Gordon Brown Mansion House speech, 11 June 1998

http://www.hm-treasury.gov.uk/speech-chex-110698.htm

Mr Lord Mayor, Mr Governor, My Lords, Ministers, Aldermen, Mr Recorder, Sheriffs, ladies and gentlemen

I am delighted to be here at the Mansion house, to thank you Lord Mayor for your kind introduction to me and to thank you also for your toast to the prosperity of the public purse and to my health.

This Lord Mayor's dinner to the bankers and merchants of the City of London has been an event that has prospered for 120 years.

And over this time the bankers and merchants of the city have had to continuously adapt to a fast changing and now global marketplace.

London is a city that is creative and responds to change. It has excelled because of the hard work and skills of its workforce and these are the essential British qualities - creativity, adaptability, a belief in hard work, fair play and openness.

And the city is open and outward looking: London is home to more foreign banks and financial organisations than any other city worldwide; there is more international equity trading on the London stock exchange than any other exchange.

And London's role as an international financial centre is reflected in the guest list for tonight's dinner which includes people from across the globe and I welcome you all here tonight.

This is a year that will usher in even more change to which London, as a financial centre, has already shown itself ready to adapt.

From next year, the euro will be a neighbouring currency and a competitor currency. But I am pleased to say that the slogan "London is ready for the euro" is accurate. So too will be the United Kingdom.

Now for almost a hundred years, at almost every lord mayor's dinner they have attended, my predecessors in office have been telling you how they are grappling with the problems of Britain's relative economic decline in the 20th century. A matter which, because we are now in the second last year of the century, somewhat to my relief can shortly be left to the historians.

Some say that first governments managed decline. Then governments mismanaged decline. Then governments declined to manage.

But I think we can all agree that fifty years of our economic history from 1945 was marred by a succession of sterile and self-defeating conflicts between state and market, managements and workforce, public and private sectors. And I believe that we should not only set aside for good these old battles but think of a Britain where public and private sectors are not just in some temporary truce but where public and private sectors are constructively working together to meet nationally important and defined objectives.

For the challenge for all of us now is to play our part in equipping Britain for the 21st century. So this evening i want to chart the course ahead, not for a few months or even a year or two, but for the long term, and in doing so to explain the building blocks.

First, monetary stability that allows businesses and families to make their plans for the long term.

Second, long term fiscal stability that delivers sustainable public finances. And I want to say something about my announcement today about the public spending framework which we will apply for the rest of the parliament.

And third, a drive for higher levels of investment, skills and productivity, through three major reform programmes - structural reforms in labour markets, product markets and capital markets. And finally a commitment to open trade and policies for constructive engagement in the developed world's largest market, the European union.

Through our commitment to stability, productivity and to Europe we can, in my view, forge a new long-term direction for our country, a reinvigorated sense of national economic purpose.

A new national purpose born out of the recognition that we need to work together. A national purpose founded on the innate British strengths - our creativity, adaptability and internationalism. Strengths focussed on raising British levels of employment and prosperity.

First stability.

In today's deregulated, liberalized financial markets, the Keynesian fine tuning of the past which worked in relatively sheltered, closed national economies and which tried to exploit a supposed long-term trade-off between inflation and unemployment, will simply not work. Neither can stability be delivered in wholly deregulated markets through a rigid application of fixed monetary targets, as was attempted in the 80s.

When there are ever more rapid financial flows across the world that are unpredictable and uncertain, the answer is to ensure stability through establishing the right long-term policy objectives and to build credibility in the policy through well-understood procedural rules that are followed for monetary and fiscal policy.

Stability is enhanced if there is an openness and transparency that keeps markets properly informed and ensures that objectives and institutions are credible.

We know more than most that Britain has been subjected to the instability of boom bust and constantly changing policies.

That is why when we came into power last may we had to set out new long-term monetary and fiscal objectives, to ensure these would be met by adopting rules based on open institutions and a commitment to openness and transparency.

First, the right objectives: price stability through a pre-announced inflation target and sustainable public finances through applying the golden rule, that over the economic cycle current spending should at least cover consumption. In other words a balanced current budget, combined with a prudent approach to public debt.

Second, unambiguous procedural rules: a new system of monetary policy making, at the heart of which, is the independence of the bank of England, and an open letter system.

And a commitment to proper procedures in fiscal policy by legislating a fiscal stability code and a pre-announced commitment to prudence.

And, third, transparency in policy-making: an open system of decision-making in monetary policy through the publication of minutes, a system of voting and full reporting to parliament; and in fiscal policy an open and transparent system under which government allows its actions to be subject to full scrutiny, and ensures that key fiscal assumptions are independently audited.

And I believe people now understand that clear long-term objectives, well-understood procedures and openness and transparency are the way to stability for national governments in a modern global marketplace.

The new system has in my view already given greater credibility to monetary policy making.

When we came into power inflation was heading way beyond its target and we had to act. Because of the action now taken - difficult as it is - i am now confident that the economy is on course to be back on track for stability and sustainable levels of growth.

Stability rather than a return to stop-go is the essence of our policy.

And the bank of England will continue to set policy to meet the governments inflation target of 2« per cent - which I reaffirm tonight.

And because people are now coming to believe that the inflation target will be met, long term interest rates have come down to below 6 per cent, the lowest for 33 years, before England last won the world cup.

And with a commitment to price stability and with long term interest rates coming down, we have a unique opportunity to break free form the stop-go cycles of the past - the short but excessive upswings followed by the long and violent down swings - that have done so much damage.

We have the chance to create, for the first time in decades, a continuous circle of low inflation, low long-term interest rates and high levels of investment - the best platform for growth and prosperity. So while I do not comment on the month to month decisions of the monetary policy committee, i do believe that the whole country should support early action on inflation to prevent the recurrence of stop-go and to achieve economic stability.

At this point in every cycle of the past, the British economy has been prone to a bout of wage inflation.

So let me add just one thing.

It would be the worst of short-termism to pay ourselves more today at the cost of higher interest rates tomorrow and the loss of jobs and reduction in growth that would follow .

The public sector is making its contribution. But both public and private sectors must play their part. All of us starting from the boardroom outwards must now show the responsibility that the country needs .

Stability requires not only low and stable inflation but sustainable public finances.

I believe that the prudent management of the public finances is the primary responsibility of the treasury and in setting out our fiscal framework and commitments over the rest of the parliament, in the first ever economic and fiscal strategy report published today, the treasury is discharging this duty.

Sustainable public finances have eluded governments for decades.

In the last economic cycle the average deficit on current spending was 1« per cent of GDP, a ?12 billion deficit every year, at today's prices.

It was controversial in 1976 when one labour prime minister said we could not spend our way out of a recession.

I say tonight we cannot simply spend our way through a recovery either.

So prudence will be our watchword.

And our first rule is to balance the current budget over the economic cycle.

We have already demonstrated a commitment to prudence with our two year ceiling on public spending.

Last year people said we would not meet our targets. In fact we met them and were able to because of our prudence to devote more resources in many areas including the national health service and to education.

And the discipline we have shown is not a one-off effort to demonstrate that we can be tough. It is part of a continuing and rock solid determination to have sustainable public finances.

That is why at this stage in the cycle are planning for surpluses on the current budget for the coming three years of 7, 10 and 13 billion pounds.

As a result of the plans I announced today we will lock in the fiscal tightening I announced in the march budget not just for this financial year but for the next financial year as well.

Our second rule is a prudent and stable debt GDP ratio falling below 40 per cent.

The plans we published this afternoon show the debt ratio falling from 45 per cent when we came into government to 40« per cent next year and in the following year down again to 39« and 38¬ per cent.

Public sector net borrowing was over 3 per cent of GDP in the last cycle. As a result of the measures we have taken, it will average 0.2 per cent for the parliament. So we are locking in further our long-term commitment to sustainable finances.

Just as we set clear rules for monetary policy so we have set rules for fiscal policy and shown how we will achieve them.

The background is decades of short termism, a failure to control spending, and a neglect of our priorities.

There have been two pressures on past governments, which they have found difficult to resist.

The first is a fault of previous labour governments, to spend in the first two years and then to have to cut back in their remaining years with all the instability that this causes.

Our tough decisions have ensured that we have used our first years not to spend imprudently but to put the public finances on a sustainable footing.

But there is a second temptation for politicians - another form of stop-go - to raise spending in an election year so there is more public spending on what is electorally attractive. Decisions made not as a result of the economic cycle but of the electoral cycle.

It has been suggested that this is my plan for the years to come, the election war chest thesis, nothing can be further from the truth.

Of course politicians enjoy winning elections. From my own admittedly limited experience I find that I like winning elections. And from rather more experience i can tell you I hate losing them.

But I have to say that our fiscal rules have been specifically designed to preclude party political manipulation of the public finances for electoral purposes.

We have today locked in stability for a whole parliament and we have done it to create the best environment for investment and for high and stable levels of growth and employment.

And to reinvest in our future we have planned a series of sales of holdings we do not need, and new private public partnerships, which can invest better in the future.

We will plan effective private public partnerships for the national air traffic services and the commonwealth development commission and examine them for the tote and the royal mint.

And that brings me to third building block of economic success - how, in Britain, we can modernise to achieve, alongside rising employment, the higher productivity on which lasting growth depends.

Since I arrived at the treasury I have been seeking to understand the extent of and the reasons for our productivity gap with other major economies.

The latest figures show a productivity gap with France and Germany of around 20% and a gap of 40% with the United States.

There are great British success stories, world-class firms that are beating competition all around the globe in whose achievements we all have pride. But in manufacturing as a whole UK productivity is lower than in other major economies. In the United States, productivity is twice that in the UK in the food and beverages industry and in the machinery industry. Even in the service sector we fail to lead the others in any major industry.

I believe these disappointing figures can no longer be ignored.

The challenge is to work together and close the gap in productivity; the gap between what Britain is today and what we can become in the future.

I want the period from now until the next budget to be used constructively to examine what more we can do, focussing on modernisation in labour, product and capital markets and on any tax and spending reforms they imply.

We must turn ideas made in Britain into products made in Britain, make our strengths count with our team work and innovation in individual business and companies, and we must be sufficiently confident about our virtues to make committed long term investments in our future.

We have made a start in the last year.

We have made tax changes to create the right environment for investment, cutting corporation tax rates to their lowest level ever, and increasing investment incentives for small and medium sized companies.

We have since we came to office reallocated money to education and training allowing an additional ?2.5 billion to improve standards and facilities in our schools, and to improve skills ?100 million was made available in the budget to help reduce the skills gap in I.T. and high technology.

And I say tonight that where it is necessary modernisation, wholesale modernisation and nothing but modernisation will be my policy.

On product markets the way forward is not stifling competition by over-regulation or pursuing a free- for-all devoid of anti-trust, anti-monopolies legislation. It is to vigorously pursue a pro- competition agenda that involves opening up competition in financial services, telecommunications, energy removing barriers that still thwart open trade.

We also need to consider modernising our capital markets.

Let me give an example. In the first half of the 1990s Nasdaq in the United States raised seven times more capital than all the European equivalents together. Its listed companies employed nine million people and created 16 per cent of all new jobs.

The challenge for Britain is to create a stronger venture capital industry and to help venture capital do more to encourage the hi-risk, early stage and start-up companies.

So we need a new approach in Britain to risk- taking that will increase the number of entrepreneurs and raise the growth and survival rate of small businesses. We must destroy the barriers that hold us back - fiscal, regulatory, economic, cultural - as a matter of urgency. And we will consider the measures we must take.

We must also engage in far-reaching reform of our labour markets not just in employment policy but in welfare, education and taxation and social security policy. The way forward is neither old style regulation or a crude form of deregulation, which leaves the unskilled without the training or education essential for employability. The way forward is one that recognises that bringing out the best in people by policies that ensure opportunities for all is the best route to prosperity in the modern world.

So we need a modern employment policy that does not offer welfare irrespective of work, but is built on a system of matching rights with responsibilities, an active welfare state which provides new opportunities for work and a tax and benefit system that makes work pay.

And to create the right incentives to work and to cut the costs of hiring, we have already announced radical changes to the current tax and benefit system. Changes in employers and employees national insurance and a new working families tax credit which, underpinned by a national minimum wage is the means to ensure that work pays more than benefits.

So stability, long term prudence, and a dynamic supply side are key building blocks for prosperity but there is another building block that for too many years we have undervalued strong and lasting trading relationships with Europe. We are not only one of the most open economies in the world trading 25 per cent of our GDP. But, in addition, nearly 60 per cent of our exports are to mainland Europe and astonishingly high levels of us and Japanese investment into Europe, 40 per cent of it, comes to and through the UK.

For the first time we are as a country committed, in principle, to European monetary union.

And having declared for the principle we will ensure that the preparations are made.

All necessary steps are being made to ensure business will be able to use the euro here from 1999 for a wide range of business activities, from filing company accounts, to paying taxes and issuing shares.

And low corporate tax as well as our financial expertise and our commitment to free trade and open markets will further underpin Britain's position as the most profitable place in Europe from which to exploit new business opportunities after 1999.

And I believe that a new national consensus on Europe the very consensus that has eluded us for years is now within our grasp.

My themes therefore: our economy founded on a platform of monetary stability. Sound finances through prudence and investment in reform. A national drive for higher productivity through economic reform and a new purpose in Europe.

Taken together this reform agenda offers a new and radical way forward that helps equip our country for the new century, one that realises, for a new world, the great British qualities - the virtues of hard work, creativity, fair play and openness - and does so in a modern non-dogmatic way.

It is a new way for our country that creates a society that has both sound finances and good public services. No longer a false choice between those who say you can have prudence but only at the cost of running down public investment and good public services and those who say you can have public services but only if you pay over the odds. Neither should we throw money at problems nor walk away from them. It is by breaking with the past and by modernising our approaches that, as we showed today, prudence and investment in reform can become the foundation for good efficient public services and a modern infrastructure.

 

There is a new way for our country's economy too that creates an economy that is both enterprising and fair. No longer a false choice between those who say that if you have enterprise it is at the cost of fairness, or those who say let us have fairness even if it kills of enterprise. Instead by a modern approach to opportunity to all that draws on the best of British values, we have enterprise and fairness together.

And there is a new way for Britain in the world. No longer the false choice between suggesting pride in our country means cutting ourselves off from Europe or an internationalism that caves in to Europe at the expense of British interests. But a Britain confident in Europe fighting for our national interests and reforming and modernising Europe at the same time. A mature patriotism that is open outward looking and internationalist.

And this new way ahead for Britain - an economy enterprising and fair, a society prudent and committed to long term investment in Britain's future, with a mature patriotism that is outward looking and internationalist - gives us a renewed sense of national purpose and a long term direction as a country.

A modern Britain, founded on lasting British values, the values of the British people. Built on a determination to make Britain a more prosperous country for all its citizens. Driven forward by the energies of a new generation willing, like our predecessors, to reject failed dogmas and to modernise and reform. A Britain ready to fulfil its role in the new world and to realise the potential of its people.

That is our task, our challenge and that if we work together can be our achievement.