In 2005, as the newly appointed shadow chancellor, George Osborne explored possibilities for introducing a flat rate of income tax, citing Estonia as a model and inspiration. Back then, at the age of 34, he seemed to be a conventionally Eurosceptic, low-tax, small-state right-winger. Even if he self-identified as a moderniser and social liberal – as a metropolitan he was relaxed about many of the issues that unsettled social conservatives such as Margaret Thatcher, from race and immigration to gay rights and the equalities agenda – his free-market economics were bone-dry. In his early years as Chancellor, a role he took on in 2010, he seemed to be conforming to stereotype as he compared Britain to Greece and, against Keynesian orthodoxy, introduced deep spending cuts to the current and, disastrously, to the capital budget. “Slasher Osborne”, he was called by David Blanchflower, the former member of the Bank of England’s Monetary Policy Committee who is one of his most trenchant opponents.

At the 2012 Paralympics in London, Osborne was booed by the crowd during a medal presentation ceremony. It hurt him deeply. This was the same year as the “omnishambles” Budget, the carelessness of which undermined his reputation for strategic brilliance. In 2013, a ComRes poll for the Sunday Mirror and the Independent on Sunday adjudged him the politician ­people would least like to share Christmas with and run the country. Unfairly or otherwise, Osborne had become Britain’s most reviled politician, caricatured as a caddish Tory baronet wilfully inflicting hardship on the poor.

“It was perfectly understandable,” Osborne said, reflecting on that period when we met last Thursday. We were in Newton Aycliffe, in the north-east of England. He and David Cameron had just addressed the regional media in the show carriage of one of the new-model trains that will be built at Hitachi’s recently opened factory. “You’re in an incredibly difficult economic situation, you set out a difficult plan, and to begin with, all people can see is the difficulty of the plan, they can’t see the results. Now, of course, there’s much more evidence of the results.

“You have just watched a Conservative chancellor and a Conservative prime minister be interviewed by the local press of the north-east of England. That is not the kind of questions we would have had three or four years ago.”

The reporters’ questions were brief and respectful – mostly about jobs and business matters in the region – and each was answered courteously. The Prime Minister, who was deeply tanned, and the Chancellor had an easy rapport. Once so awkward in public, Osborne was relaxed and self-assured, further evidence of the startling transformation in his fortunes over the past three years. The whole jamboree was a bit like watching two first-rate tennis players knocking the ball across the net to each other in the warm-up before a big match.

For all the artificiality of the setting, I found it fascinating to observe Cameron and Osborne together, so comfortable in each other’s company, and so unlike Blair and Brown, especially in the terminal phase of their relationship, their mutual trust corroded by years of feuds and resentment. Cameron operated as if he were the chairman, delegating questions of detail to his chief executive. The Chancellor, ever alert to an opportunity, could not resist making an anti-Labour gibe (“We are supporting industry in the north-east and not putting all our bets on the City of London as under the last Labour government”) as he extolled the virtues of the “Northern Powerhouse” and reaffirmed his commitment to reviving British manufacturing, which has fallen to 10 per cent of GDP (part of the blame for which lies with the deindustrialisation policies of the Thatcher government). Earlier, before assembled dignitaries and senior Japanese executives from Hitachi, Osborne had introduced the Prime Minister affectionately as “my boss”.

Later, as we sat at a table drinking tea, Osborne attempted to explain why he and Cameron had worked together so successfully for so long. “First of all, we are very good friends,” he said, keeping his shrewd eyes averted. “We’re personal friends, we’re very similar in our outlook. And we’ve been determined to make this relationship work. You’re very much shaped by the political world in which you become an MP: just like Blair and Brown were shaped by Margaret Thatcher’s Britain, so we were shaped by what happened to the Conservative Party as we became MPs, and by the Tony Blair premiership, the rows between Blair and Brown – the lessons you learn about what happens if you don’t work together.”

Osborne recalled being asked by Michael Howard in 2005 whether he wanted to stand to be leader of the Conservative Party. He was already shadow chancellor, having risen rapidly since entering Conservative Central Office as a young Oxford graduate and impressed with his strategic intelligence, talent for the game and single-mindedness. “I thought about it briefly,” he told me. “I just didn’t think that [it] was right for me at that point and, speaking to my friend David, he had a very clear idea of what he wanted to do with the job. And so, far from running myself, I ran his campaign.”

Cameron and Osborne, who knew each other from Central Office but not well, became close only after first being elected to parliament in 2001. “People think we’re always friends from years and years ago but we actually became friends when we became new MPs. And I remember . . . we became MPs just as September 11 happened, and that was the big defining event of that parliament. In the big debates that happened that autumn about anti-terror legislation, I noticed that the other new MP who turned up to listen was David.”

In all the years since, Osborne told me, he has “never looked at David and thought, ‘That should be me.’ I think Gordon Brown thought that every time. He wanted to depose Blair, he wanted to replace him . . . And so I don’t have that sort of sense of injustice – which I thought was ridiculous in Brown, but anyway – I don’t have that at all. In fact, I’m nothing other than delighted in [Cameron’s] success.”

It’s obvious that Osborne is David Cameron’s preferred choice as successor and that he is being presented as prime minister-in-waiting, as Tim Montgomerie, the founder of the ConservativeHome website, has put it. Having relished his reputation as a Machiavel and arch-manipulator – he has been discussed as if he were some kind of Tory Bond villain, pulling the strings of government from his subterranean lair in Whitehall – Osborne has in recent times had something of a makeover. He is slimmer, fitter and more confident in public than he used to be. But the change in him is more than cosmetic; it’s as if philosophically he has become a different kind of Tory.

Has he made a conscious effort to amend his personal style and politics?

“Well, look, you know, of course I’ve changed,” he says, laughing, “as you would expect someone to change as they grow older and they’re exposed to more things and they have more experience . . . I think the way our country is run is broken. The model has failed and my views have changed on this. I grew up in the middle of London [but] I’ve been a north-west MP for 14 years and it has changed my perspective. I realise of course that not everything in the country happens inside the Circle Line and that’s been a very important development for me as an adult. I’ve also changed my view about the capability of central government to get everything right, and I have much more confidence in strong local government both to make successes and also to get things wrong but then be held to account.”

He joked to me about discovering his inner Michael Heseltine, and he is interested in, to adapt a phrase of the New York Times columnist David Brooks, “building relationships across differences”. Consider the Northern Powerhouse project. Richard Leese, the Labour leader of Manchester City Council, told me that he considered Osborne to be “a very political animal”. And yet, he added, “here’s a right-wing chancellor supporting a northern Labour authority. He’s been prepared to do what we need to do to benefit the northern authorities and he’s been prepared to do it at a pace that Whitehall is not used to.”

Leese was disappointed, however, that the new Tory government had cancelled, or “paused”, the proposed electrification of the TransPennine railway line – enhanced and integrated transport networks being vital to the project. “It made me wonder if the Northern Powerhouse was anything more than election rhetoric.”

When I mentioned Leese’s expressions of disappointment, Osborne said: “I was disappointed as well! But the Northern Powerhouse is about much more than one engineering project. I’m not saying it’s not important and we’re not trying to fix it, but I have a much bigger idea. We’ve started something with enormous potential, and the progress we’ve made would simply not have been possible if we had not been able to work across party lines, people like Richard and myself.

“The basic concept is that if you bring the northern cities closer together and you empower them with real civic powers, you have something that is bigger than its parts.”

***

Danny Alexander, the Liberal Democrat and former chief secretary to the Treasury, told me that Osborne is deeply learned in British and American history. I heard a story of how last year he wrote a handwritten letter to the novelist Neel Mukherjee, saying how much he enjoyed The Lives of Others, the saga of a Bengali family in Calcutta which went on to be shortlisted for last year’s Booker Prize. Like Boris Johnson, Osborne has a hinterland, but unlike Johnson the exhibitionist and showman he is reluctant to reveal it. Why? “I think it’s because he’s really quite shy,” Alexander said.

During a break, I asked Osborne about the nature of his conservatism. It seemed to me that the Chancellor is far more flexible than his image as a cold-eyed austerian suggested and that his conservatism is less about ideology and a fixed body of ideas than it is a disposition, a sentiment, a way of reacting to the world. After all, he

is a free marketeer who wants to intervene in markets to force employers to pay a national minimum wage higher than anything proposed by Labour, from which he audaciously pinched the idea.

“I think there are two powerful strands in conservatism and they both need to be brought together,” Osborne said. “One is the economic rationalism of Nigel Lawson: you’ve got to make the sums add up. There is a strong incentive to create simpler and flatter taxes, a modern state that is not overburdened by complexity; and without that, nothing else is affordable and nothing else works. But you also mustn’t then lose sight of the very powerful role for government in regenerating areas that have been left behind – in the case here of Nissan, it’s interesting that the plant opened through a regional grant under Margaret Thatcher’s government [and is] now receiving money from the government to encourage it to ­innovate as a company here in the UK, [and] in devolving power to local authorities, which is a big part of the Northern Powerhouse agenda.

“So that was the Michael Heseltine. You’ve got to have Nigel Lawson telling you, ‘You can’t have 98 per cent rates of tax,’ and you’ve also got to have Michael Heseltine’s vision to say, ‘You know what? I’m going to go in to the Albert Docks in Liverpool, or Canary Wharf, or the Isle of Dogs in London, and there’s a big positive role for government.’ So I would say I’m a Conservative who understands, perhaps more than I did ten or 15 years ago, the positive role for government in making things happen, and using the enormous resources that the state spends, in very particular interventions that help areas, or indeed industries.”

***

George Osborne relishes visits such as the one on which I accompanied him to the Hitachi factory and, before that, to the Nissan plant in Sunderland. We were there on the day that the Japanese vehicle-maker announced an additional £100m investment to build its new Juke model at the plant, guaranteeing hundreds of jobs. The news delighted Osborne, who is unconcerned that the British car industry – like many of our best companies, and our top football clubs – is mostly foreign-owned. What matters to him is not resisting the forces of globalisation but creating the conditions in which multinationals such as Nissan will invest in Britain, hence his desire for low corporation taxes.

In 2011 Osborne was widely ridiculed for saying in his Budget speech that he wanted “a Britain carried aloft by the march of the makers”, but he has not been deterred from his belief in the need for a revival in British manufacturing, which lags behind the service sector. During this year’s election campaign he was seldom seen without a hard hat and high-visibility jacket. Contrast this with Ed Miliband, who spoke continuously about the need to build houses but rarely if ever visited a building site; instead, he stood mostly at a lectern, like some economics professor delivering his latest treatise on inequality.

“What I’m trying to do in politics – I’m not a commentator, I’m not writing a column in the New Statesman – is to take the things I believe in and the ideas I have and put them into practical effect, and that involves political decisions,” Osborne told me. “I always think the accusation that someone’s ‘too political’ is a bit of an odd one to lay on a politician. The things I feel very strongly about, the things I want to see in my country, I’m not just going to shout and scream [about] from the sidelines. I’m going to try and make them happen. And that involves deals and compromises and political manoeuvres, but they are just the means to the end, they are not the end in itself. The political game as you described it would not be worth playing if it was just a game. There has to be an endpoint. When you talk to the apprentice at Nissan or you see this big factory here, this is the thing that makes you think, ‘Yes, I played some part in making this happen.’”

***

I have been told by aides but also by civil servants that Osborne is much more likeable and open than his public image would suggest. So what is he like to work with?

“George is warm and amusing,” Danny Alexander told me when we met for coffee in Westminster. “He is very loyal and people are loyal to him in return. I’d say his knowledge of history is unrivalled – in meetings, he often liked to pull out some analogy from British history from 150 years ago. [Osborne studied history at Oxford, not economics – which some critics of his policies use against him.] But there’s a big difference between the private and public person and that’s been one of the difficulties for him. In the early years – when he was known as ‘the Submarine’ – he avoided attention. It was not him but me who went out to explain our policies. That not fronting up became a problem for him. He changed his approach.”

Alexander said that Osborne’s reputation as a “tricky political tactician” was justified. “But he also has a world-view. You shouldn’t doubt that he is sincere in his ­conviction of trying to do the right thing by the British economy.” Surely the same could be said of all chancellors? “Well, you must realise that in the Treasury you have ideas and you drive policies forward but you rely on other departments for their implementation. I’d say the implementation of some of the coalition’s policies, especially on welfare – I never approved of the bedroom tax – was too rough around the edges, and that’s what caught people’s attention.”

During our conversations Osborne referred often to Tony Blair, either directly or more cryptically by appropriating buzz-phrases of the man some Tories used to call “the Master”. As expected, he was scathing about Jeremy Corbyn, whom one day soon he might be facing across the despatch box. Osborne told me that over the summer, he had “looked on in complete astonishment” as “the whole of the Labour Party moves leftwards, abandoning the centre, and I think therefore abandoning the working people of this country”.

Three of the candidates for the Labour leadership – Corbyn, Andy Burnham and Yvette Cooper – were, he said, seeking to unravel “a lot of the things the previous ­Labour government sought to establish, like education reform”. He continued: “The new Labour MPs are markedly to the left, Unite-sponsored in large parts, compared to, for example, the intake in 2010, 2005, or 2001, the intake I came in with . . . that had people like David Miliband. In 2010 there was Tristram Hunt, Chuka Umunna. Now there’s talk of actually purging some of those people. I noticed [moderates like] Helen Hayes or Wes Streeting among the new Labour MPs seem to be in tiny minorities. I don’t think that’s particularly good for the country that you have an opposition heading off to the wilderness.

“But I think now there’s a big responsibility for the Conservative Party to hold to the centre, to represent working people, to continue these reforms that previously have had cross-party support. And you know what? I can say it’s the Conservative Party that is looking forward, not back.”

“Forward, not back” was, of course, a favourite phrase of Blair’s, the slogan under which Labour fought the 2005 general election. Osborne also referred to the “forces of conservatism” – that is, those opposed to his reforms – more than once in our conversation.

I asked Osborne if he felt Corbyn posed a threat to national security because of his unilateralism and opposition to Nato.

“There’s no doubt ideas like abandoning Britain’s nuclear deterrent at a time when, frankly, more and more countries are trying to acquire nuclear weapons, or some of the things that have been said about terrorist organisations like Hamas, are deeply unpalatable. I don’t think they represent the views of the British people. But we don’t regard what is being said in the Labour leadership contest as a joke. We take it deadly seriously. I regard these things as a real risk to Britain’s security were they ever to have the chance to be put into practice . . .

“Jeremy Corbyn has dragged two of the Labour leadership candidates to the left. He is clearly being supported by a large body of activists in the Labour Party, and supporters in the trade union movement. So it’s not about one individual. It’s a party and a movement that I think is heading in the wrong direction. My responsibility as a Conservative is to make sure our reaction to that is to stay where we are, occupying the centre ground, looking forward, not back, and if they want to go back to the 1980s, let them. The Conservative Party is not doing that. We’re moving forward into the 2020s.”

Osborne indicated to me that he thought Ed Miliband had made a mistake by resigning so quickly after his defeat in May, unlike Michael Howard who, after losing in 2005, stayed on to ease the Conservative Party through a period of painful transition. “There is no doubt that Michael Howard’s decision to stay on created the space for a real debate about why we had lost. Not just, of course, that election, but the preceding two elections. And it enabled a proper range of candidates. And for new MPs coming in, you’re not immediately bounced into a leadership contest. You have a few months to find your feet . . . I was running David Cameron’s campaign, and obviously it enabled David, who was not particularly well known in the immediate aftermath of the 2005 election, a chance to explain what he wanted to do with the Conservative Party, and change it, and put it in a position where it can win an election.”

He paused and then continued: “It’s up to others to judge whether Ed Miliband should have done that, and on the [leadership contest] rules change, people will ask very serious questions about the changes to the Labour Party constitution. It’s not my responsibility to look at the Labour Party. But we do want to live in a country where you do have a serious, credible opposition, which holds the government and all of the departments to account. I can’t help noticing that, for most of my childhood and early adult life, a succession of Labour Party leaders reformed the constitution of the Labour Party. Neil Kinnock did, John Smith did, Tony Blair did, to make sure that it was more rooted in what the British people wanted. And it does seem, as an external observer, that a generation’s work has been unravelled in the space of 12 months.”

***

Since the last election, David Cameron has sought to redefine the Tories as a party of One Nation, even as the multinational United Kingdom fragments around him. This might be wishful thinking or mere rhetorical positioning. It might also be recognition of limitations and that the Tories have a slender majority and grudging mandate. “An intelligent reading of the election is that the Tories did not win an endorsement for their ideas; it was more that the electorate could not accept the alternative [of a Labour/SNP alliance],” Danny Alexander said. “I think George understands that, which is why he is trying to hold the centre ground and not be pulled to the right by backbenchers.”

***

Meanwhile, the Tories’ desire to run a Budget surplus, welfare reforms and cuts to tax credits have caused much suffering and created many victims. In an essay published in the New Statesman in June, Amartya Sen, the Nobel Prize-winning economist, criticised the government’s austerity policy, saying it was unnecessary as the current ratio of public debt to GDP is much smaller than in the two decades after the Second World War, when it caused little panic. Moreover, Sen argued, austerity has not worked: “price-adjusted GDP per capita in Britain today is still lower than what it was before the crisis in 2008” and the recovery has been slower in Britain than in the US and Japan. Writing in April, Robert Skidelsky, the cross-bench peer and leading biographer of J M Keynes, also faulted Osborne’s economic logic. “Historians will debate his motives but I believe that this intensely political Chancellor saw in a manufactured crisis of confidence a once-in-a-lifetime opportunity to cut the size of the state,” he stated.

During our car journey to the Hitachi factory, Osborne listened patiently as I attempted to explain why the Tories remained so unpopular with so many and why Nobel laureates were so critical of him. His austerity policies and benefits sanctions regime affected the poorest and the disabled: did he think about that?

“What I think is the victims are people who are victims of when an economy fails. When you get these decisions wrong about your national economy, it is not the richest in the country who suffer. It is the very poorest: they are the people who lose their jobs, they are the people who have their opportunities snatched from them. This government has to deal with a huge Budget deficit. So, you know, the victims of economic failure are the poorest. And in the end who are the beneficiaries of creating jobs, growing the economy? Again, it’s not the person who’s always been employed in the hedge fund. It’s the person who was previously out of work and now has a chance in life, like these young apprentices I’ve just been meeting in Nissan.”

And on the vexed issue of welfare reform, he was unrepentant. “A welfare system that is completely unsustainable, in terms of how much it costs, creates perverse incentives where it’s better to stay at home rather than go out to work, which creates real resentment with working people who are paying their taxes . . . I would argue that we are re-founding confidence in our welfare state. We are re-establishing the trust of the taxpayer that their money is well spent and goes to those who genuinely need it, whether they are disabled or they’ve lost their job . . . I’m not someone who wants to abolish the welfare state. I would argue quite the reverse: that we are actually re-establishing trust in our country in the welfare state.”

Osborne is not only denounced by Keynesians and the left. Many on the free-market right long for him to be bolder, especially with Labour being so divided and the Liberal Democrats decisively defeated. Why not use this moment to revive some of the more libertarian, Randian ideas of his younger days? Why not cut income tax and roll back the state even faster?

“I don’t think the Conservative Party’s response to the Labour Party’s lurching to the left should be a lurching to the right,” he replied, his voice unvaryingly measured. “I think it’s a huge opportunity and responsibility for us to hold the centre of British politics. Now, the centre doesn’t mean you can’t change the centre, you can’t shape the centre, and I would say things like the education reforms from Michael Gove and Nicky Morgan, some of the things we’re doing on apprenticeships, where we’re introducing the apprenticeship levy, the National Living Wage we’re introducing . . .” – he paused and looked directly at me – “the whole argument about the country living within its means: these are shaping the new centre of British politics.

“We should not be heading off into the wilderness at the same time as our opponents are. We should be staying very firmly rooted in the centre, but that’s not a static thing. I always think [of] a sort of motto I have: which is, in politics, in opposition, the pressure is always to move to the centre; when you’re in government you can move the centre. I would take education reform as a kind of classic example of that. And, by the way, I think there’s some opportunities in this parliament – over things like that new pact we’re seeking to establish between the welfare system and the new National Living Wage, an affordable welfare system but higher wages paid by employers, the potential for really interesting prison and criminal justice reform now in the next couple of years – I think those are the kinds of things you’ll see us focusing our attention on.”

As to his own future prospects and speculation about who might eventually succeed David Cameron, Osborne is evasive. “I guess my approach to this has always been to try and focus on the task at hand and not to be thinking about the next job. Of course there will be a point when the Conservative Party runs a leadership contest. By the way, there may be several Labour leadership contests between now and then, so it’s some way off . . . I’m absolutely determined not to allow that to overshadow what I’m trying to do now or let it drown out the work I have to do as Chancellor. So I’m just mentally able to say, ‘I’m not addressing that now. I’m not thinking about that now.’ If I started going on about the next job, I think it wouldn’t make me a very good chancellor.”

To translate: he wants to be prime minister. His public appearances are becoming more frequent and grander, as his visit to the Faslane nuclear base in August, during which he toured the River Clyde flanked by military personnel in a boat, demonstrated. The Submarine is submerged no more.

***

One of Osborne’s gifts is for surrounding himself with heterodox and surprising thinkers – such as Neil O’Brien, the former head of Policy Exchange; Robert Halfon, the Harlow MP who advocates “white-van conservatism” and campaigns for workers’ rights and trade unions; the former BBC producer Thea Rogers, who is responsible for the Osborne makeover, or so some say; James Chapman, the highly regarded former political editor of the Daily Mail, who leads his media relations team; and Rohan Silva, a philosopher manqué and dedicated reader of the books of Nassim Nicholas Taleb and John Gray who is now working as a tech entrepreneur in east London. More than this, Osborne has a network of journalistic cheerleaders in senior positions on newspapers, and many of his former aides are now in powerful positions in the cabinet.

So does it pay to be one of George’s friends, as has been suggested by supporters of Boris Johnson, whom Osborne will have to defeat if he is to become the next prime minister?

He smiles. “I am someone who puts a lot of effort into getting good people to work with me and bringing those people on. It’s not that I’m deliberately trying to create some network. It’s that I like working with really talented people . . . My approach to things is, when you have a discussion, anyone can say anything, and they can say ‘it’s completely wrong” or ‘we should do something else’. I listen to all those views and we have a good argument. Then once we make a decision, everyone stays shtum.”

With that, he rises, shakes my hand and leaves the room. I look on as, soon afterwards, he and Cameron are led to a waiting car. They sit side by side in the back seat and are quickly absorbed in conversation – the two close friends who, in their early years in the Commons, learned so much from observing Tony Blair and Gordon Brown, learned both what was best about them, and worst, and then, with patience and fortitude as well as no little luck, set about winning and holding on to power, just as Blair had done before them. Meanwhile, turning in on itself and seeking renewed self-definition, the Labour Party stumbles ever further to the left, just as Osborne would have wished. He’s in the clear now.

Now read the full Q&A with George Osborne