44/05

25 April 2005

Speech by The Rt Hon Gordon Brown MP, Chancellor of the Exchequer, at The British Chambers of Commerce Annual Conference 25 April 2005

Can I say what a pleasure it is to be at this annual meeting of the Chambers of Commerce, to have the opportunity to thank all of you here for the contribution you make to the success of the British economy, and to thank in particular your new president Bill Midgely, your Chief Executive and staff – and your membership of 135,000 businesses – for your work in encouraging new business, new employment and new economic development in every city, town and region of our country.

And it is because of your resilience, your fresh thinking, your courage to respond and change that we see 4,000 new businesses starting up each week and 125,000 people finding new jobs every week.

Men and women of commercial flair, entrepreneurial vigour and civic pride built Britain’s towns and cities in the nineteenth century and our great Victorian cities were known as citadels of economic dynamism throughout the world. And these business leaders built the Chambers of Commerce movement.

Now in the 21st century with your active engagement as Chambers, Britain’s cities and towns are being renewed again - vigorous, dynamic, entrepreneurial centres from Birmingham to Bristol, from Leeds to Liverpool, from Manchester to Cardiff, from Newcastle to Nottingham, from Belfast and Edinburgh to Sheffield --- responsible for many of the 2.2 million new jobs created in our economy and for consistently high rates of economic growth, showing as the Chambers of Commerce movement testifies and your manifesto proposes that we are a Britain of many dynamic centres of enterprise and initiative.

And I thank you for your contribution and promise you I want to see the wide and deep consultation we have built up continue to strengthen.

I believe that the nations that will succeed amidst today's ever more intensive global competition - not least from a rising China and India - will be those that are sufficiently confident and forward-looking to entrench stability, to celebrate enterprise, to make long term investments in science and skills, and be outward looking rather than protectionist, leading as pro Europeans the drive for competitiveness across the European Union.

And while it would be easy in the heat of an election campaign to trade allegation and counter-allegation, here today I want to ask whether a non partisan, shared pro-enterprise consensus about the future of our country can, over the next few years, be built that can stretch across our whole country and across all groups. And whether we can ensure together that building on Britain’s great strengths - as the country with traditions of stability deeper than almost any other industrial economy, with traditions of scientific inventiveness longer than any other, and with a global reach that has been wider than almost any other - we can together forge a shared national economic purpose where we agree on the right long term decisions for stability, science, skills and enterprise so that great Britain can be one of the great success stories of the global age.

Context

The challenge to all of us is a global economy undergoing the most rapid and extensive transformation the world has ever seen - in pace of change, in scale of change, in the impact of change.

In the next ten years world output is likely to rise by 50 per cent.

In the next ten years world trade volumes will rise even faster – by almost 100 per cent.

In the next five years alone world trade volumes will rise by nearly 50 per cent.

An opportunity but also a challenge for Britain and all advanced industrial economies.

In 1980 less than a tenth of manufacturing exports came from developing countries.

Today it's almost 30 per cent.

In twenty years’ time probably 50 per cent.

So we are witnessing the most rapid shift in the global balance of production the world has ever seen.

Twenty-five years ago, only a quarter of the exports of developing country were manufactured goods: today 80 per cent.

China is already consuming half the world's cement, over a quarter of the world's steel and a third of the world's iron ore. Between them China, India and the rest of Asia already account for nearly a quarter of the world's trade. And we are undergoing a global economic and - as we are seeing – employment transformation on a continental scale that is the equivalent of America’s rise in the 20th century and will dominate the first decades of this century.

And the issue is not China and India as low-cost, mass producers while the advanced world prospers in high-tech value added goods. For on my visit to China I saw for myself an Asia moving forward in science based, high skilled, high value added production and services too.

So for companies like yourselves, there is hardly a product or increasingly a service you produce that is not subject to global competition. And no country, however successful today, can assume it will still be successful tomorrow.

Countries, indeed continents, will prosper only if they adapt and change but they will fall behind if they relax or are complacent. Quite simply, that the countries that will do best will be the countries that have the resolution, foresight and patriotic pride to make the long-term changes and investments to succeed.

Stability

And of all the long term economic responsibilities of government where a long term view must be taken the greatest and pre-eminent is the creation and entrenchment of economic stability and never taking stability for granted but at every point taking the hard decisions to lock stability in, even in difficult times in the world economy.

Let us remind each other of Britain’s chronic post war history of stop-go, inflation, short-termism, under-investment and higher unemployment and the damage it did to good hard working businessmen and women.

As recently as during the world downturn in the early 1990s the British people and British business suffered 10 per cent inflation, 15 per cent interest rates and more than 2 million out of work.

This was the old stop-go Britain: an instability that meant with 10 per cent interest rates or more for a whole four-year period, businesses like yours could not invest with confidence.

And with interest rate charges so high and prospects so uncertain many with talent and initiative found it too costly and risky to start up companies, would-be entrepreneurs having to devote all their energies not to their ideas and innovation but instead trying to stay afloat as high interest rates threatened their very survival.

Even the most successful businesses could not make long term plans as everyone expected inflation to recur - and we must never repeat those mistakes again.

And it is important we understand how and why it is Britain - once the most stop go of economies - that has avoided the downturns that hit America, Germany, Japan and Italy and, unlike most other industrial economies, has recently enjoyed the least volatile record in inflation and enjoyed continuous and sustained growth.

So let me just explain that it was not just one but four long-term difficult decisions that had to be made – decisions that have to be reinforced each year as we seek to entrench the stability we have achieved.

When we came into power - and having understood the damage that stop go instability had done to your businesses and having talked widely with people like Alan Greenspan and others whom I respected round the world - the new government decided to break decisively with the old short termism.

And so in our first day in office we removed the politicians' power to make month-to-month interest rate decisions.

Remember how in the past it was the course of least resistance to delay necessary interest rate decisions before an election - and to put the electoral cycle ahead of the economic cycle. Remember how on six occasions in 1996 and early 1997 the Bank of England’s advice to raise interest rates was rejected and inflation rose beyond the 2.5 per cent target. And then how in the later in 1997 and 1998 it was necessary because of the delay in acting to raise interest rates on five occasions.

Without the Bank's independence it was always easier to postpone the right action.

Indeed in the past politicians may have wanted to do the right thing but always found a cause for delay.

Now in 2004 and 2005 in the pre election year there have been four interest rate rises, independence of the Bank ensuring that the electoral cycle will never again take precedence over the economic cycle.

But the change we made was not just the bold one of making the Bank of England independent.

Perhaps even more important - and a decision vital to our continued stability today - we put in place a wholly new long term fiscal and monetary discipline and framework which some now refer to as the 'British model' for monetary and fiscal stability.

Why was it so different from the past?

It was different not just because we put in place an independent Monetary Policy Committee with outside members external to the Bank but also because we instituted a symmetrical inflation target - now just 2 per cent.

Many - including many businessmen and women - thought that an independent Bank would be too cautious, would refuse to be forward looking, and would act behind the curve instead of ahead of the curve.

We have seen in America the benefits of proactive, forward looking monetary policy - 19 interest rate changes since 2001 - in contrast to just seven in the euro area where interest rates have been at 2 per cent for nearly 2 years.

Our symmetrical inflation target requires the monetary authorities to be forward looking and proactive as we have seen Dr Greenspan be over many years. Our symmetrical inflation target means that the Bank has to take deflation as seriously as inflation. This was important in how we responded to the world downturn. But it is also important to how we have responded as the economy has moved upwards. With our interest changes in the last year people understand very clearly we will never be complacent and stability will never be put at risk.

A third decisive change arose from our new framework -- setting new fiscal rules not just for one year but for the whole economic cycle and imposing a new fiscal discipline founded on a radical reduction of the national debt.

In the old days governments made spending decisions at one time of the year and then make tax decisions at another time.

The deficit or surplus was simply the residual arising from the balancing out of two separate decision making processes.

I remember past decades when fiscal rules were set and re-set almost every year - a balanced budget, a balanced budget over the cycle, towards a balanced budget, towards a balanced budget over the cycle - rules set almost annually to explain away the difficulties in fiscal policy at the time.

Since 1997 we have had two fiscal rules, one to balance the current budget - the golden rule - and the second, to borrow only for investment if our levels of debt are sustainable.

And starting with a radical reduction of debt and debt interest payments we have been able to meet all our rules.

Having tightened fiscal policy by over 4 per cent of GDP and sold off assets including spectrum - paying off more debt in one year than all the debt paid off in the whole of the last fifty years taken together - we cut debt from well over 40 per cent of GDP to well under 40 per cent.

Having cut debt, we have reduced our debt interest payments – which with social security had taken up 75 per cent of all additional public spending just over ten years ago - to around 2 per cent of GDP, lower than at any time since the First World War, a position that remains true in 2005.

So our long termism has avoided problems that have befallen the European Stability and Growth Pact. Our rules are not short term annual rules but for the whole economic cycle. By adjusting for the cycle we can avoid spending too much in an upturn and avoid having to cut back in a downturn, the wrong time to retrench.

Fourth, our long term rules now take into account the needs of investment – long term investments in education and in infrastructure and transport - which matter I know to business and which you have rightly emphasised in your own business manifesto.

Today it is a measure of Britain’s fiscal stability and strength that we have lower deficits and lower debt than all our main competitors from France and Germany to Japan and America.

So with monetary and fiscal stability, the low inflation that eluded most previous governments has been achieved each year since 1997. Our inflation target met each year and every year. And as a result interest rates are half the average of the last government; mortgage rates half the average; and unemployment half the average - and not least because of the obligations of the New Deal and your engagement with it unemployment is today half that of Germany and France and today lower than the USA.

And instead of being - as in the old days - first in, worst hit and last out of any world downturn, Britain has not only avoided recession but has continued to grow in quarter after quarter, year after year, in all 8 years of our government since 1997.

And now that the world economy is strengthening, growth is also becoming more balanced with business investment, manufacturing output and exports rising now - and expected to continue to rise this year and next.

Let me promise you we will always be vigilant to the risks not least to high oil prices and growing economic imbalances between the continents but while this year's euro area growth is expected to be just 1.5 per cent and Japanese growth less than 1 per cent, growth will be between three and three and a half per cent in Britain with, of the G7 countries, Britain and North America again growing fastest.

And I can also assure you that having had the strength to make four difficult long term decisions after 1997, we will continue to have the strength to take the long term decisions that put stability first now and in the future, supporting our monetary authorities in the difficult choices they have to make. And I can say categorically to investors everywhere that while no-one can ignore the reality of the economic cycle and the potential of global events to impact on the economy, we will entrench not relax our monetary and fiscal discipline.

Not only have we in an election year seen interest rates rise in the interest of entrenching stability but while making affordable tax cuts and investments in our future, the Budget locked in stability as we tightened fiscal policy.

So we have refused to make the short termist mistakes of the past. And we are determined not to be diverted from that path.

With difficult long term decisions that in my view the country must stick with - Bank independence, a symmetrical inflation target, long term fiscal rules, attention to long term investment and also the obligations of the New Deal - our watchword is stability yesterday, today and tomorrow. Stability first and foremost and always.

And it is not simply in the running of the British economy through the Bank of England – and in maintaining our tough inflation target - but in any decision about the British economy that we will do nothing to put stability at risk. While we support the euro in principle we have been determined that to ensure stability any decision must be based on the national economic interest and be clear and unambiguous. And I believe that we were right to conclude in this Parliament when we examined the five tests in detail that we could not recommending joining. In the next Parliament and at all times I can guarantee that the five tests would have to be met and the results clear and unambiguous. Stability and the national economic interest will always come first.

But just as in the last decade we have pioneered a British way to economic stability that has turned Britain from one of the world's stop go economies into one of the world's most stable, so too, in this decade, we must pioneer a British way to prosperity in a fast changing global economy.

Britain’s future success depends upon making the right long term choices and the role of government is not to stop the clock against change or to subsidise loss makers. In a global economy the role of government is to create and sustain the stability and competitive environment in which the entrepreneurial, the talented, and the dynamic can rise and succeed. And I tell you my view: we must be prepared to change as required; modernise as required; reform as required; create new incentives as required; and be more flexible and competitive as required. There can be no room in the new Britain for the old complacency, for accepting second best, for condoning failure or low aspirations, or for tolerating outdated inflexibilities or the old them-and-us confrontational attitudes.

For decades the neglect of investment in science, education and infrastructure damaged British growth and prosperity. And today, again like every advanced nation, Britain faces a stark economic choice: we could repeat the mistakes of the past, once again failing to invest long term in our science, skills and transport and infrastructure or just as together we forged a British way to stability in the global economy, together we build upon our scientific and creative culture, our commitment to education, our global reach, and forge a British way to prosperity in the new economy.

Enterprise

So I want our government at all times to be on the side of businessmen and women as they start up, look for finance, look to set up their first payroll, hire their first employee, make investments and look to get equity into their company.

And I can tell you that while in every country health care cures and technologies have meant rising costs - in America almost twice as expensive as ours - hence our decision that national insurance pay for new investment matched to managerial reform in the NHS - we have since 1997 cut corporation tax from 33 pence to 30 pence, cut small business corporation tax from 23 pence to 19 pence, cut capital gains tax for long term business assets dramatically - from 40 pence where it had been for years down to 10 pence - and we will continue to look with you at the business tax regime so that we provide incentives for investment in wealth creation and rewards for success and so that Britain has and retains a competitive tax regime.

In your manifesto for business you asked us to consider incentives for investment and not only have we made first year capital allowances permanent not least for modern manufacturing strength but particularly in the wake of Rover we will do more - expanding regional venture capital funds, improving the small firms loan guarantee scheme and introducing new enterprise capital funds to give new and growing businesses the finance they need to expand. And I hear what your members say about the importance from the regions of encouraging new firms to enter our export markets with support from the DTI.

I understand that regulation, red tape and bureaucracy are challenges in every industrial country of the world and whenever I go to the USA businessmen and women there raise the very same things about the USA economy - red tape, bureaucracy and regulation. you asked if together we could look at vat. And instead of having to account for every transaction, an automatic flat rate VAT calculation for small businesses which lifts the burden of VAT red tape off the shoulders of hundreds of thousand of companies and I am pleased we will now be working together with you to increase take up of this scheme.

You asked us in your manifesto if working together we could look at red tape in planning and we are working with you to develop a faster track planning process. You asked us if working together we could look at red tape in auditing and we have exempted more small businesses from the requirement to submit an independent audit. You asked us if working together we could look at the system of inspections and enforcement and its costs and by applying the principle of risk based regulation we are now able to cut inspections by a million a year, reducing 35 inspection agencies to just 9 - a reduction of 26 just as we also cut public sector inspectorates from 11 to 4 - and we will apply to new and existing regulations a competitiveness test. Because 40 per cent of major new regulations come from Europe we are resisting inflexible barriers being added into European directives like the working time directive and agency workers directive, showing as in our determination to make deregulation a theme of our Presidency this year that the best contribution we pro Europeans can make to Europe's future is to lead the reforms that will make it more competitive.

Enterprise starts in our classrooms. In 1997 less than 15 per cent of schools offered enterprise education. Now half of all schools do. By 2006 every school will. And I praise you for your work with schools in widening and deepening our entrepreneurial culture. And I want us at the same time to become the best educated and best trained workforce: demanding, in return for investment, the highest standards in our schools and further education colleges; and, as your manifesto suggests, making training more responsive to business needs, investing in the all too often neglected area of vocational education and the improvement of the numbers and quality of modern apprenticeships giving young people the practical skills they and the economy needs.

Conclusion

I said at the outset that more than ever Britain, building on our historical qualities - the pioneer of free trade, the home to scientific invention and the industrial revolution - needs for our future a shared sense of and a patriotic pride in our national economic destiny:

A Britain - once the stop go economy of the world – determined to entrench long term stability.

A Britain that succeeds in the new global competition because working together we reject the old rigidities of the past and win as a flexible, reforming, and ever more enterprising economy.

A Britain that succeeds globally because working together we invest in science and skills, and look outward to Europe and the world.

Government effective where it has to be effective - in economic stability, science, skills; businesses able to be the wealth creators they are, and encouraged where it matters - with incentives and rewards to invest and grow.

And a Britain that succeeds globally because we share a long term economic purpose - that long term commitment not ever to take the easy way out or the short term course but resolute to get things right for the long term.

Making Britain a better place to do business - and, if we continue to make the long term changes needed, better still years from now.

Ends