The UK Chancellor of the Exchequer addressed a luncheon of CBI members on Friday 28th January 2011 in Davos, Switzerland as world leaders took part in the annual World Economic Forum. His speech was as follows:
I would like to start by thanking the CBI for organising this lunch and inviting me to speak here today. It is great to see so many top figures from across the world of business in this room. I will make some remarks and leave plenty of time for questions afterwards.
There has been much talk in Davos this week of a two, or even three, speed recovery. While emerging markets are continuing to power ahead, many Western economies – and European economies in particular – are only slowly emerging from the trauma of the last two years.
My argument today is that there is nothing inevitable about European decline – we do not have to accept life in the slow lane. As Mervyn King and I have both said, the recovery is likely to be “choppy”.
But I am an optimist. And I believe that if we get policy right over the next two or three years, then the opportunity is great for Britain and Europe.
The challenge may be formidable, but the future will favour the bold. And if we are bold enough, the prize will be worth the effort: nothing less than a new model of sustainable growth.
Many European governments face this challenge. But as this week’s growth figures demonstrate, the challenge is particularly acute in the UK.
Over the last decade, our economy became perhaps the most extreme example of any major economy of the dangerous imbalances that now need to be unwound. The biggest housing boom, the most leveraged banks, the most indebted households, the biggest budget deficit. An illusion of growth built on easy money that has now turned to dust.
As the work of Ken Rogoff and Carmen Reinhart shows, recoveries from this kind of debt-fuelled boom and bust tend to be slower and more protracted than those from other kinds of recession.
How could it be otherwise when our banking system is nursing the wounds of the greatest financial crisis since the 1930s and the economy is 10% below its pre-crisis trend?
Our goal should be that new model of economic growth, built not on unsustainable debt in the public and private sectors, but on the entrepreneurial dynamism that creates lasting prosperity.
Not overly concentrated in one region of the country or one sector of the economy, but more balanced both geographically and economically. A model in which investment and exports replace debt-fuelled consumption in the public and private sectors as the drivers of growth.
Building this new model of growth will not be easy – if it was then we wouldn’t have been tempted down the path of easy money in the first place. And it’s clear that for some that temptation remains – a bit more government spending here, pumping the bubble back up a bit there.
We are absolutely clear – allowing ourselves to be seduced by those siren voices would only lead to even greater disaster down the line. Right now the right long-term choices for the economy are the difficult choices. Adjustment will not be without struggle.
While almost everyone agrees in general terms that Government spending needs to be cut, vested interests will line up to defend every line item when it comes to specifics.
While everyone pays lip service to welfare reform, actually tackling our dependency culture and cutting the ballooning benefits bill requires tough and controversial decisions.
And while everyone argues that we need to promote enterprise and growth, opposition to specific measures is often no less entrenched than in opposition to specific spending cuts.
So we have to fight for this new economic model. Let me explain my vision for sustainable growth. It has three crucial ingredients: a stable macroeconomy; competitive taxes; and removing the barriers that are holding Britain back.
The foundation must be a strong and stable macroeconomy. That means dealing with Britain’s massive debt problem.
When the new coalition Government came into power in May our public finances were in a dire state. We inherited from our predecessors the biggest budget deficit in the whole of the G20 – the second largest in Europe with the single exception of Ireland. And we inherited that deficit slap bang in the middle of a European sovereign debt crisis.
So we set about the immediate reductions to in-year spending to buy us a breathing space in the sovereign debt storm;
We created an independent Office for Budget Responsibility to bring honesty back to official forecasts – and the OBR is already established as a permanent feature of our macroeconomic framework.
At the Emergency Budget in June last year, and then at the Spending Review in October, I set out a four-year plan to remove the bulk of the budget deficit over this Parliament.
We based our plan on the leading academic evidence on successful fiscal consolidations.
We ensured, like successful consolidations elsewhere, that the great majority of the deficit reduction will happen through reducing spending and not increasing taxes.
We prioritised capital spending over wasteful welfare spending.
And where taxes do have to go up, we will prioritise increases in indirect taxes which are more economically efficient and do less damage to enterprise.
It is notable that many of these principles have been adopted by the Fiscal Commission in the US.
Earlier this month we saw the plan start to take effect with the tough, but necessary step of increasing Value Added Tax to 20%.
After this week’s growth figures it is no surprise that one disappointing weather-affected quarter of growth has brought the critics out of the woodwork.
Never mind that the Government’s current spending was higher this December than in any other December in our history, government should spend more they say.
It’s always their answer. In boom and in bust, in good times and bad, more government spending is what’s required.
Just imagine if they got their way – if I stood up in the House of Commons on Monday and said: “we’re abandoning our deficit reduction plan”. Imagine the reaction. The soaring market interest rates. The widening spreads. The credit rating back under threat. That would be disastrous for our economy.
We have to keep focused on the big picture. If we don’t deal credibly with our debts, then we cannot build a more balanced economy that works for everyone. That is the verdict of the IMF this week in their World Economic Outlook.
It is also the verdict of the Secretary-General of the OECD who said on Wednesday about the UK that “dealing with the deficit is the best way to prepare the ground for growth in the future. In fact if you don’t deal with the deficit, you can be assured that there will not be growth, because confidence will not recover”.
So the British economy must be stable, but it also has to compete.
The second part of our vision for growth is simply put: I want Britain to have the most competitive business taxes of any major western economy – in Europe or North America. So that when you are next considering where to invest and where to do business, you choose the UK.
Our four-year fiscal plan will cut the deficit without increasing taxes on business. And let me tell you, when you are doing my job, the easiest thing is to increase taxes on business – because businesses don’t vote. Not only have we avoided that, in fact we have cut the taxes faced by business.
We reversed the most damaging part of the planned jobs tax. From this April it will be cheaper to employ people on low and middle incomes, which in turn will save jobs and support the recovery. Small businesses will see their tax rates cut.
And from April, you will see the first of four annual reductions in the main rate of corporation tax. That will bring corporation tax to 24%, its lowest ever rate, the lowest in the G7.
Interestingly, the corporate tax plan announced by President Obama in his State of the Union speech is based on the same principles – a simpler system with a broader base and lower rates.
But we are not stopping there – our corporate tax roadmap has set out the direction of travel so that you can plan ahead with more certainty. In the coming Budget we will reform Britain’s outdated and complex rules for Controlled Foreign Companies. We have seen a steady stream of companies that have left the UK in recent years. This Government is not content to sit by and watch our competitiveness leech away and our corporate tax base undermined.
And to encourage high-tech businesses to invest in the UK and create high-value jobs, we will introduce from 2013 a lower 10% corporate tax rate on profits from newly commercialised patents. Our patent box will mean that Britain’s tax regime for intellectual property will be among the lowest in the western world.
Let me repeat: our goal is the most competitive business tax regime of any major western economy. Let me also make clear: I am very conscious of the impact of personal tax rates on our ability to compete. That’s why the personal tax allowance is increasing by one thousand pounds from April.
And it’s why I have said very clearly that I regard the 50p tax rate as a temporary feature of the tax system. We need stability. We need to compete. And we need to grow.
So the third part of our vision for growth is a war on all the barriers that stop your businesses expanding, investing and taking new people on. The barriers that stop new businesses starting up, growing their operations and taking on the world. In planning, we will tip the balance from delay and objection to expansion.
In energy, we will provide a carbon price floor and regulatory certainty to secure investment.
In trade, we will lead from the front, as we have already done on major delegations to China and India, and we have launched a new concerted commercial effort in the Gulf.
In competition, we will simplify the system and open up all sectors to challenge by new entrants.
In transport, we are completing Crossrail, investing in our roads, and connecting our great cities with high speed rail.
In higher education, we have had the courage to ensure funding for a world class university system in the face of the most opportunistic opposition.
In welfare, we are taking the tough decisions no government has ever been prepared to take to make work pay.
In skills, we have found scarce resources to fund more apprenticeships and we are bringing colleges closer to business.
We are protecting the science budget in cash terms, when so many other budgets have to be cut, and creating technology transfer centres to turn cutting edge innovation into practical application.
We will create a Green Investment Bank to support new clean energy infrastructure.
We are expanding support for venture capital funds and supporting small business loans.
And on banking, let me be very clear. We want Britain to be the undisputed European home of financial services and the leading world centre for finance. But we also want banks to play their proper role in society. So I am seeking a new settlement with the banks, which will secure financial stability and result in a banking system where banks:
- lend more to the British economy, especially small and medium sized businesses;
- contribute more to the British exchequer;
- pay less in bonuses;
- are more transparent about what they pay;
- and make a greater contribution to society.
I hope we can reach agreement soon so that we can provide the boost that our small businesses need.
All these things are part of our vision for growth. Achieving them all will not be easy.
In almost every area that is holding British business back, whether it is regulation, planning, poor skills or a hideously complex tax system , the forces of stagnation are lined up to defend the status quo.
That is the reason why these problems have lain unsolved for so many years. That’s why for too long the response from government has been to succumb to the pressure for more regulation and more bureaucracy, while papering over the cracks with yet more spending.
But the taxes and borrowing needed to pay for that spending were unsustainable, and the creeping march of regulation has slowly undermined our entrepreneurial spirit. Our competitiveness has suffered a lost decade.
That is why this Coalition Government will be just as bold in promoting enterprise as we have been in dealing with the deficit. The ambition of my Budget on the 23rd of March will be to turn the tide on the forces of stagnation.
And the guiding principle as I put the Budget together will be: the future favours the bold. We saw one example yesterday of what we can achieve when we are willing to be bold.
For years now the issue that businesses have raised with me more than any other is the deadening effect of our employment tribunal regime on job creation.
And no Minister has been willing to stand up and say: yes, employees have rights and they should be protected, but what about the right to get a job and not be priced out of world labour markets?
What about the right to start a business and not be sued out of existence by vexatious claims and unreasonable costs?
Well yesterday, this Government, this Coalition Government, had the courage to answer that question.
The Business Secretary, Vince Cable, announced that the system will change: there will be fees to deter vexatious claims; compulsory arbitration; the right to seek redress only after two years of employment instead of one today.
These are controversial measures, but they are the first major shift in well over a decade in the balance of power away from regulation and towards enterprise.
People are already lining up to oppose them. And I say to business: don’t stand on the sidelines and watch us fight the forces of stagnation. Join us in defeating them.
We need your help.
An enterprising Britain cannot be built by government alone. An enterprising Britain comes about when its businesses say ‘we won’t be held back any more’.
An enterprising Britain is born when its citizens believe that their aspirations in life are shaped by the fruits of their labours, not the circumstances of their birth.
An enterprising Britain is one that sees a world with a resurgent China, a booming India, a thriving Brazil and understands that it is an opportunity not a threat.
An enterprising Britain. A Britain open for business. That is what I want to build. And I need your help to do it.