98/05

24 November 2005

Chancellor of the Exchequer, Gordon Brown’s, speech to the Institute of Directors in London on 24 November, at 20.45

Check against delivery

My theme is that globalisation is made for Britain.

That if we make the right long term decisions Britain can be one of the greatest global success stories of future years, beneficiaries not victims of global change.

And I want to discuss with you how we can put to use these great British values – British enterprise, British inventiveness, British creativity and British openness to the world – to meet and master tomorrow's challenges.

I think 2005 will go down in history as the year when we first had to come face to face with the sheer scale of global economic change: the trebling of oil prices, itself a direct result of Asia's rising demand for oil, the consequent return of global inflation; the calls for protectionism; the fears for the environment; right down to the loss of individual jobs in traditional manufacturing companies - all these have their origins in this rapid global change and in particular the dramatic entry of 2 billion people in India and China into the world economy.

I have just returned from visits to Asia, to the oil producing states and to the wider Middle East.

I am in no doubt that those who say that over the next decade global output will increase by 40 per cent and in the next five years alone global trade will increase by 50 per cent are near the truth.

For the first time, Asia will export more manufactured goods than the whole of the Euro area.

Ten years ago, just 10 per cent of the world's manufactured exports came from the developing countries; by 2020, it could be 50 per cent. And we expect 5 million jobs could be outsourced from Europe.

How do we approach these challenges?

As business you will look for new market opportunities almost certainly in higher value added goods and services.

As a government our duty to you is to maintain and enhance national economic stability by tackling at source the recent recurrence of global inflationary pressures.

And I know we must do more: we must take all steps necessary to remove any barriers - financial, trade, regulatory, cultural - that hold back British companies seeking global success.

I think you should be confident that we in Britain can maintain, indeed entrench, long-term stability. It is upon this stability that, in the modern world, inward and domestic investment depends and competitiveness can be built.

Why do I say this?

Because these last eight years have not been without major shocks – the Asian crisis, the IT slump, the halving of share prices starting in wall street, the US recession and now the trebling of oil prices - and at every point we have been tested.

But all through these years, quietly, we have been able to manage the shocks and uncertainties

And so it is no accident that uniquely in our history, our economy has kept growing without interruption quarter by quarter, now for 53 successive quarters.

That is what the post-1997 monetary and fiscal framework is all about and was designed to achieve - a mechanism to act quickly and proactively wherever risk appears through a symmetrical inflation target, which identified both inflation and deflation as enemies. And underpinning this long-term commitment to low inflation a complimentary stable and consistent fiscal discipline - our Golden Rule founded on low public debt.

At each time in the last eight years when we have been tested our framework has proven to be resilient.

So in 1997 we acted quickly to raise interest rates and cut inflation, just as in 1999 and 2000 at the time of the US recession, Britain alongside America acted quickly to lower interest rates in the wake of the IT bubble, stock exchange falls and a world downturn.

Let us remember that between early 2001 and mid 2003 Britain cut interest rates nine times, America 13 times - seven times more than the Euro area. More recently while monetary policy has also been proactive and forward looking in Britain and America, Euro interest rates have been on hold for two and a half years.

In these last 18 months, even in an election period, British interest rates were raised four times - the first time in our post war history that such interest rates changes happened before an election - and the result is that even faced with a domestic house price bubble on top of an international oil price rise, each of which would have in the past caused Britain to return to stop go and recession, Britain has acted to control inflation and maintain low inflationary growth.

Today British inflation is lower than inflation in the US, which is currently running at 4.3 per cent and lower than inflation in the euro area which, despite 1.2 per cent growth, is running at 2.5 per cent.

And international studies that have just been published show that from being one of the most volatile economies in the previous 30 years, Britain has today the lowest inflation volatility of any country in the developed world and is seen as among the most stable.

In each year since 1997 inflation has been at or around its target and the Bank of England is forecasting inflation just below 2 per cent next year and on target in each of the subsequent years - showing our new macroeconomic framework was not some one-off change whose benefits lie only in the past, but is a mechanism which has a built-in capacity to respond quickly and proactively to changing circumstances, whether high inflation or low growth. The result being that year after year stability has been continuously delivered.

It is no surprise to me that the new nominee for head of the Federal Reserve in the USA has considered matching his monetary policy arrangements with an inflation target similar to ours and – as I found in my visit last week - that the new Governor of the Bank of Israel, himself a former Deputy Managing Director of the IMF, is proposing a monetary policy committee for that country.

And the reason is that our monetary and fiscal framework is proving resilient in meeting the demands of our age.

If we look back to the immediate post war years the monetary and fiscal framework we created then meant growth and employment were in fact bought at the expense of inflation. In the 1980s the monetary framework chosen to cure inflation was at the expense of employment and growth.

Our new regime - a symmetrical inflation target that addresses both inflation and deflation underpinned by a long-term fiscal discipline - has been delivering low inflation, high employment and sustained growth.

I believe this system and this active mechanism will again prove resilient as we now tackle the threat posed by a recurrence of inflation at a global level.

Let us look at the three essential elements of this new inflationary phenomenon: commodity price rises, goods price changes led from Asia, and the pressure of a growing service sector more dependent on domestic labour costs - all pressures that have their roots in the changing global landscape.

For the first time for decades global commodity prices have been rising not primarily because of the shortage of supply but because of rising demand from Asia.

In the past 10 years Chinese demand for oil has doubled, and in just four years demand for cotton has risen by 50 per cent, rubber by 50 per cent and aluminium, copper and tin by 80 per cent.

And we have seen not just the trebling of oil prices but metal prices rise by over 100 per cent, steel by over 100 per cent and copper prices by over 150 per cent.

Oil alone has been responsible for half Britain's rise in inflation.

And it is because I am determined that oil ceases to exercise the destabilising pressures on ours and other economies that last weekend I went to Saudi Arabia, talked to OPEC members and oil companies, discussed how we aligned long term supply to long-term demand with more investment in production and refining capacity, greater transparency to increase stability, and new investment in alternative energy sources and to address potential oil and other shocks.

So we are seeking to ensure supply increases to match demand oil, seeking to minimise oil price inflation.

Globalisation has not only increased the demand for oil and commodities but it has lowered the price of manufactured goods.

Over the last 10 years because of the inflow of cheaper Asian manufactured goods and the decisions of British companies like yours in sourcing imports from these markets and then pass on the benefits to consumers - goods prices have fallen in Britain - household appliances and clothes by 20 per cent, TVs and radios by 50 per cent and computers by 80 per cent - for five years goods inflation has been negative.

It is countries where there has been genuine extension of competition, such as Britain, that goods inflation has fallen fastest.

And the test as to whether this downward pressure will continue will not just be whether Asian manufactured costs remain low, but whether competitive pressures in our economy remain high. And I am determined that with our new competition regime - modelled on the independence of the Bank of England - we further extend competition.

The third source of inflation is again a consequence of global change. As families pay less for their goods they are able to spend more on services - 20 years ago services accounted for just a third of what they spent, today it is half.

And as services are provided mainly by local labour, inflation pressures here come primarily from wages. Here again Britain is better placed to address any inflationary risk: firstly, continuing to extend competition across the services; and secondly continuing to exercise control from the public sector outwards on pay pressure and overall by maintaining a flexible labour market.

The public sector must play its full part. And I can say tonight that I have written to the public sector pay review bodies explaining that we will meet our inflation target and re-emphasising that pay settlements should be based on us achieving that target of 2 per cent.

And I can confirm when tackling all long-term pressures from pensions and welfare to the public services, we will spend only what we can afford, maintain all our fiscal disciplines, consistently meeting our fiscal rules.

The Turner Commission - and I thank Lord Turner for his work - will usher in an important debate about the future of pensions. When the Government set up the Turner Commission on pensions it was precisely to achieve that - to build a long-term consensus across our country on the future changes necessary. The issue is not reform versus the status quo; there must be continuing reform. The issue is how we achieve the right reforms, reforms which are sustainable fair and affordable.

And we can only implement and sustain the right reforms on the basis of a continued commitment to long-term stability. So there will be no taking risks with inflation, no let up in our demand for restraint in wage settlements, always a determination to tackle immediately and at source any inflationary pressures - and at all times fiscal discipline and no relaxation of our fiscal grip.

Ensuring stability is indeed the precondition for global success.

But it is only the foundation.

It is upon the rock of stability that we can and must build a sustainable competitive position, as true for a country as it is for a company.

And i believe there is a consensus about what needs to be done. Indeed whenever we have discussed these matters together we have all agreed that central to our future success is our science base, our skills, our entrepreneurial flair - creating an environment in which we minimise the constraints of regulation and maximise our flexibility.

I want to emphasise the importance of flexibility - the ability to respond quickly and adjust to global change - what America has learned, Britain is learning and other countries in future will have to learn.

And it is by making a long-term commitment to science, education, enterprise, infrastructure and to minimising regulation that we the British people will carve out the best possible economic future for Britain - and I see Britain as number one in the world in many of the areas that are at the cutting edge of global progress.

Next week in the Pre Budget Report I will emphasise the importance we attach to reform matching investment in transport - led by the Eddington review - in enterprise - where we wish to do more to back the risk takers – and most of all in education – where we can be world leaders and make education one of our major exports.

And let me just emphasise the importance in a global economy of our science based industries: even now Britain has a higher share of science-based innovation than the USA - and over the last 50 years alone Britain has produced 50 Nobel prize winners, reminding us that we have been at the forefront of creativity and inventiveness throughout our industrial history and giving us confidence that this great nation can be a world leader in the future.

The £2.5 billion of additional investment we have projected from the 10-year science partnership we forged between government and business is now happening. And in a few days time I will be able to announce new incentives for research and development; new encouragement for the creative industries, following the recommendations of Sir George Cox’s report; and the next stage of our ten year science plan on how Britain can become a world-class centre for medical research.

Every one of you here who runs a company - large or small - knows that you must draw on the potential of everyone in your company to be successful; its no different for a country. At the Pre Budget Report i will publish the interim report by Lord Leitch into the UK's skills needs in 2020 - showing that while by then the we should have made real gains, because too many people do not have the basic skills that they need to advance and progress, we as a nation will need to go further and faster if people in Britain are to realise the opportunities of globalisation.

Of course I couldn't close this evening without talking about regulation. It is what makes us all full of frustrations and making a real difference by cracking this problem would help us all. Let me just say whenever I go to the USA and talk to businessmen and women there they express exactly the same frustrations and the same hopes.

And I believe there is a way forward.

For more than 100 years in our industrial life policy makers have thought the only safe way to avoid abuses is to take a blanket approach to regulation - to ask all businesses to fill in forms, to impose universal requirements for information, to subject all of you to uniform and continuous inspection.

It has reached the ridiculous state of affairs that national chain of shops or businesses operating in hundreds of different places and doing so under the same national company rules and regulations, can be subject to hundreds of different regulators and inspectors requiring information.

But in other areas we have come to learn to be more scientific about the measurement of risks where there is a danger of abuse.

So in the Pre Budget Report I will show how our new model of regulation can apply to processes and procedures from health and safety and the environment to tax and the financial services from the old model of inspection of premises, procedures and practices irrespective of known risks or past results - to a new model that is quite different: a risk based approach that means no inspection without justification, no form filling without justification and no information requirements without justification. And thus instead of an implicit threat of 100 per cent inspection, limited only by resources, inspection where only high risk can be identified - in future not just a light touch but a limited touch.

And this new approach - driven by private sector business leadership - will reduce the number of inspection agencies from 31 to 7, reduce the number of inspections themselves by a third - in total 1 million fewer inspections – cut the amount of form filling by one quarter.

And this is an approach I want to extend not just to the implementation of regulation, but to their design and indeed to the decisions about their development.

Britain is the pioneer, in history the greatest standard bearer of what is the essential element of a successful globalisation - free trade. As an island of traders and merchant venturers we have a global reach greater than any other. Our reach has always been global not just one continent but to every continent.

And today Britain should lead the way to a new trade agreement next month in Hong Kong, which unites the world and makes globalisation work for the poorest of the world.

Let us be clear about the prize: the opportunity for all countries to benefit from what could be at least an extra $300 billion in world growth every year.

And so let us also be clear that what we now need is progress in the negotiations that allows countries like India and Brazil to positively support the liberalisation of services and greater market access. And the key that will unlock that door is America and Europe offering progress by reducing protectionism in agriculture.

Indeed what better signal could Europe send of its commitment to wider economic reform than tackling wasteful subsidies that consume 40 per cent of the European budget, even at a time when agriculture accounts for just 2 per cent of the European economy.

Agricultural protectionism means $300 billion a year in subsidies to shelter the richest parts of the world that dwarfs the $50 billion spent on aid for the poorest. And it is simply wrong to say that tariffs are essential to advanced industrial societies and wrong to say that big cuts in farming tariffs would not help a solution to poverty.

So I believe that countries and continents from India and Brazil to America and Europe now have a common interest in resolving these issues and together brokering a deal.

Last week in a nationwide enterprise week the IoD supported tens of thousands of young people, joined 2,000 separate enterprise events, master classes and competition.

Britain now has competitions ranging from the young entrepreneur of the year, to the inner city growth area and enterprise town of the year -- showing us how alive and strong the entrepreneurial spirit among young is people in our country – with Britain seeing more new companies, more university research spin offs to companies and more businesses showing entrepreneurial flair in areas once considered no go areas for small business creation in our country --- I am optimistic that if we make the right long-term decisions globalisation will work for Britain.

The challenges are clear. It is my belief we a share a common agenda. I believe by adopting it we can forge a shared national economic purpose because what we share is a belief in the importance of stability, the centrality of science, education and creativity and the need to minimise regulation in our economy and maximise flexibility.

And we share the vision of a Britain as the place to be the number one in the world in stability, creative skills, financial services, science and education and number one in our willingness and desire to trade with every part of the world in which we live.

Globalisation is indeed made for Britain.

Let us together make it work for British business, the British economy and the British people.