85/07

25 July 2007

Speech by the Chancellor of the Exchequer, the Rt Hon Alistair Darling, MP at the London Business School

Check against delivery

It is a pleasure to give my first speech as Chancellor of the Exchequer at London Business School. Let me thank Sir Andrew for his words of introduction - someone who I know well from his time in the Treasury.

We are now sustaining the longest period of growth in our country's history.

Indeed last Friday figures confirmed Britain's economy has grown for sixty consecutive quarters, as employment reached a new record high.

At a time of change in the Treasury, and accelerating change around the world, I want to emphasise the need for continuity in the Government's commitment to sustaining Britain's growth.

And here at the London Business School let us remember London's contribution to it.

I remember when I was first in the Treasury ten years ago as Chief Secretary and City Minister people feared for London's future as global city.

Then people worried about whether Frankfurt or Paris would overtake London's pre-eminence.

But today London is the global city;

London has competed with the best and become an Olympic city;

London along with Glasgow has shown again our determination to face down terrorism and, as the Prime Minister said in the House of Commons today, in our steadfastness showed the world we will not yield or be intimidated by it;

London has risen to the challenge of the global economy and has become the world's leading financial centre.

And London's success is, I believe, an example of how, by equipping ourselves for change, we can enjoy prosperity in the years to come.

In underlining my commitment to sustaining our growth, I want to set out how we must prepare our economy, our business environment, our public services and our country for change, and to meet the essential challenges of the future.

The context for this change is globalisation:

fierce global economic competition;
rapidly expanding global trade; and
of course climate change, the greatest global threat.

On one level globalisation is nothing new. Goods, services, investment and people have crossed national boundaries for centuries.

What is new though is the scale and speed of economic change made possible by the technological and telecommunications revolution that drives it.

You only need to travel to countries such as China and India, as I have in the past few months, to appreciate it.

China's economy has doubled in size in the past six years; India in eight; as a result the global economy as a whole has doubled in barely more than a decade. In that time global trade has grown two times over and global investment flows by almost three times.

And when you visit these countries and realise that they too want to compete with the best and importantly be the best, it is easy to be daunted by the challenges globalisation poses.

The City has shown we can compete with these new challenges. So too have other sectors - British manufacturing is competing successfully all over the world.

And I am also struck by the opportunities for a country like Britain whose history is defined by its global outlook and whose wealth is built on it.

The extent to which we realise opportunities depends on how we respond.

It's an essential part of Government's job to look ahead and lead our response.

But we must not allow globalisation to shape us to our disadvantage. Indeed if we do, people will understandably react against it. They will doubt its opportunities because they won't see them.
We must instead shape the response to globalisation. We must recognise the challenges posed by globalisation, rise to them and then be ready to seize the opportunities that a rapidly expanding global economy can bring.

There are three elements to how we respond:

first, we maintain the stability that has been the foundation for our current economic success;
second, we continue reforms that equip us for change and help us meet competitive challenges from other countries; and
third, we cooperate with other countries on collective challenges to all our prosperity.

Let me take each in turn.

Stability

In previous decades instability and spiralling inflation too often pushed Britain's economy from boom to bust.

In the past decade we have put that instability behind us, and have reaped the rewards.

We were right to set stability as our foundation. There will be no return to the past. My first priority as Chancellor is to stick to stability now, and in the future.

So I will support the Bank of England in the decisions they take to meet the inflation target.

Public sector pay settlements - key to anchoring down inflation expectations - must be consistent with our inflation target.

And I will ensure fiscal policy continues to support monetary policy. The Budget forecast confirmed that we are on course to meet our fiscal rules.

Competitive challenge

Stability is the necessary condition for success. But alone it is not sufficient.

Countries that succeed will be those who use their stability as their starting point and build on it; reach out and are open to global economic expansion; and have the flexibility to adapt to it.

For Britain's part, our openness has enabled us to benefit from low cost goods exported from Asia, while at the same time enabling us to expand our own strength in the high value added industries and become the world's financial centre leading in exporting services to all parts of the world.

Our openness, alongside all our economic and labour market reforms - matching flexibility with fairness - have helped keep inflation low, while enabling the economy and employment to grow, and make Britain the number one destination for inward investment.

I welcome investment to Britain. It is a sign of our success.

Future prosperity and hundreds of thousands of jobs in all parts of Britain depends on increasing trade and investment.

Of course, all investors, including government backed companies need to operate according to the rules of the market in which they participate, including high standards of governance and appropriate transparency. So I welcome the IMF's work in leading further analysis of this and look forward to the results at the next annual meetings in October.

But across the world, investment needs to be a two way process. So just as we welcome investment here, there needs to be a level playing field for British investment overseas. Openness should be a commitment by all. Free trade should be just that.

And looking forward for Britain, we must invest in the areas that will drive growth tomorrow. And new research shows Britain is investing as much in the intangible assets that are essential to equip ourselves for change in the new global economy - in innovation and intellectual property, in software and skills - as we are in more traditional physical assets. Indeed it suggests Britain is investing up to a quarter of its income in its future.

Now whilst we have good reasons to be confident about the future, other countries are raising their game.

After years of sluggish growth, the euro area is now growing more strongly. The governments in Germany and now France are committed to economic reforms. China and India and other developing countries are no longer just low cost low skill producers, but with growing middle classes of their own - by 2020 larger than the total population of America and Europe - they are developing their own domestic markets and raising their own skills.

Crucially all this brings opportunities for us. The euro area is our main trading partner and we are seeing benefits in our exports of its renewed growth. A wealthier China and India will become bigger markets for the high value added goods and services in which we are already world leaders.

But if we are to realise these opportunities, we must do more.

For my part, the Treasury will continue to play a leading part in this commitment, not just as a finance ministry but, working with the rest of Government, as an economics ministry:

constantly championing economic reform in the European Union;
improving the way we regulate, focusing our attention where risk is greatest;
continuing our reforms to the planning system, increasing efficiency and accountability, and properly address economic and environmental priorities;
simplifying the support we provide to businesses so it better helps them innovate, invest and grow; and
ensuring our business tax rates and regime remain competitive. The reforms in the last Budget - cutting the corporation main rate to 28p and simplifying the tax structure - will do this. We must continue to simplify the tax system further wherever we can.

The public sector too has a critical role to play.

It is of course an important part of the economy in its own right.

But - working with the private sector - it has a big role in equipping the economy and country as a whole for change.

This is the objective of the Comprehensive Spending Review.

I can confirm today that the conclusion of the Review and the Pre-Budget Report will be announced in the House of Commons together in October.

Last year we published analysis of five long term challenges driven by global change: economic competition, rapid technological innovation, demographic shifts, global security uncertainty and pressures on natural resources.

Our response to these will be the investment priorities we set. Let me take three of the most critical investment choices:

investing in ensuring we have an efficient and effective infrastructure so we have not only a competitive economy but Britain is a good place to live;
in a world where it is human capital as much as, if not more than, physical capital that matters investing in ensuring people have the skills they need to be ready for change; and
alongside that, investing in ensuring we harness people's ideas and innovations and transform them into economic opportunities and ultimately prosperity for everyone in Britain.

On infrastructure, our fiscal rules have helped ensure the longest period of sustained public investment for over a quarter of century, and tackle the backlog built up under successive governments.
We will sustain this investment, increasing it every year to £60 billion by 2011. For example, investment in flood defences will increase to £800 million a year, investment in housing and the essential infrastructure for the communities around them will enable us to build 3 million more homes between now and 2020, and we intend to honour the long term funding guideline of two and a quarter per cent in real terms for transport.

One of the biggest challenges for transport is Crossrail. The Transport Secretary, Ruth Kelly, and I have said before the Government is committed to Crossrail. However, it is very expensive and before we can make a decision we need to make sure it's affordable. And that will mean substantial contributions from outside Government as well as Government itself.

On skills, investment in education will increase every year to over £74 billion in England alone by 2011.

If the challenge ten years ago was to help people find jobs, the challenge for the next ten years with as many as five million new highly skilled jobs in the economy - as the Leitch Review sets out - is to ensure people have the skills to take them.

That is why investing in skills is our best response to globalisation. No young person should leave school without the basic skills they need. On leaving school they should have a choice of routes to gain higher skills from school or college-based academic qualifications to workplace-based apprenticeship-type qualifications, and - through the new diploma - a combination of both. And all people should have the chance to acquire new skills throughout their lives.

On innovation, public investment in science will also increase every year to over £6 billion by 2011.

But let me be clear, investing in and being good at science is just the start. It's what we do with it that matters. While Britain's record of scientific discovery is one of the best in the world, others have too often been better at converting discovery into economic opportunity.

Look at what we have achieved:

British scientists pioneered the discovery of the sequencing of the human genome;
the engines used on 40 per cent of the world's planes;
the world wide web, the screens and batteries used on mobile phones; and
a British designer designed the iPod and a British spinout company in my own constituency in Edinburgh designed the chips used in them.

Building on successes such as these is the objective of our 10 year public-private science framework is to both increase the total level of innovation in the economy and also encourage a more seamless progression from pure scientific invention to commercial success.

Collective challenges

While many of the challenges from globalisation are competitive and demand we remain competitive, many of the challenges to globalisation itself need us to act together. Challenges that have no respect for traditional borders, and so can only be secured through cooperation across them.

Let me give you three examples.

First, the international economy. To be fully effective we need the international system to reflect the realities of the changing global economy. That is why we have supported broadening the G7 and G8 dialogue to China, India and other emerging economies. And it is why we have supported modernising the role of IMF, leading the argument for its move away from crisis management for individual countries to crisis prevention across countries, and strengthening its surveillance role by putting global economic stability at the heart of its remit.

Second, the greatest long term threat and long term test of cooperation is climate change.

The Stern Review showed clearly climate change is not a passing trend. It is a reality we must factor into everything we do. If we do not, threats to our everyday life - like the floods this week - risk becoming more common.

So I welcome the progress made at the G8 in Germany. All countries now recognise we need goals to reduce global emissions and a framework to achieve them. The hard work of agreeing them now begins.

Working with Hilary Benn, the new Environment Secretary, I want Britain to be at the forefront of this:

pioneering some of the most innovative environmental technologies;
establishing ourselves as the centre for carbon trading;
championing the next stage of the EU emissions trading scheme - the foundation for a global framework; and
leading the efforts to agree this framework and so helping us meet our obligations on climate change, meet our needs for a long term energy supply that is secure and stable, and meet our ambition for sustainable prosperity for all countries into the future.

Third, just as cooperation is the key to tackling climate change, it is the key to unlocking the benefits of trade

Previous rounds have benefited us all. So could this one, lifting millions out of poverty and securing billions of dollars in extra growth.

So the latest stalling is a big disappointment. It risks further calls for populist protectionism. Bold leadership is needed to restart the talks.

In Britain we have shown over the centuries that openness to the world is good for Britain. It could be good too for the rest of the world if we get the right deal.

We have the strengths and if we make the right decisions of the kind I have set out today, it can be good for Britain in the future too.

So I start this job where I left my previous job: championing free trade and using the influence Britain can bring to bear to reach a solution.

Conclusion

Countries like us have a simple choice: to retreat behind national borders, hope we can keep the tide of globalisation at bay, or have confidence in our ability to face it head on and make globalisation a force for good for all our people here and across the world.

Having that confidence demands the right qualities. We have them.

So let's have confidence in ourselves and in our country that we can sustain our prosperity into the future.