Speech

George Osborne's speech to the Economic Club of New York

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Chancellor sets out his three crucial elements of a successful economic recovery plan.

The Rt Hon George Osborne

Thank you for inviting me here today.

The last time I was in the US in October I visited Independence Hall in Philadelphia and was reminded that British Chancellors of the Exchequer have not always been so welcome here.

Indeed it was the stamp taxes, imposed here by one of my predecessors that set in train the events that led ultimately to the declaration of independence.

No taxation without representation was their cry.

What I’ve learned after almost five years in the job is that no taxation - even with representation - is a pretty effective rallying cry.

For some time after independence the relationship between Britain and the US remained a difficult one.

Indeed, next month, January 2015, marks the 200th anniversary of the battle of New Orleans - fought between our two armies in the not entirely accurately named War of 1812.

And there was that little matter of burning down the White House.

But what’s interesting about the Battle of New Orleans, and its anniversary next month, is that it also marks the last time our two nations went to war with each other.

In January, therefore, we commemorate not just the casualties of war - we also celebrate 200 years of friendship, peace and extraordinary partnership.

To mark that great alliance I can tell you today that the British government will help fund a permanent memorial in New Orleans to the lives lost and the friendship began.

A friendship built on our shared values of democracy and liberty.

A partnership which has again and again been called upon to defeat the forces of tyranny.

I mention this today, in a speech to the Economic Club of New York, because of a very important reason; we can promote those shared values and provide a joint defence because of the economic strength that our countries have built over those 200 years.

The industrial revolution, new technologies, free enterprise, open trade, the rule of law, sound money.

These are the foundations of our prosperity and the guarantors of our values.

But that economic strength is now being questioned.

Both the UK and US economies are recovering from the biggest financial crisis in living memory and the deep recession that followed it.

In the UK that recession was half as big again as it was in the US - and was the deepest since the Second World War.

Our deficit, already high going into the crash, ballooned to over 10% of our GDP.

In recent years, the pessimists argued that we couldn’t escape the recession without massive fiscal stimulus and even higher deficits.

Instead, our two economies have grown faster than almost any other advanced economies.

A partnership of activist central banks and fiscal consolidation - more intentional in the UK, I’ll grant you, than in the US - came together to restore confidence, secure growth and reduce unemployment rolls.

Now the same pessimists argue that our two countries are condemned to secular stagnation and our best days lie in the past.

Today I want to argue that they are wrong.

Today I want to argue the case for optimism.

That if we apply a consistent and long term economic plan we can rise to the challenge and ensure that our best days lie ahead.

So what is the economic evidence in support of this optimism?

Since some prominent economists in the US warned of “secular stagnation” just over a year ago, the US economy has grown by 2.4% and the UK economy by 3.0%.

The unemployment rate has fallen by a further 1.2% in the US and 1.7% in the UK.

And in the case of the UK, new revisions to our historical data this summer show that our economy has grown significantly faster than previously thought - by more than 8%, the third fastest in the G7 since 2010

It has also been clear over the last year that the global recovery has continued to be uneven, with Europe getting weaker as the UK and US have got stronger, and we’re seeing weaker growth in some emerging economies too.

We can draw important lessons for policy from this pattern of recovery around the world.

I believe we’ve been able to make progress here in the US and in the UK because we’ve followed an approach with three crucial ingredients, and these remain the key ingredients to the future.

First, a commitment to activist monetary policy that will do whatever it takes to sustain sufficient demand in the economy.

Second, a credible commitment to sustainable fiscal policy so we eliminate deficits and reduce high debt and make ourselves less vulnerable to unexpected shocks.

And third, an ambitious attempt to improve productivity with supply side reform to support enterprise, innovation and openness.

In other words we take the difficult decisions to stay in the front ranks of the economic nations of the world.

Let me consider each of these three elements in turn.

First, the experience of the last few years suggests that, to put it simply, activist monetary policy works.

I believe strongly that political systems should give their central banks the space and the independence to do their job.

The most obvious contrast is between recent strong performance in the UK and US, where central banks are now considering decisions about the timing and speed of exit from extraordinary stimulus, and the situation in the Eurozone, where inflation is now extremely low and unemployment remains stubbornly high.

I fully support Mario Draghi’s efforts to ensure that the ECB does whatever it takes to meet its inflation mandate.

And I agree with him that the Eurozone needs to do more to strengthen its institutions and deliver on commitments to structural reform.

Recent falls in the oil price should provide a boost to all our economies, but as Ben Bernanke has argued in the past, the full macroeconomic benefits of lower commodity prices depend on an accommodating monetary policy response.

Activist monetary policy also depends on strong financial systems to ensure that the transmission mechanism between policy and private sector financial conditions is not broken.

Again the US and UK were swifter to act on this front.

We’ve both used tough stress tests to recapitalise our banks.

I am hopeful that the recent stress test and Asset Quality Review in the Eurozone should now provide some support.

There are perfectly legitimate concerns about financial imbalances associated with activist monetary policy, but these can be best addressed with well-designed macro-prudential policy.

In the UK we have put in place a world leading new system for macro-prudential control, with a new Financial Policy Committee in the Bank of England which is tasked with overseeing financial stability.

It represents a whole new set of weapons in the fight for economic stability and our new policy committee has already acted to tighten mortgage underwriting standards and limit loan to income ratios in our housing market, so that this time the punch bowl gets removed before the party gets out of control.

Activist monetary policy is the first crucial ingredient of any successful economic plan for recovery.

The second is a credible commitment to sustainable fiscal policy.

At every stage over the last five years I have been confronted with the argument that fiscal consolidation is incompatible with economic recovery.

And for five years I have argued that credible fiscal consolidation plans are not only a crucial foundation for effective monetary policy, they are a necessary precondition for sustainable economic recovery.

The evidence has shown this to be the case.

In the US, spending cuts, imposed, it has to be said, more by the separation of power than by coordinated design, have not choked off the recovery in the way that some feared they might.

I know the path of fiscal policy in the UK has been the focus of some interest in the American debate, so let me briefly set out our approach and the thinking behind it.

In May 2010 we were faced with a record 10.2% budget deficit, a Parliament where no party had a majority, a banking system four times as large as our GDP, and none of the advantages that the role of the dollar as the world’s reserve currency provides for the US.

What’s more, across the English Channel and the Irish Sea some of our nearest neighbours were teetering on the brink of a sovereign debt crisis.

In these circumstances fiscal credibility was vital for economic stability, let alone economic recovery.

So we moved quickly to set out a multi-year deficit reduction plan and legislated for it.

The pace of our fiscal consolidation over the last four years has been steady, with an average annual reduction in the cyclically adjusted primary balance of around 1.6% of GDP according to the IMF - the largest and most sustained of any major advanced economy.

In response to the acute crisis in the eurozone we made no significant changes to tax policy or spending plans, so the underlying stance of fiscal policy remained unchanged.

But the fiscal credibility we had earned meant we could safely allow the so called automatic stabilisers to operate through lower than forecast tax receipts.

The net result is that since 2010 fiscal consolidation has been accompanied by the third fastest GDP growth in the G7 and the fastest employment growth of any major advanced economy in the world.

Indeed, our participation rate, far from falling has risen to a near record high.

And following our recent data revisions we now know that business investment has grown significantly faster than previously thought - by 26.6% since we enacted deficit reduction - and is now 6.1% above its pre-crisis peak.

That’s very similar to the US where it is around 7% above its pre-crisis peak.

And all of this has happened despite warnings from some that our determined pursuit of our economic plan made it impossible.

Now we must finish the job we have started.

Our deficit is forecast to be down by a half as a share of GDP by the end of this year; but our goal should be to eliminate it altogether over the next couple of years.

Today, in the UK, we are publishing a Charter of Budget Responsibility and we will ask our Parliament to vote on it.

It commits us to getting debt falling as a share of GDP by 2016-17, and to get the cyclically adjusted current budget into balance by the following year.

There are those who say we should wait longer, until the end of this decade - and by implication must borrow much more. £50 billion more in annual spending and borrowing by the end of the decade.

This would destroy confidence and drive away jobs.

Let me be clear. The new Charter of Budget Responsibility means £30 billion pounds of further deficit reduction.

It commits us to finishing the job - and getting our national debt falling.

For if after 7 years of growth we don’t start reducing our debt, round the world people will ask; “if not now then when?”

Manana is not a credible fiscal plan.

Once we have got rid of the deficit and have debt falling, we should be running an overall budget surplus.

International experience has shown that is the only reliable way to reduce high levels of public sector debt when inflation is low - Sweden and Canada provide examples of countries that have used surplus or balanced budget rules to deliver resilient public finances following a fiscal and financial crisis.

The alternative would be to leave our debts for our children to pay off and leave our economies dangerously exposed to the next crisis - and we know better now than to assume there won’t ever be another crisis.

Treasury analysis shows that limiting our ambitions to current budget balance, rather than a surplus of 1% of GDP, would mean a national debt bigger by half a trillion pounds in twenty years time - almost £30,000 for every working household in Britain.

Imagine the situation that the UK and the US would be in now if we had entered this crisis with public debt ratios of 80% of GDP, the levels we see today - we would still be in crisis instead of recovery.

You can’t build a better future on a mountain of debt.

This time we will fix the roof while the sun is shining.

Those who have lost the public argument on current borrowing have now turned their argument into the case for unrestricted borrowing for capital investment.

They say it is a ‘free lunch’ - but benefactors of this Economic Club know that there is no such thing as a free lunch.

Productive capital investment is important for growth.

Indeed I’ve said that as well as running a surplus in normal times, public capital spending should grow at least in line with the economy.

But capital spending should be paid for by lower public spending in other areas or by the private sector by putting the right frameworks in place.

Otherwise capital spending is just higher spending, and that means higher debt.

So credible fiscal policy is the second crucial element of any successful economic plan for recovery.

The third element is a comprehensive and ambitious programme of supply side reform to support enterprise, innovation and openness.

In the long run, after all, productivity is everything.

This final element is becoming more important than ever in countries like the US and UK where unemployment has fallen significantly - indeed even some of my most prominent critics here now acknowledge that the supply side, rather than fiscal policy, has the potential to be the binding constraint on growth.

What you do hear, however, from economists like Robert Gordon is that recent innovations do not have the transformative potential of the great 19th and early 20th century inventions like the railways.

But again I believe the case for optimism is more compelling.

The most notorious thing about that Battle of New Orleans 200 years ago is that it was fought on 8th January 1815, after the peace agreement between the US and Britain was signed over two weeks earlier on Christmas Eve 1814.

Why? Because communication at the time was so slow that the news of the peace did not reach the armies in time.

Back then they could not have imagined the idea that they, and the rest of the world, could learn about a peace treaty on Twitter within seconds - or that the rest of the world would let the politicians know what they thought of that treaty seconds later and in robust terms.

There is no reason why we and our descendants will not see similar transformations over the next 200 years - that are unimaginable for us today.

Technological innovation has not been exhausted.

Human thirst for improvement is not slaked.

And there is nothing to suggest countries like the US and the UK need to accept long term decline.

The statement “everything that could have been invented has been invented” is often misattributed to the nineteenth century US patent commissioner Charles Holland Duell, but it was a view widely shared at the time.

In fact he believed that the discoveries of the time would appear insignificant compared with what was to come, and he was right.

Today the scientific breakthroughs of the past century have created an explosion of technological applications, which are in turn stimulating new advances in fundamental science.

Just as improvements in lens technology and better microscopes led to huge leaps in germ theory and medicine, today we cannot even imagine the advances in all areas of science – from genetics to materials – that high powered computing will make possible in the years ahead.

We are already on the cusp of a life sciences revolution – the first complete human genome was sequenced in 2003 at a cost of $3 billion; today it can be done for as little as a few thousand dollars per person.

And the scope for positive surprises is not just about the long term.

Even just a few months ago very few people predicted the full scale of the impact that US innovation in shale gas and oil extraction would have on oil and gas production, and, through the oil price, on the entire global economy.

Now the challenge for this generation of politicians, business leaders and policymakers is to embrace innovation and make the case for the economic reforms that can harness its potential.

So we should encourage the potential of new genetic technologies not fear them; in Europe we must make the case for GM crops instead of giving in to hostility and protectionism; and all of us need to invest in the application of new discoveries such as graphene – discovered in the UK – instead of allowing our competitors to overtake us.

In the UK we are building on our historical strengths in science and innovation.

According to the most recent index, four of the world’s top six universities are in the UK.

We have 1% of the global population, 3% of global R&D spend, but over 11% of citations and 16% of the world’s most highly cited articles.

Indeed, I’m afraid to say that we have overtaken the US to rank 1st by field weighted citation impact, an indicator of research quality.

And the Global Innovation Index shows UK now ranking 2nd in 2014 up from 14th in 2010.

But if we really want to turn new ideas into faster productivity growth and higher living standards we need to help our economies adapt to the new business models and new forms of economic activity right across the country that they enable.

That means for example holding the door open to disruptive intellect innovators of the sharing economy and resisting the lobbying from the older business models they challenge.

It means resisting protectionist sentiment in all its forms, so let’s prioritise the Transatlantic Trade and Investment Partnership between the US and the UK, and explain why standing in the way of jobs, trade and mutual prosperity is wrong.

It means continuing the hard work of economic reform, whether that’s reducing welfare transfers, increasing state pension ages or making our tax systems more competitive.

In the UK we have saved half a trillion pounds over the next fifty years by setting out a timetable for future increases to the state pension age – the single biggest saving we have made.

And from April 2015 our corporation tax rate will reduce to 20%, the lowest in the G20, down from the 28% rate we inherited.

And if we are to spread the benefits of innovation and productivity growth to everyone in our society then we must build a ladder of opportunity for people to climb.

In the UK we are putting this approach into practice.

We have dramatically cut the tax burden on the low paid; we are raising school standards with radical reform and the UK equivalent of charter schools; and we are replacing our complex web of working age benefits with a single Universal Credit so that it always pays to work.

None of these reforms have been easy.

Many have been bitterly opposed by entrenched and vested interests.

But I’ve learned one thing, above all, doing this job - it is always the economically essential that are the politically difficult.

So these are the three crucial elements of a successful recovery plan – activist monetary policy, credible fiscal policy, and ambitious supply side reform.

And the evidence shows that if you can get all three of these elements working together then your plan will be stronger than the sum of its parts because you will command the confidence of the world.

This is what we have attempted to do in the UK, with increasingly strong results.

We cannot know what the future holds – and there will no doubt be new shocks and more crises to contend with.

But if we in the UK and the US retain our ambition to be at the front rank of the economic nations of the world, then we can be confident that our values will be as relevant to the next 200 years of human endeavour as they have been to the last 200.

And we can look our fellow citizens straight in the eye and say with confidence: our best days lie ahead.

Published 15 December 2014