My speech at the British Chamber of Commerce Annual Conference, London, 16 April 2007
It is an honour to be invited here today to speak at the beginning of your 2007 annual conference.
This is the tenth British Chamber of Commerce annual conference since this Government came to office in 1997. But it is the first time I have been invited to attend as a Treasury Minister.
So I wanted to take the opportunity to look back on some of the key economic policy decisions which the Government has taken over the past decade; and then look ahead to some of the risks and future challenges we face if UK businesses are to continue to prosper and meet the new challenges of globalisation.
But first let me start by wishing you a very successful two days – and thanking your new President Peter Mileham, your Director-General David Frost, Chamber staff around the country, and especially your membership of 135,000 businesses – for all the work you do creating jobs and wealth in every town, city and region of our country.
I know from my own constituency in West Yorkshire – but also from having met with members of local Chambers across Britain – that the businesses you manage or represent are the backbone of our national economy, the true innovators and wealth creators of Britain.
You have a unique perspective on the economic challenges we face, both global and local.
You are at the frontline of globalisation, running businesses which compete daily to win contracts against fierce competition from Europe and America but also increasingly from low-cost producers in Asia and Eastern Europe. For your companies – as for our constituents – globalisation is not an economic theory but a daily reality – which requires you to be continuously ahead of the game.
To give just one example, recently I met a local chain maker in Stourbridge. The owner showed me barrel after barrel of Chinese imported chains, explaining that he just could not compete anymore on cost grounds. But his business is not contracting, it is expanding – using Chinese chains and his workforce’s skills and ingenuity to make state-of-the-art play equipment to the highest safety standards; and producing new chain-based hoes – a new model every year – which are used to maintain artificial sports fields and which they export to the United States.
But while many of you are acing global competition, it is local chambers of commerce which also truly have their finger on the pulse of our local economies. Your members know where the real skill shortages are, which Regional Development Agencies are doing the best job, which further education colleges understand the needs of modern businesses.
And many of your members are active in their local communities, whether that be representing the business view on local Learning and Skills Councils; or – increasingly – helping us to advance our shared agenda of promoting enterprise and ambition in the school curriculum so that we can inspire the entrepreneurs, engineers and managers of the future to stay on in education and make their mark – as you have done.
When Sir Digby Jones came to our area last month to launch with me our local Wakefield “Make Your Mark” enterprise campaign – one of only four in the country alongside Liverpool, Coventry and Lowestoft – I was proud to be able to tell him that our local Chamber members – and particularly our local Young Chamber – were backing our efforts to make our economy more dynamic and entrepreneurial.
I said I would speak today about our economic prospects and the challenges and the risks we face.
Because I know some commentators fear we are going to move into a more difficult phase for the British economy.
Having predicted a downturn last year – which then did not materialise – some commentators have been predicting that era of low inflation in Britain might be coming to an end, that the Government’s “luck” might be running out.
But having been at the Treasury in one way or another for much of the last decade, it has not felt like an easy or lucky period.
Just think of the different events and crises which the British economy has withstood over the past 10 years:
- the Asian financial crisis of 1997 and 1998 which spread from Thailand and Indonesia to Russia and then all the way to Wall Street when the LTCM hedge fund went into default;
- the bursting of the IT and Dot com bubbles in America at the turn of the century which sent stock markets falling round the world;
- then the biggest contraction in world trade since the early 1970s, conflict in the Gulf, record high oil prices, the Enron and WorldCom accounting scandals and continued instability in global financial markets as recently as this year.
But in every past period, when the world has gone into recession, the UK has started with higher inflation, too high national debt and suffered a deep recession.
In this decade we have bucked that trend.
So while earlier this decade, America and other G7 economies suffered recessions, the British economy did not go the same way. Our economy has continued to grow, and both employment and investment have continued to rise.
And why? Much of the credit must go to the Monetary Policy Committee of the independent Bank of England.
Our decision to make the Bank of England independent was controversial at the time. Some feared it would mean higher interest rates and a more deflationary approach to monetary policy.
But the MPC has in fact responded to fears of global deflation – both in 1998 and then again in 2001 – by cutting interest rates, month after month, to sustain UK growth.
Some believe that the great advantage of central bank independence is that it stops politicians from interfering too much. My argument is the opposite – that in the past politicians too often sat on their hands and hoped that something would turn up, acting only when the recession was taking hold or inflation was out of control.
The Bank of England, by contrast, has taken – and continues to take – an explicitly forward-looking and pre-emptive approach to meet our symmetric inflation target.
It has cut rates early when necessary. But it has also been willing to raise rates early too.
Those decisions are never popular. But over the past three years, as the economy has strengthened, the MPC has rightly taken a forward-looking approach to lock-in stability and keep interest rates and inflation low for the long-term.
That approach is right for our economy and right for business – and represents a decisive break with British post-war economic instability.
And fiscal policy has also played an important role in supporting monetary policy and sustaining growth.
Over the past few years, when other economies have suffered recessions, some have been forced to respond to lower growth by raising taxes and cutting spending – because they faced levels of national debt that were too high and deficits too large.
But again Britain has bucked that trend. Even when in the UK, as in other countries, lower than expected tax revenues pushed up fiscal deficits, we have been able to sustain rising investment in education, health, science and transport, while supporting growth and job creation.
And the reason is that the Government took difficult but necessary decisions to reduce the deficit and cut debt in the late 1990s – changes which affected households and businesses alike.
There is one particular decision which I would highlight today.
You will remember the Government’s decision to auction the 3G mobile phone spectrum in 1999 through an open and competitive market-based auction.
The Government expected to raise well under £10 billion from that auction. In fact we raised £22 billion.
And we had a choice to make – there were many calls for how the extra money should be spent – many deserving causes too.
But when a family or a business receives an unexpected windfall like that, the prudent thing to do is to set it aside for a rainy day. And for Government, that means repaying national debt. And so in the following year, 2000-01, we were repaid a total of £36 billion pounds. This was more in one year in cash terms than in the entire cumulative period from 1945 to 1999.
It was decisions like this which meant that the UK started this decade with one of the lowest levels of national debt of any of the major economies, and which has enabled us to continue to keep to our fiscal discipline with our debt still well below 40 per cent of our national income.
Of course, our commitment to stability is constantly being tested. The market turbulence of recent months demands that policymakers are continuously vigilant to potential downside risks and continue to take a forward-looking approach to policy.
But it has been this combination of a forward-looking monetary policy focused on low inflation; and a long-term approach to fiscal policy based on low national debt – which has delivered for the UK an unprecedented period of stability upon which business can invest and compete.
Globalisation and the city
You all know that we live in a fiercely competitive world.
I have already spoken of the ways in which businesses in our country are rising to meet these new challenges – and win new markets.
Over the past year, as City Minister with responsibility for financial services across the UK, I have also seen how that part of our economy has been prospering from globalisation.
It is only a short time ago that many commentators and practitioners feared that new globalising forces – the emergence of new financial centres and technologies, the switch from physical to virtual trading platforms, and new regulatory challenges in the UK and Europe – would threaten the standing of the City.
Yet the City has not stumbled, but prospered. Today, no other financial centre matches the global scale, scope and internationalism of London’s financial markets.
It is our shared commitment to openness and internationalism, our proportionate and risk-based regulatory approach, combined with the great pool of talent gathered from across the world that underpins the UK’s success as a global financial leader.
But Government can make a contribution too in setting the right framework. I want again pay tribute to those who saw through the Big Bang liberalisation of the City of London and the opening up of our markets in the mid-1980s.
Since 1997 we have built on those reforms. First, in addition to operational independence for the Bank of England we also took the decision to set up a new independent and unified regulator, the Financial Services Authority with a new regulatory regime based on principles and not rigid rules – a system of regulation that is regularly cited as one of our chief attractions – a huge competitive advantage.
And as part of the work programme of our High Level Group on City Competitiveness, we are working together to make sure financial regulation stays proportionate and risk-based, that we attract the best global expertise to Britain, that our tax system is competitive, that our infrastructure is world-class and that we engage positively and effectively with our European partners to take forward the single market in financial services across the EU and keep London’s position as the established financial services gateway between Europe and the rest of the world.
Globalisation and business
But we cannot be complacent – for the City or the rest of business. With globalisation and today’s rapid pace of change, success can reverse quickly if we make mistakes – as a company, or as a country.
Look at how in the US, following the WorldCom accounting scandal in 2002, the decision to introduce the Sarbanes-Oxley accounting regulations caused real difficulties for business operating in the US – and I know there is now a lively debate taking place in the US about the right balance of regulation.
In the UK, it would have been easy for us to follow suit, given the widespread outrage at those scandals. But that would have been the wrong decision. Instead, and in the face of some criticism, we decided that the best action was to pursue a measured and proportionate response.
So sometimes decisions not to act can be as important as decisions to act – and just as controversial.
A few years ago, some feared that both our financial services industry and British business as a whole would lose out from our decision not to join the single currency in 1999.
But based on a careful assessment based on the five economic tests, the Government judged both then and again in 2003 that it would not be in the UK national interest to join.
And while we keep that decision under review on a annual basis, so far that 2003 assessment has stood the test of time – while fears that flows of foreign direct investment to the UK would suffer, or the City would be set back, have not proved correct.
Our task, in order to back British business, investment and jobs, is to continue to try to make the right long-term decisions for Britain – decisions which play to our competitive strengths.
So on skills: Lord Leitch set out in his review last year that there is still a long way to go to close skills gaps in the adult workforce. He called for a new long-term partnership between government, employers and individuals to raise our game – and I know Sir Digby will talk about this challenge later on.
On transport: in the light of Rod Eddington’s recommendations, we need investment to go where it will make most difference – increasing productivity, improving environmental performance, and strengthening the safety and security of our networks.
On science: we will continue to invest in both science and innovation, building on the more than doubling funding for science so far.
On regulation: we need to get the balance right – and we recognise the concerns published by the BCC today. That is why the Government is systematically reviewing the areas where regulations place a large burden on business. For example, at the Budget we published a consultation to reduce the costs associated with workplace dispute resolution procedures. And in December, we announced over 500 measures to save business £4bn of regulatory burdens. This included a number of measures to adopt the risk-based approach advocated by Philip Hampton.
And on taxation, too, we must take the actions necessary to maintain stability and keep our economy competitive.
When we came into Government in 1997, we were determined both to get our national debt down and to address the historic problems of underinvestment and short-termism which were holding the British economy back.
It was clear from our discussions with business before the election that the corporation tax system inherited by this Government in 1997 did not adequately support UK business competitiveness.
First, the UK’s main rate of corporation tax had remained unchanged for over a decade, during which competitive pressures had intensified.
Second, dividend tax credits, which were payable at that time, meant that the effective tax rate on company profits was lower if profits were distributed as dividends than if they were retained for investment, thereby discouraging companies from making much-needed long-term investment.
Third, dividend tax credits, alongside Advanced Corporation Tax, meant that British-based international companies were tax disadvantaged, discouraging investment in the UK.
And so in the 1997 and 1998 budgets we took action to:
- abolish the payment of dividend tax credits to pension schemes and UK companies;
- abolish Advanced Corporation Tax and move to in-year payment of corporation tax;
- and recycle revenues from abolishing the dividend tax credit to pension funds through cutting the main Corporation Tax rate from 33% to 31% and then 30%, cutting Capital Gains Tax and then subsequently introducing the R&D tax credit.
These were difficult decisions – inevitably controversial. But the Government judged that this package of reforms was necessary both to cut national debt and improve the climate for long-term investment and enhance the competitiveness of the UK.
And since 1997 we have indeed experienced a decade of stability that has helped improve the environment for UK businesses to invest – with the fastest growth in business investment in any nine-year period since data began in the 1960s.
Since those reforms, other countries have followed suit – abolishing distortions in their business tax systems and cutting main corporation tax rates.
So ten years on, we have taken our modernisation of the business tax system a stage further in this year’s Budget – responding to business concerns and reflecting increasing global competition.
Consistent with fiscal stability, we have announced a reform of the system of capital allowances to better reflect the long-term investment priorities of the modern economy; and with the resources released by this reform, we have further cut the main rate of Corporation Tax from April of next year from 30% to 28%, the lowest corporate tax rate of all the major economies.
Over the last decade, we have also taken action to support small businesses and enterprise, such as enhanced first year capital allowances, payable tax credits for R&D, Enterprise Management Incentives and improvements to the Small Firms Loan Guarantee.
These measures, along with economic stability, have contributed to the growth of small businesses with 220,000 more VAT-registered businesses now than in 1997, 350,000 more self-employed people, and employment in SMEs now having risen by over 1 million since 1997.
But in the Budget we have had to take another difficult decision. You will know of the problem that has arisen in recent years, where many of those paying the small companies’ rate were in fact individuals incorporating to avoid paying their due share of tax.
Without addressing this, this trend would have continued at a cost to the rest of the taxpaying population of billions of pounds – money which could not be afforded.
To avoid this threat to the public finances, the Budget this year announced that the small companies’ rate will rise in three stages from 20% this year to 22% in 2009. But, again, all the revenues from this change will be recycled back to legitimate small businesses through enhanced investment allowances – which will mean tax reductions for investing small businesses.
Let me highlight one other decision on tax we have taken since 1997.
When people say to me what is the most important decision that the government has made to back entrepreneurs in our country, I say it is not our decision to make the Bank of England independent to entrench a culture of stability in our country, or to introduce R&D tax credits – but our decision to cut the Capital Gains Tax rate for business assets from the 40p we inherited to just 10p, the most competitive CGT regime for entrepreneurs in the world.
This single measure alone now costs around one billion pounds a year.
But we did it because it was the right thing to do – to make Britain the best place to start a business, grow a business and then reinvest again in a new business.
So in conclusion, I understand that running a successful business in a highly competitive global economy is far from easy. You need a Government which is on your side, and gets out of the way whenever it can.
But you also need a Government which is willing to take the right long-term decisions – however difficult and controversial – to deliver stability and sound national finances and keep our economy competitive.
And you only have to look at recent financial market instability, the stalling of world trade talks, the ongoing pressures from the trebling of oil prices, the continued demand for discipline in wage bargaining, the rise of new global competition, to see that the pressure to make difficult decisions is not going to abate.
I believe that on monetary policy, reserve management, fiscal policy, Europe, regulation and tax we have shown we can take difficult decisions which are right for Britain.
Indeed, it has not been due to luck that Britain alone, among the major economies, has enjoyed uninterrupted growth for a decade; but because of those tough policy choices – opposed by many at the time and by some even now – that we have made, and will continue to make in the long-term interests of the economy.
That is the way, on a platform of stability, to ensure that: our economy, your companies and the British people can continue to prosper in the months and years to come.
ENDSPosted November 26th, 2015 by admin