Philip Hammond – 2017 Speech in Davos

Below is the text of the speech made by Philip Hammond, the Chancellor of the Exchequer, in Davos on 19 January 2017.

The theme of this year’s conference is ‘responsive and responsible’ leadership.

It’s quite clear why this title was chosen.

That leadership has never been more necessary as we leave 2016 behind us, and face the challenges of 2017.

At home, last year delivered the decision of the British people to leave the European Union.

In the US, the decision of the American people to elect a President who ran as an anti-establishment outsider.

And across Europe, a rise in support for non-mainstream parties, the effects of which may start to be seen in elections later this year.

Clearly something is going on and governments have to respond.

And what better way to respond than to gather the global elites for a serious discussion in an exclusive mountain ski resort?

The most immediate challenge facing the UK is negotiating and executing our departure from the European Union.

There have been many assessments made of, and conclusions drawn from, the referendum outcome in the UK, and the lessons will no doubt be pored over by historians and political scientists for years to come.

But two things in particular strike me:

First, while the drivers of global political events in 2016 may well be linked, we should be cautious about attributing motive to votes in a referendum, as opposed to an election.

I do not doubt that a section of the population is disillusioned by the obsolence of their skills and the stagnant real wages that implies – and happy to kick the political establishment when given an opportunity to do so. And we, as politicians, need to hear that message and react to it.

But it’s a big step to say the UK electorate as a whole is fundamentally rejecting capitalism or globalisation. It isn’t.

Some of them were simply expressing a view on the European Union! And, of course, on immigration.

As the Prime Minister has made clear, we need to show how we can build an economy – on the bedrock of our tired and proven system – that will work for everyone in an age, not just of globalisation but of unstoppable technological change.

And second, the UK vote to leave the European Union was clearly not a vote to turn inwards, whatever is going on elsewhere in the world.

The rhetoric of the referendum was not one of insularity and isolation, of protectionism and retreat.

In fact it was quite the opposite.

The UK takes pride in being the most open economy in the world.

And the successful leave campaign was premised on the rapid conclusion of free trade agreements with China, with India, with Japan, with the US and the wider Anglosphere – as well as other countries beyond it.

The argument put forward to the British people was that by leaving the EU we could do more, not less, trade with the rest of the world. And that the EU itself is too inward looking and is ill-equipped to exploit the full potential of the rebalancing of the world’s economy to the East and the South.

Politicians on both sides of that debate have been consistent and entirely aligned since the referendum in emphasising that Britain is open for business and will remain an open economy and an outward-looking society.

So we should react to signals of the popular mood, but we should not overreact.

In Britain, at least, what we have heard was a rumble of discontent, rather than a nascent revolution.

So as we move into 2017, we must define, and then deliver a new relationship with our European neighbours.

You heard from the PM on Tuesday, that we want to maintain the closest possible relationship with them – including the most comprehensive possible free-trade agreement.

But we must do that in a spirit of realism about the political context that we and our European partners operate within.

It is clear for instance, that on migration we cannot continue with freedom of movement as we have it today.

That doesn’t mean we’re pulling up the drawbridge: we must continue to attract the brightest and best to work and study in Britain; immigration from the EU will remain crucial to filling skills shortages, delivering public services and maintaining Britain as one of the most competitive places in the world to start and grow a business.

But we must be able to demonstrate that we can control the migration process in our own interest.

And we are equally clear that we must respect our EU partners when they say membership of the Single Market means accepting the so-called “four freedoms”.

That’s their political reality.

That is why the Prime Minister made clear this week that as we negotiate our future relationship with the European Union, membership of the Single Market is not our objective.

And because we want to be able to strike our own free trade agreements with countries around the world, we may not seek full membership of the Customs Union either.

It is on the basis of this pragmatic framework, recognising political realities on both sides, that we will set out to achieve the best possible deal for the British economy:

A trade-maximising deal, across low friction borders: a solution that delivers for the UK and for the EU alike.

It is clear that it is in European manufacturers’ interests to maintain access to our market, but access to our financial services should also be a priority for our EU partners.

Thanks to their depth and liquidity, UK capital markets provide a highly efficient source of finance to European companies and, indeed, governments. So much so that 60% of all EU capital markets activity is executed through the UK.

UK based banks provided more than £1.1 trillion of cross-border lending to the EU during 2015.

Half of all UK private equity investments in 2014 were in mainland European companies.

And this isn’t just about hedge funds and mergers and acquisitions.

It’s about the loan that gives someone a leg up onto the housing ladder for the first time; the insurance that protects cars and homes; the savings pot that provides support in retirement.

Consumers across Europe, as well as businesses, rely on our financial services industry for many of these critical services.

London’s financial services industry is a complex ecosystem that has grown up over decades.

In my conversations with business leaders in the sector I am told repeatedly that it is this scale and depth that has generated such strength.

Replicating this elsewhere in Europe in a short timescale is simply not feasible. Punishing the UK, by trying to fragment that ecosystem would only mean European businesses having to go to New York for some, at least, of the financial services they need.

Any diminution of London’s financial markets would be bad for businesses and consumers in Britain and in the EU. It would drive up costs. And it would act as a drag on the economy of this entire continent.

It is therefore in everyone’s interest to transition to a new relationship with the EU which provides the greatest possible degree of mutual access to each other’s market for goods and services, so that we can minimise the disruption to existing patterns of business and supply chains.

Of course, the interests we share are not solely economic.

The continuing risk of terrorism and geopolitical instability demonstrate the need to continue our close cooperation in areas such as security. And we want to maintain our close relationships in culture, science and technology, educational exchange and research and development too.

We recognise that we won’t achieve a deal overnight. But it is in nobody’s interests either to prolong uncertainty or for there to be a cliff-edge for business or a threat to stability as we transition to our new partnership with the EU.

Therefore we will seek to agree a phased process which gets us from where we are now to the end-state of our future, permanent, relationship with the EU.

Anything else would be damaging for both UK and European economic, and potentially financial, stability.

And a UK in a close, ongoing, partnership with the EU, will have a vital national interest in the future success of the EU. So we will do nothing that could undermine that success.

Let me be clear: our ambition is to remain in the economic mainstream of Europe, with a comprehensive deal with our European neighbours.

But maintaining Britain’s competitiveness is not an optional extra; it’s an existential necessity.

So if somehow, despite our best efforts, political retribution were to triumph over economic logic and we don’t get a fair deal providing the reasonable access to each other’s markets…

…we will have to do whatever is necessary to ensure the continued competitiveness of our economy in those circumstances.

That is not a threat, it’s a statement of the blindingly obvious.

Negotiating Brexit is not the only challenge of 2017. We have to understand and learn to work with a new administration in our closest ally and partner.

We have to manage the impact of currency driven inflation after a period of stable prices.

And we have to get our economy match-fit for the post-Brexit world that awaits us.

I am confident we will get a sensible Brexit deal. But to take full advantage of it, we need to focus on overcoming a weakness that has plagued our economy for well over a decade: our poor productivity performance.

The UK needs to up its game urgently.

We lag US and German labour productivity by some 30 percentage points. But we also lag France by over 25 and Italy by 9.

That means it takes a German worker less than 4 days to produce what a British worker makes in 5. And inevitably that means that too many British workers work longer hours for lower pay than their counterparts.

Our upcoming Industrial Strategy consultation will address this challenge head on.

The quality of public infrastructure, insufficient skills, and regional imbalances are all factors restraining productivity, alongside underinvestment in businesses.

That’s why I took the decision in the Autumn Statement to allow additional borrowing to invest £23 billion in a new National Productivity Investment Fund over the next five years, specifically focused on productivity-generating infrastructure, housing, research, development and innovation.

That means real-terms public sector set investment is forecast to be over 50% higher than the whole period of the last Labour government, and focused more clearly on the needs of the economy.

And we are taking a long term approach by establishing the National Infrastructure Commission as a permanent body.

I look forward to their first National Infrastructure Assessment later this year – which will offer the first comprehensive view of our long-term infrastructure needs.

And, of course, we are making sure Britain remains one of the most competitive places to invest with corporation tax set to fall to 17%, by far the lowest overall rate of corporate tax in the G20.

And addressing the productivity challenge is not only good for our economy – it also helps to address some of the social challenges we face.

That is important because, over the coming years our economy, and our social structures, will have to cope not only with the impacts of globalisation and an ageing population profile, but also with a quickening pace of technological change as the fourth industrial revolution gathers speed.

On the positive side, many of the new, disruptive technologies are being developed in the UK.

To support that we will be investing over £8 billion of public money in R&D annually by the end of the decade, ensuring that what is invented and discovered here gets developed and commercialised here.

And, yes, ultimately, taxed here.

But that won’t, in itself, protect us from the impact as first unskilled, and then skilled workers, find their jobs disappearing.

Indeed, looking at the relative speed of development of recent advances in computerised medical diagnostics on the one hand and driverless vehicles on the other, it could well be skilled workers who are under the most immediate threat.

I only hope that I’ve left the office before they automate the Chancellor of the Exchequer!

Of course, it is possible to mask the effects of change in the short-term: and we will certainly face demands to do so.

But Politicians who take the populist route will find it a very short road.

There is no sustainable future for a developed economy in protectionism, subsidy, and high debt.

So whether it’s on restoring the public finances to health, getting the right Brexit deal for Britain or tackling the long-term productivity challenge facing our economy, this government is providing the responsible economic leadership that our country needs.

That means facing up to the fact that we have some hard graft ahead.

There are no easy answers. Populism is a fool’s paradise.

I hope I have already demonstrated that I welcome suggestions from business and will act on them where I can.

You asked us to confirm the businesses rates reductions – and we did.

You asked us to boost spending on research and development, and at the Autumn Statement we responded by increasing public R&D spend by £2 billion a year by 2020-21.

You asked for investment in infrastructure – and we will deliver a higher rate of public sector net investment than in every year from 1993 until the financial crash.

But in the end, economic growth is not delivered by what we do. It’s delivered by what you do.

So let me close by thanking the CBI and business leaders for your enduring commitment to growing our economy and creating the jobs and the ideas on which it depends.

As we navigate our way through the unchartered waters of Brexit, the partnership and dialogue between business and government will be more important than ever.

So let us work together, using all our networks to impress on our European neighbours how much it’s in all our interests to retain that strong trading relationship.

Let us work together to ensure we retain the innovation, the dynamism, and the job creation that mark out the British economy from many of its competitors.

And let us work together to secure our long term prospects by matching public sector investment in productivity with a renewed wave of private investment as the fog of Brexit begins to clear.

Working together, we can be confident that our best days lie ahead of us.