My Lord Mayor, Ladies and Gentlemen
Thank you for the honour of inviting me to this important event. I recall my first political invitation to discuss the future of the City: a dozen years ago, as an unknown MP and a minor spokesman for a third party far removed from power, when I was sounding off about banks in the wake of the Cruickshank Report.
I appreciated your courtesy then, as now, and also admired your capacity to finger potentially troublesome politicians at an early stage.
You will have noticed that I have moved on and for the last 9 months I have been busy in government. Indeed, my department has completed an extraordinarily challenging spending review: our contribution to deficit reduction. We have succeeded where our predecessors failed with a clear programme to stabilise and privatize the Royal Mail. We have put in place unprecedented higher education reforms. I could go on. However, our central task is the one I set out in my very first speech: to put growth at the centre of the government’s work and growth to provide employment.
Last autumn, we turned down the easy option of putting out yet another government paper about growth. The last administration churned out such documents every year or so, and failed to achieve anything resembling sustainable growth. We know business wants action, not words. That is why instead we embarked on a Growth Review, an exercise every bit as rigorous and challenging as its spending equivalent. It has challenged every department to get behind the growth agenda, critically examining every policy that might get in the way or hold back our vision for private sector recovery.
It won’t be easy. We inherited some big problems: the biggest budget deficit in the G20; a badly damaged banking system; households as well as the state burdened with excessive debts; and our finest economic minds divided as to whether we are most threatened by inflation or deflation.
And just to add to the challenges of government we now have the prospect of a fully fledged energy and commodity price shock squeezing real wages and pushing up inflation.
In my more wistful moments I do see the continued attractions of writing books explaining how we got into this situation rather than being in government trying to dig our way out of it. But what defines this government is a collective willingness to make difficult decisions in pursuit of a wider, long term, national interest. If I am less popular in some quarters than a year ago that is some sign that I am doing my job.
And let us not be under any illusions. Britain’s escape from the near-death experience of financial collapse and deep recession is not the same as recovery. That will be difficult even if we continue to behave sensibly. Indeed, I confess to a certain exasperation with commentators and opposition politicians who, for reasons of ignorance, amnesia or mischief, assume away the past and expect that the Government can somehow guarantee an immediate, miraculous, return to rapid economic growth through some all-encompassing plan. Developed market economies can’t be made to grow like Soviet style diktat. It isn’t like that.
But what we can do is set out the principles and commitments that underlie our vision for the economy. Over the next few weeks leading up to the Budget you will hear the concrete, difficult steps this government is taking to ensure sustainable growth. We do this in the knowledge that there are good and bad ways for the economy to recover.
Our central task- and mine in particular - is to strengthen a framework in which the private sector can grow the economy out of its current problems; and to do so without returning to credit-financed private consumption, a dangerous property bubble and unsustainable government deficit financing. As Einstein is meant to have said, the definition of insanity is doing the same thing over and over again and expecting different results.
There is, however, no Delia Smith cookery book providing a simple recipe for producing growth, let alone in the abnormal post-crisis environment which we inhabit.
In the short term, the main drivers are monetary and fiscal policy but these are necessarily constrained. We therefore have to work with the other policies open to us to stimulate private sector dynamism; encouraging what Keynes called the “animal spirits” of entrepreneurs.
Fortunately, both parties in the Coalition have a commitment to liberal economic policy. The agenda I set out six years ago still applies and is integral to our growth strategy: free trade; deregulation; removing the barriers to investment.
Trade & investment
Let me start with openness and international competitiveness. Britain is a small part of a growing world economy and will prosper by exploiting growth opportunities in expanding markets. At present exports are doing relatively well mainly thanks to a 20% depreciation. But this cannot continue for ever, and instead we need to expand the areas where we are world beating - which currently include advanced manufacturing, creative industries, financial and professional services.
In addition, we must retain our position as the destination of choice for international businesses: we are currently in the world’s top three recipients of FDI and the recent news of big investment in steel by SSI and in the car industry supply chain by Tata (Jaguar Landrover), Ford, GM-Vauxhall, Nissan and others is very encouraging.
And openness relates to people as well as capital. This government has, successfully I think, got the balance right between providing reassurance to the public that borders are under control and providing a welcome to visitors be they businessmen, skilled workers, tourists or students. It can’t be said often enough that the vast majority of people who come here are good for Britain and good for London in particular.
Being fleet of foot internationally also requires a recognition that the centre of gravity of world economic growth has shifted decisively from the developed world. Bizarrely our own trade with the BRICs remains less than our trade with Ireland. This is a glaring sign of our current patterns of trade being misaligned for future world growth.
To rectify this anomaly, I’ve been part of five trade missions since becoming Secretary of State, to India (twice) and to China, Brazil and Russia. Each time we have celebrated successes - Pearson and Hawk aircraft in India, GSK in Russia, and deals worth more than £3.5bn with China, with major science collaborations and energy initiatives in Brazil. More generally we are building up long term relationships, and through the EU we are pushing hard on both the Doha agenda and for free trade agreements as with Korea, India and Japan.
I am very conscious that one part of my job description is being President of the Board of Trade. The Trade & Investment White Paper, published last month, is an attempt to give definition to work in this field: talking to business, listening to their requests, and acting with a new package of support for exporters - especially SMEs with a bigger suite of short-term credit products.
A second and related part of our growth strategy is to prevent the government getting in the way of private sector recovery: reducing the burden of unnecessary regulation. Successive governments have made ritual commitments to reducing red tape but have added to it, inconveniencing businesses large and small.
From the longstanding retailer who estimates that he spends ten times longer on form filling than twenty years ago, to the care worker who was bizarrely asked to train as a taxi driver in order to be allowed to drive the people in her care into town.
There is of course often a powerful economic rationale behind some of the regulations that really bother business. The proposed rules giving shared parental leave and flexible working largely reflect good industrial practice and contribute to the flexibility of the labour force. Indeed, our employment laws stand up well to international comparison - our flexible labour markets are one reason for unemployment being so low relative to, say, Spain and helped us during the recession. We have to find a way nevertheless of ensuring that small business is not handicapped by tiresome form filling.
Within my own department I have already taken action, to remove regulations which impede the ability of businesses to expand and take on people. This includes a review of labour market regulation specifically to stop cases reaching employment tribunals without a prior attempt at reconciliation and restricting access for unfair dismissal cases to the employed for two years rather than one.
But the problem goes much further. In the past, Whitehall has rewarded people for coming up with new regulations, and never for scrapping them. While ‘One in one out’ is gradually changing this culture, I acknowledge that this is so far stemming the flow rather than reversing it. Another useful step forward has been the steps we have taken to stop ‘gold plating’ EU regulations and fight damaging regulatory impositions from the EU like the Working Time Directive. Working within Europe at an early stage is a labour the fruits of which will show over the long term.
Above all, we are working to achieve the aims of regulation in a less burdensome way. For example, we inherited an Equality Act that in some ways is useful, by streamlining a mass of existing rules and laws. Without in any way compromising our clear belief that equality is not just right but good for business, we are, for example, not pursuing mandatory gender pay reporting but are developing a voluntary approach.
But, to repeat, the most important reform to regulation must be to recognise that it is the smallest companies that bear disproportionately the heaviest burden from new rules. They can’t afford dedicated staff to measure and note down whatever the government demands. As Secretary of State for Business, I am targeting regulation which hampers small business in particular.
For example, the UK gains a real advantage from upholding high standards in audit and accounting. But small company rules are stricter in the UK than in almost every else in the developed world. We will change the law to simplify small company audit rules, saving UK companies up to tens of millions in unnecessary audit fees. And we will reduce the costs for subsidiaries of larger companies.
Small companies should also benefit from less complex financial reporting requirements; so we welcome the Accounting Standards Board consultation on the reporting requirements for 35,000 medium sized companies. If you agree with me about how important this is, now is your opportunity to speak up.
Another aspect of regulation in the UK is a particular impediment to growth. The planning system has been a major barrier not only to social mobility through its effect on house prices, but to business expansion. The market in land is dysfunctional, distorted both by a slow and prescriptive planning regime, speculative hoarding, and a less than effective tax system.
Development, and in particular badly needed construction, is paralysed, often in parts of the country which need it most. I hear countless stories of perfectly reasonable developments being thwarted by bizarre planning rules.
For example, I was recently told of a derelict barn that was denied the planning permission to convert into a bed and breakfast, because it lacked public transport. Now, until chickens start commuting, I don’t think barns will normally have bus links. But that is still no reason to let them rot as they are.
Thousands of such small decisions add up to a huge missed opportunity for the economy. And sometimes obstruction prevents the transformative economic opportunity from taking place: the retailer that regenerates the town centre, or the international headquarters that instead decides to head elsewhere.
That is why the government is bent on planning reform. Contrary to what you may read, Eric Pickles and I are at one on this. We want local communities to benefit from growth, and the standard answer to be Yes, not No. That is what we promise to deliver.
Infrastructure and GIB
But a growing economy isn’t just about government getting out of the way. Government has a major role even when slimmer and less intrusive. For example, there is a very large deficit in infrastructure provision - energy supply; transport; telecommunications; waste disposal.
In particular, there is considerable evidence that the risks inherent in new low carbon investment are such that banks and financial institutions can’t fill the gap. This is why we are delivering a Green Investment Bank, capitalised initially with a billion pounds but evolving into a bigger institution, to tackle risks associated with green infrastructure which the market can’t currently adequately finance, and thereby unlock further billions from the private sector.
The capital is there. Indeed, British institutional investors repeatedly express their frustration at their inability to fund infrastructure projects which will provide their clients with a good, long-term rate of return. They need the government to show the boldness required to facilitate this. We will do that.
Skills and innovation
The government’s long term plan for growth is reliant on skills and cutting edge innovation. Innovation is key to success in developed economies: turning scientific ideas into commercial technological applications. Against a really tough spending round we protected science from cuts, thereby ensuring that we did not cut off research vital to our long term future.
We also recognise that scientific progress often happens through disruptive technologies which mean small firms and academics working in entirely new directions. And they often need help: with the technological infrastructure such as the Wave Hub in Cornwall for marine energy, or the Composites centre in Bristol. This is what our proposed Technology and Innovation Centres will be.
If we want to match our competitors in advanced industries, we also need to address a massive challenge in skills. Around 15 per cent, that’s 5 million adults in England, are “functionally illiterate” a reading age of 12 or below. There is a mass of evidence unfavourably contrasting the performance of the UK economy in producing intermediate level skills with competitors like Germany, not helped by a damaging cultural mindset which says that vocational training is inferior to academic learning and that apprenticeships belong to a bygone era. We are reversing that prejudice and are investing heavily in apprenticeships by prioritising our spending.
And finally, there is one sector in which government and private sector have collided painfully: financial services, particularly banking. Anyone waiting for my banker jokes will have been disappointed. Rather, I have serious points to make.
There were problems with balance sheets bigger than the British economy, and which were too big to fail. We discovered that banks are global in life but national in death, which is why their fate is now in the hands of national regulators and politicians.
I have been working with the Chancellor to try and find a constructive way forward. My first priority was to ensure that the rapid deleveraging should not choke off, or make prohibitively expensive, the supply of credit to good British companies, especially SMEs. Supporting growth has been our overriding priority. I think the agreement which we reached three weeks ago is helpful in that regard.
I was very pleased also to see also that the £2.5bn Business Growth Fund will fill a growth capital gap for large SMEs and mid-caps in financial markets first identified in the 1930s but never fully addressed before. We are also going to make pay systems more transparent. And the absolutely central issue of bank structure is being actively considered by Sir John Vickers and the Banking Commission. The issue was summarised well by the Governor of the Bank of England the other day: “our role is not to stop banks failing; it is to make sure that if they fail they do not contaminate the rest of the economic and financial sector”.
I should say that in supporting this agreement I chose to disregard the advice of commentators and supporters who told me not to touch the agreement with a barge pole. Nonetheless I believe it was right to try; that we shouldn’t let the best be the enemy of the good; and that we have to take political risks in order to get the British economy moving.
That is the spirit with which the Coalition, and my party in particular, approach the formidable task of economic management that we have inherited. Our Growth Review exemplifies this approach, and will continue to for duration of this. Vigorous, targeted action where the government can make a difference; combined with robust and unsentimental withdrawal of Government from unnecessary interference. This is what you should hold me and my colleagues accountable for.
I would now like to propose a toast to the Lord Mayor and the Lady Mayoress.