Good evening. It’s a pleasure to be here with you tonight.
In my office in Whitehall there’s a framed cartoon, showing a man leaving the house in the morning to go to work. His son calls after him: “Have a great day at the Treasury, Dad. Be brave. Try not to cry.”
Well, I can assure you that as a lifelong Ipswich supporter I’ve had to build up a fair bit of bravery over the years.
But I think that cartoon is illustrative of two aspects of my job as a Treasury Minister since 2010.
First, that the Treasury is a department which has been … how shall I put this … not always the most loved department, within as well as outside Whitehall.
And second, that the past six years have seen us operating under exceptionally difficult conditions.
The reasons for this are relatively simple. Even in good economic times, it tends to be the Treasury who says “sorry, no, we can’t afford to do this”.
That’s part of the normal tension of government. If you have the power of the purse, then it’s also you who has to exercise restraint in using that purse.
But the situation in May 2010 was anything but good economic times. We were a country living well beyond our means, borrowing one pound for every four we were spending, and lacking a credible plan to turn that situation around.
Because we had not been sensible during the boom years, the 2008 financial crisis caught us unprepared. The tide went out and it turned out that we were the ones who were skinny dipping.
It fell to the Treasury to sort it all out.
Today, I will talk about how we went about that task. But before I do that, I’d also like to talk a little about the philosophy behind our actions.
A defence of the free market economy
When I became an MP in 2005, there was a certain degree of consensus about the right way to run an economy.
We had moved away from the polarised arguments of the 70s and 80s and had, more or less, agreed on certain fundamentals.
For instance, that the big state doesn’t have all the answers.
That in normal times, a country shouldn’t spend more than it earns.
That excessive tax acts as a disincentive.
That it’s businesses who drive national growth.
That more power to the centre doesn’t necessarily mean greater efficiency.
That before distributing wealth, you have to create it.
And that the free market has, by and large, been an overwhelming force for progress.
It seemed, for a while, as if the planned economy versus free market argument had been won – and I’m sure that the very visible collapse of the Soviet Union hammered the final nail in the coffin.
I’m not so sure that’s the state of political discourse today.
We’ve seen a lot of people in recent years come out against those fundamentals.
We’ve started hearing the old calls for greater taxes on the highest earners, renationalisations, and trade protectionism.
Now of course, it’s legitimate – indeed important – for all policymakers to take a step back and ask themselves “are our policies delivering for the people of this country”.
But there is a reason why we study history: to learn from the follies and successes of the past.
Time and again, it has been proven that the free market, and private-sector driven growth, and taxation which encourages ambition, and a State which accepts it can’t do everything, does lead to national prosperity.
We have the system we have because it works. Other systems, to put it bluntly, historically haven’t worked. And in the modern, interconnected world we live in, they are even less likely to work.
If you remove the disincentives for doing well – whether that’s for individuals or companies – then those individuals or companies will simply move away and take their aspirations elsewhere.
And when a country stops doing well, it is only a matter of time before the people living in that country begin to suffer. Inevitably, those who have the least are hit the hardest.
In other words, it’s not a game. Livelihoods – and indeed lives – depend on the government of the day getting the economy right. Aside from the defence of the realm, there is no more important task for a government to do.
What that means is that you cannot use the economy as some sort of a safe space in which to try out abstract theories. That is for the university debating society. We have the fifth biggest economy in the world to run.
When I entered the Treasury in 2010, alongside George Osborne and the rest of the ministerial team, we had one ambition: to pull Britain’s economy back from the brink, and to set it on a path to recovery.
That meant restoring stability; reining in excessive spending; and putting in place the right policies and incentives for growth.
So I’d like to talk a little more about how we created, and implemented, our strategy for economic success.
In the 1970s, one of the then Chancellors’ private secretaries casually remarked to a journalist that “I have no idea what a deficit is”.
These days, I can assure you that everyone in the Treasury knows what a deficit is!
Reducing the deficit is the task we were asked by the British electorate to do – and it’s the task we have to keep a relentless focus on.
Back in 2010, we inherited a deficit of £153bn, which was around £5900 for every household in Britain.
We’ve made a huge amount of progress since then; but even this financial year, we are still having to borrow £3,300 for every household in the land.
That’s simply a reflection on the size of the ship we’ve had to turn round.
The good news is that we are succeeding. We have a credible path for deficit reduction, backed by the independent Office for Budget Responsibility, which will take us into running a surplus in the 2019/2020 financial year.
Perhaps equally importantly, public sector net debt is set to fall every year, from 82.5% of GDP this year to 71.3% in 2020-21.
That’s important for two reasons:
First, because it gives us room for manoeuvre in exceptional economic times. If the situation is such that an additional stimulus is required from Government spending, then we’ll be able to afford it.
And second, because servicing the interest on debt diverts funds from where they could be better used.
It’s an experience familiar to anyone who has put too much on a credit card!
Servicing our public sector debt cost us over £45 billion in the last financial year. That is more than we spend on schools or defence. And that’s in an era of extremely low interest rates.
It won’t come as a surprise to many in this room that making cuts in public spending is never a pleasurable activity.
Even if you do believe there are things the state shouldn’t be doing…
Even if you do believe that subsidies can cause harm as well as good…
There is little fun in standing up and announcing spending cuts!
Yet it is necessary. That is why in the first year of Government we carried out a comprehensive spending review. We followed that up in 2013. And, following the election last May, we repeated the exercise.
“Do more with less” has been the mantra.
A significant part of the savings were simply due to making better use of our existing resources – pooling functions, harnessing technology, cutting down on our use of external consultants wherever possible.
Part of the savings came from reducing the cost of government – in particular, making the Civil Service a more cost-effective organisation.
Some of the savings came from reductions to the welfare bill – which, under the Blair and Brown administrations, had been allowed to expand to unsustainable levels.
And some of the savings came from reviewing capital projects which weren’t providing adequate value for money.
I chose the word “review” specifically, because it’s easy to categorise spending cuts as simply saying “take this off the shopping list”.
In reality, it is much more complicated than that. The conversation will typically be along the lines of “Are we doing this project in the most cost-effective, joined up way? Is it the most important thing to be doing right now? Could we be more innovative about how we fund or design it? Is there a cheaper option that could achieve the same outcome?”
In many ways, that is the point of what we do in the Treasury. Believe it or not, the first guide to how to run the UK economy was written over 800 years ago, in 1178. It says: “The highest skill at the Exchequer does not lie in calculations, but in judgements on all kinds”.
The central “judgement” involved in public spending is where to cut – and where to invest.
Everyone knows that if you don’t water a plant enough, it will wither away.
Conversely, give it too much and it won’t do very well either.
But what works in the desert doesn’t work in the paddy field.
The same rules apply when it comes to government spending.
There have been significant areas where we have maintained spending or actually increased it.
Health and schools are the most major areas in terms of cash – but there are many others. National security. Police. Science and research. Energy innovation. Transport. Overseas aid. Pensions.
We’ve made it a priority to improve the quality of our infrastructure, and reverse the decades of underinvestment our roads and railways suffered from.
Above all, we have never shied away from investing in things that will improve our national growth.
If keeping hold of the purse strings is the first function of the Treasury, then the second is pulling the levers for economic growth.
So today I’d like to talk about three specific levers.
The first of these levers is the taxation system.
That’s my particular field, as Minister responsible for tax.
Our policy is extremely straightforward. We know that one of the best ways of attracting talent to your economy is through competitive taxes. And that one of the best ways of making sure that talent goes elsewhere is by making your taxes too high.
It’s not rocket science – but it’s astonishing how often people forget this basic principle.
Further to competitive, low taxes, there’s one other things which helps businesses prosper, drives job creation, and supports economic growth: the certainty of having a fair and properly working tax system in place.
Low taxes; fair rules which are followed. Those are the two principles we’ve followed since 2010.
Back then, our rate our rate of corporation tax was 28%; and it was a fact that one of the factors pushing businesses away from the UK was our tax regime.
So, even at a time of deficit reduction, we made it a priority to cut the corporation tax rate.
Since 2010 we have cut it from 28% to 20%. These cuts will save businesses £10 billion a year from 2016.
This was part of a range of pro-business reforms, including the introduction of the Patent Box, and reform of R&D credits to make them more generous.
We’re going further along the same route, so that by 2010 the rate of corporation tax will be 18%, the lowest in the G20.
These cuts will benefit over a million businesses.
They will help attract more overseas investment.
And they will help support UK businesses, allowing them to retain more of their profits and use that money to invest in plant and machinery or to hire more people.
We’ve increased the level of the Annual Investment Allowance to eight times what it had been previously.
And, to provide the stability and certainty that businesses need, we have committed to publish a Business Tax Roadmap in March this year, setting out the government’s tax plans for the rest of the parliament.
The second lever you can pull is more of a diplomatic one: opening yourself up to some of the world’s fastest growing and most exciting economies.
Over the years, this has been a nation that has reaped the rewards of being open to the world around us.
The benefits of free trade have been proven time and again. And it’s not just businesses who benefit: the evidence suggests that an increase in our trade to GDP ratio is associated with an increase in per capita income.
So if we want to secure our economic success, then it’s important to be active all over the world – with the fastest-growing economies in Asia; with the United States; as well on our doorstep, with the nations of the European Union.
That’s what we’ve been doing over the past six years: building partnerships and signing deals with India, China, and the Far East; making London a Western hub for renminbi and Islamic finance; and helping our world-leading financial services sector gain business worldwide.
And, closer to home, we’ve consistently called for, and proposed, measures to improve the EU’s competitiveness: from a Capital Markets Union to a free trade agreement between the EU and the US, giving British businesses improved access to a market six times the size of our own.
The third lever is putting in place policies to improve our national productivity, one of the key drivers of a nation’s prosperity.
For too long, we have had a so-called “productivity gap”, between our economy and that of countries such as Germany and the United States.
There are no easy solutions to the productivity gap. It is due to a large number of factors – some of them negative; some of them, such as our record levels of employment, positive.
But there are actions we can take to resolve the problem – and, for the first time, last year we published a Productivity Plan setting out precisely how we do that.
I’ve already mentioned our national infrastructure, and the problems caused by the fact that for several decades, we failed to invest enough in it.
We’re now turning that around – indeed, we’ve committed to spend £100bn on infrastructure over the course of this Parliament…
We’ve set up a National Infrastructure Plan with an infrastructure delivery pipeline…
We’ve published a specific plan for the skills we need…
And, so we can look more clear-sightedly at the future, we’ve also set up the National Infrastructure Commission, to take a long-term, depoliticised approach to major projects. It will set out its initial ideas in time for the March Budget.
Improving our national infrastructure will also help deliver a key part of our long-term economic plan: regional rebalancing.
London and the South East has been an enormous economic success story over the past few decades. But as the cricketers in this room will know, you can’t rely on just the one batsman if you want to field a world-class side.
Our ambition is therefore to enable cities outside London and the South East to display equally impressive growth – and help the country’s economic recovery.
Michael Heseltine showed the way forward back in the 1980s, when he said government policies for cities such as Liverpool needn’t be one of managed decline.
Today, that’s what we mean by the Northern Powerhouse: a combination of more funding and greater devolution, to help cities in the North reach their fullest potential.
We’re particularly interested in developing capability in areas where a competitive advantage can be created.
One example is science and innovation, where some of the most exciting developments are happening in Northern cities. Manchester, for example, is home to the new supermaterial graphene – and we’ve supported the National Graphene Institute in Manchester with almost £40 million of funds.
Great transport created the first Northern Powerhouse nearly 2 centuries ago. And it can create the second one today – which is why we’re investing £13billion in transport in the North over the course of this Parliament, including the creation of Transport for the North, a new, dedicated body.
Alongside that, we’re putting in place a new and exciting programme of regional devolution – not just in the North, either, but across the country.
As a government, we wholeheartedly believe that the best decision making often happens at the regional or even the local level.
That shouldn’t come as too much a surprise, perhaps; because when local decisions are made at the local level, they tend to be made by people who know the area extremely well, and have the greatest incentive to implement policies effectively. It is, after all, their patch. We should work with that rather than against it.
So the offer we made to local leaders was as follows:
If you want that greater responsibility … if you can live with that greater accountability … if you have an ambition for what your city can achieve … then we will look at giving you those powers.
These powers could be quite significant: control over major budgets; managing housing, health, and skills; running city-wide transport networks…
Giving those levels of powers away carries a risk, of course. That is why we asked leaders to demonstrate that they were are capable of implementing that ambition, and could live with the increased responsibility.
So if a large city wants control over major powers and budgets, it must have a directly elected, executive person covering the whole metropolitan area, in the form of a Mayor – just like many of the world’s greatest cities, including London.
Already, we’ve signed some exciting deals with a host of regions including greater Manchester and Cornwall, and many more discussions under way.
We’re clear that this is not just a programme for the North. There should be no monopoly on Powerhouses – we want a Western, Midlands and Southern Powerhouse too.
Because if all regions can mirror the tremendous success of London and the South East, then that will be a long-term gamechanger for the British economy.
So there is still a lot to do over the course of this Parliament. But we shouldn’t forget quite how far we have come over the past 5 ½ years.
With growth leading the G7, record levels of people in work, living standards and wages rising, our economy is truly delivering for the British people.
We made the tough decisions and we’ve been getting the results.
But good times in the future aren’t a given. Worldwide, there are still plenty of risks out there.
They are risks we have to insulate ourselves against – and the best way we can do that is to make sure we have our own house in order, start running a surplus and reducing our debts, and continuing to create economic security.
The worst thing to do, right now, would be to throw away the fruits of our hard work.
I spoke earlier about the resurgence of voices asking us to do exactly that.
We’re not going to – because this country’s economic security is much too important.
What we will do is continue down the path we took in 2010:
One which gets us living within our means as a nation;
One which helps people and businesses prosper, expand, and create growth;
And one which will make the UK fundamentally stronger, and more able to withstand any storms in the global economy.
It hasn’t been an easy path in the past, and it may not be an easy path in the future either.
But that makes it all the more important to stick to it.
Thank you – and I’d be delighted to take some questions.