Vince Cable's keynote speech on growth
Secretary of State
3 Jun 2010, CASS Business School
Well, the first thing you may have noticed is that I am not Peter Mandelson. For one thing, I am a better dancer. Or at least I have actually passed some exams, which may or may not be the same thing.
It’s been an interesting month… I teased David Cameron the other day by suggesting that it may be too provocative to describe a Conservative leader as a revolutionary.
But this government is revolutionary – at least for anyone less than pensioner age. A full coalition. A policy platform based on compromise rather than first-past-the-post force majeure. And it’s a good thing. The British public clearly see it as a good thing – in marked contrast to some of the carping, tribal commentators.
But we face deep-seated problems. A very fragile recovery – both at home and in our continental European neighbours. A massive budget deficit. A dysfunctional banking system. An economy that is seriously unbalanced both in its sectoral mix and in its regions. That’s why we have deliberately projected this coalition’s ambitions over a full Parliament, because the task is that big.
I don’t want to just set out a work programme today. You’ve had a Queen’s speech. I want to complement and develop the ideas which David Cameron set out in his speech on the economy last week.
As this is my first speech in Government I want specifically to say something about the approach I plan to bring to the department of Business, Innovation and Skills. Or ‘BIS’, in the inevitable Whitehall abbreviation. This will not be a speech about policy detail. It is necessarily broad brush. But it will tell you what kind of policy you can expect from me.
Now, I used to work for the Department of Trade, one of the forerunners of BIS, as a Special Advisor in the 1970s. I worked for the late John Smith, whom I much admired.
Some of you might remember that I actually later called for the DTI to be abolished. I think I said it was “drifting with no sense of purpose”. It drifted, subsequently, under a succession of Ministers for the best part of a quarter of a century.
Well, today BIS is very different. So my civil servants can relax. Briefly.
In part because the mission of the department and its mandate have changed radically since the DTI days. And the key to this is that it is no longer just a department of Business and Trade.
By bringing together university policy, skills policy, business, regulation and competition policy, science and research policy, it has become in effect, the department for economic growth. When Ed Balls used the phrase post-neo classical endogenous growth theory he was, unwittingly, explaining the rationale for my department.
It is, in any event, a major economic department, complementary to the Treasury. A key measure of the success of this government is that both succeed. We cannot have sustainable growth without fiscal stabilisation. And fiscal stabilisation will only be successful if it leads to growth.
There is a critically important issue of timing. There is a balance of risk. If deficit reduction comes too rapidly there is a danger of deeper recession and even bigger deficits. But like the Governor of the Bank of England, and like the OECD, I have been persuaded that early action on the deficit is essential. Going forward, policy must be driven always by the same rational calculation of economic risk and benefit.
Early exposure to the agenda of cuts means that from day one I have been looking at ways of saving money in my own – very big – department which spends more than £20 billion a year. It is a good discipline: forcing me to think clearly about what BIS is for in an age of austerity.
The right balance
The Department’s central task, and my central task, is making sure that Britain is a place where enterprise and innovation are made easier and can succeed. Where ideas are generated and are turned into jobs. Where people have the skills we need.
The basic reality is simple: government is no longer in a position to promote growth through fiscal stimulus. Private consumers are debt-laden. Growth will have to come from the business sector. It will need to come from trade.
And of course that means making this country a good place to do business. Where it’s easy to start a business or invest from abroad. Where regulation is proportionate (and there is less of it than now.) Where starting an enterprise or creating a job – even just one job – is genuinely valued by society.
And the reality is that sometimes that means standing up to business. Arguing for more competition instead of cosy cartels. Arguing for better protection for consumers from shady practice. Rejecting special pleading.
Radio 3 listeners – I believe they do exist – may have heard my recent lecture on Adam Smith, whose ideas I taught to economic students in Glasgow early in my career. Amongst his many wise words which have stood the test of time is this: “the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”. And the consumer is all of us.
Smith – and this is often forgotten – also argued trenchantly that successful capitalism rested on a sense of morality, not on unfettered greed.
So I see my role as weighing the needs of small businesses and big businesses, sole traders and multinationals, the City and regional manufacturing. The short against the long term. Getting the right balance.
And yes, that means taking a tough line with parts of the banking system, which have not served enterprise in this country as well as they could. Or operated in the long term interests of our economy.
I respect and admire a lot of what is done in the City – much of which has nothing to do with banking. I do believe that it is one of the UK’s most valuable clusters of specialist expertise.
Yet I know that my insistence on pushing this agenda is being presented by some as a grudge against the City. So it is important to draw a distinction very clearly between financial services as an industry and those banks that are trading and making substantial profits with an implicit promise of public rescue if it all goes wrong.
And in some cases of course it did go terribly wrong, inflicting huge costs on the British taxpayer – who are ultimately paying the costs of the banking collapse and the recession it caused.
That is a situation that should outrage the most red-blooded capitalist every bit as much any left-leaning radical. Few people are more outraged than those responsible bankers who managed their depositors’ money carefully, were content to pursue long term shareholder value, maintained close relationships with their business, customers and were not tempted by the lure of the casino.
So as part of the coalition I have three big priorities here. First – the question of structural reform - separating retail and investment banking, which we will address through the Banking Commission whose membership and terms of reference will be announced shortly. This exercise matters not only to make banks safe but to ensure that our banks are equipped to provide a range of funding streams, on a competitive basis, for the UK economy to function successfully.
Second - the question of a levy on the banks to reflect the fact that – at least until banks are made safe through structural reform – the taxpayer is providing insurance: protection for which the banks should pay.
And third – perhaps most important for early economic recovery, I will redouble our efforts to ensure that bank lending agreements from banks that have benefited from taxpayer subsidy are being honoured – especially for SMEs. We do not expect to see viable businesses deprived of credit or working capital by banks that are largely owned by the taxpayer, or the general beneficiaries of wider public support.
The banks claim that there is no demand. That is not right. If the bar is set too high, of course no one is willing to jump. The current risk aversion by banks in the SME sector will stifle recovery and, if it does, will actually rebound on the banks through bad debt.
The right role for government
I hope what is emerging from this is a clear sense of how I see the market and the government and the limits of both. Why I think being pro-enterprise, pro-trade and competition – doesn’t just mean being the voice of business.
I sometimes find myself described in the unfriendly press as some kind of socialist. They should refer back to the Orange Book I co-authored with David Laws six years ago.
I am a liberal. I am a free trader. I believe in open markets. Anyone who doubts the clarity and consistency of my views should look up my writing on trade policy from the 70s, attacking protectionism.
I think the WTO is a good thing, not a neoliberal conspiracy and I will be pushing hard to get the Doha world trade round revived this year and next.
Nor do I have a philosophical problem with big business. I spent years working for one – a big, controversial oil company no less - and I’m proud of the world-class managers and engineers I worked alongside.
I do however think that the market economy has to deliver opportunity rather than constrain it. It has to spread wealth around, not concentrate it at the top or siphon it off to tax havens. It should be a place where value and reward are transparently linked. I think that it has to be a route to social justice as well as economic efficiency.
For example, Government invests in the education and skills that build up human capital and aim to make the job market a level playing field for all of us.
And it helps provide the infrastructure and science and research that the market exploits but won’t always fund itself. And which are critical to our competitiveness in a knowledge economy.
I go back again to Adam Smith, who acknowledged the importance of public goods two and a half centuries ago.
The debate about industrial policy always raises the spectre of ‘picking winners’. But in a globalised economy its time to move this debate on a bit – be clear about what this means. Because in some ways we have to be picking winners.
We have to make choices about allocating the training budget, or funding certain kinds of science or research, or promoting science, technology, maths or engineering degrees for higher education. We have to make some strategic choices. We can’t avoid that.
But the ‘winners’ in this sense are the skills we judge we will need for the future, and the sectors they support. Because while we can’t divine the future, we can recognise in a broad sense what Britain is good at and likely to become good at, and the areas where the changing nature of the global economy make it futile for us to try to compete – our comparative advantage in economic jargon. We can and must allocate scarce public resources on the basis of this evidence.
What we shouldn’t be doing is trying to micromanage the economy at the level of individual companies or so-called national champions: trying to supercede the judgement of markets.
The green technology revolution is a good example, and a potential source of huge opportunity for Britain. The Government is, and should, support development in a variety of renewable energy technologies and a variety of environmentally friendly vehicles – it does not have to be prescriptive.
By contrast, I recall debates with lobbyists in the 70s arguing in all seriousness that it was strategic to have a protected underwear industry, or to revert to wartime food production. That kind of argument is far from dead.
Going back even further, I think of the shipyards in Glasgow where I taught economics and worked as a Councillor and as someone who identified very strongly with workers trying to save their manufacturing jobs and skills, I have to ask how much we have to show today for the grand and well-intentioned attempts to stand in the way of the economically inevitable when we should have been investing in change.
My general approach going forward will be supporting enterprise, but rarely selecting individual enterprises for support.
I do think we can look at countries like Germany and Korea that take science and technical education and infrastructure and long term finance for industry incredibly seriously and learn some lessons.
But when these policies are effective they almost always target capabilities, not companies. And I do think the last government blurred that line.
Part of the problem more widely is what I’ve called the New Interventionism – the philosophy that interprets the banking crisis as a failure of markets in general rather than financial markets in particular. That leaps straight from a discredited approach based on the naivety of “efficient markets theory” to a statist approach based on economic nationalism and protectionism.
And that has to be resisted, especially in our European backyard, where the protectionist instinct is often worryingly strong. In my book ‘The Storm’ published at the height of the crisis I warned of this threat. The fact that it has not yet materialised does not mean that the threat has gone away.
So on the basis of this general approach there are a few things you can expect from me over the months ahead.
First, as I’ve already argued, an agenda for cuts has to be offset by a clear focus on policy designed to be a stimulus to growth. Our challenge is to redefine growth policy for an age of constrained public spending. I want a genuine audit of what the state has taken upon itself to do in business support, higher and further education, science and research over the last decade and how it does it. This is our window for transformational change. You’ll see the results in the weeks ahead.
I’m specifically committed to getting rid of some of the BIS quangos. We had 74 last year. 13 are now being got rid of, merged or having their funding cut. I aim to merge or abolish another 20 or so within a year – that’s a third of the rest. And we will keep scrutinising the others – if they fail to perform or the world has moved on, I will take action.
Second, I will take a tougher line on regulation, because I believe that often the most useful thing governments can do is simply to get out of the way. Every small business can tell a story of how they could do more and hire more people if they spent less time on form filling. Regulation is too often the creature of big businesses with the resources to handle it forcing out the small. The cost to business of regulation currently in the pipeline is around £20bn: far in excess of any direct help the Government does or can give.
Of course regulation can be necessary to protect consumers, the environment and the labour force. But it must be proportionate. I used a statement to Parliament yesterday explaining how this Government will embark on radical steps to remove and stop unnecessary and costly regulation.
Third, I want BIS to play a central role in putting Higher and Further Education on a sound footing for the future and linking both better into the economy.
Bringing HE, skills and enterprise together under the one departmental roof is central to the ‘BIS dividend’. My priorities are an increased emphasis on lifelong learning, stripping out some of the bureaucracy around FE and making sure that the outdated value distinction between blue collar apprenticeships, and further education on one hand and university on the other is disposed of for good.
In the last few weeks I found scope within my department to refocus £200 million in capital spending in FE colleges and 50,000 extra apprenticeships. Indeed, it is shocking that we only have 250,000 apprenticeships to start with.
Education and learning are of course desirable in their own right. Education for education’s sake – learning how to learn - benefits the economy in the long term. Philistinism is bad economics. It is also fundamentally unacceptable.
A story from own life makes the point. My mother and father left school at fifteen to work in factories. My father eventually taught building trades in the local technical college: we need more people like him. My mother was a housewife and when I was ten she had a major nervous breakdown and spent time in a mental hospital. When she recovered she saved her mind through adult education – learning for the first time about history, literature, philosophy and art. We need more people like her too.
Fourth, I want to make sure that we are maximising the economic benefits of our science and research sector in the same way. BIS is the Ministry for science, and science is a vital public good - one that the market unprompted will not provide at the level needed in a modern knowledge economy.
My younger son, who works in a particularly recondite area of quantum physics, is a one man lobbying industry for scientific research. I also have the National Physics Laboratory in my constituency and the Laboratory of the Government Chemist. So I don’t have any doubt about the importance of support for science.
Making sure, however, that groundbreaking science makes the long step to commercialisation is one of the things Britain is relatively bad at, and the mechanism of innovation is still poorly understood. I know from first hand experience of constituents like Trevor Baylis, the inventor of the wind-up radio, how difficult it currently is to translate invention in to commercial application.
Finally, I also plan to crack some of the intractable problems which defeated previous governments. I want to resolve the nagging problem of the Royal Mail. I want to see private capital and worker share ownership in the Royal Mail – commercial discipline alongside employee involvement.
There are a few other areas where I want to see action and change in the same spirit. One is reform of the UK’s takeover rules. The Takeover Panel’s current review should play an important part in this agenda.
Too many takeovers in the UK fail even by the limited criterion of shareholder value – and often with serious implications for the people who work for the firms on both sides.
For me this is not about foreign or domestic ownership – it draws no distinction between the two. One of the most important – and positive – decisions made by the DTI when I was there was to welcome inward investment by Japanese companies in the car industry.
So it is not about protectionism or strategic industries. It is certainly not about protecting bad management by blocking takeovers. It is about changing the way in which unfettered short term speculation can have damaging long term consequences.
It is also about responsibility. It is renewing a sense that a company is an enterprise, not just a set of paper assets. It is about insisting that running a company and owning shares in a company should be an important responsibility, and never more so than when a company changes hands. This is an important issue for me because I think in many ways it captures something simple and important about the economy we want to build.
Conclusion: The future
Britain has to ask and answer some pretty fundamental questions about how it is going to pay its way in the world. We’ve had a decade of consumer-led, debt-fuelled growth based on inflated property markets that was not sustainable. We have an economy that is still too dependent on hydrocarbons, too wasteful of energy, too vulnerable to the excesses of some of its banks. Too dependent on public services for job creation in some of its regions.
Getting from where we are to a highly-skilled, enterprise-based entrepreneurial economy is a lot more difficult than making speeches about it. I recognise that we can’t make this leap from one day to the next. Regions with long histories of mass industrial employment, or large scale public employment can’t be turned into entrepreneurial silicon valleys of private enterprise overnight.
To achieve that shift requires looking at enterprise in the widest sense. I have always believed that the value of mutualism, cooperatives and social enterprise lies precisely in the way they help people be self-motivated entrepreneurs with a clear stake in what they do for a living, while still remaining part of a supportive community of fellow workers. We will be encouraging more of them.
I started by saying that this coalition has defined its ambitions for a full Parliamentary term. But in one sense we have to set our sights much further ahead than that. Our task is to build the foundations of a future economy that must look very different from the old one.
That can’t be done just by waving a chequebook let alone by Ministerial decree. It will happen only when there is confidence to invest, long term, in training, technology or to develop markets. There are no quick fixes. But that’s the task we have to set ourselves.
A recession is in part a failure of confidence, just as the banking crisis was a failure of trust. We have to repair both those deficits, as well as the pressing one in the Government budget.
That means being more than just ‘pro-business’. It means finding the right blend of responsible capitalism, and leaner but more effective government.