Speech by the Chief Secretary to the Treasury.
I spoke to the CBI dinner in Inverness in March, shortly after the Budget. Much has changed since then, both for the economy and for Scotland, and I welcome the opportunity to reflect on both with you tonight.
It has been a turbulent Summer for world markets. Equity markets across America, France, Japan, Germany and even China exhibited a degree of volatility not seen since 2008, and of course the UK is not immune to these events.
Concern about both sovereign debt and economic growth is at the heart of these problems, fuelled by uncertainty about the ability of political leaders across the globe to take the decisive action needed.
Since we came into office, the Coalition Government has shown itself willing to take the difficult, and often unpopular, decisions necessary to deal with the country’s enormous economic problems.
Indeed, returning our country to lasting prosperity is the founding purpose of this government - the overwhelming national interest that motivated two very different political parties to take responsibility together for a full 5 years.
Taking responsibility does not just mean dealing with the enormous budget deficit. It also means leaving behind the failed model of debt fuelled growth of our predecessors and replacing it with prosperity that is more balanced, sustainable and lasting because it is built on firmer foundations.
The first of those foundations is financial discipline. As a consequence of our resolve, even amid turbulence, the market continues to back UK government bonds. UK gilt yields have fallen to near record lows in recent weeks, with the spread to bunds falling by over half a percentage point since May last year.
This is a vote of confidence that vindicates the Government’s decision to get ahead of the curve and deal with the deficit we inherited. Despite having a deficit larger than Portugal we have interest rates close to Germany’s.
It sets us apart from countries in the Eurozone that have struggled to establish the credibility of their deficit reduction plans. It sets us apart from the US, where political deadlock has brought a historic downgrade of the country’s credit rating. And it sets us apart from those who dug a record peacetime deficit and want to keep digging.
Those low interest rates have real benefits - keeping people in their homes and helping businesses - that those who oppose our plans seem willing to sacrifice. I am not.
Financial discipline is not ideological - it is a necessary condition for effective government. So let me be clear - we are sticking to our plans.
We might also want to ask ourselves how Scotland alone would be faring through these difficult times.
Let me give you some facts. Calculations by the Treasury show that, on the basis of share of the population, in 2009/10 Scotland’s share of the national debt would have been around £65 billion. And that does not include the cost of recapitalising RBS and HBOS, which dwarfed the entire Scottish budget.
As the experience of other small countries with large banking sectors, like Iceland and Ireland, have shown these would have been a catastrophic problem for Scotland to deal with had we decided to go it alone.
And our underlying fiscal position in Scotland would not help. According to the Scottish government’s own figures, even with the most flattering account of oil revenues, there was a gap between what Scotland raised in tax and what it spent of £14 billion in 2009/10 - Scotland’s deficit would have been one of the largest in Europe.
Heroic assumptions about oil revenues don’t actually help much - with revenues forecast to fall steadily, a further structural problem for Scotland would be just around the corner.
As an important part of the United Kingdom, responsibility for dealing with these problems is shared, and Scotland benefits from the low interest rates and significant fiscal credibility that we have. That is just one small part of the benefit to Scotland of being part of the longest standing and most successful fiscal, monetary and economic alliance in world history.
United we stand. United we have the capacity to resists the pressures that have overpowered some of our neighbours’ economies, united we can build a model for growth that is sustainable.
Our Emergency Budget last year, followed by the most difficult Spending Review in decades, has put the UK back on a path to fiscal sustainability. And the very same rating agency that downgraded the US, took Britain off the negative watch and reaffirmed our AAA status.
Tackling the deficit is the number one priority for this Government because it is a vital precondition of growth. The difficult decisions that we have made have kept interest rates low, have kept families in their homes, and have stirred an economic recovery creating 500,000 new private sector jobs over the last year. And both the Bank of England and Office for Budget Responsibility forecast continued growth over the coming year.
But the UK suffers from a huge debt overhang following the financial crisis, and recovery from this sort of debt driven recession is bound to be prolonged and difficult. Households are paying down their debt, companies are postponing investment, and banks are reducing the size of their balance sheets.
These are powerful drags on a recovery. And it’s a story that is replicated across the world. The imbalances that were built up in the global economy over the last decade still have a long way to go to be resolved. As the Governor of the Bank of England said in the last Inflation Report, the UK recovery is not immune to the harsh winds of these structural adjustments.
That is why we are redoubling our efforts to build a new model of balanced growth powered by investment, exports and enterprise.
We cannot revert to the unsustainable debt-fuelled consumption of the past.
Instead, we must build a recovery based on growth in the private sector, growth across different sectors, and growth across all part of the UK.
In Scotland we have strengths to capitalise on …a strong financial sector, a strong manufacturing sector and a strong energy sector with huge potential for growth. Our high quality universities provide a large and ready pool of talented, ambitious and skilled young graduates to invigorate businesses across the country.
But at the same time, there are some entrenched weaknesses which are by no means unique to Scotland, but are obstacles to be overcome. Scotland has a smaller private sector than that of the UK as a whole, and though a strong and vibrant financial sector is essential to economic recovery, after London, Scotland has the second largest exposure to the financial industry.
We cannot rely on ever more debt funded public and private spending as the route to growth. Instead, through reform and judicious use of the resources we do have, we have to create the conditions that will galvanise a private sector recovery, build a more balanced and sustainable economy, and create the jobs for our future.
There are many elements to the Coalition’s efforts to do just that.
First, investing in precious transport infrastructure. Even with resources constrained as they are now, the UK government has found the money to increase investment in transport over the next 4 years as compared to the last four.
If I may be permitted an observation as a Highland MP, that is what Scotland needs too
As Scottish ministers review their own spending plans - and I know how difficult the choices they face will be - I hope they will find the courage to set more money aside for transport, unblocking the choking arteries of the Scottish economy especially in the North.
Through Infrastructure UK we have brought an unprecedented level of focus on the UK’s long term infrastructure needs, to identify our key priorities, and attract private sector interest and investment to support the £200 billion of infrastructure investment needed by 2015.
Because infrastructure investment is vital to stimulating new growth in established sectors such as construction, but also the future high growth industries in the digital, online and of course, the green technology sectors. The coalition and the Scottish government both have huge ambitions for the renewables industry in Scotland - by working together, with the Green Investment Bank, we can deliver on those ambitions and support a green economic recovery.
And the Coastal Communities Fund that I announced in July will give Scottish communities a substantial and direct benefit as the marine renewables sector grows.
Second, trade. The United Kingdom has always been a trading nation and more often than not, led by an outward looking and entrepreneurial Scotland. But in recent years, too little priority was given to trade and manufacturing as politicians were beguiled by the illusion of debt-fuelled financial sector growth. We are redoubling our efforts to support British businesses seeking to export, using both UKTI and our embassy network around the world. And in Europe we are pushing hard to extend the single market to boost growth.
On tax, we are reversing the steady decline in the UK’s competitiveness that has marred the last decade and a half. In 1997, the UK had the tenth lowest main rate of corporation tax in the EU. By the time we came to office, we’d slipped to 20th.
Last year we announced that we would be cutting the main rate of corporation tax, and the Budget this year announced a further one per cent reduction on top of that. By 2014, the rate will be reduced to 23%…a total reduction of 5%, the lowest in the G7, and the fifth lowest in the G20. And by making our first priority income tax cuts for low and middle earners, we are supporting working families in these tough times.
And while I know some of you did not support our decision to increase taxation on North Sea oil extraction - necessary to help reduce the burden of high oil prices on families and businesses - I hope you will also recognise the efforts we have made to work with the industry to fulfil the commitment we made then to listen to and act on proposals to relieve specific difficulties caused.
The changes we announced to the Ring Fence Expenditure Supplement in July have already had a positive impact, most notably in the case of Statoil’s multi-billion pound Mariner and Bressay heavy oil fields. We continue to engage on field allowances, and look forward to receiving further proposals from the industry later this month.
We are working to make Britain the best place to start and grow a business. Most importantly, that means ensuring access to finance. This includes a bank-led £2.5 billion Business Growth Fund, and of course, earlier this year we reached agreement with the biggest banks in the UK to commit to lend £190 billion of new credit to all businesses in 2011. A total which includes £76 billion specifically ear marked for SMEs - £10 billion more than was lent last year. And whilst the latest figures are promising, we have been clear that the Government will use every tool available to ensure that the banks live up to their promises - in full.
We have also announced the location of 22 Enterprise Zones across England to accelerate local growth, and create thousands of jobs by 2015. These Zones will attract hundreds of new start up firms, with simplified planning rules, super-fast broadband and over £150 million in tax breaks for new businesses. Of course, whether Scotland chooses to establish its own Enterprise Zones or not is a matter for the Scottish Parliament, but we said when we launched the policy in March that we wanted to hear about and help with Scottish government proposals to do likewise here. That offer is still open, and we are ready to work with the Scottish government to take forward any ideas it wants to discuss.
Finally, we must ensure that we have a workforce equipped with the skills that businesses need. We are delivering 250,000 apprenticeships over the next four years, and investing £7.6 billion in 2011-12 in education and training for 16 to 19 year olds. In Scotland these are matters for the Scottish Government to pursue. It is vital that the younger generation do not bear the brunt of these tough economic conditions and are not left to fend for themselves.
To improve our labour market, we also have to reform the welfare system - one of the greatest failures of our predecessors. Our plans for a Universal Credit will simplify the complex system of benefits and tax credits, and will improve the incentives to get a job.
Most importantly, our work programme is the biggest single payment by results employment programme that Great Britain has ever seen. I saw earlier today what a difference this is already making to people here in Glasgow when I visited one of our providers, Working Links. This new system will help over half a million people a year, will pay providers for positive outcomes only, and will get people off welfare and back in to work.
That is our plan for growth. Of course, in many of these areas responsibility lies with the Scottish Government. You will need to judge whether their approach is supporting growth - and, if my experience is anything to go by, you will be vocal when you judge they are not.
We have put forward radical plans to strengthen the responsibility and accountability of the Scottish Parliament. We believe it is right to provide the Scottish Government with capital borrowing powers, and more flexibility and control of taxation policy. It is the most fundamental shift of financial responsibility within the United Kingdom for 300 years and it is being taken through Parliament brilliantly by Michael Moore as we speak.
Of course the Scottish Parliament already has hugely significant powers over big areas of the Scottish economy. As the new government works on its spending review, we hope that the Scottish Government will, like the UK Government, prioritise spending that boosts a private sector recovery, ensures sustainable growth…
…and capitalise on the unparalleled economic, financial, fiscal and social ties that bind the UK economy together.
Because Scotland, within the UK, is a success. In fact Scotland exports nearly two thirds of its total exports to the UK and benefits from large inwards capital flows from the rest of the UK. In 2010, firms owned by the rest of the UK employed 20% of all Scottish workers and contributed to around 25% of total turnover.
Among the nations and regions of Britain, only London and the south east have a higher Gross Value Added per head than Scotland and Scotland’s employment rate is higher than the UK average.
The ties between Scotland and the rest of the UK are an essential cornerstone of our economic recovery. Scotland’s road to recovery is intimately tied to recovery of the rest of the UK, and we must work together, politicians and businesses, to capitalise on every opportunity to support recovery. We are stronger together - and we are stronger when Scotland’s two governments work together, pulling in the same direction for the people of this country.
We cannot allow the current constitutional uncertainty to distract or undermine this economic goal - Scotland is too important to the UK and the UK too important to Scotland for that. I hope that your voices - the voices of Scotland’s economic future - will be heard as that debate develops.
We need to hear your voices too as we come to the next stage of the Government’s Growth Review with a focus on infrastructure, education, logistics, medium sized businesses, open data and the rural economy. These are all critical areas of the Scottish economy.
Some of the levers that affect these sectors are devolved, but UK policy will still have a big impact on Scottish businesses. I know there may be a few wry smiles when I say that I am from the Treasury and I am here to help, but I want to engage with you over the next few months to develop the ideas and the policy that will help promote growth in these areas.
The coalition is as much a government for Scotland as Holyrood is, so I hope very much that you will engage positively with us.
We have come a long way in the last year to put the nation’s finances on a sustainable path. But we know that there is a long and difficult path to tread towards recovery. There is no easy way out of the challenges we all face.
The businesses present today will be critical to this recovery. It is vital that we learn what more it is that Government can do - or stop doing - to support you. What is it that the Government can do for business, growth and employment in Scotland?
I encourage you all to pro-actively engage with the Treasury as we embark on the next stage of the Growth Review, and I look forward to working with many of you in the months and years to come.