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Rt. Hon. Lord Mandelson, First Secretary of State, Secretary of State for Business, Innovation & Skills, Lord President of the Council
Trade and Industry Dinner, Mansion House, London, 04 March 2009
Over the years, this night and this speech have been a chance to reflect on a period of stable economic growth in Britain and a growing world economy. From this lectern we’ve had an annual stocktake on the building of a globalised economy in the UK, with some of the highest rates of inward investment, employment and innovation in the world. The consolidation of the City of London as a global and European hub for commercial and financial services.
Inevitably, this year is different. We face not just a global crisis of credit, but now a global crisis of demand. We can’t separate the confidence problem from the liquidity and solvency problem, and both must be solved. That’s why the entire thrust of the government has been directed for six months at repairing the hole in the banking system and doing everything we can to keep finance available to viable businesses of all sizes.
Repairing the hole in confidence is also a global problem, with a national dimension. It means being clear about where we need to do things differently and the important lessons to be learnt, but also insisting on what we have got right in the UK, in the City, in government and industry. Some are talking the UK down. I’m going to talk the UK up.
I believe that, over the last decade, in our fundamentals, the UK has overwhelmingly made the right choices. In our openness to trade and investment. In our competition regime and flexible product and labour markets. In the research and development policies that have helped innovative firms grow and prosper here. Above all, in our gains in productivity, which, as Paul Krugman says “isn’t everything, but in the long run, is almost everything”.
A bit like a blue chip that’s taken a knock in daily trading, I believe that the UK’s fundamentals will be borne out when the global economy returns to growth. We will restore and rebuild, and we will emerge stronger and better. But we will emerge a different country. The shape of our economy, the drivers of its growth, our approach to the relationship between the private and public interest. These need to change. The Lord Mayor has just called for a politics of reconstruction. I agree. That’s what I’d like to set out tonight.
The next decade in the UK will be defined by both a constraint and an opportunity. The constraint lies in the need to sustain growth while holding to tight public spending discipline in the medium term and paying down borrowing. Maintaining our capital investment and our human capital with a pot of public capital that will grow less quickly.
We are right to continue stabilizing and repairing the banks. We are also right to refuse to retrench on vital spending in the teeth of falling national output. We have learned that lesson from previous recessions. Short term cuts mean longer term costs to competitiveness and capacity. But Alistair Darling was also right to set out clearly, from the start, how we intend to pay for this in the medium and long term.
So the search for yield, so to speak, on the public pound is going to be tougher than ever. And that means a renewed focus on public sector reform and productivity. That’s one of the reasons why the government made the decision to push ahead with modernization of the Royal Mail: because an unreformed service is a drag on public resources at a time when every pound matters more than ever. It means, I believe, some basic choices about where and how we invest public money. And there is no priority more fundamental than the return to growth, and a balanced economy for the future. That underwrites everything else.
But there is also huge opportunity. The global economy will double in size in the next two decades, driven in large part by India and China. For all of their current problems, both the US and to an even greater extent our European hinterland will remain prosperous markets full of commercial opportunity. A competitive exchange rate will provide a real opportunity for UK exporters. So long as we can keep those markets open – and this is absolutely critical – then they are ours to compete in.
So Britain will fight its way back by focusing on its strengths in high-tech manufacturing, aerospace, automotive, biosciences and high tech engineering. Britain will fight its way back by catering for the growing global market for business, computer and financial services. Through a City that will remain preeminent as a world centre for banking, trading, insurance and specialist finance. Britain will fight its way back by continuing to nurture the strongest creative sector in the world, exporting more cultural goods than any other economy in the world. Kate Winslet was just the beginning…
But these opportunities will not just fall into our lap. We will come under relentless pressure as others continue to develop their own strengths. And that’s where the role of government becomes important. Private enterprise will drive our success. Competition will keep us lean and innovative. It will be the million small choices of the market that define and refine the technologies we use and the way we do things. There is no case for British protectionism and none for economic nationalism. British companies thrive in, and depend on, an open European and global market, and the same is true for any European country or company.
But the competitiveness of a company is not just a measure of the quality of its product. It is not just a measure of its entrepreneurialism and innovation. It is also a measure of the infrastructure, skilled workers and enterprise environment that it draws on. We must make sure British companies and British workers are equipped for the opportunities ahead. If the end is high-value added jobs and growth in the UK, we have to will the means. Government has to provide the regulatory certainty, clear procurement rules, the predictable market framework in which the private sector can then make its own decisions.
We’re committed to British manufacturing as part of a balanced British economy for the future. Now we need to make the UK the best place in the world to help build the next generation of single aisle passenger jets, or produce civil nuclear technology, or design semiconductors. And the list goes on. We’ve built a mix of investment and procurement policies that have made the UK a leader in civilian and military aerospace design and manufacture. It’s time to secure those strengths for the next decade, and to do the same, for example, in rail transport and low carbon vehicles.
We’re committed to British life sciences. Now I am working with Alan Johnson and Paul Drayson to make the UK the world’s leading location to carry out life science research and develop the drugs of the future. That will include a cast-iron commitment to a stable regulatory environment and the research and development facilities that enable companies to make the long term investments necessary to produce the next generation of innovative and targeted medicines.
We know that digital infrastructure will be central to our economy in this century. What Stephen Carter is setting out in his Digital Britain work is how we get broadband to practically every home and business in the UK in just the next few years.
What happened at Lindsey Refinery last month is a reminder that alongside a commitment to mobility and fair treatment for workers in the EU, we must also ensure that British workers possess the complex skills and productivity that they will need to compete in the years ahead. John Denham is working on precisely this kind of strategic skills strategy.
We depend on the UK being the best place in the world to build innovative companies, and that means looking at the capacity of UK financial markets to produce the equity they need, especially in the regions and in a tough credit market. It’s with that in mind that we have been developing ideas for a new version of the ICFC – the body that became 3i - to leverage long-term capital for growing firms. This could build on the £75million Capital for Enterprise Fund launched by the government, for which we have now recruited fund managers to channel risk capital to innovative companies through the downturn.
We’ve regulated in this country to drive the demand for low carbon goods and services. Now we need to think about supply, making the UK the best place in the world to build a low carbon business, develop civil nuclear technology or recruit expertise in energy efficiency or low carbon finance. On Friday, Ed Miliband and I will start consulting on how we do this through a low carbon industrial strategy.
I’ve called these important strands of work “industrial activism”. What drives my thinking is a simple challenge: to use the strategic role of government better. We’ve too often devalued our ability to build a stronger private sector through activist public policy. Deferred to private sector expertise without the balancing assumption that government must have a parallel expertise in shaping the world in which private enterprise operates. We’ve been so spooked – often rightly – by the very idea of ‘state intervention’ that we’ve been too cautious in asking what more we can do as a country to equip ourselves to compete in a global economy and to bring high value jobs here. Across government, in everything we do.
We should never make a major regulatory or public procurement decision in the UK – on transport, energy or anything else - without asking whether there are supply chain opportunities for UK-based companies to compete for. And if there are, and if it makes long term economic sense for the UK to compete for them, we have to equip ourselves to do so. Without closing our markets and while safeguarding the taxpayer’s long term value for money. Others ask these questions routinely. In Britain, we don’t ask them enough. In my view, this is part of the social contract for a globalised economy. Unless we demonstrate the domestic advantages of an open global economy, we will lose public support for globalization at home.
The Britain that went into this downturn will not be the one that comes out of it. As I said, as well as reflecting on what needs to be done differently, we need to recognise the strengths we have built over the last decade – including here in the City. It is important to recognize that whatever went wrong in some City institutions, the legal and commercial expertise that has developed here has not somehow been wiped away in the last year. They will remain central to the UK economy in the decades ahead, just as they have been for centuries. The government recognizes that strength, recognizes that it must be nurtured and reinforced.
We have a private enterprise culture in the UK that recognises the need to reward entrepreneurship, innovation and hard work – that provide opportunities for individuals to succeed, regardless of where they come from. We’re successful because of our strong commitment to Britain’s economic place in the EU, which is the context for everything we do to equip the UK for globalization. We need a Europe with a competitive Single Market at its heart, that is open to trade and investment. The case for industrial activism I have set out tonight applies as much to the EU as a whole as it does to the UK, precisely because it is not economic nationalism. It is about tearing down barriers to European companies competing with the best, not putting up barriers to keep others out. Our new industrial activism will never become a new economic nationalism.
But we are, at some level, aware of the need for a new balance. A new sense of public responsibility and of the public interest in Britain. A sense that the same basic rules of responsibility and merit apply across the board. That a dynamic capitalist economy is not an end itself but a means to a stronger and more cohesive and prosperous society. A capitalism that builds for the long term as well as rewarding in the short term. Is that the definition of a responsible capitalism? I think it is.
Banks are already feeling this. Customers will expect a different approach, including a clear recognition of the custodial function of banking in the economy. Because it’s a basic reality that a modern industrial economy is built not on money as such, but on the stable and reliable availability of credit. As someone who has spent the last few months defending to angry businesses the urgent and unique claim of the banking sector on the taxpayer’s support, I can tell you that the demand for a sounder, more sober model of banking will shape the expectations of a generation of businesses. Especially small firms.
People will inevitably ask why the ‘bonus culture’ in some parts of the financial services sector appears to have led to behaviour that destroyed value rather than creating it. The habits of excessive, unmerited rewards for some at the top do not sit well with the very tough realities we are now working in. We also have to understand how financial innovation – which is a good thing in itself – got so far ahead of not just regulators, but also many of the companies that traded in complex financial instruments. We recognize now that the leverage that looked so attractive to individual institutions was toxic when it turned into a general feature of the financial system.
There’s probably a proverb somewhere that says a crisis should not be wasted. Well, this is ours. The Basel rules need to be revised, and we need to renew the case for global accounting standards. We need new approaches to regulation on risk taking and the rewards attached to it. The financial system is now global, while regulation and oversight remain national and local. We used to talk about light touch: now it’s going to be about the right touch. What needs to happen in London at the G20 Summit is the first iteration of a new grand bargain that finally adapts the machinery of global economic governance to a new global economy. These are questions for shareholders and boards, regulators, politicians and ultimately, voters. I agree, incidentally, Lord Mayor with your point about the tasks of Boards, and the need to reflect on their vital supervisory role.
A recession is more complicated than just two consecutive quarters of negative growth. A recession is, in part, the economic expression of our collective confidence to invest or spend. Our confidence in the future. And how we see ourselves in the future. We are of course spending most of every day on questions of everyday survival for banks and businesses. That is how it should be. But at the same time we are putting in place the bridges to our economic future. Not just recovering, but re-building. And not just rebuilding, but rebuilding better and stronger. Setting out a picture of Britain’s industrial future that speaks to the biggest City corporate as much as the smallest start-up in the Midlands. Setting out how Britain fights its way back. We can do so. And we must. And, if we pull together as a nation, we will.