Kenneth Clarke: 'The British are astonishingly complacent ... no one's criticising the Government's economic policy bar me'

First, a little recent history. Ken Clarke won't discuss Edwina Currie's affair with John Major. "I don't talk about the sex lives of my friends, even over a drink," he says, noting pointedly that the only Tories to have done so publicly are David Mellor and Jonathan Aitken.

But having been her boss at the Health Department, he does raise an interesting question about one of the grievances which supposedly helped push Ms Currie into her revelations – Mr Major's failure to give her a job she wanted.

She had been, Mr Clarke says, a "good minister" handicapped only by an "insatiable taste for publicity", adding that: "I think I enjoyed working with her more than she enjoyed working for me. The problem was that she was doing health promotion and I think she found my lifestyle rather undermined her work."

But having vainly tried, with Margaret Thatcher, to back her in the face of a Tory backbench lynch mob, he was more willing, as Home Secretary, than some of his Cabinet colleagues to help her rebuild her career in 1992 by taking her back as a minister. (He himself thought she should do crime prevention rather than the job she was offered, running prisons.)

He was therefore "rather irritated that she said one reason she had turned it down was that she didn't want to work with me again". But it is still a mystery "why, when she seemed anxious to rebuild her career, she turned up at Downing Street with all the cameras and turned down what was a promotion to Minister of State".

That was then. Two electoral "massacres" later and the Tories are struggling in opposition under their current leader Iain Duncan Smith, who faces his first real party conference tests from today.

Affirming that "the party needs to get its act together ... it has been strangely silent at times", the former chancellor adds: "I think the conference will demonstrate, on the economy and on the public services, whether the Conservatives' quiet year has been the result of thinking, working, producing a strategy and some policies. I think that's what every Conservative will hope they have been doing."

Bur first there is Iraq, which he has also identified as a test for the Tories. While endorsing the right to take military action to stop Saddam Hussein acquiring weapons of mass destruction, Mr Clarke has already made clear his deep disquiet about the new doctrine of "regime change" and his strong desire that any force should be "proportionate" and by a wide coalition which includes Islamic countries.

"I can't believe the front bench are not going to be talking about Iraq when they are in Bournemouth and I hope the message is not 'we're with you George [Bush] come what may, tell us what to do', which I feel at times is the state that Blair is falling into.

"I think British prime ministers always exaggerate their influence on any American administration and I think perhaps because he's desperate to exercise some restraint, Blair is dangerously boxing himself into a position where he might be expected to take part in some completely maverick military operation."

Just as, as an Atlanticist, he feels free to criticise US foreign policy, so as a "pro-Israel" politician he says: "I don't think [Ariel] Sharon is the best defender of the state of Israel and I never have."

What the Tories mustn't do, he says, is to "allow the anti-American Left, whom I have always disagreed with, to monopolise the questioning of Blair on his rationale by sensible pro-American people of this country or to leave it to Charles Kennedy".

He acknowledges the latter's party is "on a bit of a roll because they did well in the last election, thanks to the Conservatives". But his sense of the public reaction to the Liberal Democrats is that "Charlie is a very nice guy but I don't know many people who think he's a great political statesman".

From the look of him, Ken Clarke could hardly be enjoying himself more. Being a "freelance backbencher" after 25 years on the front benches is, he confesses, "quite fun". If there's a hint of menace behind the geniality, it lies most in the fact that his attacks on the Government are issued with an authority the present shadow cabinet are still groping vainly to attain.

The economy is a case in point. As the most prominent Tory EMU supporter, he is quite content for Tony Blair to await the Treasury's study before deciding whether to hold a referendum next year, and accepts that the economics do matter. "I personally think the economy has been convergent with that on the continent for some time now, and my main concern has been about the [high] exchange rate."

But then he adds: "We aren't doing as well as people think we are. The British are astonishingly complacent because no one's criticising the Government's economic policy bar me, as far as I can see."

He is careful not to criticise Michael Howard, the Shadow Chancellor and an old university friend, but he recalls his accusation during the last parliament that "there was a conspiracy between the Labour Party and the Hague front bench, saying how marvellous it was in Britain – the Labour Party saying it was because of the wonders of Gordon Brown, and the Conservative Party because we were not in the euro".

"That is dangerous politics, because I think these are very uncertain economic times. And I strongly disapprove of this commitment to huge levels of public spending for years in advance, based on wildly optimistic estimates of the likely growth of the economy which are not being achieved."

He says the chafing by centre-left governments against the EU stability pact's stipulation that budget deficits should not exceed 3 per cent of GDP isn't because of "some mighty outside events forcing wise finance ministers to abandon fiscal discipline. I think it's because Schröder, Jospin and the Portuguese prime minister had elections to fight and Gordon Brown panicked about the health service. There is no great issue of principle in British interest in amending the stability pact. It's just that they're terrified of having to put taxes up before the election."

In the budget debate, he had treated the Chancellor's growth forecasts – now likely to be revised down – with "total derision". He adds: "We've gone back to tax-and-spend and it's very reckless at such a dangerous time for the world economy, and my other complaint is that just shoving the money up front on such a scale will actually make the reform more difficult rather than easier.

"There's a huge danger it will get swallowed up in public sector pay and public sector inflation, with no constraint on the cost. And the idea that there's money there for everything means people avoid the difficult decisions on the ground."

Which brings us to the sharpest advice he has for his own party – on public services. His chief reaction to the Labour conference last week was "how far the gulf is now between Tony Blair and the Labour Party and how quite a lot of [his] policies on the public services are the same policies I was advocating as part of the Thatcher government more than 10 years ago". Which, he implies, gives the Tories the ideal opportunity to divide the Government from its party.

Effortlessly turning the screw, he goes on: "Estelle Morris is there and not Kenneth Baker and Alan Milburn is there and not me. Alan has actually improved the internal market. I am not shocked; I am very pleased. I certainly don't think the Conservative Party should start rushing around trying to find some alternative philosophy to distinguish themselves. We make ourselves look ridiculous." He adds: "We [would] probably do quite enough damage by telling Alan Milburn how much we agree with him on his basic approach."

This still leaves more than enough room for challenging the Government, first on "the gulf between the rhetoric and delivery – an enormous gap between this rediscovered philosophy and what is going on on the ground", and "the gulf between Gordon Brown's belief that none of this should be allowed to interfere with the Treasury's iron control of the detail and Milburn's St Paul-like conversion to decentralisation and choice and competition."

Here Mr Clarke opens the wounds of the bitterest current policy conflict within Government, on Mr Milburn's cherished foundation hospitals. Speaking before yesterday's Tory announcement, extending plans for foundation status to all hospitals, he said that, like Mr Milburn, "I wanted the NHS trust hospitals to be allowed to borrow. I lost that argument with the Treasury when I was Secretary of State [for Health]. When I was Chancellor nobody wanted anything to do with it any more because with the party's losses in its majority we were so obsessed about Labour's attacks on privatisation that we were afraid that the Labour Party would howl with rage and say this proves that you're privatising. So we didn't do it. Now at last common sense is coming into the health debate. I think foundation hospitals should be allowed to borrow in the markets."

He insists this must be done without a Government guarantee. "It would be very dangerous to do what they have done with Network Rail, where I think they've gone mad, and just to give them a licence to print money by saying you can borrow come what may with a Government guarantee behind you."

But isn't this just what Gordon Brown is justifiably resisting in the case of hospitals? "I don't understand how Gordon can argue it when he's completely sold the pass on the railways. And you can't replicate that in health. You really will lose the plot if you do that. Everybody says well what if they default, the hospitals will close. Well of course they won't. What happens if they default is that the bondholders lose their money and the management gets sacked and you restructure it."

Instead of seeking "clear blue water" through some alternative method of funding health – just when the Government has moved onto their own ground of consumer choice and decentralisation – the Tories should recognise that having introduced the internal market, they were better able to manage it than Labour. "I see their abandonment of the old Labour ground as an opportunity for Conservatives and not as an incitement to go wandering off into some right-wing wilderness."

He insists that the party's "quiet year" may be no bad thing since it "has got to do some serious thinking before it charges back into the headlines again.We got a lot of headlines before the last election, but they were just destructive".

He congratulates Iain Duncan Smith for taking a more "relaxed" attitude to Europe, adding: "The main thing they've done is shut up about it and allow everybody a free range of views. There are one or two members of the shadow Cabinet where I haven't got the first idea what their views are apart from Europe, where they are very extreme, but I am looking forward to discovering they are Tories like me on the economy and public services and social issues."

And so to the leadership, twice denied him. Since he said at the weekend "never say never", could it be third time lucky? "I always get caught on that question, because you know the only safe answer for 649 members of Parliament is to go around saying 'no no, I never will'."

Which isn't, of course, ruling it out. "I just think it is just all classic speculative questioning. I do believe last year's leadership election settled the whole thing to the next general election, and by the next election I should be far too old to think about leading a party to the election after that."

Not by historical standards? "Not by historical standards. I'll be as old as [West German Chancellor Konrad] Adenauer was when he started, but you have to admit that was exceptional." At this point he produces a loud, spontaneous, and – if you were Iain Duncan Smith – just faintly disconcerting laugh.

The CV and all that jazz

Kenneth Clarke

Born: 2 July 1940

Educated: Nottingham High School; Gonville and Caius College, Cambridge

Politics: Elected MP for Rushcliffe in 1970, made assistant whip in 1972 and spokesman for Industry in 1976. Made junior Transport minister in 1979, then Minister for Health, Paymaster General and Chancellor of Duchy of Lancaster. Made Health Secretary in 1988, followed by posts as Education Secretary and Home Secretary. Was Chancellor of the Exchequer from 1993 to 1997. Failed in leadership bids in 1997 and 2001

Other career details: Called to the Bar in 1963; made Queen's Counsel 1980

Hobbies: Watching sport and listening to jazz