David Laws: 'I am not a Tory; I'm a liberal'

David Laws was a banker. But he is much better now. He gave up a six-figure salary working for Barclays, setting the Libor interest rates (now at the centre of the banking scandal), to earn £14,000 as a researcher for the Liberal Democrats, little knowing that a decade and a half later he would be, albeit briefly, in the cabinet.

His return to government, which has been talked of as imminent ever since he resigned in an expenses scandal that also outed him as gay, is now a Westminster certainty: a reshuffle is expected after the Olympics. The 46-year-old plays down expectations, saying he would prefer to see the Lib Dems "use this period in government effectively" than "be the minister for morris dancing". But he is not really on the back benches, anyway. While Nick Clegg last week talked of being "gradually lobotomised" by being in government, Laws remains one of the big brains of the Lib Dem operation. Few expect a return to cabinet, but a Whitehall-roaming policy brief seems likely.

Home Counties born, privately educated, a Cambridge graduate, a career in the City. On paper, he should be a Tory. Some of his colleagues think he is secretly. His suggestion two weeks ago that public spending should fall from 40 to 35 per cent of GDP didn't help. George Osborne even tried to persuade him to defect to the Tories in 2007. He declined.

"I am not a Tory because I am a small 'l' liberal. Which means liberal economically – which I think most Conservatives are – but also liberal in terms of personal life … most importantly, a social as well as economic liberal, believing that the state has to intervene to ensure not only protection for people in the bottom of society, but that there are strong ladders for those people to do better and improve themselves."

He hammers home the differences. Where Tories promised inheritance tax cuts for millionaires, Lib Dems wanted the low paid to be lifted out of income tax. The right's assertion that free-market economics automatically lead to more socially mobile societies has failed. "We are in danger, in Western nations, of getting a sort of caste-like society where it's actually more difficult than it was a number of decades ago for people who are born into disadvantaged backgrounds and households to do well in life. We have got to challenge [that] even in these tough economic times."

Public blame for the economic mess falls variously on the coalition, the last Labour government and the bankers. He warns against the "hysterical, ill-informed ... rent-a-quote idiocy" which has greeted the latest banking scandal, pointing out that the City remains one of the engine rooms of the British economy, though the banks cannot "paper over the cracks" with PR spin. From 1992 to 1994, he was managing director of the division of Barclays that set the inter-bank lending rate, Libor, which lies at the heart of the controversy that last week forced the resignation of the Barclays chief executive Bob Diamond. Setting the Libor rate in his day was "pretty easy", because there was only one market. An increasingly global banking system has become more complex, and regulators have failed to keep up. He says he would be "absolutely staggered" if senior figures, including Diamond, knew what was going on.

Barclays was, he says, a very different bank from the global monolith it is today. The culture was "very responsible"; it was traditional old-style banking, "not necessarily at the cutting edge of technology or the markets". But times were changing, and the merger with the investment bank BZW brought a "totally different culture ... more red braces"; people drove Porsches not Rovers. Even then, people knew they were paid too much, and in the years since, wage inflation has "gone into the stratosphere ... just ludicrous". Pay in the City now bears no relation to the value someone brings to the company. "Everyone is trying to bid up everybody else's pay in order to justify being paid even higher."

Bankers never learn. In a boom, "all of the controls go out the window" and the inevitable bust is greeted by "overreaction". In the middle of the 1991 recession, he recalls meeting the bank's treasurer who was "in a particularly bad mood because he had applied for a Barclaycard and been turned down". Today's scandal could be "dangerous" for Ed Miliband and Ed Balls because "it reminds people that the origins of a lot of our problems were in the period when Labour was in office".

The son of a Tory-voting banker and a Labour-supporting mother, Laws became politicised by the 1979 general election, when "politics was very divisive, between an increasingly right-wing Tory party and an increasing left-wing and unelectable Labour"; he chose the third party.

He insists the Lib Dem strategy is not to just "cling on" and argues they should be vindicated in 2015 for taking the right decisions in government. "We have put the brake on things that people don't like about the Conservative Party and we made a difference." Despite David Cameron's best efforts, the Conservatives "still hadn't persuaded people in 2010 that they were a party that represented everybody". From EU-bashing to David Cameron's idea to take housing benefit away from the under-25s, the Tories are lurching to the right. Laws adds: "Some of the developments in the Conservative Party over the past few months seem to have been leading potentially away from that type of liberal Conservativism. We've already fought battles on uprating of benefits to make sure people who are poor don't get pushed further into poverty."

Having successfully negotiated the coalition agreement, Laws spent two weeks as Chief Secretary to the Treasury. Then came the revelation that he had claimed £40,000 to pay rent to his partner, James Lundie. The two years since his resignation have been "difficult", but support from his Yeovil constituents stopped him quitting politics altogether.

Having not thought it a policy priority, he now believes legalising gay marriage is a key objective for his party. The coalition is split on the issue, which is opposed by many Tory backbenchers, and one or two in the Cabinet. Laws says it must and will happen. He has found the visceral reaction from opponents, particularly church leaders, "very depressing". For his own part, he has not considered tying the knot with Lundie. "But is it something I would like to have the option of? Yes."

It has clearly taken a long time to recover from having details of his financial affairs and love life splashed across the front pages. Now, though, he is clearly ready for the fight. He is "certain" Clegg will lead the party into the next election, describing him as a "man of integrity" and a "massive asset" for the 2015 election.

"They're not going to see the same Nick Clegg brand that they might have voted for in 2010, the purest outsider offering something new and fresh, because he's going to be bloodied by five years in government." He hopes Clegg will be credited for Britain being a "much, much, much more liberal and fairer society".

A regular presence in meetings in both Clegg's suite of offices and in No 10, Laws says he is happy to help "in any way I can". More than once I try to gauge how often he actually speaks to Clegg. He pauses. The white phone on his desk rings. I joke that it could be Clegg. He says it is unlikely, as not many people have his landline number, and nervously picks up the receiver. It is not his boss. Not this time. But you can be sure the call will come soon, and his return to government will be complete.

Curriculum vitae

1965 Born Farnham, Surrey. His father was a Tory-voting banker, his mother votes Labour.

1974 Educated at Woburn Hill school and St George's College, Weybridge.

1984 Joins the Liberal Democrats.

1987 Graduates from King's College, Cambridge, with a double first in Economics. Joins JP Morgan.

1992 Joins investment bank Barclays de Zoete Wedd (BZW).

1994 Retires, a multimillionaire at 28. Becomes economic adviser to the Liberal Democrats.

1997 Contests Folkestone & Hythe as a Lib Dem against sitting MP Michael Howard.

2001 Contests former Lib Dem leader Paddy Ashdown's seat in Yeovil, Somerset. Wins.

2005 Wins re-election. Appointed Shadow Work & Pensions Secretary.

2007 Becomes Lib Dem spokesman for Children, Schools, and Families.

2010 Helps negotiate coalition deal with the Tories. Appointed Treasury Chief Secretary. Resigns after reports highlight irregularities on £40,000 expenses claims. Reveals he is gay.

2011 Found guilty on expenses but Parliamentary Standards Commissioner says actions not financially motivated. Suspended for seven days.

2012 Says resignation made him "happier and wiser". Calls for deeper tax and government spending cuts.

Shannon Firth