24 Feb 2003
Speech by the Chief Secretary to the Treasury, Paul Boateng MP, at the PBR Seminar in Edinburgh, Scotland
Introduction
It is good to be in Edinburgh and apt that we are in the Scottish Widow’s building, as we all know how much is being done in the Financial Services industry in Scotland. This visit is part of a series that Ministers are making to towns and cities up and down the UK. This time is for us to make sure we hear and learn your concerns as wealth creators. It has always been the Chancellor’s determination that we as Ministers get out and about ahead of the budget at a time when your feedback is so important to us. I hope we will be able to engage in a dialogue where you can share your experiences with us.
Helen Liddell talks to Treasury Ministers all the time representing the needs of all communities to ensure we are in tune with what is happening in this country. We value this contribution enormously. Our partnership with the devolved administrations is so important. As you will know in the economic area, under the Scotland devolution settlement, some functions such as macroeconomic policy, fiscal policy, Government funding of the Scottish Executive and employment areas such as the New Deal are reserved to the UK Government; and other functions such as economic development, training and a wide range of public services are devolved to the Scottish Executive.
Nothing must therefore be allowed to get in the way of the partnership. We at the Treasury are determined to work in a way that reflects the needs of this partnership. It is vital that we ensure that the machinery of Government is equipped to reflect the needs in all the constituent parts of the UK. This PBR seminar is a concrete example of that partnership.
Treasury Ministers are strongly committed to devolving power to enable decisions to reflect local priorities, and making a success of devolution. I am very much looking forward to visiting Glasgow tomorrow to see examples of devolution in action. I will be visiting a PFI school where the children are being engendered with the skills they need to thrive in order to become our wealth creators of the future.
Scotland is a small open economy with a big competitive future. We are constantly being reminded that we live in a global economy. But the irony of globalisation is that it makes locality even more important. Nations and regions can themselves be magnets - attracting ideas and the entrepreneurs to develop them. Few self-respecting Scots men and women doubt that Scotland has got what it takes. The challenge is now to spread the word by creating a world-class, prosperous country with a stake in success for everyone.
Scotland has taken the challenges of globalisation, of changing technology, and of the decline in demand for traditional manufacturing products, in its stride. It has reflected a capacity to think globally that belies its size. In fact Scotland has always had the capacity to think and act globally. When I was growing up in Africa there were Scottish construction engineers, Scottish teachers and missionaries.
We all recognize that here in Scotland as well as elsewhere in the UK the manufacturing sector and electronics have suffered. This is part of a global phenomenon. But despite the world downturn the latest Scottish Executive figures show continuing growth in Scotland’s GDP. And the Scottish Executive and Scottish Enterprise are committed to developing Scotland’s science base. This has to be good news for the manufacturing industry – still so important to the Scottish economy.
The development of the services sector - including financial services which has been such a prominent success story of the Scottish economy – is also hugely important.
In each of these areas the Scottish Executive has taken up the challenge of economic renewal – working to promote a smart successful Scotland. And so it is within that context we have seen that since 1997 Scotland has experienced significant growth, with an additional 138,000 people in work – an example of that partnership’s success.
For its part the Government has provided a stable and successful macroeconomic framework, producing low inflation, low interest rates and low unemployment in Scotland. The Scottish Executive in turn is using its devolved powers to promote economic development through its Smart, Successful Scotland strategy.
Economic outlook
All that is good news, but we need to look also to the wider global economic outlook.
Twenty of the world’s biggest economies have been or are in recession. These economies account for 60% of the world’s output. World trade growth, which held up throughout both the world recessions of the early 1980s and 1990s, fell twelve percentage points last year.
Unfolding events in Iraq, the impact of oil prices, concerns about corporate governance, problems in the IT industry, and current account imbalances have led to falls in investment, in the last two years, around the world.
In the past, Britain has always suffered badly when the world economy was in trouble. Too often we have been the first into painful recession and the last to come out.
The number one priority for the Chancellor, and for the Government as a whole, since 1997, is and will continue to be stability and steady growth.
In our first term we took difficult decisions to bring much needed stability to the economy. We were right to do so: Britain is weathering these global storms so much better than many of our competitors because of the hard decisions taken at that time.
Since 1997 – employment has increased by almost 1.5 million.
Inflation is low and stable and interest rates are lower than for a generation.
As a result of reducing the debt we are saving £7 billion a year on interest payments.
We are better placed than in previous world economic downturns, and better placed than many of our competitor countries.
Growth is expected to pick up throughout the year and is once again expected to be the highest in the G7, along side North America. That means, with cautious planning and comfortably within the fiscal rules we have set, we can:
a. Meet our commitments on the public services such as health, education and transport;
b. Meet commitments to support incentives to work and provide support to pensioners; and,
c. Meet our commitments to support business and enterprise.
Funding for Scottish Executive
Steering a steady course, and well within our fiscal rules, we have been able as part of that to provide increased funding for the Scottish Executive.
Last July, in the Government’s Spending Review, we were able to provide large increases to the Scottish Executive’s budget – an annual average real terms increase of some 4.4 per cent.
Following on from that, in September last year Jack McConnell, Jim Wallace and Andy Kerr published the Scottish Executive’s own spending plans. Total managed expenditure in these plans increases from £21 billion in 2002-03 to almost £26 billion in 2005-06, an increase of some £5 billion or 23 per cent in nominal terms.
Jack McConnell set out his administration’s spending priorities – growing the Scottish economy, increasing opportunities in Scottish communities, improving Scottish public services and safeguarding Scotland’s environment. And not just more investment but better results. The Scottish Executive’s spending plans set out key service delivery targets to ensure that improvements in public services are achieved in all the key priority areas - health, education, crime, transport, and jobs.
I will be meeting with colleagues from the devolved administrations in March for the first of six monthly quadrilateral meetings to discuss areas of shared interest and ways in which we can continue to improve our partnership working with a view to benefiting us all.
So public spending is another example of the Government and the Scottish Executive working together – our successful running of the economy enabling the Scottish Executive to put in place plans reflecting the priorities of the people of Scotland.
Productivity
An area of real concern for UK plc is that of productivity. If policies for stability and steady growth have been the first priority, and hallmark, of Gordon Brown as Chancellor, policies to support enterprise and improve productivity are a second.
We all recognise that macro-economic stability is a necessary but not a sufficient condition for business success. That is why we are determined to ensure that the right micro economic framework is in place and that the UK is and remains a good place to do business. The UK is and will remain a low tax environment – with further tax cuts for SMEs in last years Budget, an increase in the VAT threshold and an annual accounting scheme to cut the cost of compliance. I know that those measures are welcome and that the CBI in Scotland has lobbied hard for these measures, and I am glad that we have been able to put them in place. We have taken steps together to ensure Scotland remains a good place to do business.
The OECD says that the UK has the lowest barriers to entrepreneurship of any advanced industrial economy. That is encouraging. But there is always room for improvement, there is never room for complacency, and we are determined together with you in partnership to do more to improve the competitiveness and the productivity of the UK economy.
That is why we have introduced a series of targeted reforms focussed on the five key drivers of productivity – investment, enterprise, innovation, competition, and skills.
In the Budget we extended the Research and Development Tax Credit to all companies. The credit will be given at a rate of 125% on all qualifying R&D expenditure: benefiting around 100 large companies in Scotland. We have also launched two reviews to stimulate innovation in the UK economy. And I welcome during my time in Scotland to learn more of how the Scottish Executive and Scottish Enterprise are tackling these key issues.
PBR
We know that across Scotland, SMEs are a vital source of productivity growth: acting as a channel for new ideas, products and processes; and cranking up the competitive forces that drive investment and innovation across the Scottish economy.
But Scotland, and the UK as a whole, still faces a significant enterprise challenge.
The proportion of adults involved in starting or running a new business in the US is nearly twice as high as in UK. That is telling us something, and we have to learn from this. It’s about growing that culture of success and nurturing the ‘can do’ mentality.
Business creation rates in our least enterprising communities are up to ten times lower than in the most enterprising. Here in Edinburgh the rate of business creation is 36 per 10,000 people – around the national average, but over in Inverclyde it is just 16 per 10,000 people.
This government’s aim is to build an enterprise society, in which all who have the initiative, skills and drive feel they have the opportunity to start and grow a business.
In the PBR 2002, building on previous reforms, we carried forward our proposals on encouraging enterprise, investment and wealth creation in all the areas, and communities of the UK.
That means the launch of Enterprise Areas – focal points for our efforts to encourage the development of an entrepreneurial culture in our most deprived areas.
In the Enterprise Areas a range of government policies will come together to meet the needs of businesses – giving them the support and the freedom they need to bring jobs, and opportunity, and wealth creating activity back into areas that have been abandoned and ignored for too long. In Scotland we are creating some 140 Enterprise Areas, benefiting the most deprived wards.
These efforts will reinforce the work of Scottish Enterprise and Highlands and Islands Enterprise as they work to create a Smart Successful Scotland.
In the Enterprise Areas, subject to state aid approval, we are extending stamp duty relief to include all non-residential property transactions. Stamp Duty is always an area of concern for business, stripping it away in the Enterprise Areas aligns both public and private interests – promoting economic growth and urban regeneration hand in hand in some of the most disadvantaged areas of Scotland.
Areas like this, as the Chancellor has said, need more businesses, not more benefit offices. Our response to that to make sure that we get more businesses is to work in partnership with business for continued improvement in this area.
Employment and tax credits
If we get the economy right, if we can get the investment flowing in, and the businesses starting up, then we will have gone a long way toward the achievement of high and sustainable levels of employment. But even with high levels of employment problems like in work poverty can persist. So alongside our programme of economic reform we have introduced targeted support for some of the most vulnerable members of society.
The PBR emphasised supporting families, support for pensioners, and tackling child poverty in Scotland. Central to this objective is our new system of tax credits. The new Working Tax Credit and Child Tax Credit will benefit 450,000 families in Scotland.
The Government is committed to increasing employment opportunities in Scotland, through strengthening tax incentives and through the New Deal, and introducing and then increasing the minimum wage. Extending the New Deal for Lone Parents has provided over 22,000 more lone parents with the opportunity to gain new experience and skills. It is about tackling the isolation and marginalisation that has led to such a waste of people who have so much to offer.
Conclusion
I would like to end with two thoughts for you.
First, as members of the business community, you have the chance to take advantage of schemes we have put in place – flat rate VAT, Small Firms Loan Guarantee, Research and Development Tax Credits - and you have the chance to influence the wider development plans of your area, getting involved with the work of the development agencies of Scotland.
Your own role as the role models for the next generation of Scottish businessmen and women is so crucial. You all have a part to play, passing on your expertise, sharing your experiences, holding open for the entrepreneurs of tomorrow the doors which, perhaps, you had to struggle to break down.
These events are not just about me telling you what we are doing. They are a chance for you to tell us what is going on at the hard end, which initiatives work, which ones do not, where the burden of compliance can be cut, which agencies are working effectively, and which are not.
However we must not forget that this is a unique time. We have the macroeconomic stability that is needed to build a future environment for young people to prosper and thrive. Working together we can build that environment we all want.