Speech by the Chief Secretary to the Treasury.
Thank you very much for inviting me to speak here this morning, and thank you Iain for the kind introduction.
By some twist of fate I’ve been scheduled to make quite a few speeches over the last two weeks…at Conference, and across Scotland….at what is a very precarious time for the country.
It’s been an incredibly volatile few weeks, even by the standards of an especially difficult few years. We’ve seen confidence rise as quickly as it’s crashed.
And we all know just how much is at stake for the country.
But events have been clouded by a mist of commentary, analysis and speculation.
Ultimately it all comes down to our ability to take a firm grip of the malaise.
It all comes down to tomorrow. The Quarter Finals depend on it and the World Cup is on the line.
We have to beat England in Auckland, and I have every confidence that we will.
If only, however, that were the biggest risk on the horizon. You don’t need me to tell you that we are confronting an extremely difficult economic environment.
World markets have exhibited a degree of volatility and uncertainty that we haven’t seen since 2008.
Over the summer, stock markets around the world have fallen by as much as 30%, with the banks leading the charge dropping by as much as 40%.
And last week, the pace increased as S&P downgraded Italy’s credit rating and the IMF warned that we are entering a “dangerous new phase” for the world economy.
The Eurozone has been at the epicentre of this crisis.
And as the President of the European Commission, Jose Manuel Barroso said in his state of the union speech on Wednesday, the EU faces the “biggest challenge in its history.”
The UK is of course directly impacted by this ongoing turbulence. After all, the EU is our largest trading partner.
And we have been urging the EU to take the decisive action that is needed to restore confidence in the Eurozone, to calm the nerves, and follow the remorseless logic of monetary union towards closer fiscal integration.
But these aren’t problems that have emerged out of the blue. They have been a long time brewing.
At their core are concerns about the size of sovereign debt, and the pace of economic growth. Concerns fuelled by the inability of politicians across the world to take decisive action that the markets demand.
Our coalition on the other hand didn’t waver on inheriting the largest peace time deficit this country has ever seen. We didn’t waste any time on setting about taking the drastic action needed to balance the books.
Through the toughest Spending Review in decades, we took the difficult and often unpopular decisions to eliminate the structural current budget deficit by the end of this parliament.
These were not decisions taken on a whim, they were decisions vital to restoring our economic credibility in world markets. Because as well as the record deficit, we also inherited a negative watch on the UK’s AAA rating from Standard & Poors.
But only 4 months after our Spending Review, S&P put the UK back to a stable outlook, reaffirming our AAA status, crediting the Coalition’s ‘cohesion’ in putting the UK’s finances back on a sustainable footing.
And the markets have agreed with that judgement, and continue to back UK government bonds. In recent weeks, UK gilt yields have fallen to record lows. Despite inheriting a deficit larger than Portugal’s, we have interest rates close to Germany.
This is a huge vote of confidence that vindicates the Government’s decision to get ahead of the curve and deal with the deficit.
It sets us apart from countries in the Eurozone that are scrambling to consolidate at the behest of the market.
And it is a vital precondition for growth. Those low interest rates have real benefits - keeping people in their homes and helping businesses refinance debts and secure loans.
As a result, since March last year the economy has created almost 600,000 new private sector jobs. The Bank of England, the Office for Budget Responsibility, and the IMF all forecast continued growth this year and next.
And the Chancellor, our coalition colleagues, and I have all reiterated that we are sticking to the plan.
This is absolutely not the time to be complacent on the debt challenge this country faces. As Christine Lagarde, Managing Director of the IMF, said recently on her visit to the UK: “risk levels are rising”, and in that environment, “the UK policy stance remains appropriate.”
But of course, the recovery will be choppy. We are recovering from the worst financial crisis in over a century, and we are living under the shadow of a huge debt overhang.
Households are paying down their debt, banks are shrinking their balance sheets, and companies are postponing investment.
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. And of course the UK will be impacted by those structural adjustments.
Bringing down the deficit is necessary for growth, but it is not sufficient.
That is why we are redoubling our efforts to support the recovery and build a new model of balance growth powered by investment, exports and enterprise.
Plan for growth
Across Scotland we have a number of strengths to capitalise on…a strong financial sector, a strong manufacturing sector and a strong energy sector with huge potential for growth.
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.
Earlier this year the Coalition published its Plan for Growth which set out the many elements of our efforts to realise this ambition.
On tax we are reversing the steady decline in our competitiveness that has marred the last decade and a half.
First and foremost we are cutting corporation tax to 26% this year, and 23% by 2014, making it the lowest rate in the G7, the fifth lowest in the G20. And we’ve singled out corporation tax because we know it is the most growth inhibiting tax that there is.
Businesses benefit from the lower rates, but so do the employees through higher wages, shareholders through stronger dividends, and consumers through lower prices.
Increasing VAT however is not an easy choice, but it’s the right one. It’s the least growth inhibiting option there is and in the words of the Director General of the CBI:
A VAT cut is not affordable.
But tax competitiveness is about more than rates and thresholds, it’s also about ensuring simplicity and stability.
Through the Office of Tax Simplification we are cutting out the layers of unnecessary exemptions and reliefs in the tax code.
In similar spirit we are lifting the regulatory and planning burden on businesses. We cannot let layers of bureaucracy suffocate the innovation, investment and enterprise needed to grow the economy.
We have already exempt micro and start up businesses from new domestic regulation for three years, we have already scrapped plans for regulations that would have costs £350 million a year, and we continue to slim the regulatory rule book through our Red Tape Challenge.
Likewise on planning, we are making radical changes to the system to support job creation and embed a presumption in favour of sustainable development.
Under the current system, planning costs imposed on business are nearly ten times larger in the West End of London than in Brussels, and more than double those in Paris. In total, the system costs the UK as much as £3 billion a year.
The new National Planning Policy Framework will deliver sustainable economic growth whilst also protecting our social and environmental priorities.
Scottish Spending Review
In all these reforms we have committed to greater engagement and consultation with businesses and consumer and interest groups than any previous Government.
A huge step change in policy making. And one that provides certainty and stability to business.
In stark contrast, businesses are confused and concerned by the Scottish Government’s spending review. In particular, businesses are rightly worried about the projection of a vast increase in the yield on non-domestic rates.
The Scottish Government is always talking about the taxes they would cut if only they had the powers. Yet they have the power over business rates and they are increasing them by £850 million by 2015.
Undermining the support we are providing businesses through our cuts in corporation tax.
A potential referendum on independence is already causing real uncertainty for many forms. The perception of rising business rates makes matters worse.
These two together are harming Scotland’s reputation as a good place to do business at a time when we need to be supporting the private sector.
As well as a competitive playing field, the Coalition is also ensuring that our businesses have the vital access to lending that they need to grow.
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 also have to ensure that we have the skills base to capitalise on the new opportunities that the recovery holds.
The UK wide Technology and Strategy Board recently announced a wave of technology and innovation centres to open in October, including one at the University of Strathclyde…part of our ambition to place the UK at the heart of emerging high-tech manufacturing industries.
And in England, 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 and I’m encouraged by the announcement in the plans to provide 125,000 Modern Apprenticeships for young people in Scotland.
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.
Finally we have laid out plans through our National Infrastructure Plan for £200 billion of investment over the course of the parliament in the UK’s key infrastructure priorities.
We know that infrastructure investment is amongst the most growth kind of investment. It is vital to spurring new growth in well established sectors such as construction, but can lay the foundations for new high growth industries in the digital and online sectors.
Such is our commitment that only two weeks ago the Deputy Prime Minister announced that the Coalition would be handpicking around 40 of the biggest infrastructure projects in the UK, the ones most important to growth, and giving them a new special priority status to ensure they are delivered on time and on budget.
Where we can help unblock barriers of regulation, funding, procurement, planning, we will.
And through our plans, we are almost doubling the investment in our energy sector and actively promoting a green recovery.
That means £3 billion to capitalise the Green Investment Bank, developing the UK’s first Carbon Capture and Storage project, and investing £200 million in the development of low carbon technologies.
And on transport, investment will also be higher in real terms by 2015/16 compared to 2005/6.
Investment to improve the rail network such as Cross Rail… of the world’s biggest urban transport schemes currently under construction. And investment to target pinch points on the key motorways and trunk roads where it is choking the local economy.
Both energy and transport investment are equally vital to Scotland.
Green industries offer huge potential to realise growth across Scotland…through wave and tide in the West coast, through offshore wind in the Moray Firth, and earlier this week I spoke in Caithness, where I saw first hand the potential for tide-power in the Pentland Firth.
Indeed the Pentland Firth along with Orkney are the first regions in the world to be granted commercial leases for two years to develop marine technology on the Crown Estate.
Ten sites capable of generating enough electricity to meet the needs of up to 750,000 homes. Boosting Scotland’s renewable sector is a shared priority for the UK and Scottish Governments,
And on transport, as a Highland MP, I understand the difference that focused, targeted investment in transport infrastructure can make to the more remote regions across Scotland.
To make journey times shorter and safer, unblock Scotland’s choking transport arteries, and support businesses working across the entire country.
Earlier this week the Scottish Government announced the outcome of its spending review.
The decision to commit £2.5 billion to major transport infrastructure projects is welcome, but the great bulk of that money is accounted for by two Central Belt projects alone - the second Forth road crossing and Edinburgh to Glasgow rail improvements.
The Scottish Infrastructure Plan to be published this Autumn, has to set out in detail the Government’s investment plans for each of its key infrastructure sectors.
The Scottish Government has to deliver on the infrastructure promises it has made.
And we are providing the Scottish Government with further tools and powers through the Scotland Bill to do just that.
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.
Earlier this week I attended the first Joint Exchequer Committee, to discuss the implementation of powers already granted by the Scotland Bill.
And whilst we are happy to discuss their request on Corporation Tax, there remain a huge number of unanswered questions, questions which the Exchequer Secretary David Gauke has put to the Scottish Government…
- On the costs and benefits of the current regime
- On how the Scottish Government proposes to minimise the burden on businesses and simplify the administration of the system
- On how the Scottish Government would approach taxation of foreign profits
- And on what consideration had been made on the State aid implications
That said, where we can work with the Scottish government to deliver realistic ambitions on a clear timetable, we will do…
Indeed, one of the key demands made by the Scottish Parliament is for an increase in the amount of capital borrowing permitted by the Bill. We have already agreed to conduct a review of the impact of extending Scotland’s borrowing powers.
And following representations by the Scottish Parliament we have also amended the Bill to allow the power to issue bonds to be introduced in the future without primary legislation.
I can tell you today that later this year we will begin a final public consultation on Scottish bond issuance. This is a complex area, with a range of impacts to be considered, but one where it is right to take forward the debate.
We all have to ensure that the Scottish Government will use its powers to prioritise spending that boosts a private sector recovery and ensures sustainable growth… The Scottish Government has the opportunity and the tools to deliver on investment and growth for the whole of Scotland.
Exactly as we are doing from Westminster.
Because, this coalition is as much a government for Scotland as Holyrood is, and I encourage you to engage with us as we embark on the second stage of our Growth Review with a focus on infrastructure, education, logistics, medium sized businesses, open data and the rural economy…all vital sectors to the Scottish economy.
We know that there is a long and difficult path to tread towards recovery. We have made substantial progress over the last year to put the country on a stable financial footing, but there is no easy way out of the challenges we all face.
The businesses present over this conference will be critical to the Scottish recovery, as well as the wider UK. I am eager to learn what more it is that Government can do - or stop doing - to support you.
And I look forward to working with you in the weeks and years to come, and I hope you enjoy the rest of this conference.