Oliver Letwin: 'I don't have a quiet life and nor am I making pots of money. I must be mad'

But the ex-merchant banker isn't afraid of the 'big beast' of Labour. As he tells Jason Nissé, he's ready to step out of Gordon Brown's shadow

Number 11 Downing Street is one of the most attractive buildings in Whitehall. Its public rooms are large and airy, decorated in a soft classical style, while its apartments are so spacious that Tony Blair took them over to give extra room for his family, who would have felt cramped in Number 10.

Number 11 Downing Street is one of the most attractive buildings in Whitehall. Its public rooms are large and airy, decorated in a soft classical style, while its apartments are so spacious that Tony Blair took them over to give extra room for his family, who would have felt cramped in Number 10.

By contrast, the rooms occupied by the shadow Chancellor are small, dark and a little shabby. Oliver Letwin's desk is heavy with papers. A bag underneath groans with more documents, while a table next to it, nominally there for meetings, is weighed down with piles of unread books, the most prominent of which is a biography of a man whose job the former NM Rothschild merchant banker and academic covets, Gordon Brown.

As the Chancellor stands up to present his Budget on Wednesday - rather than the customary Tuesday, a break with tradition like Autumn Statements in December and lounge suits at the Lord Mayor's banquet - Letwin will be lying in wait. Unlike his predecessors in the job - the current Tory leader Michael Howard and the soon-to-be retiring Michael Portillo - he can see a chink in the Chancellor's armour.

"Five years ago it was impossible [taking on Brown]," admits Letwin. At that time the former Labour firebrand was sticking religiously to the financial strictures set down by the Conservative Chancellor he succeeded, Kenneth Clarke. Labour was adopting the Tory-created Private Finance Initiative and "prudence" was the watchword.

Add to that the formidable intellect of Brown, who even his harshest critics can't help but admire, and you see how hard a job being shadow Chancellor was.

But the chipper Letwin, whose gaffs about asylum-seekers when he was shadow Home Secretary, and over tax cuts during the last election, threatened to sink his career, is now genuinely relishing the battle with the "big beast" on the Labour front bench.

"Gordon has a seismic problem. This is not plan A," beams Letwin. By this, he does not mean that Brown thought he would be Prime Minister by now and someone else would be grappling with the economy. No: he is referring to the growing black hole in the public finances, which are anything up to £20bn worse off than the Chancellor had expected, depending on which economist you ask.

"Gordon expected to come up to this Budget with a tiny level of borrowing, £10bn or so, and plenty of areas for manoeuvre. But it has all gone wrong: he is sitting there with £37bn of borrowing. Everybody is saying he has a black hole in his finances. Everybody is saying he has to raise taxes. And then he has the Exocet of Gershon."

"Gershon" is the report on the efficiency of public services being produced by Sir Peter Gershon, the former managing director of GEC and head of the Office of Government Commerce. Although not published yet, it was extensively leaked a few weeks ago, just ahead of an announcement that Letwin was due to make on the Tories' medium-term spending plans. Gershon is expected to say there are at least £15bn of annual savings that government can make in increased "back office" efficiencies.

The Tories have their own version of Gershon, a study by corporate troubleshooter David James. This indicates that the savings could be even larger - maybe as much as £35bn a year. Even the Liberal Democrats have their own version of this, with a hitlist of savings targeting quangos and bureaucracy.

Much has been made of the differences between the Gershon plan and those of the opposition parties. Letwin is even coming under pressure within his own party. He has not given any detail on how he would cut public spending, although he trumpets a headline figure of keeping expenditure growth to 1 per cent less than the growth in the economy. But studies by the Institute for Fiscal Studies, among others, have argued that his plans will need a cut in the Tory sacred cow of defence spending of up to 6 per cent in real terms and surgery to the international development budget, bringing accusations of taking money from the starving in Africa to feed tax cuts in Surrey.

However, Letwin argues that this is the wrong debate. He says everyone agrees there are savings to be made, but the differences are in what you might do with the money. Brown would use it to increase spending on frontline services: health, education, transport, regional aid etc. Letwin would use it to pay off government debt and keep down taxes.

Now, for the first time in nearly a decade, there is a clear choice for the electorate on economic policy. "The centre ground has changed," argues Letwin. "Gordon has to go back to tax and spend."

Letwin is not, however, promising tax cuts - he learned his lesson during the last election - but planning to cut down on the number of taxes people have to pay. He harks back to Nigel Lawson who, when he was Tory Chancellor, vowed to eliminate a tax a year. Given the plethora of new taxes, credits and other devices brought in by Brown, a tax a year may not be enough.

"Gordon has gone into the highways and byways to raise tax in covert ways," argues Letwin. "The fact is that the complexity of the web, and the level of tax resistance that this has bred, has reached a level where even the Treasury would say many of these taxes are ineffective."

Letwin says he sees no reason to raise a single tax and later this year he hopes to set out a proposal to cut back on the complexity and intrusiveness of the tax system. This will be done gradually. Letwin lived in the US when Ronald Reagan tried a big bang reform of taxes, which collapsed under an avalanche of special pleading.

"I see a good part of any headroom we might have as a way of thinning out the thicket," he says. "I am very concerned about the effect tax has on low-income families. And I think simplification will generate increased economic activity and reduce tax planning."

The danger for Letwin is that the big beast he is up against is particularly adept at borrowing other people's ideas, adapting them and stealing the initiative. Only last week, Brown announced a clamp- down on tax-avoidance schemes, something the Tories have been suggesting for some time.

Sitting in his overheated rooms at Westminster, you could not blame Letwin for casting envious glances east at his former merchant banking colleagues, with their million-pound bonus payments. "I think of them all the time," he admits. "And my old colleagues in academia. Now I have neither a quiet life nor am I making pots of money. I must be mad."

BIOGRAPHY

Born: 19 May 1956.

Education: Eton, Trinity College Cambridge.

1981: Visiting fellow, Princeton University.

1982-83: Research fellow, Darwin College Cambridge

1983-86: Prime Minister's Policy Unit.

1986-1997: NM Rothschild (director from 1991).

1997 to now: MP for Dorset West.

2000-01: Shadow Chief Secretary to Treasury.

2001-03: Shadow Home Secretary.

2003 to now: Shadow Chancellor.

Publications include 'Privatising the World' (1987) and 'The Purpose of Politics' (1999).