Speech by the Financial Secretary to the Treasury.
It’s a pleasure to be here today with Scottish Financial Enterprise.
With almost one in ten jobs in Scotland based in financial services… you already represent a significant part of this nation’s economy.
And having grown by over a third in the last 5 years, I don’t envisage your importance diminishing…
…Quite the opposite in fact.
A strong Scottish financial sector will underpin a prosperous and successful Scottish economy.
Not just as a source of prosperity in your own right, but also because it’s your industry that helps make an entrepreneur’s vision become a reality.
Your industry that provides the finance needed for investment and enterprise.
And it’s your industry that will prove vital in supporting growth and securing the economic recovery.
Today, however, I would like to talk about the Government’s plans for the economy.
The important role that the financial services sector has to play.
And how this fits in with our approach to financial regulation.
As the Minister responsible for financial services, I’m well aware of the issues you’re currently facing.
That businesses in Scotland have suffered in recent years.
Where on the one hand, you hear Government calling for greater private investment.
But on the other, the impact of the financial crisis has led to a general re-pricing of risk… and that investment opportunities are not as clear cut as they used to be.
From a policy-making perspective, this is perhaps one of our greatest challenges.
Because investment and growth are one of the same.
They’re mutually reinforcing.
To the extent that you struggle to have one without the other.
And this is a dilemma that any Government faces in the wake of a downturn.
Where growth has taken a hit, confidence has suffered, and investment prospects are more difficult to forecast… what’s the solution?
Well this Government’s answer has been to set out a clear and credible plan for growth.
After a period of turmoil, what investors need is some certainty.
And that’s what we’ve provided.
We’ve made it clear that tackling the deficit is our chief priority.
Because allowing uncertainty surrounding the public finances to continue will undermine confidence.
It would risk spiralling interest rates, rising inflation and higher taxes in the future to compensate for wasteful expenditure today.
So yes, we’ve had to make difficult judgements about how we spend our money. But the alternative - to do nothing - would have damaged the economy for years to come.
That’s why we will eliminate the structural current deficit over the next four years.
Return debt to a falling path over the same period.
And place our public finances on a stable footing.
With the emphasis firmly on cuts to public expenditure… as opposed to tax rises for individuals and businesses.
Last year’s Spending Review saw us take a big step towards delivering this promise - and it’s a promise we fully intend to keep.
But let’s be clear.
Returning our public finances to a stable footing is not enough.
There’s also an important role for Government in supporting the private sector… by creating a stable and competitive tax system.
In our first Budget, we announced our plan to create the most competitive corporate tax regime in the G20.
We said we’d look at the problems that had plagued the system in the past.
And listen to businesses ideas for reform.
What became apparent was that two things had to change.
First, that our headline rates were putting us at a competitive disadvantage.
That over the past decade, governments across the world had been cutting corporation tax, while we had stagnated.
And if we want growth… if we want to attract business from across the world… then this is a situation that has to be rectified.
That’s why we’ve chosen to cut corporation tax by 1% this year…and in each of the next three years.
So that by 2014, we’ll have a headline rate of just 24%.
This will be the lowest rate of any major Western economy, one of the most competitive in the G20, and the lowest this country has ever seen.
The second concern that businesses voiced was the growing uncertainty that had been symptomatic of our predecessors’ approach to tax policy.
With the introduction of two fiscal events for every financial year.
Each one jam-packed with tax amendments.
All of which were made under the veneer of consultation.
While in reality, businesses often had little or no say in the tinkering of tax policy, let alone the frequency of these changes.
So we’ve adopted a very different approach.
Putting greater stability and predictability at the very heart of our tax system.
And seeking to give businesses the certainty and confidence needed to make long-term investment decisions.
This is something we demonstrated last year… having published our Corporate Tax Road Map - setting out our long-term plans for CT reform.
This is all part of our new approach to tax policy making.
One that is more collaborative, more open, and more transparent.
Because competitiveness is not just about having lower rates… it’s also about the way you tax; how you make tax changes; and the costs of compliance.
SME access to finance
But on the path to sustainable growth, access to finance remains an obstacle.
And the reasons are clear for all to see.
Financial institutions have retrenched; weathered the financial storm; and looked to rebuild their balance sheets.
Credit has become harder to come by; investment has suffered; and the flow of cheap money has all but dried up.
Small and medium-sized enterprises in particular are finding it difficult to secure affordable funding.
And if we want a private sector recovery, this is something we have to address.
In Scotland, SMEs represent almost 99% of all businesses.
They’re easily the nation’s largest employer.
And ultimately, it’s their success that defines growth in the economy.
So we’ve been looking at how to create the right incentives to promote responsible and sustainable lending…
…not just to help the small businesses we have today, but to also to invest in the industries of tomorrow.
Whether it’s green technologies, advanced manufacturing, pharmaceuticals, engineering or whatever the future may hold, it will be largely built on the back of private finance.
In our July Green Paper - Financing a Private Sector Recovery - we assessed the availability of business finance in a recovering economy, in particular for creditworthy SMEs.
And as part of our response to this paper, we’ve announced a series of measures to increase the flow of resources, such as:
- The £2.5 billion bank-led Business Growth Fund - to provide equity investment to established and growing businesses.
- Continued support for the Enterprise Finance Guarantee - to enable over £2 billion of lending to small business.
- £200 million of additional funding for the Enterprise Capital Funds…
… And just a few weeks ago, we reached an agreement with our largest banks to lend at least £76 billion this year - £10 billion more than last year - to help growing small businesses.
But it’s also apparent that many businesses still feel shut out of the equity financing market.
That they’ve become over-reliant on bank lending as their primary source of external finance, when other types of funding would better suit their needs.
This is something we’re keen to address.
Because… with over 70% of the European equity market… and a vast array of specialist services and expertise… there’s a real opportunity to do more.
And as one of Europe’s largest financial centres, we have stay vigilant when it comes to the Commission’s busy regulatory agenda.
Domestic regulatory agenda
And we have been busy on the domestic regulatory front too.
During the financial crisis the regulatory foundations laid by the previous administration were tried, and found to be sorely wanting.
As the pressure began to mount, cracks rapidly spread, exposing the structural flaws in the regulatory architecture.
And it was the taxpayer who was forced to intervene, to prop up the financial system, and prevent it from total collapse.
This is a situation we simply can’t afford to repeat.
So we’re putting in place a new regulatory architecture - one that will ensure all regulation of the financial system is effectively targeted.
We’ve started by doing away with the failed tripartite system - where responsibility for the financial system was diluted across the Bank of England, the Financial Services Authority, and the Treasury.
It was a model that contained a number of inherent weaknesses.
First, it placed responsibility for all financial regulation in the hands of a single regulator - the FSA. Its dual mandate: supervising the safety and soundness of firms while regulating the relationship between companies and their customers.
With so many objectives, this led to a loss focus.
And second, the tripartite regime gave the Bank of England partial responsibility for financial stability, but it lacked the tools to do tackle the problems it identified.
In essence, there was a lack of clear focus and responsibility.
But regulatory structure was only one part of the problem.
Too much emphasis was placed on ticking the right boxes and filling in the right forms, as opposed to actual analysis of risk.
Most worryingly, the old system prevented the regulatory authorities from exercising their own judgement - their hands we’re tied in bureaucratic knots.
So we’re condemning this arbitrary approach the history books…
…and taking forward reforms that will give supervisors more discretion to use their own judgement, their own expertise.
As when tackling the challenges posed by individual firms and particular products, a one-size-fits-all approach doesn’t work for such a diverse and complex sector.
As a first step, we are creating a single, dedicated, macro-prudential regulator.
… to ensure that any risks developing across the financial system are identified and dealt with.
This new body is the Financial Policy Committee - who, as part of the Bank of England, will have chief responsibility for maintaining financial stability and addressing systemic risk.
The interim FPC has now been appointed and will meet for the first time in the very near future.
And at a more micro level, we’re setting up the Prudential Regulation Authority - as an operationally independent subsidiary of the Bank - with responsibility for prudential regulation of deposit takers and insurers.
By bringing together both micro and macro-prudential regulation under one roof, we will improve the coordination and coherence of financial supervision.
But that’s not the end of the story.
Far from it in fact.
If we’re to improve sustainability and resilience of the financial system, it’s vital that we safeguard the interests of savers, investors, and borrowers.
If customers have confidence in regulation, then they are more likely to invest, save and plan for the future.
So alongside a more secure regulatory base, we need a financial sector that works for everyone - that earns our confidence, competes for our services, and keeps us properly informed.
Which is why we’re setting up the new Financial Conduct Authority.
This new body will monitor the behaviour of all financial institutions - from the smallest retail credit union, to the very largest investment bank.
Whether in the retail, wholesale, or markets sphere - this new regulator’s actions will be guided by a single ambition: to protect and enhance confidence in the UK’s financial system.
Which in turn will encourage more people to invest in your products.
Make financial markets more accessible to a wider audience.
And ultimately, increase demand for the services you provide.
So to finish I’d like to reiterate that few governments have faced challenges like those seen today.
But we’ve risen to these challenges by providing a more stable tax system, to mitigate uncertainty.
Increased access to finance, to support the recovery.
Reformed our financial architecture, to promote stability and confidence.
And, most importantly of all, delivered macroeconomic stability, to help you plan for the future.
But now I’d be keen to hear your ideas for supporting growth in Scotland.
Your thoughts on what more needs to be done.
And your plans for the future.