Annual Mansion House speech by Chancellor of the Exchequer, RT Hon George Osborne MP.
Lord Mayor, it is good – very good – to be back.
Thank you for the hospitality you have shown to your guests tonight.
I come tonight with my largely new Treasury team to move Britain from crisis and recovery, and towards a new settlement of responsibility and prosperity.
A new settlement for the British economy. A new settlement for the way we manage our public finances.
A new settlement in what we ask of your important industry, financial services.
A new settlement in Britain’s relationship with our partners in the European Union.
We do so from the fortunate position of being a majority government.
The last time that any Prime Minister increased both their party’s seats in the House of Commons and share of the popular vote, was in 1857 under the premiership of Lord Palmerston.
The parallels with my friend David Cameron don’t extend too far.
Lord Palmerston was well into his late seventies when he returned to Downing Street and literally died on the job: in the middle of making love, it is said, to a young housemaid on top of the billiard table.
You’ll be pleased to know that the billiard table, and the housemaids, have long since disappeared from Downing Street.
But there is one practice from Lord Palmerston’s time that we would do well to revive.
For it was under his Premiership that the Commissioners for the Reduction of the National Debt last formally met.
These Commissioners had first been appointed by William Pitt the Younger to reduce, and indeed, eradicate the national debt.
Not only have the Commissioners for the Reduction of the National Debt not formally met for over 150 years – it’s worse than that – most of the Commissioners don’t even know who they are. No wonder the public finances got into such a mess.
So I can tell you that next month I have called my fellow Commissioners together for their first formal meeting since 1860.
They’re an interesting bunch, ranging from the Lord Chief Justice to the Speaker of the House of Commons.
And, you, of course, Governor.
As I’m sure you knew.
When the Committee last met in 1860 the Governor was a Mr Bonamy Dobree and the Chancellor was a Mr William Gladstone – so, Mark, I think it’s fair to say I have a harder act to follow than you.
Lord Mayor, without sound public finances there can be no lasting economic security – and without economic security there can be no lasting economic prosperity.
So the new settlement for the British economy I talk about tonight starts with a new settlement in the way we manage our national finances.
When I spoke first to this dinner five years ago, our deficit stood at over 10% of our national income.
One pound in every four that our government spent on everything, from pensions to healthcare to defence, had to be borrowed.
Questions were raised about our ability to pay our way in the world.
In the last five years the working people of Britain have answered these questions with a determination and readiness to confront hard choices that few at the time foresaw.
The long term economic plan we have pursued has seen one of the most sustained reductions in the structural deficit of any major advanced economy in the world.
And we have been rewarded for that supreme national effort.
Not with the mass unemployment some predicted – but the highest employment rate in our history.
Not with the double or triple dip recession some warned of – but with economic growth that last year and now this year is forecast to be the fastest of any major advanced economy in the world.
Having come this far, and with the government now re-elected, the temptation is to think the task is almost complete – and the job is done.
I wish it were – but the harsh fiscal realities tell us it is not.
We have a budget deficit that remains, at just shy of 5% of national income, one of the highest in the developed world.
Our national debt stands at over 80% of GDP.
This year, for the first time since the beginning of this century, it is set to fall – because of the effort we have made.
If we ease off now it won’t fall, but continue to rise.
So that is why, last week, my cabinet colleagues and I found further savings of £3 billion in government departments.
Some people were surprised that we acted so swiftly after returning to office.
I trust that they will not be surprised when we act again in the Budget next month to find further savings in public expenditure.
Nor should they be surprised by the further action we will take against tax avoidance and aggressive tax planning, for we will do this fairly.
With our national debt unsustainably high, and with the uncertainly about what the world economy will throw at us in the coming years, we must act now to fix the roof while the sun is shining.
Indeed we should now aim for a permanent change in our political debate and our approach to fiscal responsibility – just as they have done in recent years in countries like Sweden and Canada.
The result of this recent British election – and the comprehensive rejection of those who argued for more borrowing and more spending – gives our nation the chance to entrench a new settlement.
A settlement where it is accepted across the political spectrum that:
without sound public finances, there is no economic security for working people.
that the people who suffer when governments run unsustainable deficits are not the richest but the poorest.
and that therefore, in normal times, governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future.
In the Budget we will bring forward this strong new fiscal framework to entrench this permanent commitment to that surplus, and the budget responsibility it represents.
This fiscal framework will be voted on by the House of Commons later this year, and assessed by the Office for Budget Responsibility we created.
I trust this new settlement for responsible public finances will now command broad support.
Lord Mayor, a commitment to living within our means is a necessary component of a long term economic plan – but is not by itself sufficient.
Britain must address its poor productivity.
We don’t export enough; we don’t train enough; we don’t save enough; we don’t invest enough; we don’t manufacture enough; we certainly don’t build enough, and far too much of the economic activity in our nation is concentrated here in the centre of London.
We will tackle each and every one of these weaknesses with the same determination we have brought to tackling the deficit – and we’ll draw the whole government effort together in a single plan for productivity next month.
Our financial services industry in Britain has, in recent years, been seen as part of the problem – now it must become part of the solution.
We have been seeking to resolve that British dilemma of being a host for global finance without exposing our taxpayers again to the calamitous cost of financial firms failing.
I believe that in restoring the Bank of England’s role in the heart of supervision, in ring-fencing retail banking and insisting on much better capitalised firms, we have made enormous progress in solving that dilemma.
Now we can raise our ambition and ensure we have the best, and most competitive financial services in the world.
I want us to be able to say this of your industry five years from now:
UK financial services will be the best regulated in the world, with markets of unquestioned integrity and the highest standards of conduct.
There will be more competition, more innovation and more players in retail markets – offering customers a better service.
There will be new firms disrupting the status quo, and big firms raising their game in response, with Britain leading the fintech revolution.
We will see even more high quality jobs in finance across the UK, in Edinburgh, Birmingham, Belfast, Cardiff and the great cities of the Northern Powerhouse.
In five years’ time the City of London will remain the world’s leading international financial market, holding our existing pole position in trading foreign exchange and derivatives.
But we will have further established ourselves as the pre-eminent Western location for new Asian markets like RMB, Rupees and Islamic finance.
The City will not just lead in financial markets, it will be the leading centre for insurance and reinsurance, for asset and wealth management, for shipping, and for a wide range of legal, accounting and other professional services.
And let me be clear. I want Britain to be the best place for European and global bank HQs.
It’s in our national interest to be so.
And I think with the combination of a highly competitive economy, skilled people, new infrastructure, good quality of life and the rigorous application of the rule of law, we can achieve that.
But I am also clear that it is in our national interests that that is achieved alongside a fair deal for the taxpayer and a regulatory system that protects all those who rely on banks.
We will continue to work together with you to ensure we get the balance right over the next five years.
Tonight, with the Governor of the Bank of England, I want to set out some of the steps we will take to deliver this new settlement for financial services.
The Fair and Effective Markets Review, which we launched together at this dinner a year ago, is publishing its findings today.
I want to congratulate Minouche Shafik, Martin Wheatley and the Treasury’s Charles Roxburgh for the work they’ve done – and to thank the industry, led by Elizabeth Corley for engaging so constructively.
This is the Review into the misconduct in fixed income and foreign exchange markets here in London, echoed in other markets around the world, that has done such enormous reputational damage to your industry – and which so many of you are justifiably angry about.
The Governor will have more to say about the detail, but it must be right that we focus on the accountability of individuals – one of the central recommendations of the report.
Of course, boards and top management must live up to their responsibilities – and face the consequences if they don’t.
But simply ratcheting up ever-larger fines that just penalise shareholders, erode capital reserves and diminish the lending potential of the economy is not, in the end, a long term answer.
It also leaves those guilty of misconduct untouched.
The public rightly asks why it is that after so many scandals, and such cost to the country, so few individuals have faced punishment in the courts. In any other walk of life those who committed these offences would be in prison.
The Governor and I agree: individuals who fraudulently manipulate markets and commit financial crime should be treated like the criminals they are – and they will be.
For let us be clear: there is no trade-off between high standards of conduct and competitiveness. Far from it. Implementing the reforms set out in this Review will ensure trust in our markets and strengthen London’s global leadership position.
There is another step we take today towards a new settlement with financial services – and that is to get the government out of the business of owning great chunks of the banking system.
We have already made good progress in that task since I first stood before you five years ago.
Northern Rock has been sold to that great new challenger, Virgin Money.
Our stake in Lloyds banking group is less than half what it was.
Here is a staggering fact. The sales of Lloyds’ shares and other assets we are planning this year amount to the biggest privatisation programme in British history.
It is worth reminding ourselves why this is the right thing to do.
I am not an ideologue who says public bad, private good.
Indeed, I believe there are many important services that should be funded and provided by the State.
But all the evidence suggests that commercial organisations are more efficient, more innovative and more effective when they are in the private sector.
They have to meet the disciplines of competing for capital from investors; they are freer to take risks with their resources, because it is shareholders’ money not taxpayers’ money at stake.
In the private sector, commercial organisations have the freedom to succeed, flourish, invest and grow.
It’s why we want to return Lloyds to the private sector over the coming year.
And I can tell you that we have now sold a further £500 million of Lloyds shares, reducing our stake in this bank to under 18%.
It’s why we should sell our shares in the Royal Mail.
I can announce that the first sale of our remaining stake in the Royal Mail has begun tonight.
We want to help the Royal Mail attract more investment and serve its customers, and use the money we raise in return to pay down the national debt.
And we’re also going to make sure that there is a special bonus for the workforce who have done such a great job turning Royal Mail around.
Thanks to them, Royal Mail’s share price has risen; so we’re going to give more of the shares to the staff.
Tomorrow we will announce more details of that, and how much of our stake we have sold.
So with Lloyds and now the Royal Mail we’re making good progress – but, candidly, the hardest nut to crack remains: the Royal Bank of Scotland.
The £45 billion the previous government put into RBS represents the largest single bank bail-out in the world.
This Bank employs over 60,000 in Britain and provides over a quarter of all the small business lending in Britain.
Its problems and its slow recovery have been one of the biggest drags on our economy, as many smaller firms know all too painfully.
The restructuring of RBS I announced here at the Mansion House two years ago, and the great work that Ross McEwan and his team have done since, has brought us to this decision point.
Do we begin the process of selling down the government’s huge majority stake, even though the share price is still below what the last Chancellor paid out seven years ago?
Or, do we hope against hope that something will turn up?
Frankly, in the short term the easiest path for the politician is to put off the decision and leave it to someone else at some future time to pick up the pieces.
I’m not interested in what’s easy – I’m interested in what’s right.
I was not responsible for the bailout of RBS or the price paid then for shares bought by the taxpayer: but I am responsible for getting the best deal now for the taxpayer and doing whatever I can to support the British economy.
There is no doubt that starting to sell the government’s stake in RBS is the right thing to do on both counts.
That is not just my judgement – it is the judgement of the Governor of the Bank of England, whose views I sought and whose letter to me on the issue we publish today.
In the Governor’s words: “it is in the public interest for the government to begin now to return RBS to private ownership”.
That return “would promote financial stability, a more competitive banking sector, and the interests of the wider economy”.
Indeed “there could be considerable net costs to taxpayers of further delaying the start of a sale”, the Governor writes to me.
It is also the conclusion of the independent review I have commissioned from Rothschilds and am also publishing today.
They say that beginning sales now, and increasing the free float, will improve the marketability of our remaining stake – and it means we can expect to see larger sales on better terms in the future, but only if we start now.
Indeed this independent report confirms that if you take into account all the sales we’ve authorised of our bank assets, and the fees we’ve received – at the current valuations taxpayers can expect to make £14 billion more than they paid out.
Let me be very clear about what I’m saying tonight: Our economic plan has been about fixing what went wrong in the British economy.
So, in the coming months we will begin to sell our stake in RBS.
It’s the right thing to do for British businesses and British taxpayers.
Yes, we may get a lower price than that was paid for it – but we will get the best price possible.
For the longer we wait, the higher the price the whole economy will pay.
And when you take the banks in total, we’re making sure taxpayers get back billions more than they were forced to put in.
From bailing out the banks, to bringing them back from the brink, now is the time for RBS to rebuild itself as a commercial bank.
No longer reliant on the state, but serving the working people of Britain.
Given the size of our stake in RBS, the sales will take some years and will likely involve all types of investors.
With such a complex investment case, we have to start with institutions, but I see no reason why ordinary investors – in other words members of the public – should not take part in due course.
That is the approach we’re taking with Lloyds.
Lord Mayor, alongside the new settlement with financial services, we also need a new settlement with our partners in Europe.
Now, there will be those in this room who are absolutely certain that Britain should leave the European Union.
And there will be those who think Britain must remain in the European Union, come what may.
I suspect the majority of people here would, to borrow an old phrase, like “Britain to be in Europe but not run by Europe”. That is what, in essence, I see the renegotiation we are undertaking as seeking to secure.
Different countries joined the European Union for different reasons that reflected their different histories and challenges.
Germany and France joined to end a century of bloody conflict.
Spain, Portugal and Greece and Eastern Europe to entrench their new democracies as they emerged from tyranny.
Britain joined for overwhelmingly economic reasons – to put behind us our industrial decline and open our economy.
It’s why, for us, the common market, and now single market has always been the benefit of membership we’ve raised above all others.
Now it is economic challenges that are causing our country to consider the merits of that membership.
Let me focus on just two of those challenges tonight, because they are felt very keenly by your financial services industry – but they are certainly not unique to finance.
First there is the way the European Union seems intent on pricing our continent out of the world economy.
Britain benefits enormously from the single market in financial services, and the City thrives as the global centre of European finance – London trades twice as many euros every day as the whole Eurozone put together.
Yet one of the greatest threats to our international competitiveness comes from ill-designed and misguided European legislation imposed not just on our financial services industry, but many other industries too.
That’s why a central demand in our renegotiation is that Europe stops costly and damaging regulation, and instead rediscovers its economic ambitions that once made this the most dynamic and prosperous part of the world.
Completing the single market in digital and professional services; free trade deals with the US, India, Japan and China.
That’s a European agenda we need to see more of – an agenda that will benefit not just the United Kingdom, but the whole of the European Union.
The second economic challenge we face is reconciling the integrity of the European Union as a collection of 28 member states with the integration of the Eurozone as a currency union of 19 economies.
It is a particular challenge for the UK – and one that wasn’t envisaged in the EU Treaties.
For we, almost alone along the non-euro members, have no commitment to join the single currency – and no realistic prospect of wanting to do so.
That poses problems as the Eurozone follows what I called four years ago the remorseless logic that drives it down the road of fiscal, financial and political integration.
So, for example, soon the Eurogroup will not only have an automatic qualified majority on all financial services legislation for the whole EU – but in the European Central Bank it will have a single financial supervisor guarding the Eurozone’s interests, even if it’s at the expense of the rest of the single market.
We’ve already been told that certain financial businesses can only locate in a subset of Eurozone member states.
That was a fundamental challenge to the principle of the single market, which we successfully overturned in the court.
But it points to the looming challenges ahead, when proposals like their financial transaction tax are developed.
Even the most pro-European in the room would, in time, come to question the benefits of British membership of the EU if we did not tackle these issues now.
We need a settlement that recognises that while the single currency is not for all, the single market and the European Union as a whole must work for all.
So among the principles we seek to establish in this re-negotiation are these simple ones: fairness between the euro-ins and the euro-outs enshrined, and the integrity of the single market preserved.
It’s in our interests that the Euro is a successful, strong currency. So we’re prepared to support the Eurozone as it undertakes the further integration it needs.
But in return, we want a settlement between the UK and the Eurozone that protects the single market and is stable, fair and lasts.
Lord Mayor, Britain would not have pulled itself out of economic crisis – and this government would not have been re-elected with a majority – if we had ducked the big issues facing our nation.
I don’t want my country to give up on the future.
I don’t want to look on from the sidelines as other parts of the world pioneer new science, promote new business, offer new finance, take forward new art and say to my two young children: that used to be us; that used to be Britain.
I believe it is within Britain’s reach to become the most prosperous of all the world’s major economies in the coming generation – and for that prosperity to be shared widely across our one nation.
Working together, achieving these new settlements for our public finances, for our financial services, and for fairness in Europe, will help us secure that bright future for us all.
And I look forward over the coming years to working with you to make that happen.