HM Treasury

Newsroom & speeches

04 December 2008

Edinburgh Chamber of Commerce Dinner

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Let me start by thanking the Edinburgh Chamber of Commerce for the invitation to address you all tonight.

And it is a pleasure to be able to do so in my own constituency.

And to speak to so many people in business all over the city and beyond.

The sheer range of businesses represented by the Chamber, the expertise and breadth of experience, shows why Edinburgh’s economy has done so well over recent years. And here we see public and private sectors working together.

These are truly exceptional times in the world economy.

Interest rates at 2 per cent, the lowest level since 1951.

A global financial recession, and disruption to banking systems everywhere, of unprecedented proportions.

This year has been tough for the global economy – in the UK and, of course, for Scottish banks here in Edinburgh.

But despite the pressures we face, I remain confident that together we will get through this.

With interest rates falling, significant support from Government, and strengthened banks, we will get through this sooner and in better shape.

The credit crunch, and the peak in oil and food prices this summer, are weighing down on economies everywhere.

The euro area has been in recession since April.

This week the US announced it has been in recession all year.

In Japan and Germany, output has shrunk by about 1 per cent in the last six months.

And this year, growth in the United Kingdom is set to be ¾ per cent – and next year I expect the economy to contract.

While the IMF expect the group of major economies to move into recession next year.

When Gordon Brown and I went to the meeting of the Group of 20, in Washington last month, there was unanimous agreement that we needed to act together – and act now.

If we don’t, the downturn would be worse and more damaging.

Because in the face of this, governments have a choice.

We could sit back and let the recession take its course. But that would be irresponsible.

We have been here before, in the 1980s and 90s, and we saw what happened then – to families, to businesses, and to industry.

I believe that, across the world, countries must act decisively.

That’s why I decided to put £20bn into the economy – to help everyone get through this.

And with:

I am confident that the slowdown will be shallower and shorter – and that growth will resume again.

I welcome today’s decision by the Bank of England – it will help business and people throughout the country as we go into the next year.

So too will falling oil prices, which peaked at close to $150 a barrel this summer, but are now below $50 a barrel.

And which will be reflected in cheaper petrol prices at the pump.

And cheaper gas and electricity prices too – which the utility companies must pass on as quickly as possible. They owe it to their customers.

These falling prices will translate into sharply lower inflation next year.

And will mean people’s money will go further.

A total reduction in interest rates of 3 percentage points since October – to the lowest rates for over 50 years.

This will help people and businesses – and I want to see these cuts passed on.

Since the last interest rate cut, over 4 million homeowners on tracker mortgages have seen their monthly payments fall by £100 on average.

But as the Governor of the Bank of England has said, monetary policy – interest rate cuts – on their own are not enough.

It has to be matched by significant and substantial action from the Government – cutting taxes and supporting business.

And that’s increasingly recognised by countries all over the world – in the US, in Germany, Australia, and today France announced significant help too.

Lower interest rates go with the decisions I took in the Pre-Budget Report to support the economy.

First, I wanted to cut taxes.

The cut in VAT, from 17 ½  to 15 per cent is the biggest single tax cut since 1988.

It will provide a significant boost to the economy – and quickly.

It is helping people now – the VAT cut is equivalent to £23 a month for each household.

The majority of goods and services pay the standard rate of VAT.

So this cut puts money in everyone’s pockets.

And it is big enough to help the economy.

Of course, prices are falling around Christmas – as they always do.

But this VAT cut is not just for Christmas – it’s for the next 13 months.

£12 ½ billion being put back into the economy.

I also wanted to cut income tax for people on modest incomes, by increasing the personal allowance.

This means lower income tax for all 22 million basic rate taxpayers.

And I also gave help to parents, by bringing forward the child benefit increase.

And to older people, by bringing forward their pension increase.

By maintaining spending on public services we are also helping the economy.

It is right that the Government supports business in this way, through investing in construction, energy and transport.

So I have brought forward money we had planned to invest in 2010 and 2011.

To build £3bn worth of roads, schools and homes, to boost economic activity now, not later.

For Scotland, the Administration can choose to bring forward up to £260m of their own investment plans.

Since September, I’ve told them that we’re willing to cooperate fully.

They are yet to come forward with specific proposals, but when they do, we will do everything we can to help.

It’s essential to support small and medium sized businesses – essential for the future of the economy.

I also wanted to help business in my Pre-Budget Report.

With a government guarantee for £1bn of new lending for Small and Medium Enterprises.

The Small Business Finance Scheme will offer loans – on a more flexible basis – between £1,000 and £1m.

And we are also making available another £1bn of government-guaranteed funding for small exporters who need access to credit.

That’s in addition to another £1bn of credit available to SMEs, from the European Investment Bank

On top of this, up to £1bn of lower business taxes.

I put off the increase in the small companies rate of corporation tax – saving SMEs hundreds of pounds next year.

Firms will also be able to offset their losses this year against profits made in the last three years.

And we expect 90 per cent of these companies to have their full current losses cancelled out.

We are am helping businesses meet their tax bills more easily. To allow business in temporary difficulty more time to pay their tax bills on a timetable they can afford.

And I also increased the amount of tax relief small companies can receive for their empty commercial properties.

Covering up to 70 per cent of all empty properties.

But as well as putting money into the economy, I had a second objective in the Pre-Budget Report.

So I also announced measures to make sure that we reduce borrowing – and come back to current budget balance again.

Just as we did over the past 11 years, when we cut government debt.

But also fixed the legacy of under-spending in schools, health, transport, education and science – by more than tripling public investment since 1997.

As well as dealing with the consequences of the global financial recession, both now and in the future, we must also tackle its causes.

And the biggest challenge is the turmoil in the banking sector.

There are lessons to be learnt regarding regulatory supervision. And we’ll be bringing proposals in the spring.

But the last 14 months have been traumatic for banks – and economies – all over the world.

First, here, with Northern Rock.

And since then we have seen similar, deeper problems everywhere.

In Germany, $950m of subprime losses at IKB bank last autumn.

In March we saw the collapse of Bear Stearns.

And government support for AIG – one of the biggest insurance companies in the world.

And once Lehman Brothers filed for administration, banks everywhere took a hit: Dexia in France, Fortis in the Netherlands, and every bank in Iceland.

I would bet that, one year ago, few of you predicted that every single Wall Street investment bank would have by now failed, merged or changed business.

Only in the last week, America had to bail its largest bank.

The Governor of the Bank of England describes it as the greatest financial crisis since the first world war.

In October, we had to act decisively and quickly – to prevent the collapse of the banking system.

Faced with this, we took two vital steps: to recapitalise the banks, but also to guarantee eligible lending to the banks.

Our objective was to maintain financial stability.

What we did was followed around the world within days.

By next month, banks will have accessed some £100 billion of the government credit guarantee scheme. That’s on top of the £200bn of extra liquidity.

We also acted to protect savers, so that people knew their money was safe in the bank, while protecting the taxpayer’s interest.

And today no retail depositors in British banks have lost out.

And we were able to do this because of the strength of the UK economy. It was essential.

Let me say a word about the Scottish banks – RBS and HBOS.

The Treasury now own a 58 per cent share in RBS.

These shareholdings will be managed at arm’s length from the Government – by a separate company – UK Financial Investments Limited.

Their goal is to look after the investment in these banks, leading eventually to a sale.

But they also making sure the banks maintain their commitments on keeping lending availability at 2007 levels.

I also want to say a word about HBOS and Lloyds TSB.

In September, the two banks decided to merge. It was their commercial decision.

The Government amended competition law to allow the financial stability implications to be considered alongside the effects on competition.

Since then, yes, we have recapitalised the banks.

And if the merger between them is completed, we have committed to a total of £17bn of new capital.

I have always been clear that anyone with an alternative proposal will need a credible plan and the funding to make it happen. And the Government would consider any such proposal.

Because before I commit billions of pounds of taxpayers’ money – I need to know there is a plan to make HBOS viable and serve the interests of financial stability.

No such alternative proposal has been made.

Whatever happens, HBOS has to resolve its problems.

It was very exposed to wholesale markets, which have virtually dried up.

I know this is a very worrying time for everyone connected with HBOS.

We will do everything we can to help the bank – but the decision is for the shareholders to take next week.

But the biggest challenge for us all is to get bank lending going again, while at the same time allowing banks to rebuild their capital position.

It is crucial that the banks continue treating their customers decently and fairly.

I welcome the recent announcements by RBS.

Their commitment not to increase pricing of SME overdrafts for at least a year – helping up to 1m small businesses.

I also welcome the promise yesterday, by Lloyds TSB, to pass on in full any further reductions in rates this year and next to small businesses.

And the pledge, from RBS, Bradford and Bingley, and Northern Rock, not to initiate repossession proceedings for at least six months after arrears start.

Banks must treat their customers fairly.

In the same way that banks expect customers to stick to their side of the deal, customers can expect the banks to stick to theirs.

So yesterday, we announced that it will take steps to put voluntary Banking Code, which governs the banks’ behaviour towards its customers, on a statutory footing.

And when people are encountering difficulty repaying their mortgage, it is right that they should receive help.

A moratorium on repossession from the banks.

And now help from the Government so that they can defer a proportion of their interest payments until they get their finances back on track.

Lots of people are worried about losing their home – this is an important step, to reassure people and bring confidence to the market.

So they will now that if they get into trouble with their mortgage – there will be help for them.

And we will do more to make sure that the wider availability of lending is kept going.

We want all businesses and homeowners to be able to get affordable credit.

RBS, and if the merger goes ahead between HBOS and Lloyds, will have legally binding commitments to maintain lending availability.

But we need a resumption of lending, not only at these banks, but at all banks.

We are ready to take further steps to build on what we’ve already done, to get responsible lending going again.

Because with the right support for the economy, and the right support for lending, the Scottish economy and Scottish banking will recover.

The financial services industry remains very important to us – in the UK, in Scotland, and here in Edinburgh.

It has doubled in the last 10 years.

Second only to London as a centre for banking in Europe.

The investment fund sector manages over £450bn worth of assets.

Not just the banks, but insurance, pensions, and trusts.

And the expertise of lawyers and accountants – they are all important.

Make no mistake – there is a difficult year ahead.

But the world economy will recover – expected by some to double over the next 20 years.

And I am confident that, as part of the UK, the Scottish financial services sector will continue to succeed.

Because of its capacity to innovate, safeguard investments and improve its operations.

And all businesses here tonight have seen they can compete with the best.

It may be hard to believe, on this cold December night, but there are many reasons to be confident.

And yes, I am confident.

Because we have lower interest rates and inflation coming down.

Because our flexible labour market gets people into jobs quickly.

Because we can get bank lending going again.

Edinburgh has been a world financial centre for over 300 years.

It has many successful, vibrant businesses.

Ours is an adaptable, open, cosmopolitan city.

Let’s be confident that we can deal with the problems we face.

Let’s be confident about our future.

 

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