Chancellor tells CBI, government will 'stick to its economic approach'
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Chancellor's keynote speech at the Confederation of British Industry's (CBI) annual dinner.
Good evening ladies and gentlemen, and thank you, Roger, for that introduction.
You’ve been a powerful voice for business – and I want to thank you for everything you have done at the CBI as president not just for the business community, but for Britain.
I said at my first CBI dinner as Chancellor – three years ago – that the economic inheritance we faced was the worst any modern government had faced.
That there was no single lever we could pull to solve Britain’s problems: just the painstaking work of reducing our record deficit, making our taxes competitive and rebalancing our economy away from an unsustainably large public sector to an unacceptably small private sector.
That was the course of action that I set out then.
It is the course of action we follow now.
We have faced economic trial and tribulation, from oil price shocks to an unprecedented sovereign debt crisis in Europe.
But we have not relented.
Yes, it’s taking longer than anyone hoped.
But we have made substantive, real progress.
1.2 million jobs created by the private sector.
The deficit down by a third.
The most competitive business tax regime in the G20 by 2015.
All the consequences of deliberate government policies, devised and fought for and delivered.
There will always be obstacles in our path - and disappointments on the way.
Today unemployment rose, although youth unemployment and the claimant count fell and the monthly data is better.
But the fact is, the most recent economic news has been more encouraging.
The economy is growing.
Surveys are better.
Confidence is returning to financial markets.
This is all reflected in the Bank of England’s inflation report today.
As the Governor says, “there is a welcome change in the economic outlook”.
And my message to the business community and to the country is this:
We have a clear economic plan.
Our plan is working.
Now is not the time to lose our nerve.
Let’s not listen to those who would take us back to square one.
Let’s carry on doing what is right for Britain.
Let’s see this through.
Our economic plan is based on three simple propositions.
First, the most powerful weapon we have in supporting economic demand is monetary policy.
So we have been monetary activists, helping keep interest rates low for families and firms, keeping credit channels open, using our balance sheet to encourage private investment, and repairing the banks.
Second, you cannot have an activist monetary policy if you’re not fiscally responsible.
So we have set out a credible deficit reduction plan that has brought the deficit down by a third while switching more money into productive capital investment and allowing the automatic stabilisers to operate.
But neither monetary nor fiscal policy alone can solve Britain’s greatest economic challenge.
How do we make sure Britain is not out-competed, out-worked and out-smarted in the global race by those more ambitious for success than us?
So the third proposition is that far-reaching supply side reform – to help businesses to grow, exports to rise and investment to flow to our shores – is the only sustainable way to deliver rising living standards for our population.
Let me start with monetary activism.
It’s the quickest and most effective way to stimulate demand.
It gets money to where it should be: not in Whitehall departments, but off the interest bills of families and businesses.
At the Budget I updated the currently MPC remit to take into account recent developments in the practice of monetary policy around the world.
For the next inflation report in August, I’ve asked the MPC to consider the case for the kind of signposting the Federal Reserve is providing on the path of future interest rates.
This is not some obscure change – it is about whether it might help to give businesses like yours greater information as you make decisions on whether to invest.
That inflation report will be under a new Governor of the Bank of England.
Mervyn King has provided great leadership, integrity and insight.
So when I needed to find his replacement, I set out to find for Britain the very best. In Mark Carney, we have got him.
Isn’t it a fantastic advertisement for the openness and global reach of our country that we can ask someone who is not British but who is the best in the world, to lead our central Bank?
Our Bank of England is, quite properly, independent in its monetary policy decisions.
But the Treasury and the Bank of England are rightly working together to unblock the transmission mechanism from monetary policy to the real economy.
The Funding for Lending scheme has had a dramatic effect on mortgage rates –rates on some fixed rate mortgages have declined by over 1% since the scheme’s launch.
And we’re now extending the scheme and sharply increasing the incentives for new lending to SMEs.
We’re working with the Financial Policy Committee and our new prudential regulator to ensure our banks are properly capitalised and can supply the credit our economy needs.
We’re also using the credibility of the government’s balance sheet to support the economy with billions of pounds of infrastructure guarantees, housing guarantees, our Help to Buy scheme, and Business Bank investment.
None of this would be possible if our public finances were out of control.
Monetary activism and using the government’s balance sheet to support private investment are only possible because of the credibility and low market interest rates that our deficit reduction plan has earned.
This is the second part of our strategy.
To get to the facts about fiscal policy, we need to cut through a stylised debate between austerity and growth.
The real debate is much more subtle: what is the right mix of fiscal, monetary and structural policies that can actually deliver sustainable growth?
I’d like to thank the CBI for its steadfast support for the government’s deficit reduction plan.
In the UK, with our record budget deficit, the arguments for more fiscal stimulus three years ago were always weak, and as signs of recovery emerge those arguments are getting even weaker.
Let me take on the case for looser fiscal policy– for a so-called Plan B.
It starts with an assertion that the government’s fiscal plan has been the reason for slower than forecast growth since 2010.
The implication is that the “fiscal multipliers” – the calculation that considers the impact of fiscal consolidation on growth – have been higher than assumed back then.
The problem is it doesn’t fit the facts.
The independent Office for Budget Responsibility – another innovation of this government - did an assessment of their own forecasting record and they found that nominal consumption turned out almost exactly as they forecast in 2010.
It was higher-than-expected inflation that reduced consumption in real terms relative to the forecast.
And more recently, slower than forecast growth has been more than accounted for by the weakness of exports – particularly exports to the EU.
Domestic demand has been growing consistently since 2010.
For all these reasons and more, the independent OBR’s own analysis finds that, instead of the government’s deficit plan, a combination of three other factors is a more convincing explanation for slower than expected growth in the UK:
inflation shocks, such as the higher oil price
the impact of the eurozone crisis
and the ongoing damage done by the financial crisis
What’s more, without allowing inflation to climb even further above target, a fiscal stimulus three years ago would simply have been offset by less supportive monetary policy, with no net impact on demand.
With the independent MPC judging that the risks to inflation and output are evenly balanced, the same is true today.
So, just as the argument for fiscal stimulus three years ago was mistaken, so is the suggestion for a discretionary fiscal loosening now. Because we have sensibly allowed the automatic stabilisers to operate, our deficit is only just falling in nominal terms.
Are those advocating looser fiscal policy really suggesting we should set out to increase our deficit year on year when it is still larger than when Britain went to the IMF in 1976 and one of the highest in the western world today?
And those who argue that because the UK has its own central bank and the ability to print money the UK cannot lose market confidence are dangerously wrong.
The UK’s own history shows it to be false.
If financial markets sensed that the UK was going to print its way out of trouble, the response in the markets would be catastrophic.
The people who would pay the price are the millions employed by the companies represented in this room and the millions of families who would face higher mortgage rates.
Finally, those who advocate more spending have had to admit that it would increase borrowing.
But, they say, it would lead to lower borrowing after that.
We would borrow more to borrow less, they say.
Once you unpack the assumptions required for this to be true, this argument becomes patently ludicrous. Let’s take the idea that a temporary VAT cut would eventually reduce borrowing.
This would require the multiplier effect of a VAT cut on the economy to be seven times higher than the independent OBR estimate. It simply doesn’t stack up.
The truth is that while the detail and credibility of our deficit plan stands out internationally, our pace of consolidation is in the middle of the pack.
We are reducing the structural deficit by about 1% of GDP a year – in line with other developed economies, and less than the US.
And we’ve let the automatic stabilisers operate in response to external shocks.
So we will stick with our approach, which has seen the deficit cut by a third.
We’re doing this in as growth friendly a way as possible – with only 20% of the burden on tax, and further cuts to day to day spending to increase capital spending above what we inherited, as the CBI recommended.
The detailed spending plans we set out next month for the year that spans the next election will include further investment in improving Britain’s infrastructure.
We’re already investing more in our railways than anyone since the Victorians and more on roads than for a decade.
Our aim is to get away from short term, stop start decisions that have left Britain lurching from one set of capital plans to another.
We want to lift our eyes from today – and think about what Britain needs for tomorrow.
That’s what we’ve done with Crossrail and High Speed 2.
These projects are always controversial and difficult for the communities affected.
That’s why politicians often find it easier to duck them.
Yet they’re precisely the kind of long term infrastructure investment Britain needs.
All these long-term structural reforms don’t attract the same headlines as fiscal or monetary policy, but ultimately they are more important.
For if we don’t fight to stay in the global race - jobs will be lost, our country will be poorer and standards of living will fall.
Three years ago, international companies were leaving the UK and nothing was being done.
Now we’re cutting Corporation Tax from 28% to 20% and changing the overseas profit rules – so that companies like AON and WPP are moving to Britain.
The recent KPMG survey found we moved from near the bottom to the top of the most competitive tax systems in the world in just two years.
And on Europe let me say this – I believe our aims are the same as those of British businesses: a more open, more flexible and more competitive European Union.
And I also believe that the vast majority of British businesses both big and small back the Prime Minister’s strategy for achieving that goal of a new settlement for Britain in Europe.
And we’re backing those small businesses at home.
Just today I talked in the Queen’s Speech debate about the legislation for our new Employment Allowance.
A job tax cut which takes two thousand pounds off the National Insurance bill of every business – one third of employers will soon pay no jobs tax at all.
You asked us to reduce the burden of regulation.
So we’ve dramatically simplified our planning laws, doubled the qualifying period for unfair dismissal, and we’re introducing fees for employment tribunals.
Each involved a massive fight with pressure groups and trade unions.
But we did it.
You told us you needed an education system that equipped young people for the workplace.
So we’re transforming education – we’ve opened 2900 academies; started 1 million apprenticeship and we’re directing a quarter of billion pounds of skills funding direct through employers.
In the face of opposition - from vested interest groups and unions.
But improving education is the most important economic policy of all.
You asked us to provide certainty for energy investment.
We’ve set a 10 year levy control framework for renewables support.
Instead of banning new fracking technology as some would have done, we’ve launched generous new tax breaks.
And, if the price is right, we will move forward on a new nuclear programme at a time when other countries are abandoning theirs.
I know you want delivery and this summer we will set out strike prices for new energy investment.
No other major country has done this much.
We’ve not been afraid to intervene in sectors where Britain is world class.
We’ve supported aerospace skills, created patent boxes for pharmaceuticals and introduced tax breaks for creative endeavours. This week we heard the new multi-million Star Wars movie is going to be made in the UK.
We fought hard for that because I don’t want to see jobs and investment disappearing to a galaxy far, far away. I hear you when you say you want things to move more quickly.
I say: me too.
That’s why I made Paul Deighton, the man who delivered the Olympics, a Treasury minister to figure out how we improve Whitehall’s capacity to deliver big projects quickly.
He is having a transformative effect.
So we are following through on what I promised three years ago: that we would do everything to support the private sector and show Britain is open for business.
On the top rate of tax;
on corporate taxes;
on planning and employment law
on schools and universities and welfare.
All have been hugely controversial – all bitterly contested – but all supported by business.
I thank you for that.
But our job is not done.
We face a choice.
We can follow the path some western countries are taking – taxing enterprise, increasing the size of government, driving away wealth creators and businesses.
That is a path many in our political system urge on the UK.
It would be a disaster.
We won’t penalise enterprise but back it.
We won’t grow the size of government but shrink it.
We won’t drive wealth creators away from our shores but bring them here.
We are travelling a hard road.
But we’re making progress.
And with your help we will get there.