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Newsroom & speeches
21 October 2009
A year ago, the world banking system and the global economy were staring into the abyss.
Today, the financial system is more stable.
Confidence is returning across the world economy, in a way few would have thought possible at the beginning of this year.
The past year has shown that, even in a globalised world, governments can make a real difference.
It’s precisely because we took radical action a year ago that there is more confidence today.
But we are not yet out of the woods.
There’s a lot of uncertainty. Many pitfalls still to be negotiated.
The battle to stop recession becoming global depression is being won.
But we must be ready to face a new challenge – to secure long-term sustainable growth.
That, of course, needs a functioning market for credit.
So we will continue to put in place tough practical measures to strengthen the banking system and protect the public interest.
We published proposals in July and I intend to push ahead with them.
Only yesterday Finance Ministers agreed to further reform the regulatory system in Europe.
It’s perhaps a bit unusual for me to address a city audience and not talk solely about the banks.
I’m perhaps breaking with convention by speaking about economic growth so close to the Pre-Budget Report.
I’m doing so because I believe the decisions we make over the next year will define our prospects for the next five to ten years.
And make no mistake, we do have a choice.
We can resign ourselves to a decade of austerity, low growth and low employment.
Or we can embrace change, turn it to our advantage, and seize the huge opportunities a global recovery will bring.
To do that, we must complete the reform of the financial system and see through the recovery.
And as we come through recession and rebuild our fiscal strength, we must now secure the growth that will create jobs for our children and grandchildren.
That is entirely possible, but only if we make the right decisions.
Three steps are needed.
First, we must support the economy until we’re sure the recession is over.
Some are tempted to think the crisis is over. It’s not.
Banks all over the world are still dependent on government support.
Unemployment continues to rise. But some still call for an immediate end to support for businesses and families.
Ending support now would be wrong and dangerous.
And I can tell you – not one of the 186 IMF members, across all political persuasions, believe that’s the right thing to do.
We have showed how governments, acting together, can support the global economy.
We stabilised the banks and introduced fiscal measures to support demand.
That’s complemented by monetary policy, where I agreed a programme of quantitative easing to increase the supply of money and boost activity.
There’s encouraging signs that the steps we’ve taken are working.
150,000 businesses given more time to pay their tax bills.
We cut VAT – boosting people’s incomes and supporting consumer demand.
And even with the worst of the recession behind us, there are still around 2.5 million more people in jobs than in 1997.
Unemployment is too high – but over a year into this recession, it is still 200,000 lower than at the same point in the 1990s recession.
Key to this has been our £5bn of support to help people move into jobs.
That’s important to our future – in the 1980s and 1990s, short-term job losses became long-term unemployment, with huge costs.
So there are signs that the action taken by governments around the world has prevented global recession sliding into prolonged depression.
But it’s too early to sit back and relax. The situation in the world economy remains fragile.
We need to continue to support our economies – helping those struggling to deal with the impact of the downturn, until they are able to stand on their own again.
And one set of data showing positive growth will not be enough – we need to ensure that the recovery is embedded.
Countries must develop coordinated exit strategies, to reinforce confidence and avoid disruptions to global markets.
But as we agreed at the G20 Summit in Pittsburgh, now is too soon to withdraw support.
Supporting the economy is only one part of the strategy I announced last autumn.
The second, equally important, is to rebuild our fiscal strength in the medium term.
This global financial recession has depressed tax receipts – corporation and income taxes are down, stamp duty is down.
When times are tight, families and businesses will tighten their belts.
But – as Keynes observed many decades ago and as the G20 agreed this year – if governments act in the same way as families and companies they can compound the problem and make the downturn much worse.
Withdrawing the support we’ve provided to the economy would put the recovery at risk and abandon people facing unemployment.
Borrowing to support people now and to invest in the future may feel counter-intuitive.
That’s why Keynes called it “the paradox of thrift”.
But in the longer run, it will mean the bills we face as a country are lower, and that we are better placed to pay them off.
The choices we make over the next year will be crucial – in deciding whether we can foster the recovery and benefit from the global upturn.
So the choice isn’t whether we can afford to invest in our economy. We cannot afford not to.
Once the recovery is secured, we will need to take action to rebuild our fiscal strength and reduce our borrowing.
That is why we have already set out a deficit reduction plan that will halve the deficit over four years.
We are raising taxes on higher incomes and taking some tough choices on public spending for the years ahead.
That will mean cutting costs, cutting waste and cutting lower priority budgets, while continuing to invest in our priorities and our future.
But there must be a third, and crucial, part of our strategy for the economy – growth.
There is no better time to plan for growth than now.
Not only is growth the best way of creating jobs and increasing prosperity – it is also the best way to earn the money to pay down debt.
We need growth, because when we grow, the economy becomes bigger, we all become richer as a country, and it gets easier to pay back debt.
As a country, we have a choice. You can say there’s nothing we can do, wallow in an age of austerity, tell people there is no alternative.
That is a poverty of aspiration.
Or we can say – yes – we can make a difference, there are jobs out there, we have a diverse economy with many strengths, ready to seize the opportunities of the future.
That’s the scale of our ambition.
To make the wrong choices, to refuse to invest, will simply mean that the economy gets smaller, we all get poorer, and even greater and deeper cuts are needed.
We have seen this before – the savage cuts of the 1980s meant whole swathes of our economy disappeared.
So how can we secure growth?
Functioning markets, private endeavour, individual ingenuity are all necessary.
But they’re not enough on their own.
The invisible hand of the market must go alongside the enabling hand of government.
Yes, it will be Britain’s companies – from the blue-chip multinationals to the venture-capital start-ups – who will have to compete in an uncompromising global economy.
But the government can help our businesses and our people succeed.
Public investment and private endeavour working hand-in-hand.
So we will set out how we shift the focus away from short-term support towards medium-term growth.
We will need to encourage innovation and enterprise, and so far we have:
But we need to exploit this advantage.
With four universities in the world top-ten, we should have even more commercial applications of our research and deeper R&D activity at our firms.
The new Innovation Investment Fund will focus on investing in start-ups and spin-outs – across digital and life sciences, clean technology and advanced manufacturing.
And in the next few weeks, Chris Rowland’s Review will set out how we can support the provision of growth capital for UK firms.
On skills, Government training programmes have supported millions more to improve their skills. Apprenticeships have more than trebled – with over 2 million since 1997.
But there is still a skills gap with our competitors – and we need to address it.
Next month we will publish a skills white paper, so we can focus on the areas where training can have the greatest productivity impact.
Increasing apprenticeships for young people, training aimed at the high-growth sectors of the future, and raising employer demand for skills.
Infrastructure is a vital element of growth.
Since 1997, we have increased capital spending and transformed the way we invest.
Look at transport alone.
Nearly 70 major roads and motorways improved since 2001. Increased rail reliability while carrying record numbers of passengers.
In the private sector, Heathrow’s capacity improved, with a fifth terminal capable of handling 30 million passengers a year.
But we still need to do more – that’s why we are looking at new high-speed rail links.
And we’re looking at our infrastructure needs across energy, waste, water, telecoms and transport over the next 50 years.
Alongside changes to the planning regime, these steps will encourage private investment and reduce market uncertainty.
Our approach also means reducing market failures, dismantling the barriers to growth which are holding back some of our key sectors.
Digital technology, for example.
New small software firms are no longer clustered in a few areas.
Why? Because the current generation of broadband unlocked new business opportunities throughout the country.
Now next generation broadband is becoming available, with the potential to create another wave of opportunities.
Some argue we should just hope it happens, that it is not worth supporting this.
I think this is wrong. That's why we're dedicating funding to support Britain’s digital infrastructure.
In the low carbon sector.
By addressing investment barriers we’ve released billions of pounds for offshore wind, ultra-low carbon vehicles, marine energy, and low-carbon aerospace.
Green industries alone could support a further half a million jobs over the next decade.
None of this would happen without our support.
Government can be a force for good across a range of sectors.
Since the Budget, we have:
It is only by growing and investing in our key sectors that we will be able to deal with the many global challenges of the coming decades.
We face ever-expanding globalisation – so we must build on our strengths in high-tech manufacturing and tradable services.
We face demographic change – so countries must decide how to look after an older population and put in place the foundations of a modern social care system.
We face potentially devastating climate change – so we must push forward with climate finance initiatives and reductions in our emissions.
And that’s why securing sustainable growth is so important.
Countries have shown they can act together. We need to continue that effort – starting at the G20 meeting in St Andrews next month.
Together, we are beating the recession.
Let us now win the recovery.
