all income groups that we have answers to the problems and challenges of global economic change.

People on the right or the left?

Both, actually, but we must not lose any part of our New Labor coalition.

Tory leader David Cameron is going after the New Labor middle-class voter.

I don't think he'll succeed. I think at the moment [he's] more about spin and public relations than substantive policies. And I think people will want to see [his] real policies and they will be very similar to those that he [pursued] in the Conservative losing manifesto of the last election, which he himself wrote.

So it won't be just about Cameron riding a bike to work?

Where is the substance? For example, they say that they want to support the environment, but the one measure that has made a huge difference to emissions is the climate change mandate which they oppose -- a climate change levy which is responsible for a 40 percent cut in emissions. It's a business levy that we set up and we cut taxes in other areas. It was actually cost neutral.

You are said to have never met a tax you didn't like.

Our record is we actually cut the rate of income tax. We cut corporate taxes for businesses. We cut capital gains tax for long-term business investors. The one tax we raised was to pay for our health-care system. So I don't accept this criticism.

If you become prime minister, what will be the main difference between you and Blair?

It's not so much that the method will be so different as the challenges. Many manufacturing jobs were lost in America and Europe last year. People are worried about what's going to happen to their jobs. There's a lot of offshoring and outsourcing taking place. There's a lot more mobility of labor and of people. Unless we explain what's happening, people will resort to protectionism and xenophobia.

How would you position Great Britain between America and Europe?

We're obviously geographically, historically and economically part of Europe. I think what we're doing with Tony's leadership is making European economies more flexible and enterprising and dynamic.

But wasn't it you who stopped Blair from adopting the euro?

We as a government decided not to join the euro.

But wouldn't you say Blair has more of a passion for Europe than you do?

We both came to the conclusion that while [the euro was] desirable in principle, in practice, economically, it wasn't the right thing to do. And I think that has been proven to be the right decision because our economy is more geared towards financial services and business services than some other economies.

What do you think of the Bush administration?

I get on very well with them. I deal directly with the Treasury and with the Federal Reserve. We've done a lot together [to stop] people moving money from country to country for the purpose of supporting terrorism.

What do you think of the war in Iraq?

I was a supporter of the war in Iraq.

But what do you think your country and the U.S. should do now?

We are hoping, as is the president, that the work we are doing to create a new government and to have local people managing the police and security [will succeed]. But it has been my interest to see the economy of the country develop, which will provide a far more secure environment. . . . I'd be interested to train the local security and police forces to build a stronger democracy and government and to provide the basis on which economic development can bring the communities together.

How long will that take?

The most important thing is done -- the government is formed. I don't think we're talking about particular dates, we're talking about a process by which we encourage the local people to take control of their own affairs.

What do you feel about Iran?

It's in nobody's interest that we have these threats from the development of nuclear weapons, and therefore I think we'll find that Britain is working very closely with America, France and Germany to make sure that we have a diplomatic solution to this.

What's the next step for you? It sounds like there is a lot of pressure for the prime minister to set a date to go.

He has said he wants a stable and orderly transition, and people from the party are asking him: What does that mean?

Some say Blair is setting up a candidate against you.

These things are said. I've just got to get on with my job. I think things will work themselves out.

But you want to be prime minister, right?

I've been in this job long enough to know, first of all, that it's what you do rather than which position you hold that matters. And equally, that you don't tempt fate by making rash announcements.

What did you think of the reshuffle?

Actually I think a lot of my colleagues are quite happy with the jobs they've taken on. You've got to judge these things not after a day or a week, but over months. I think, for instance, [former foreign secretary] Jack Straw has a huge interest in constitutional questions and I think he will enjoy the job.

The big story at the moment is rising oil prices and their impact on the economy. What do you think of that?

We've got the same issue of rising oil prices. I think there are things you could do to bring more stability to the oil market. President Bush has announced that he's not putting oil into the reserve for the next few months. We really don't know what our reserves are. We don't properly know what the needs of countries are going to be in the next few years. We should have a better idea of what the demand is, what the supply is. One of the reasons we've got oil price rises is that Asia used to take 10 percent of our oil, and now it takes 30 percent.

So what's the answer?

The answer is we need more investment in energy efficiency. We need more renewables -- wind power, wave power and bioethanol gas.

What about revaluing the Asian currencies?

The bigger issue is about the imbalances between the continents. . . . There are deficits in the richest countries. That's one of the issues that leads to the currency issue with China.

You had a surplus until you started spending.

Everybody who came to Britain in the 1980s and 1990s thought our infrastructure was pretty rundown. Now we're investing in rail and road but also in science.

But you kept a very tight rein on the budget for the first three years.

I keep a very tight rein on the budget. We've allowed spending to grow to pay for health and education but we still have pretty good fiscal discipline. Compared to other countries, our deficits are low.

There's a poll in the Times showing Labor at 30 percent, the Conservatives at 38 percent and the Liberal Democrats at 20 percent. Will this force you and Blair to cooperate?

We work together very well. I think we've had bad luck with the elections, obviously. Nobody's complacent about this because we have to win all the time, in my view.