Philip Hammond – 2017 Budget Speech

Below is the text of the Budget Speech made by Philip Hammond in the House of Commons on 22 November 2017.

I report today on an economy that continues to grow, continues to create more jobs than ever before, and continues to confound those who seek to talk it down: an economy set on a path to a new relationship with our European neighbours and a new future outside the European Union—a future that will be full of change, full of new challenges, and, above all, full of new opportunities. In this Budget, we express our resolve to look forward, not back; to embrace that change; to meet those challenges head on; and to seize those opportunities for Britain.

The negotiations on our future relationship with the European Union are in a critical phase. My right hon. Friend the Prime Minister has been clear about the fact that we seek a deep and special partnership, based on free and frictionless trade in goods and services, close collaboration on security, and strong mutual respect and friendship; and, as Chancellor, I am clear about the fact that one of the biggest boosts that we can provide for businesses and families—one of the best ways to protect British jobs and prosperity as we build that new future—is to make early progress in delivering my right hon. Friend’s vision, with an implementation agreement that allows businesses to plan and invest with confidence. This Government will make the pursuit of that progress a top priority in the weeks ahead.

While we work to achieve this deep and special partnership, we are determined to ensure that the country is prepared for every possible outcome. We have already invested almost £700 million in Brexit preparations and today I am setting aside over the next two years another £3 billion. I stand ready to allocate further sums if and when needed. No one should doubt our resolve.

But this Budget is about much more than Brexit. The world is on the brink of a technological revolution—one that will change the way we work and live, and transform our living standards for generations to come. We face a choice: either we embrace the future, seize the opportunities which lie within our grasp and build on Britain’s great global success story; or, as the Labour party advocates, we reject change and turn inwards to the failed and irrelevant dogmas of the past.

We have no doubts. We choose the future. We choose to run towards change, not away from it, and to prepare our people to meet the challenges ahead, not to hide from them. And the prize will be enormous because, for the first time in decades, Britain is genuinely at the forefront of this technological revolution—not just in our universities and research institutes, but this time in the commercial development labs of our great companies, and on factory floors and business parks across this land. But we must invest to secure that bright future for Britain, and at this Budget that is what we choose to do.

We are listening and we understand the frustration of families where real incomes are under pressure. So at this Budget, we choose a balanced approach—yes, maintaining fiscal responsibility as we at last see our debt peaking, continuing to invest in the skills and infrastructure that will support the jobs of the future and building the homes that will make good on our promise to the next generation, but crucially also helping families to cope with the cost of living.

As we invest in our country’s future, I have a clear vision of what that global Britain looks like: a prosperous and inclusive economy where everybody has the opportunity to shine, wherever in these islands they live and whatever their background, where talent and hard work are rewarded, and where the dream of home ownership is a reality for all generations; a hub of enterprise and innovation; a beacon of creativity; a civilised and tolerant place that cares for the vulnerable and nurtures the talented; an outward-looking, free-trading nation; and a force for good in the world. That is the Britain that I want to leave to my children—a Britain we can be proud of, and a country fit for the future. I know we will not build it overnight but we will lay the foundations in this Budget today. [Interruption.] Mr Deputy Speaker, I am being tempted with something a little more exotic here, but I will stick to plain water. I did take the precaution of asking the Prime Minister to bring a packet of cough sweets, just in case. [Laughter.]

Mr Deputy Speaker (Mr Lindsay Hoyle)

Order. I think it might be hearing aids that we will all need if this noise continues.

Mr Hammond

I shall first report to the House on the economic forecasts of the independent Office for Budget Responsibility. This is the bit with the “long, economicky words”. Once again, I thank Robert Chote and his team for their hard work over the last few weeks. I believe passionately that the best way to improve the lives of people across the length and breadth of this country is to help them get into work. I am acutely aware that 1.4 million people out of work is 1.4 million too many, so today I welcome the OBR forecast that there will be another 600,000 people in work by 2022. I am immensely proud of this Government’s record in having created over 3 million new jobs since 2010—incidentally, a rather far cry from the 1.2 million job losses that the right hon. Member for Hayes and Harlington (John McDonnell) predicted in 2011—but let nobody be in any doubt that this Government will continue their relentless focus on getting more people into work, giving them the security and peace of mind of a regular wage.

I also want work to be good quality and well paid, and regrettably our productivity performance continues to disappoint. The OBR has assumed at each of the last 16 fiscal events that productivity growth would return to its pre-crisis trend of about 2% a year, but it has remained stubbornly flat. So today it revises down the outlook for productivity growth, business investment and GDP growth across the forecast period. The OBR now expects to see GDP grow 1.5% in 2017, 1.4% in 2018, 1.3% in 2019 and 2020, before picking back up to 1.5% and finally 1.6% in 2022, with inflation peaking at 3% in this quarter before falling back towards target over the next year. I reaffirm the remit for the independent Monetary Policy Committee and its 2% CPI inflation target.

We took over an economy with the highest budget deficit in our peacetime history. Since then, thanks to the hard work of the British people, that deficit has been shrinking and next year will be below 2%. However, our debt is still too high and we need to get it down, not for some ideological reason but because excessive debt undermines our economic security, leaving us vulnerable to shocks; because it passes the burden unfairly to the next generation; and because it cannot be right to spend more on our debt interest than we do on our police and our armed forces combined. So I am pleased to tell the House that the OBR expects debt to peak this year and then gradually fall as a share of GDP—a turning point in our recovery from Labour’s crisis. Apparently not everyone shares the view that falling debt is good news. I have heard representations from Labour Members suggesting increasing the debt by £500 billion, taking us back to square one and wasting an extra £7 billion a year on debt interest. If they carry on like that, there will be plenty of others joining Kezia Dugdale in saying, “I’m Labour, get me out of here.”

I have rejected these representations, and instead I reaffirm our pledge of fiscal responsibility and our commitment to the fiscal rules I set out last autumn, but now I choose to use some of the headroom I established then, so that as well as reducing debt, we can also invest in Britain’s future, support our key public services, keep taxes low and provide a little help to families and businesses under pressure: a balanced approach that will prepare Britain for the future, not seek to hide from it.

Today, the OBR confirms that we are on track to meet our fiscal rules. Borrowing is forecast to be £49.9 billion this year. That is £8.4 billion lower than forecast at the spring Budget. After taking account of all decisions since the spring Budget, the OBR’s GDP revision and the measures I will announce today, borrowing will fall in every year of the forecast, from £39.5 billion next year to £25.6 billion in 2022-23, to reach its lowest level in 20 years. As a percentage of our GDP, it falls from 2.4% this year to 1.9% next year, then 1.6%, 1.5%, 1.3% and, finally, 1.1% in 2022-23. The OBR forecasts the structural deficit to be 1.3% of GDP in 2020-21, giving £14.8 billion of headroom against our 2% target. Debt will peak at 86.5% of GDP this year and then fall to 86.4% next year, then 86.1%, 83.1%, 79.3% and, finally, 79.1% in 2022-23—the first sustained decline in debt in 17 years. Under Conservative-led Governments, the hard work of the British people is steadily clearing up the mess left behind by Labour.

At the heart of a global Britain must be a dynamic and innovative economy. On Monday, the Prime Minister set out the key elements of our modern industrial strategy—a strategy to raise productivity and wages in all parts of our country and to guarantee the brighter future we have promised to the next generation. My right hon. Friend the Secretary of State for Business, Energy and Industrial Strategy will present a White Paper to the House in the next few days. This is not just an economic plan; it is a key part of our vision for a fairer Britain—a Britain where every one of our citizens can contribute to, and share in, the benefits of prosperity. The key to raising the wages of British workers is raising investment, both public and private, and we are investing in Britain’s future: half a trillion pounds since 2010; the biggest rail programme since Victorian times; the largest road building programme since the 1970s; the biggest increase in science and innovation funding in four decades; and the two largest infrastructure projects in Europe—Crossrail and HS2.

When I took this job, I committed to making the battle to raise Britain’s productivity, and thus the nation’s pay, the central mission of the Treasury. Last autumn, I launched the national productivity investment fund to provide an additional £23 billion of investment over five years to upgrade Britain’s economic infrastructure for the 21st century. Today, I can announce that I will extend the fund for a further year and expand it to over £31 billion, meaning that public investment under this Government will, on average, be £25 billion higher per year in real terms than under the last Labour Government. We are allocating a further £2.3 billion for investment in R and D, and we will increase the main R and D tax credit to 12%, taking the first strides towards the ambition of the industrial strategy to drive up R and D investment across the economy to 2.4% of GDP.

Britain is the world’s sixth largest economy. London is the No. 1 international financial services centre. We have some of the world’s best companies, and a commanding position in a raft of tech and digital industries that will form the backbone of the global economy of the future. Those who underestimate Britain do so at their peril, because we will harness that potential and turn it into the high-paid, high-productivity jobs of tomorrow. Others may choose to reject the future; we choose to embrace it. A new tech business is founded in Britain every hour, and I want that to be every half hour, so today we invest over £500 million in a range of initiatives from artificial intelligence to 5G and full-fibre broadband. We support regulatory innovation with a new regulators’ pioneer fund and a new geospatial data commission—[Interruption.] Opposition Members should listen. The new commission will develop a strategy for using the Government’s location data to support economic growth.

To help our tech start-ups reach scale, we asked Sir Damon Buffini to review the availability of patient capital, and I am grateful to him. Today, we are publishing an action plan to unlock over £20 billion of new investment in UK knowledge-intensive, scale-up businesses, including through a new fund in the British Business Bank seeded with £2.5 billion of public money, by facilitating pension fund access to long-term investments, and by doubling enterprise investment scheme limits for knowledge-intensive companies while ensuring that EIS is not used as a shelter for low-risk capital preservation schemes. We stand ready to step in to replace European Investment Fund lending if necessary.

There is perhaps no technology as symbolic of the revolution gathering pace around us as driverless vehicles—[Interruption.] Opposition Members surely do not want me to make that joke about the Labour party again. I know that Jeremy Clarkson does not like driverless vehicles, but there are many other good reasons to pursue the technology, so today we step up our support for it—sorry Jeremy, but this is definitely not the first time that you have been snubbed by Hammond and May. Our future vehicles will be driverless, but they will be electric first, and that is a change that needs to come as soon as possible for our planet. So we will establish a new £400 million charging infrastructure fund and invest an extra £100 million in plug-in car grants and £40 million in charging R and D. I can confirm today that we will clarify the law so that people who charge their electric vehicles at work will not face a benefit-in-kind charge from next year. The tax system can play an important role in protecting our environment.

We owe it to our children that the air they breathe is clean. We published our air quality plan earlier this year, and we said then that we would fund it through taxes on new diesel cars. From April 2018, the first-year vehicle excise duty rate for diesel cars that do not meet the latest standards will go up by one band, and the existing diesel supplement in company car tax will increase by one percentage point. Drivers buying a new car will be able to avoid the charge as soon as manufacturers bring forward the next-generation cleaner diesels that we all want to see, and we will only apply the measures to cars. Before the headline writers start limbering up, let me be quite clear: no white van man or white van woman will be hit by these measures. The levy will fund a new £220 million clean air fund to provide support for the implementation of local air quality plans, improving the quality of the air in cities and towns up and down the UK.

However, air quality is, sadly, not our only environmental challenge. Audiences across the country who have been glued to “Blue Planet II” have been starkly reminded of the problems of plastics pollution. The UK led the world on climate change agreements and is a pioneer in protecting marine environments. I want us now to become a world leader in tackling the scourge of the plastic that is littering our planet and our oceans. With my right hon. Friend the Secretary of State for Environment, Food and Rural Affairs, I will investigate how the tax system and charges on single-use plastic items can reduce waste, because we cannot keep our promise to the next generation to build an economy fit for the future unless we ensure our planet has a future.

Meeting the challenge of change head-on means giving our people the confidence to embrace it and the skills to reap the rewards from it, and we have a plan to do so. We are delivering 3 million apprenticeship starts by 2020 thanks to our apprenticeship levy, and I will keep under review the flexibility that levy payers have to spend that money. We are introducing T-levels, and today I provide a further £20 million to support further education colleges to prepare for them. Knowledge of maths is key to the high-tech, cutting-edge jobs in our digital economy, but it is also useful in less glamorous roles such as frontline politics.

So we will expand the Teaching for Mastery of Maths programme to a further 3,000 schools; we will provide £40 million to train maths teachers across the country; we will introduce a £600 maths premium for schools, for every additional pupil who takes A-level or core maths; and we will invite proposals for new maths schools across England, so that highly talented young mathematicians can release their potential, wherever they live and whatever their background. More maths for everyone—Mr Deputy Speaker, don’t let anyone say I don’t know how to show the nation a good time.

Computer science is also at the heart of this revolution, so we will ensure that every secondary school pupil can study computing by tripling the number of trained computer science teachers to 12,000, and we will work with industry to create a new national centre for computing. But rapid technological change means that we also need to help people retrain during their working lives, ensuring that our workforce are equipped with the skills they will need for the workplace of the future. Today, my right hon. Friend the Education Secretary and I are launching an historic partnership, between the Government, the CBI and the TUC, to set the strategic direction for a national retraining scheme. Its first priority will be to boost digital skills and support expansion of the construction sector. To make a start immediately, we will invest £30 million in the development of digital skills distance learning courses, so that people can learn wherever they are and whenever they want.

I am pleased to be able to accept the representation I have received from the TUC to continue to fund Unionlearn, which I recognise is a valuable part of our support for workplace learning. [Interruption.] Apparently the Opposition do not know what that is, Mr Deputy Speaker. I got an email from Len asking me especially, so I couldn’t say no, could I?

Backing skills is key to unlocking growth nationally, but far too much of our economic strength is concentrated in our capital city. If we are truly to build an economy that is fit for the future, we have to get all parts of the UK firing on all cylinders. That is what our modern industrial strategy is all about. Today we back the northern powerhouse, the midlands engine and elected Mayors across the UK, with a new £1.7 billion Transforming Cities fund: half to be shared by the six areas with elected metro Mayors, to give them the firepower to deliver on local transport priorities, and the remainder to be open to competition by other cities in England.

We are investing £300 million to ensure that HS2 infrastructure can accommodate future northern powerhouse and midlands engine rail improvements. I am also providing £30 million today to trial new solutions to improve mobile and digital connectivity on trains on the TransPennine route. We are developing a local industrial strategy with Manchester, and I am pleased to announce a second devolution deal with Andy Street in the west midlands. We have agreed a new devolution deal with North of the Tyne, and we will fund the replacement of the 40-year-old rolling stock on the Tyne and Wear metro, at a total investment of £337 million.

We will invest £123 million in the Redcar steelworks site to support the ambitious plans of our new Tees Valley Mayor, Ben Houchen, and my hon. Friend the Member for Middlesbrough South and East Cleveland (Mr Clarke), who are leading the fight for prosperity in their area. We are piloting 100% business rates retention in London next year and continuing to work with Transport for London on the funding and financing of Crossrail 2. We will also make over £1 billion of discounted lending available to local authorities across the country to support high-value infrastructure projects—a Conservative Government giving power back to the people of Britain, and driving prosperity and greater fairness across our United Kingdom.

The decisions taken in this Budget also mean £2 billion more for the Scottish Government, £1.2 billion more for the Welsh Government and over £650 million more for a Northern Ireland Executive. I can confirm today that progress is being made on city deals for Tay Cities and Stirling, and on a growth deal for Borderlands. I am getting used to the experience of having my ear bent by 13 Scottish Conservative colleagues, most recently on the issue of Scottish police and fire VAT. The Scottish National party knew the rules and knew the consequences of introducing these bodies, and ploughed ahead anyway. My Scottish Conservative colleagues have persuaded me that the Scottish people should not lose out just because of the obstinacy of the SNP Government, so we will legislate to allow VAT refunds from April 2018.

In response to yet more representations from my hon. Friends from Scotland, aided and abetted by my hon. Friend the Member for Waveney (Peter Aldous), from November 2018 we will introduce transferable tax history for transfers of oil and gas fields in the North sea, an innovative tax policy that will encourage new entrants to bring fresh investment to a basin that still holds up to 20 billion barrels of oil.

We will begin negotiations towards growth deals for north Wales and mid-Wales, and we will abolish tolls on the Severn bridge, as promised, by the end of next year. We will deliver on our commitment to review the effect of VAT and air passenger duty on tourism in Northern Ireland, reporting at next year’s Budget, and we will open negotiations for a Belfast city deal as part of our commitment to a comprehensive and ambitious set of city deals across Northern Ireland—a Conservative Government delivering for all parts of our United Kingdom.

It is only by supporting our regions and nations, dealing with our debts and investing in skills and infrastructure for the long term that we can we build an economy fit for the future. But I recognise that many people are feeling pressure on their budgets now, and because we are all in politics to make people’s lives better, in the short term as well as the long term, we will take further measures in this Budget to help families and businesses where we can.

The switch to universal credit is a long-overdue and necessary reform, replacing Labour’s broken system that discouraged people from working more than 16 hours a week and trapped 1.4 million on out-of-work benefits for nearly a decade. Universal credit delivers a modern welfare system where work always pays and people are supported to earn, but I recognise the genuine concerns on both sides of the House about the operational delivery of this benefit, and today we will act on those concerns.

First, we will remove the seven-day waiting period applied at the beginning of a benefit claim so that entitlement to universal credit will start on the day of the claim. To provide greater support during the waiting period, we will change the advances system to ensure that any household that needs it can access a full month’s payment within five days of applying; we will make it possible to apply for an advance online, and we will extend the repayment period for advances from six months to 12 months; and any new universal credit claimant in receipt of housing benefit at the time of the claim will continue to receive that housing benefit for a further two weeks, making it easier for them to pay their rent. This is a £1½ billion package to address concerns about the delivery of the benefit. My right hon. Friend the Secretary of State for Work and Pensions will give further details in a statement to the House tomorrow.

We also want to help low-income households in areas where rents have been rising fastest. In the long run, of course, the answer lies in increasing the amount of housing available, a theme I shall return to. In the meantime, the best way to help them is by increasing the rate of support in those areas where rents are least affordable. So we will increase targeted affordability funding by £125 million over the next two years, benefiting 140,000 people. We will always listen to genuine concerns and act where we can to help.

Making work pay is core to the philosophy of this Government. That is why we introduced the national living wage in 2016. From April, it will rise by 4.4%, from £7.50 an hour to £7.83, handing full-time workers a further £600 pay increase and taking their total pay rise since its introduction to over £2,000 a year. We also accept the Low Pay Commission’s recommendations on national minimum wage rates, supporting our young people with the largest increase in youth rates in 10 years and delivering a pay rise for over 2 million minimum wage workers of all ages across the country.

The facts are these: income inequality today is at its lowest level in 30 years; the top 1% are paying a larger share of income tax than at any time under the last Labour Government; the poorest 10% in Britain have seen their real incomes grow faster since 2010 than the richest 10%; and the proportion of full-time jobs that are low paid is at its lowest level for 20 years—a Conservative Government delivering a fairer Britain.

As well as making work pay, we want families to keep more of the money they earn. When we came into office, the personal allowance stood at £6,475 a year. From April, I will increase the personal allowance to £11,850 and the higher rate threshold to £46,350, making progress towards our manifesto commitments, which I reiterate today. The typical basic-rate taxpayer will be £1,075 a year better off compared with 2010, and a full-time worker on the national living wage will take home more than £3,800 extra—this Conservative Government, delivering for Britain’s workers.

I turn now to duties. The tobacco duty escalator will continue at inflation plus 2%, with an additional 1% duty on hand-rolling tobacco this year, and minimum excise duty on cigarettes will also rise. Excessive alcohol consumption by the most vulnerable people is all too often done through cheap, high-strength, low-quality products, especially so-called white ciders. I pay tribute to the campaign led by my hon. Friend the Member for Congleton (Fiona Bruce) on this issue. Following our recent consultation, we will legislate to increase duty on these products from 2019. But, recognising the pressure on household budgets, and backing our great British pubs, duties on other ciders, wines, spirits and beer will be frozen. This will mean that a bottle of whisky will be £1.15 less in 2018 than if we had continued with Labour’s plans, and a pint of beer 12p less. So, merry Christmas, Mr Deputy Speaker.

The cost of travel is an important factor for families and businesses. From April 2019, I will again freeze short-haul air passenger duty rates, and I will also freeze long-haul economy rates, paid for by an increase on premium-class tickets and on private jets—sorry, Lewis. For those who do not stretch to a private jet, I can announce a new railcard for those aged 26 to 30, giving 4.5 million more young people a third off their rail fares. I will, once again, cancel the fuel duty rise for both petrol and diesel that is scheduled for April. Since 2010, we will have saved the average car driver £850 and the average van driver over £2,100, compared with Labour’s escalator plans. Fuel duty has now been frozen for the longest period in 40 years, at a total cost to the Exchequer of £46 billion since 2010.

Our NHS is one of our great institutions: an essential part of what we are as a nation and a source of pride the length and breadth of the country. Its values are the values of the British people, and we will always back it. Dedicated NHS staff are handling the challenges of an ageing population and rapidly advancing technology with skill and commitment, and we salute them. Mr Deputy Speaker, although you would not think so to listen to the Leader of the Opposition as he regularly talks down the achievements of the NHS, the number of patients being treated is at record levels, cancer survival rates are at their highest ever level, 17 million people are now able to access GP appointments in the evenings and at weekends, and public satisfaction among hospital in-patients is at its highest level in more than 20 years.

It is central to this Government’s vision that everyone has access to the NHS, free at the point of need. That is why we endorsed and funded the NHS’s five-year forward view in 2014. But even with this additional funding, we acknowledge that the service remains under pressure, and today we respond. First, we will deliver an additional £10 billion package of capital investment in frontline services over the course of this Parliament to support the sustainability and transformation plans that will make our NHS more resilient—investing for an NHS fit for the future. But we also recognise that the NHS is under pressure right now. I am therefore exceptionally, and outside the spending review process, making an additional commitment of resource funding of £2.8 billion to the NHS in England: £350 million immediately, to allow trusts to plan for this winter, and £1.6 billion in 2018-19, with the balance in 2019-20, taking the extra resource into the NHS next year to £3.75 billion in total, meaning that our NHS will receive a £7.5 billion increase to its resource budget over this year and next.

Our nation’s nurses provide invaluable support to us all in our time of greatest need and deserve our deepest gratitude for their tireless efforts. My right hon. Friend the Health Secretary has already begun discussions with health unions on pay structure modernisation for “Agenda for Change” staff, to improve recruitment and retention. He will submit evidence to the independent pay review body in due course, but I want to assure NHS staff and patients, and Members of this House, that if the Health Secretary’s talks bear fruit, I will protect patient services by providing additional funding for such a settlement.

Just as our public services must be fit for the future, so too must our tax system. It must remain competitive to attract the brightest and the best to establish and grow the businesses of the future. It must raise the revenue we need to fund our public services and it must be robust against abuse so that it is fair to all. We have heard a lot of talk recently from the Opposition about what they would do to crack down on tax avoidance and evasion, but the truth is that they did not. It is this Government who have clamped down on avoidance and evasion; this Government who have seen the tax gap cut by a quarter since 2010, to a record low; and this Government who have raked in an extra £160 billion over seven years for our public services by collecting the taxes that are due. So I am going to take no lectures, but I will take action. This Budget continues the work of the last seven years, with a package of measures that is forecast to raise £4.8 billion by 2022-23—doing the job that Labour failed to do for 13 years in office.

Our long-term phased reduction of corporation tax has generated investment and jobs and raised £20 billion extra for our public services. We are committed to maintaining Britain’s competitive corporation tax rates, but there is a case now for removing the anomaly of the indexation allowance for capital gains, bringing the corporate tax system into line with the personal capital gains tax system.

I will therefore freeze this allowance so that companies receive relief for inflation up to January 2018, but not thereafter.

I am grateful to the Office of Tax Simplification for its recent report on the VAT registration threshold. At £85,000, the UK’s VAT threshold is by far the highest in the OECD. By contrast, in Germany it is just £15,600. I note the OTS conclusion that it distorts competition and disincentivises business growth. I also note the concerns of the Federation of Small Businesses about the cliff edge of the threshold. But such a high threshold also has the benefit of keeping the majority of small businesses out of VAT altogether, so I am not minded to reduce the threshold, but I will consult on whether its design could better incentivise growth, and in the meantime we will maintain it at its current level of £85,000 for the next two years.

We cannot build an economy fit for the future without supporting its backbone: our 5.5 million small businesses, which are responsible between them for nearly half of our private sector jobs. They give our economy its extraordinary vibrancy and resilience, but I recognise that many are feeling under pressure right now. I know what hard work it is to get a business off the ground, to get it to grow, so today I want to do what we can to ease that pressure.

Business rates represent a high fixed cost for small businesses. At Budget 2016 we introduced a package of business rate relief worth almost £9 billion, with a further £435 million in the spring Budget. Today I go further. We have listened to concerns about the potential costs of the annual uprating of business rates in April next year, and today I will accept the representation of the British Chambers of Commerce, CBI and other business organisations and bring forward the planned switch from RPI to CPI by two years, to April 2018—a move worth £2.3 billion to businesses over the next five years.

I have also listened to businesses affected by the so-called staircase tax. We will change the law to ensure that where a business has been impacted by the Supreme Court ruling, it can have its original bill reinstated, if it chooses, and backdated. I hope that I can expect cross-party backing to speed that measure through Parliament.

There are three simple steps to solve the staircase tax—[Interruption.] What do they expect? It’s the tax section. To support the thousands of small pubs that are at the heart of so many of our communities, we will extend the £1,000 discount for pubs with a rateable value of less than £100,000 for one more year, to March 2019.

And I have heard the concerns about the five-yearly revaluation system. Shorter revaluation periods will reduce the size of changes in valuations, so I can announce today that after the next revaluation, future revaluations will take place every three years—this Conservative Government listening to small business.

There is a wider concern across this House and in the business community about the tax system in the digital age. Along with the innovation and growth that it brings, digitalisation poses challenges for the sustainability and fairness of our tax system. But this challenge can only be properly solved on an international basis, and the UK is leading the charge in the OECD and the G20 to find solutions.

Today we publish a position paper on the tax challenge posed by the digital economy, setting out our emerging thinking about potential solutions. But in the meantime, we will take what action we can. Multinational digital businesses pay billions of pounds in royalties to jurisdictions where they are not taxed, and some of these royalties relate to UK sales. So from April 2019, and in accordance with our international obligations, we will apply income tax to royalties relating to UK sales when those royalties are paid to a low-tax jurisdiction, even if they do not fall to be taxed in the UK under our current rules. That will raise about £200 million a year. It does not solve the problem, but it does send a signal of our determination and we will continue work in the international arena to find a sustainable and fair long-term solution that properly taxes the digital businesses that operate in our cyber-space.

Following representations from a number of my hon. Friends, we are also taking further action to address online VAT fraud, which costs the taxpayer £1.2 billion per year, by making all online marketplaces jointly liable with their sellers for VAT, ensuring that sellers operating through them pay the right amount of VAT, just as we would expect traditional retailers to do.

I want to turn to the challenge of the housing market, but before I do so I want to touch on the aftermath of the appalling events at Grenfell Tower. We have provided financial support for the victims of this terrible tragedy, and today I can announce we will provide Kensington and Chelsea Council with a further £28 million for mental health and counselling services, regeneration support for the surrounding areas and to provide a new community space for local residents.

This tragedy should never have happened, and we must ensure that nothing like it ever happens again. All local authorities and housing associations must carry out any identified necessary safety works as soon as possible. If any local authority cannot access funding to pay for essential fire safety work, they should contact us immediately. I have said before, and I will say it again today: we will not allow financial constraints to get in the way of any essential fire safety work.

I want to address the issue of empty properties. It cannot be right to leave property empty when so many are desperate for a place to live, so we will legislate to give local authorities the power to charge a 100% council tax premium on empty properties. We will also launch a consultation on barriers to longer tenancies in the private rented sector and how we might encourage landlords to offer them to those tenants who want the extra security.

I also want to say something about rough sleeping. It is unacceptable that in 21st-century Britain there are people sleeping on the streets, so we will invest today £28 million in three new Housing First pilots in the west midlands, Manchester and Liverpool, and we will establish a homelessness taskforce as part of our commitment to halving rough sleeping by 2022 and eliminating it by 2027.

I thank the many colleagues who submitted ideas on how to tackle the challenge of the housing market, including my hon. Friends the Members for North East Hampshire (Mr Jayawardena), for Eastleigh (Mims Davies) and for Weston-super-Mare (John Penrose) in particular. By continuing to invest in Britain’s infrastructure, skills and research and development, we will ensure the recovery in productivity growth that is the key to delivering our vision of a stronger, fairer, more balanced economy, and the assurance to the next generation of their economic security.

But however successful we are in that endeavour, there is one area where young people today will, rightly, feel concern about their future prospects, and that is in the housing market. House prices are increasingly out of reach for many. It takes too long to save for a deposit, and rents absorb too high a portion of monthly income, so the number of 25 to 34-year-olds owning their own home has dropped from 59% to just 38% over the last 13 years. Put simply, successive Governments, over decades, have failed to build enough homes to deliver the home-owning dream that this country has always been proud of, or indeed to meet the needs of those who rent.

In Manchester a few weeks ago, my right hon. Friend the Prime Minister made a pledge to Britain’s younger generation that she would dedicate her premiership to fixing this problem, and today we take the next steps to delivering on that pledge. By choosing to build we send a message to the next generation that getting on the housing ladder is not just a dream of your parents’ past, but a reality for your future.

We have made a start with schemes such as Help to Buy, which has helped over 320,000 people buy a home. We have increased the supply of homes by more than 1.1 million since 2010, including nearly 350,000 affordable homes. House building stands at its highest level since the crash, with the latest figures showing that over 217,000 net additional homes were added to the stock last year. That is a remarkable achievement, but we need to do better still if we are to see affordability improve.

This is a complex challenge, and there is no single magic bullet. If we do not increase the supply of land for new homes, more money will simply inflate prices and make matters worse. If we do not do more to support the growth of the SME house building sector that was all but wiped out by Labour’s great recession, we will remain dependent on the major national house builders that dominate the industry. If we do not train the construction workers of tomorrow, we may generate planning permissions but we will not turn them into homes. Solving this challenge will require money, it will require planning reform and it will require intervention. So today we set out an ambitious plan to tackle the housing challenge.

Over the next five years, we will commit a total of at least £44 billion of capital funding, loans and guarantees to support our housing market, to boost the supply of skills, resources and building land, and to create the financial incentives necessary to deliver 300,000 net additional homes a year on average by the mid-2020s—the biggest annual increase in housing supply since 1970; new money for the home builders fund to get SME housebuilders building again; a £630 million small sites fund to unstick the delivery of 40,000 homes; a further £2.7 billion to more than double the housing infrastructure fund; £400 million more for estate regeneration; a £1.1 billion fund to unlock strategic sites, including new settlements and urban regeneration schemes; a lifting of HRA caps for councils in high demand areas, to get them building again; and £8 billion of new financial guarantees to support private house building and the purpose-built private rented sector. And because we need a workforce to build these new homes, we are providing an additional £34 million to develop construction skills across the country.

Solving the housing challenge takes more than money—it takes planning reform. We will focus on the urban areas where people want to live and where most jobs are created, making best use of our urban land and continuing the strong protection of our green belt, in particular building high quality, high density homes in city centres and around major transport hubs. And to put the needs of our young people first, we will ensure that councils in high demand areas permit more homes for local first-time buyers and affordable renters.

My right hon. Friend the Communities Secretary will set out more detail in a statement to the House in due course. However, one thing is very clear: there is a significant gap between the number of planning permissions granted and the number of homes built. In London alone, there are 270,000 residential planning permissions unbuilt. We need to understand why. So I am establishing an urgent review to look at the gap between planning permissions and housing starts. It will be chaired by my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) and will deliver an interim report in time for the spring statement next year. And if that report finds that vitally needed land is being withheld from the market for commercial, rather than technical, reasons, we will intervene to change the incentives to ensure that such land is brought forward for development, using direct intervention compulsory purchase powers as necessary.

Mr Deputy Speaker, my right hon. Friend the Prime Minister has said that we will fix this problem, and no one should doubt the Government’s determination to do so. But the solution will not deliver itself. Local authorities will need help and support. Developers will need encouragement and persuasion. Infrastructure to facilitate higher-density development must be funded and delivered. So the Homes and Communities Agency will expand to become Homes England, bringing together money, expertise and planning and compulsory purchase powers, with a clear remit to facilitate delivery of sufficient new homes, where they are most needed, to deliver a sustained improvement in housing affordability.

But Mr Deputy Speaker, the battle to achieve and sustain affordability will be a long-term one, so we also need to look beyond this Parliament, to long-term measures. We will use new town development corporations to kick-start five new locally agreed garden towns in areas of demand pressure, delivered through public-private partnerships and designed to attract long-term capital investment from around the world.

Last week, the National Infrastructure Commission published their report on the Cambridge-Milton Keynes-Oxford corridor. Today we back their vision and commit to building up to 1 million homes by 2050, completing the road and rail infrastructure to support them. And as a down-payment on this plan, we have agreed an ambitious housing deal with Oxfordshire to deliver 100,000 homes by 2031. We are capitalising on the global reputations of our two most famous universities and Britain’s biggest new town to create a dynamic new growth corridor for the 21st century.

Mr Deputy Speaker, this is our plan to deliver on the pledge we have made to the next generation: that the dream of home ownership will become a reality in this country once again. But I also want to take action today to help young people who are saving to own a home. One of the biggest challenges facing young first-time buyers is the cash required up front. We have put £10 billion more money into Help to Buy: Equity Loan to help those saving for a deposit, but I want to do more still. I have received representations for a temporary stamp duty holiday for first-time buyers, but this would only help those who are ready to purchase now and would offer nothing for the many who will need to save for years. So with effect from today, for all first-time-buyer purchases up to £300,000, I am abolishing stamp duty altogether.

Hon. Members

More!

Mr Deputy Speaker (Mr Lindsay Hoyle)

Order. If you want more, you are going to have to let the Chancellor finish.

Mr Hammond

Mr Deputy Speaker, to ensure that this relief also helps first-time buyers in very high price areas like London, it will also be available on the first £300,000 of the purchase price of properties up to £500,000, meaning an effective reduction of £5,000. That is a stamp duty cut for 95% for all first-time buyers who pay stamp duty and no stamp duty at all for 80% of first-time buyers from today. When we say we will revive the home-owning dream in Britain, we mean it. We do not underestimate the scale of the challenge, but today we have made a substantial down-payment.

Mr Deputy Speaker, one of the things that I love most about this country is its sense of opportunity. I have always felt it, and I want young people growing up today to have that same sense of boundless opportunity. In this Budget, I have set out a vision for Britain’s future and a plan for delivering it: by getting our debt down, by supporting British families and businesses, by investing in the technologies and the skills of the future and by creating the homes and the infrastructure that our country needs.

We are at a turning point in our history, and we resolve to look forwards, not backwards—to build on the strengths of the British economy, to embrace change not hide from it, to seize the opportunities ahead of us and, together, to build a Britain fit for the future. I commend this statement to the House.

Philip Hammond – 2017 Mansion House Speech

Below is the text of the speech made by Philip Hammond, the Chancellor of the Exchequer, at the Mansion House in London on 20 June 2017.

My Lord Mayor, Ladies and Gentlemen, I am delighted to be able to deliver this speech here today.

And I am immensely grateful to the City Corporation for hosting us so soon after the cancellation of last Thursday’s banquet in the wake of the appalling tragedy which was then unfolding in West London.

We have suffered a series of shocking events in the past few weeks: the Westminster, Manchester, London Bridge, and Finsbury Park terrorist attacks; and the terrible fire at Grenfell Tower.

This fire was an unimaginable tragedy. My thoughts are with all those in the community who lost loved ones, and with the many people who are still suffering in hospital, and those who have lost their homes.

Our immediate focus is to ensure that survivors have everything they need in terms of housing, clothes, food and other essentials.

But we must, and will, also get to the bottom of the failure at Grenfell, and take decisive action to ensure nothing like this ever happens again.

As Her Majesty the Queen observed on Saturday, none of us can escape the sombre mood that these events impose.

But we should be cheered by the resilience of our communities and the strength of our shared values which shine through the dark clouds wherever such tragedies and outrages unfold.

And even in the face of such events, the business of government must go on: managing our economy in challenging times, improving our public services, taking the steps that will deliver on our ambition of an economy that truly works for everyone, and, of course, the huge, complex and vital task of negotiating the end of our membership of the European Union, and the terms of the partnership which we want to see replace it.

We have much work to do, and we’re determined to get on with it.

And we have a solid foundation on which to build.

Our economy has come a long way since the dark days of 2009.

Last year we grew faster than any other major advanced economy bar Germany, business has created 3.4 million more private sector jobs, the deficit is down by three-quarters – and below 3% of GDP, while at the same time we have lowered income tax for 31 million people and taken 4 million out of income tax altogether through raising thresholds, with more to come.

Inequality is at its lowest in 30 years, and the poorest households have seen their wages rise more since 2010 than in any other country in the G7, thanks to the introduction of the National Living Wage, adding £1,400 to the annual income of those in full-time work on minimum wage.

A record of which we are proud.

But that’s enough of our past achievements!

I’d rather talk about the future.

Travelling the country in the general election campaign I’ve had hundreds of conversations reflecting the challenges and issues that people face in their daily lives: fears about job security; about wage levels; the need for good schools for their children; a well-functioning health service; decent care for elderly relatives; or access to the housing market.

And it’s clear, as many of my colleagues have noted, that Britain is weary after seven years of hard slog repairing the damage of the great recession.

When I took office last year, I reset the fiscal rules, recommitting to achieving fiscal balance, but doing it over a longer timescale, creating additional fiscal space to support the economy, if needed.

But we must not lose sight of the unchanging economic facts of life.

Funding for public services can only be delivered in one of three ways: higher taxes; higher borrowing; or stronger economic growth.

And only one of those three choices is a long-term sustainable solution for this country in the face of the inexorable pressure of an ageing population.

Higher taxes will slow growth, undermine competitiveness, and cost jobs, so the government will remain committed to keeping taxes as low as possible.

And higher discretionary borrowing to fund current consumption is simply asking the next generation to pay for something that we want to consume, but are not prepared to pay for ourselves, so we will remain committed to the fiscal rules set out at the Autumn Statement which will guide us, via interim targets in 2020, to a balanced budget by the middle of the next decade.

Stronger growth is the only sustainable way to deliver better public services, higher real wages and increased living standards.

I thought we had won that argument.

But I learned in the General Election campaign that we have not.

That we must make anew the case for a market economy and for sound money.

The case for growth.

And we need to explain again how stronger growth must be delivered through rising productivity.

That means more trade, not less: maintaining our strong trade links with European markets after we leave the EU, as well as seeking out new opportunities for trade and investment with old friends and fast growing emerging economies alike.

It means the UK remaining open to the talent, the ideas and the capital that have driven the success of our economy in the past, and will drive it in the future.

But it also means addressing the domestic weaknesses that have plagued us: under investment, both public and private; inadequate skills; and regional disparities.

This government has a plan to address all three.

The National Productivity Investment Fund starts to address under-investment in economically productive infrastructure; T-Levels will overhaul our provision of technical education; and the Industrial Strategy will tackle regional economic disparity.

Lifting productivity growth by even one quarter of one percent a year, on a sustained basis over 10 years would add £67 billion to GDP – that’s £2,400 for every household in the UK.

Productivity is the elixir that raises incomes and living standards, and it must be a national priority to make every learner more skilled; every worker more productive; every business more competitive; and every public service more efficient.

That is the route to higher wages, higher quality public services, and a brighter future.

Productivity in the private sector, as in the public, is driven by investment.

One of my immediate priorities is making sure government is doing all it can to facilitate access for firms, large and small, to patient capital, to allow them to grow and bear the fruits of the flow of innovation that is pouring out of UK universities.

The European Investment Bank, and its offshoot, the European Investment Fund, have been an important source of funding for infrastructure investment and for growth businesses.

I want that access to EIB funding to continue while we are members of the EU on equal terms, so I am engaged with EIB and will provide the assurances it needs to sustain the flow of EIB and EIF funding to UK businesses and projects.

And to ensure that finance continues to be available after Brexit, alongside these discussions with the EIB I can also announce I am expanding the support available to capital funding in the UK.

For infrastructure projects, we will broaden the range of the UK Guarantee Scheme by offering construction guarantees for the first time.

And we’ll consider other credit enhancement tools, such as first loss guarantees, to reduce the financial risk that complex projects face.

To support the venture capital funds that are so important to growth and innovation in our economy, the British Business Bank will raise the limits on the amount it can invest in venture capital funds from 33% up to 50%.

And it will be able to bring forward some of the £400m additional investment that I announced at the Autumn Statement.

In the long-term, it may be mutually beneficial to maintain a relationship between the UK and the EIB after we leave the EU.

And we will explore the options together.

But we cannot take chances. So we will be prepared, in case we do not maintain that relationship.

Because investment is crucial for the economic future of this country, and we will not let Brexit uncertainty slow us down.

Investment is critical to securing economic growth; And so is trade.

The British public know that.

A recent poll showed that 90% of respondents believe that free trade is positive for our economy, regardless of how they voted in the referendum.

We are not about to turn inward. But we do want to ensure that the arrangements we have in place work for our economy.

Just as the British people understand the benefits of trade – so, too, they understand how important it is to business to be able to access global talent and to move individuals around their organisations.

So, while we seek to manage migration, we do not seek to shut it down.

Let me quote you from our manifesto, (just in case, by chance, any of you didn’t read it):

Britain is an open economy and a welcoming society and we will always ensure that our British businesses can recruit the brightest and best from around the world.

Britain has benefited from globalisation.

But we must not turn a blind eye to the growing tide of hostility to it in parts of the developed world.

To counter that, we must push for a new phase of globalisation, to ensure that it delivers clear benefits for ordinary working people in developed economies.

To date, much of the thrust of globalisation has focused on the removal of barriers to trade in goods.

“Globalisation 1.0” if you like – expanding the opportunities for major goods exporters like China and Germany to sell their products to a larger market.

But our economy is 80% services.

And many of our areas of greatest competitiveness are in services – for example, finance and insurance, ICT and communications.

So for the UK to be able to share fairly in the benefits of globalisation, we need to lead a global crusade for liberalisation of services.

And we must employ that logic in our Brexit negotiations, to agree a bold and ambitious free-trade agreement with our EU counterparts that covers both goods and services.

Let me talk in a bit more detail about what we want to achieve from those Brexit negotiations.

The Prime Minister’s Lancaster House speech in January set out clearly the arrangements that the UK would like to agree, built around a comprehensive trade agreement in the context of a deep and special partnership that goes much wider than trade.

But we recognise that this is a negotiation, and our negotiating counterparts, while broadly sharing our desire for a close ongoing relationship, will have their own priorities.

So we must be clear about ours.

I have said before, and I remain clear today, that when the British people voted last June, they did not vote to become poorer, or less secure.

They did vote to leave the EU.

And we will leave the EU.

But it must be done in a way that works for Britain.

In a way that prioritises British jobs, and underpins Britain’s prosperity.

Anything less will be a failure to deliver on the instructions of the British people.

So, how do we achieve this “Brexit for Britain”?

Firstly, by securing a comprehensive agreement for trade in goods and services.

Secondly, by negotiating mutually beneficial transitional arrangements to avoid unnecessary disruption and dangerous cliff edges.

Thirdly, by agreeing frictionless customs arrangements to facilitate trade across our borders – and crucially – to keep the land border on the island of Ireland open and free-flowing.

To do this in the context of our wider objectives will be challenging.

It will almost certainly involve the deployment of new technology.

And therefore we’ll almost certainly need an implementation period, outside the Customs Union itself, but with current customs border arrangements remaining in place, until new long-term arrangements are up and running.

And finally, by taking a pragmatic approach to one of our most important EU export sector – financial services.

Let’s be honest, we are already hearing protectionist agendas being advanced, disguised as arguments about regulatory competence, financial stability, and supervisory oversight.

We can have no truck with that approach.

But we acknowledge that, as Britain leaves the EU, there are genuine and reasonable concerns among our EU colleagues about oversight of financial markets that will then be outside EU jurisdiction, but which provide a vast proportion of economically vital financial services to EU firms and citizens.

We saw just such a concern articulated in the EU’s proposal on supervision of CCPs last week.

We must, and we will, engage with all genuine concerns.

And we must be flexible and pragmatic in responding to, and resolving them.

While never losing sight of the principal purpose of the regulatory and supervisory regimes: to ensure financial stability and to protect taxpayers from having to step in to deal with failure.

Getting this right will be critical to the future success of the British economy.

But it will also be critical to the future success of the EU economy.

Remember, 60% of all EU capital markets activity is executed through the UK.

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

And almost half of all British private equity investments in 2014 went into companies across mainland Europe.

The financial ecosystem that underpins this activity is large and complex. And critical mass is important.

Let me be clear about this.

Fragmentation of financial services would result in poorer quality, higher priced products for everyone concerned.

And when we talk about complex financial products like derivatives – we need to remind ourselves that these seemingly esoteric instruments are crucial to facilitating everyday commercial and domestic transactions across our continent, allowing households to obtain fixed rate mortgages, airlines to hedge their fuel costs, and farmers to have certainty over the price they’ll get for their produce.

Avoiding fragmentation of financial services is a huge prize for the economies of Europe.

And I believe we can do it if we approach the challenge with three simple principles.

First, we will need a new process for establishing regulatory requirements for cross-border business between the UK and EU. It must be evidence-based, symmetrical, and transparent. And it must reflect international standards.

Second, cooperation arrangements must be reciprocal, reliable, and prioritise financial stability. Crucially they must enable timely and coordinated risk management on both sides.

Third, these arrangements must be permanent and reliable for the businesses regulated under these regimes.

The industry needs confidence in the structures if it is to provide the financing needed to underpin growth in the real economy.

In the UK. And across the European Union.

The future of our economy is inexorably linked to the kind of Brexit deal that we reach with the EU.

And I am confident we can do a Brexit deal that puts jobs and prosperity first, that reassures employers that they will still be able to access the talent they need, that keeps our markets for goods and services and capital open, that achieves early agreement on transitional arrangements, so that trade can carry on flowing smoothly, and businesses up and down the country can move on with investment decisions that they want to make, but that have been on hold since the Referendum.

The collective sigh of relief will be audible.

The benefit to our economy will be huge, in established sectors like manufacturing, the car industry, financial services, and pharmaceuticals; in emerging areas like biotech, and fintech; in the housing market; in the services sector; in the travel industry, in companies, large and small, right up and down our country, employing, between them, millions of people.

Our departure from the EU is underway.

But ensuring that it happens via a smooth pathway to a deep and special future partnership with our EU neighbours, one that protects jobs, prosperity, and living standards in Britain, will require every ounce of skill and diplomacy that we can muster.

Yesterday was a positive start.

It will get tougher.

But we are ready for the challenge.

And confident that we can deliver, for British jobs; British businesses; and British prosperity.

Thank you. I’m now pleased to hand over to the Governor of the Bank of England, Mark Carney.

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.

Philip Hammond – 2016 Statement on Libya

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Below is the text of the speech made by Philip Hammond, the Foreign Secretary, to the House of Commons on 19 April 2016.

With permission, I shall update the House on the current situation in Libya and on what the Government are doing to support the new Libyan Government of National Accord.

Yesterday, I visited Tripoli; it was the first time that a British Foreign Secretary had done so since 2011. The fact that the visit was able to take place is a positive sign of the progress made in recent weeks, including in the security situation in and around the capital. During my visit, I met Prime Minister Sarraj and members of the Presidency Council in the naval base that has been the headquarters of the Government of national accord since they relocated to Tripoli on 30 March. I welcomed their commitment to representing all the Libyan people and the progress they have made in establishing the GNA as a Government of the whole of Libya.

I underlined to Prime Minister Sarraj the UK’s support for the GNA as the only legitimate Government of Libya. They have the endorsement of the Libyan political dialogue and the majority of members of the House of Representatives. I believe the Libyan people want them to succeed. We look forward to the House of Representatives completing its formal vote of endorsement in line with its obligations under the Libyan political agreement.

I was encouraged to hear from Prime Minister Sarraj and his Ministers about the steps they are taking to assume control of Government Ministries in Tripoli. After five years of conflict following the overthrow of Gaddafi, the Libyan people are weary of fighting and eager for peace. They want a Government who will start to address the many challenges Libya faces. It is important that the international community works in partnership with the GNA as they continue to consolidate their position and take forward their work to meet the needs of Libyan citizens across the country.

In my meetings, I emphasised the need to keep up momentum on the political process and to deliver practical progress on the ground. I was encouraged to hear that a clear plan was being developed to address some of the immediate challenges: delivering security, tackling Daesh, restoring basic public services, countering people-trafficking, restarting oil production, and getting the economy back on track.

We agreed that delivering security was fundamental to improving the day-to-day lives of the Libyan people and creating an environment for economic reactivation. The security agenda must, of course, be owned and led by the GNA, but the UK, along with other European nations, stands ready to respond to requests from the Libyan Government for assistance in training the Libyan armed forces in order to improve their effectiveness in providing security and in the fight against Daesh. Prime Minister Sarraj and I agreed that we should continue to work closely to establish what those training and technical support requirements were, and what role, if any, the international community could play in helping to meet them.

A number of Members have speculated in recent days that the Government might be on the cusp of committing British troops to Libya in a combat, or combat support, role. I am pleased to have the opportunity to clarify the situation. I am clear about the fact that there is no appetite in Libya for foreign combat troops on the ground. We do not anticipate any requests from the GNA for ground combat forces to take on Daesh or any other armed groups, and we have no plans to deploy troops in such a role. I will, of course, keep the House informed of any plans that we develop in the future in response to requests from the Libyan Government, but the type of mission that we currently envisage would be focused on providing training and technical support, away from any front-line operations.

The Libyan economy is suffering from the effects of years of conflict and the impact of low oil prices. It is clear that the Presidency Council is focused on the immediate need to alleviate the pressures on ordinary Libyans, including those arising from the current squeeze on liquidity in the banking system, the shortfall in power generation and the shortage of basic commodities, as well as the slightly longer-term challenge of ensuring the effective functioning of the key state financial institutions—the Central Bank of Libya, the National Oil Corporation and the Libyan Investment Authority—and the challenge of rebuilding oil production and export capacity. As I said to Prime Minister Sarraj, the UK stands ready to provide whatever technical assistance it can with those issues, in all of which British companies have relevant experience and expertise to share.

As for the migration threat, there is clearly an urgent need to tackle the challenges arising from irregular migration and the organised criminal and terrorist networks that facilitate so much of it. In my discussions, I highlighted our desire to work in close partnership with the GNA to make progress on that issue, including progress in tackling the people-smugglers and traffickers. As part of that initiative, we should look at creating a package of support that could include extending the EU’s naval Operation Sophia and building the capacity of the Libyan coastguard to support, and eventually take over, the operation, but clearly such a package would be implemented only at the invitation of the Libyan Government.

Yesterday I announced that Britain would allocate £10 million for technical support to the GNA in this financial year, to be delivered through the conflict, security and stability fund. The package will support the strengthening of political participation, economic development, and the delivery of capacity in security, justice and defence. We will work closely with the GNA to ensure that that support is channelled into the areas where it can have the greatest effect.

After years of conflict in Libya, the formation of the Government of national accord and their arrival in Tripoli have the potential to mark a real turning point in Libya’s fortunes. The challenges facing the GNA should not be underestimated, and delivering the security and economic development that will allow the Libyan people to realise their country’s huge potential will not be an easy task to fulfil, but the UK, together with many of our international partners, stands ready to assist. It is in all our interests that Prime Minister Sarraj and his Government are able to re-establish security, reactivate the economy, and defeat Daesh in Libya as quickly as possible. I commend this statement to the House.

Philip Hammond – 2016 Speech at Lord Mayor’s Easter Banquet

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Below is the text of the speech made by Philip Hammond, the Foreign Secretary, at the Mansion House in London on 6 April 2016.

They say that a week is a long time in politics. And I have to tell you that the last year, frankly, seems like a lifetime. But when I stood here just before the General Election, I set out what we had achieved since 2010 to re-establish Britain’s place in the world.

Re-shaping with a new National Security Council and prosperity as a central aim of diplomacy. Addressing the new security challenges we faced and consolidating our position as a major defence power. And restating our commitment in the Foreign Office to excellence in diplomacy.

And since that election, as a single party Government (because I have to confide to you, when it comes to parties in Government less is definitely more) we’ve been able to go still further:

In the post-Election Budget, we committed to continue to spend 2% of GDP on Defence – demonstrating our determination to maintain world class Armed Forces with cutting edge capabilities.

And in the spending review we protected the Foreign and Commonwealth Office budget, confirming the value that we place on our worldwide network and our global influence.

We’ve boosted our unrivalled soft power, with new cash for the British Council and a strengthened BBC World Service.

And in the Commons, last December, the new Parliament, wiped clean the stain of the August 2013 Syria vote when, by a large majority, it voted to extend our military action against Daesh from Iraq into Syria – demonstrating that Britain does have the political will to act to safeguard our national security.

But these achievements have been made against a backdrop of some serious storm clouds gathering on the horizon.

Headwinds continue to buffet the global economy, forcing economic policymakers around the world to revise growth rates down.

In the first six weeks of the year, concerns about China’s economic slowdown wiped over eight trillion dollars off world markets.

And the collapse in oil markets – which welcome for consumers – is devastating those countries which rely on oil revenues for their public finances.

Persistently weak inflation, negative interest rates in some countries, stagnating global trade, and vanishing demand. All, I’m afraid, point to turbulent times ahead.

And as we seek to protect the British economy from these headwinds we have to recognise that we also face significant and growing threats to our national security.

Last year, I set out the principal challenges we faced: Islamist extremism; Russian aggression; and EU reform.

One year on and none of these challenges has gone away.

The Prime Minister’s prediction that tackling Islamist extremism would be a “generational struggle” is looking increasingly prescient. And the succession of terrorist atrocities around the world including Sousse; the Metrojet bombing; Paris; Brussels; as well as attacks in Turkey, Pakistan, Lebanon and Nigeria, confirm that the terrorists’ desire to attack our values, our democracy and our freedom remains undiminished.

But, in spite of these tragic incidents, we should not overlook the progress we have made in tackling Daesh in their heartlands of Syria and Iraq over the last year.

In Iraq, government forces have retaken the strategically significant cities of Tikrit, Baiji, Sinjar and Ramadi, recovering some 40% of the territory that Daesh in Iraq once held. And an increasingly self-confident Iraqi Security Force is now preparing the ground for the forthcoming battle to liberate Mosul.

In Syria, we and our coalition partners have been systematically targeting the Daesh senior leadership and the external attack planners who threaten us directly, as well as the oil infrastructure that has provided so much of their financing.

But we are also upping our preparedness for the broader counter-terrorism fight: doubling the number of counter-terrorism officers on the FCO overseas network, standing up the four regional Counter Terrorism hubs announced in the recent Strategic Defence and Security Review and, I can announce tonight, creating a fifth Counter Terrorism hub in Europe, in the wake of the Paris and Brussels attacks, and the ongoing Daesh violence in Turkey. And underpinning this growth, we’re boosting our counter-terrorism funding, with an extra £80 million committed to Foreign Office CT over this next spending review period.

But while we boost our fight against terrorism, the old challenge of state-based aggression in breach of the rules-based international order has not gone away.

Just three weeks on from the second anniversary of Russia’s illegal annexation of Crimea, fighting has flared up again in the last few days in eastern Ukraine.

In Syria, Russia’s unannounced intervention last September has strengthened Asad, who continues to wage war on his own people, driving some into the arms of the terrorists, and many more out of their homes, out of their country into the refugee camps in Jordan, Lebanon and Turkey – and onward to Europe.

Russia and Iran are the two countries which have real influence on the Syrian regime and as members of the International Syria Support Group they have responsibility for telling Asad that it is time to go.

For our part, we will continue to work with Russia where it is clearly in our national interest to do so – as it is in Syria. But all nations must know that if they violate the rules by which the international community lives, that community will hold them to account.

And it is through the EU – my third topic from last year’s speech – that we’ve applied the hard-hitting, co-ordinated sanctions in response to Russia’s intervention in Ukraine.

I said last year that we would fight for reform in the European Union, and the Prime Minister has delivered it: an historic deal which protects our special status outside the Euro and outside the Schengen area, exempts us from ‘ever closer Union’, creates a red card for national parliaments, and a new mechanism for repatriating powers, as well as a new regime to limit access to our benefit system for EU migrants.

I have historically been a sceptic on the EU, and if you’d asked me a decade ago whether I believed it would be possible to achieve the package which is now on offer to the UK, I would have said “no”.

Because at that time, many of our partners suffered from the belief that there could only be a one-size-fits-all model for the European Union.

But that has changed, and it’s changed, I believe, for three reasons:

First, the dawning realisation that the Eurozone countries will inevitably require further fiscal and political integration. The recent financial crisis has underscored that reality. With Euro-ins and Euro-outs, a multi-destination EU has become inevitable, destroying the federalists’ vision of a one-track Europe. So now, different views of the future can be accommodated: greater integration for those who want or need it; a looser model for those of us who do not.

Secondly, the impact of the global financial crisis on the Eurozone. In Britain, we were hit hard, but thanks to the measures we’ve taken since 2010, and thanks to the fact that we’ve kept the pound, we are back on the path of economic growth and rising employment. But in the Eurozone, without the safety valve of devaluation, the impact has been longer term. Many countries are still suffering from sclerotic growth and record unemployment. This bitter experience has been a wake-up call for those whose principal concern used to be protecting something called the “European social model” – an awakening to the fact that you can’t protect any kind of social model if you don’t have a competitive economy. Boosting competitiveness and a focus on job creation are the new policy drivers in Europe. The penny has finally dropped: without a strong and competitive economy, everything we value is built on sand.

And thirdly, political views across the EU have shifted decisively. Seven or eight years ago, the UK was a genuine outlier in terms of what we believed the EU should look like and what role it should play in people’s lives. But no longer. There is now a long list of countries who believe, to quote Italian Prime Minister Renzi, in “Better Europe, not more Europe”. What used to be regarded as eccentrically British views on the future on Europe are now firmly established in the mainstream of European political thought.

It’s probably fair to observe that we, in my party, may not always have been the greatest cheerleaders for Mr Juncker but he has certainly detected, and taken on board, this change of mood – and this Commission is now delivering on a reform agenda. Proposals for new legislation have been cut by 80%. And the Prime Minister’s deal commits the Commission to sectoral targets for burden reduction, with a special focus on SMEs.

That’s a good start, but our job is far from done. We now need to lock this change of mood into the DNA of the European Union, and turn the commitments made to the UK into a working reality, institutionalising our reform agenda. And if Britain votes, as I hope it will, to remain, taking active leadership of the reform agenda in the European Union. So despite my historic scepticism about the EU, it is my firm judgement that, on balance, the benefits of the single market with the unique terms of membership now offered to the UK, mean that we will be safer, stronger and better off in.

Increasing competitiveness through strengthening the single market and driving more EU trade deals… while maintaining Britain’s attractiveness as a destination for inward investment by staying in the 500 million-consumer Single Market, but keeping the Pound.

Britain is, and will remain, a world-class player. But our ability to project our influence around the world is enhanced by our EU membership. Acting as part of a European bloc to deliver stronger trade deals, to bolster the resilience of fragile partners around our periphery and to impose tough economic sanctions against those who threaten our security, gives us greater reach and greater influence.

So to those of my countrymen who care passionately about maintaining Britain’s influence in the world, I say this: our voice will be louder and more persuasive if the United Kingdom votes to “remain” on June 23rd.

There was of course, I have to admit, one big challenge I did not foresee in my speech last year, and that was the migration crisis in Europe.

The movement of hundreds of thousands, perhaps a million or more, of people across the Middle East into Europe is at a level not seen since the immediate aftermath of the Second World War.

Some of them are fleeing terror and conflict; others are simply pursuing a better life – enabled in their quest by the ubiquitous smart phone, delivering the instant access to information that has revolutionised all of our lives.

The fact is, the digital revolution means access to information is now ubiquitous, but economic opportunity is not.

And it’s clear to me that information-enabled economic migration will be a major challenge for all rich countries, long after the Syria crisis is resolved.

Working out how we discharge our moral and legal obligations to genuine refugees fleeing persecution and conflict while dealing robustly with the traffickers and those who are seeking to circumvent the rules to access a better standard of living, will be a major challenge for politicians across the developed world for many years to come.

My Lord Mayor, Excellencies, Ladies and Gentlemen, I’ve focused this year and last on we’ve acted to restore and enhance Britain’s role on the world stage.

We’re rebuilding our economy, the foundation of everything we do.

We’ve committed the funding to strengthen our defences and protect our diplomatic network.

And we’ve rediscovered the political will to act to protect our national security.

In the fight against Islamist extremism, we’re degrading Daesh and exposing the fallacy of the so-called “Caliphate”;

We’re keeping up the pressure on Russia over Ukraine and seeking a negotiated solution and an end to Asad’s rule in Syria;

We’ve secured a unique membership arrangement from the European Union and we’re giving the British people the final say on it at the ballot box;

And we’re working with the EU and with Turkey to crush the traffickers, stem the flow of economic migrants and protect genuine refugees.

Through the actions we’re taking, we’re ensuring that Britain is better prepared both to deal with the major threats today and for the unknown challenges yet to come.

Philip Hammond – 2016 Easter Message

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Below is the text of the statement made by Philip Hammond, the Foreign Secretary, on 25 March 2016.

“Easter is a season of hope for all Christians. At this time of celebration my thoughts are with all those facing persecution, discrimination and denied the right to worship freely, particularly Christians in the Middle East. This Government has pledged to stand up for the right to live and to worship free from discrimination, and we will continue to work actively to make this a reality”.

Philip Hammond – 2016 Comments at EU Foreign Affairs Council

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Below is the text of the comments made by Philip Hammond, the Foreign Secretary, to journalists when he arrived at the EU Foreign Affairs Council in Brussels on 14 March 2016.

I’d just like to start by offering my condolences to the people of Turkey and the people of Cote d’Ivoire for the terrible loss of life in the terrorist incidents there yesterday, and as you would expect, we stand firmly behind them, alongside the people of those countries and the people of all countries as they face and deal with the challenges of terrorism around the world.

We’re going to be focusing here today on Russia, on Libya, and on Iran.

On Russia, we need to be clear about how we manage the EU’s relations with Russia in the future. We have to have relationships with Russia but we can’t lose sight of the challenge that Russia represents to our values and to our security and we have to be robust in making our case and defending our principles, our values, and our borders in Europe.

We also need in Syria, the Russians to get a grip on their Syrian clients, and make sure that they are delivering the obligations that Russia has made on their behalf in the International Syria Support Group which lie behind the current cessation of hostilities. We expect President Putin, who has backed President Assad with huge amounts of military and political commitment, we expect him to be able to get control of Assad, and at the moment it doesn’t look like he is in control of Assad.

On Iran, we need to make sure that our approach is balanced so that while we exploit the opportunities that come from an opening of Iran and improved relationships between Iran and the West, we also have to be clear that Iran continues to carry out unacceptable behaviour, missile testings, aggressive behaviour in sponsorship of terrorism around the Gulf, and we shouldn’t in any way pull our punches about that kind of behaviour.

And finally we’ll be talking about Libya with Martin Kobler, the UN Special Representative. We are obviously all very keen to see the full endorsement of the government of national accord and its installation in Tripoli as the de facto effective government of Libya. The EU has plans for a big collaboration with the Libyan government once it is properly installed and in place, and we mustn’t lose sight of the fact either that Libya remains an important irregular migration route into the European Union and as well as worrying about the situation in Turkey, we need to think about potential for continued migration flows through Libya.

Philip Hammond – 2016 Speech on Alternatives to EU Membership

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Below is the text of the speech made by Philip Hammond, the Foreign Secretary, at Chatham House in London on 2 March 2016.

In just 16 weeks’ time, Britain will face a decision that will shape the course of our nation’s history for a generation or more: Should we remain within the European Union on the terms negotiated by David Cameron or should we withdraw from membership and go it alone?

The Government’s clear view is that we are stronger, safer and better off remaining within a reformed European Union; Stronger, because our global influence is enhanced by being a leading member of the world’s largest trading bloc, safer because of the work we do together with EU partners to strengthen our defences against organised crime and terrorism, and better off because of our access to a market of 500 million consumers. The deal that the Prime Minister won in Brussels twelve days ago ensures that the UK can remain in the EU with a special status: outside the Euro; outside Schengen; with an opt-in on Justice and Home Affairs matters, an exemption from ‘ever closer union’ and a new mechanism to limit access to our benefits system for EU migrants.

That deal protects British jobs by ensuring a level playing field in Europe for British business, safeguarding the pound and the Bank of England. It will boost EU competitiveness by completing the European Single Market, prioritising international trade agreements, and cutting the burden of EU regulation. And it provides an emergency brake to limit access to our benefits system for EU migrants and gives us new powers to exclude criminals and to stop exporting child benefits at UK rates.

I think that’s a good deal for Britain.

And as the British people decide whether to take it and remain in a reformed European Union, offering Britain the best of both worlds or to take a leap into the unknown, I want to shine some light on what a future outside the EU might look like for Britain. Because the Leave campaign have so far failed to do so.

On Monday we published a paper setting out the process by which we would exit the EU following a ‘leave’ vote. Today we are publishing a paper outlining the principal alternatives to membership. I am laying the paper in Parliament this morning and it will be available online. I now want to summarise our main findings.

But first, I want to be clear about the process of negotiating an exit, and our future relationship with the EU. Because it would become the defining national project for several years. A vote to leave on June 23rd would trigger a two year window, under the terms of the Treaties, for the UK to negotiate the terms of our exit from the EU. And in the meantime, we will be able to offer British businesses no assurance at all about their future access to EU, or for that matter, to other markets. We will have nothing to say to American, Japanese, Chinese companies looking for a base in which to invest to supply the EU market. Our economy would literally be on hold, whilst our competitors, including our European competitors, forge ahead.

And at the end of two years, there is no guarantee at all that we would have reached agreement, but our exit would be automatic unless every single member of the remaining EU agreed to an extension.

Our access to the Single Market would cease. Our trading agreements with more than 50 markets around the world would lapse, with an immediate and negative effect on confidence, on growth, on investments, and on jobs.

Years of uncertainty for Britain, just as we are getting back on our feet.

And, like any divorce, the negotiations with our former EU partners are likely to be difficult. The leaders of the remaining Member States would have their own pressing domestic political calculations to consider. In many cases people in their countries already think that they’ve gone the extra mile for Britain. They’d be frustrated that having done that, to offer Britain a special – and unique – status in the EU, their efforts had been in vain. And frankly they’d be apprehensive as well, apprehensive of the ‘contagion’ that a Brexit might bring to their own countries.

So let’s be clear, if we reject the special status the Prime Minister has painstakingly negotiated, then we can expect the goodwill that we have seen towards Britain during these negotiations to evaporate with them. The blunt fact is that our former partners in Britain will not feel that they owe us any favours; they will have no interest in helping us to thrive outside the EU.

And to those who argue, as some have done, that “they need us more than we need them”, I say “sadly not the case”. Even if the only factor was trade, and it certainly isn’t, the fact is that in 2014 half of the goods Britain exported went to the EU – just 7% of the goods the EU exported came to the UK.

Our exit negotiation and our attempts to forge some sort of new relationship are likely to involve some tough and protracted discussions.

So what, realistically, are the alternatives?

At different times, the various Leave campaigns have suggested over 20 different models to choose from including the current EU deals with Norway, Switzerland, Iceland, Lichtenstein, Canada, Turkey, Korea, Macedonia. Even Peru and Vanuatu!

But they have been unable to settle on one. In fact, they have deliberately avoided trying because they cannot point to an example which is better than the special status within the EU that we now have on offer. Every other option has significant drawbacks. And the simple truth is that we cannot know what deal a Britain outside the EU would end up with.

The evidence, however, and that is what this paper is about today, suggests that there are three basic models:

– The Norway model;

– The bilateral model. A negotiated bilateral agreement, such as the free trade deals used by Switzerland, Canada, Korea and Turkey;

– or as a default, the WTO (World Trade Organisation) model.

Let me take each in turn.

Norway

Norway, along with Iceland and Liechtenstein, is a member of the European Economic Area (EEA), but not the EU.

And Norway is the non-EU country with the greatest, although still not total, access to the Single Market. It does have the same access in services as the UK has now. But it is outside the Customs Union, meaning that all trade in goods between the EU and Norway is subject to customs checks and Rules of Origin. And it faces tariffs in agriculture and fish.

Norway does also take part in some areas of non-economic co-operation, like counter terrorism. But it pays a price for these privileges. It has to adopt most EU rules, without any say in making them. It pays roughly the same into the EU per person as the UK does.

And, crucially, it is obliged to accept the free movement of people from both EU and EEA countries: migrants in Norway have the same right to access benefits as Norwegians. Today, there is a higher proportion of EU nationals resident in Norway than there is in the UK.

The case of Norway neatly demonstrates the dilemma for Leave: the price of access to the single market is freedom of movement. And the more access to the market they promise, the more empty the boast that they would be able to unilaterally control migration from the EU.

And I say this: If we care about real sovereignty, about being able to shape the decisions which affect us, then the Norway model is definitely not for us.

Bilateral

What if we were to make a bilateral agreement? After all, the EU has a broad range of trade agreements with other countries, such as Switzerland, Turkey or Canada.

Some recommend the Swiss model. But it has taken Switzerland two decades to negotiate more than one hundred separate agreements that it currently has with the EU. Even then, they only have partial access to the Single Market. They face barriers for agriculture and, crucially from our point of view, for services. And once again, they are bound by the principle of free movement of people, with almost four times as many resident EU nationals per capita as in the UK.

Others point to Turkey as a model to follow. Now Turkey of course is a candidate country for membership and has been in a Customs Union with the EU since 1995. It has full access to the single market for industrial and processed agricultural goods, where it is subject to EU regulations, but no access for raw agricultural products nor again, crucially, services.

As part of the Customs Unions, Turkey must align its external tariffs with the EU. And when the EU signs a trade deal with a third country, Turkey must open its market on the same terms. But this is not reciprocal, and the third country is not obliged to open its market to Turkish exports.

Turkey does not take part in policing and criminal justice measures; has only limited co-operation on international security, and it has no say in EU decision-making.

And our conclusion is that the Turkish model would clearly not work for Britain.

What about Canada? The EU-Canada deal has taken seven years and counting to finalise and has still not been approved by the European Parliament! When it happens, and it will happen, it will be the most extensive bilateral agreement the EU has ever made. It gives market access without the free movement of people, and without paying into the EU budget. But Canada is not a European country. And let’s be clear: the Canadian trade deal does not even remotely replicate the access we have as an EU member.

Canadian manufacturers will only have tariff-free access if they meet EU ‘rules of origin’. So Canadian products, like cars, with complex international supply chains may still face tariffs. Canadian financial services providers can’t supply directly to the EU market. They have to set up subsidiaries inside EU member states operating under EU regulations; exporting Canadian jobs. This would really matter for Britain: our services sector is four-fifths (80%) of the UK economy. We are the second largest exporter of services in the world. And the EU is our largest market for those services.

The EU also sets regulatory standards on many products: cars, pharmaceuticals, toys, foodstuffs and Canada won’t have a say over any of them.

The fact is, none of the bilateral free trade models would offer anything like the access we have now to the Single Market and many of them would require adoption of EU regulations and freedom of movement rules. What about Britain’s trade with the rest of the world? We currently benefit from EU trade deals with over 50 different countries. And these deals have been based on the negotiating muscle of a bloc with 500m consumers and a quarter of the world’s GDP. Renegotiating them as a single country would take many, many years. Years in which British businesses would be squeezed out of traditional markets and with no guarantee at the end of the process we could get terms as good as we have now.

Some have said we should focus our attention on deals with the Anglosphere and the Commonwealth. But the EU already either has, or is negotiating, trade deals with all the biggest Commonwealth countries, and none of our allies wants us to leave the EU. Not Australia, not New Zealand, not Canada, not the US. In fact, the only country who would like us to leave the EU is Russia. That should tell us all we need to know.

WTO

Let’s look for a moment now at the default option – the World Trade Organisation rules, which is where we will end up if we leave without a deal agreed. For anyone who wants to ensure a clean break with the EU, the WTO model is the only honest model. WTO rules mean we could sell into the Single Market, but at a price: The EU imposes a ‘common external tariff’ on goods and services from countries outside the EU who don’t have free trade deals agreed.

10% on cars. 30% on confectionary. 36% on dairy produce.

Our exports would cost more and so be less competitive. That will cost British jobs. And if we reciprocated, our imports would cost more too meaning higher prices in our shops.

And that would not be all. Under WTO rules, we couldn’t differentiate between countries. So, for example, if we decided to allow Irish goods to enter the UK tariff-free, we would have to do the same for all 160 countries in the WTO – putting British jobs at risk from foreign competition.

Because, as EU members, the common external tariffs protect our industries from undercutting from outside the EU, while allowing us to import from Europe without tariffs pushing up costs. Outside the EU, it would be all or nothing under WTO rules.

And for our crucial services sector, without a preferential trade agreement, UK businesses would only be guaranteed access under the General Agreement on Trade in Services. This is a much more basic framework, providing much less access to markets.

So on even a cursory inspection, the WTO model does not deliver for Britain. It would be bad for business; bad for jobs; bad for growth. Bad for Britain.

Our choice: leadership of a reformed EU or a leap into the dark
The truth is, the Leave campaigns cannot point to a credible alternative. They are unable or unwilling to address their core dilemma: the price for any significant level of access to the single market for goods, let alone services, is acceptance of free movement of people. The EU has been remarkably consistent in its dealings with other European countries. And the more access to the single market the Leave campaign promises, the more hollow their pledge to limit EU migration.

So what should we conclude from this analysis? That none of the ‘post-exit’ options offer anything close to the best-of-both-worlds, special-status, deal that the Prime Minister has negotiated in the European Union. And the most often cited model, Norway, would offer us, quite literally, the worst of both worlds. Paying as if we remained a member of the European Union, subject to the European Union and obliged to observe the principle of free movement to gain access to the single market that we have now, without any say in how those rules are made and without any say over how the European Union is run.

Negotiating any kind of arrangement with 27 countries we that have just rejected will almost certainly take years, will not give full access to the Single Market without contributing to the budget, accepting all the rules, allowing free movement, and will leave us with no seat at the table. To me, that’s less sovereignty, not more sovereignty.

Balancing the burdens and the benefits, none of the options that are remotely likely to be deliverable comes close to matching the deal that we already have on the table.

So why would we take a leap in the dark?

Why would we risk the effect of years of uncertainty on the British economy?

Why would we take that chance with our children’s future – risking our influence, our prosperity and our security?

When by voting to remain, we can have the best of both worlds in a reformed EU; rather than the worst of both outside. A powerful voice inside Europe; instead of a lonely voice outside. A Great Britain, stronger, safer and better off within the EU.

Thank you.

Philip Hammond – 2016 Speech on Global Uncertainty

philiphammond

Below is the text of the speech made by Philip Hammond, the Foreign Secretary, at the Savoy Hotel in London on 4 February 2016.

It’s a great pleasure to address such a senior business audience.

Lloyds Business Leaders Meeting
I think it’s true to say that the business and political cycles don’t always coincide.

But I suspect right now is the exception that proves the rule: most of you will be watching developments as we enter the final stages of our EU renegotiation process just as keenly as most politicians.

And I will, of course, talk about those EU reforms later in my remarks: why they’re necessary for the future health of both the British and the wider European economy.

But our EU reform agenda is just one part of a much wider, more ambitious package of reforms, aimed at equipping Britain to compete and win in this 21st Century globalised economy.

As we enter 2016, the world is once again facing economic uncertainty; but this time, unlike 2008-2010, we are simultaneously dealing with a level of global strategic insecurity and instability that we have not seen since the end of the Cold War.

The start of this year of course has underlined just how uncertain the global economic outlook is.

You all know the key statistics.

The IMF estimates that the global economic growth rate in 2015 will be just 3.1% – the lowest for 7 years.

Oil prices dipping below $30 a barrel.

Stock markets around the world volatile, to say the least.

And there’s been significant speculation about the nature of the slowdown in the Chinese economy and the Chinese authorities’ ability to manage it, and what all that means for global growth prospects.

Combined with this economic instability, the global security environment remains extremely volatile.

Just four weeks ago, the DPRK announced the test explosion of what it claimed was a thermonuclear, or hydrogen, bomb, reminding us all of the ambitions of North Korea’s illegal nuclear programme.

And despite the cooperation with the international community that led to the nuclear deal, Iran has continued to test fire ballistic missiles, in violation of UN Security Council resolutions.

Meanwhile the old adversary, Russia, is rearming at an alarming pace, despite its economic difficulties, and challenging the international community with aggressive behaviour in Syria, Ukraine and indeed closer to home as Cold War-style probing flights test our defences on a regular basis.

The migration crisis in Europe, driven by the civil war in Syria and the rise of Daesh in Iraq and Syria, continues, and represents a real political threat to some of Europe’s Governments.

If we add to these challenges the spread of Daesh and its affiliates to North Africa and parts of Asia; the civil war in Yemen; continued tension across the Middle East; and recent terrorist outrages in Europe and elsewhere in world; and the strategic impact of oil prices on critical and / or fragile countries across the Middle East, it all adds up to a picture of serious instability across the world.

A potentially toxic mix of threats that represents a grave challenge to UK and to global security.

So what is the Government’s response to this broad ranging set of challenges?

You all know just as well as we know, that businesses, and thus, economies prosper when uncertainty about the long term business environment is minimised and confidence is maximised.

We, of course, cannot be immune from the international climate, but domestically we can and we will seek to insulate the UK economy as much as we can through our long-term economic plan. We are continuing the transition from a low skills, low wage, high tax, high welfare economy; to the higher skills, higher wage, lower tax, lower welfare country that we want to see.

In 2014, we were the fastest growing economy in the G7; and in ‎2015 we were up there again, as one of the two fastest-growing major advanced economies alongside the United States.

We’ve grown almost three times faster than Japan, twice as fast as France and faster than Germany.

We’ve backed business, cutting Corporation Tax from 28% to 20% over the last Parliament, one of the biggest boosts British business has ever seen – with further phased cuts to 18% by 2020 still to come.

And, despite the dire warnings about our austerity programme from the doom-mongers and those who wanted to spend and borrow more, there are now 2.7 million more private sector jobs than there were in 2010; and over 900,000 more British businesses.

Living standards are rising.

But as we’ve recovered from the recession, the old structural weaknesses that have plagued the British economy for decades have re-emerged into the limelight:

Failings in our education and training system;

A welfare system that has too often acted as a disincentive to work;

And an infrastructure deficit that will take decades to correct.

And I am proud to say that we are tackling these familiar challenges – starting during the Coalition, despite the economic and fiscal difficulties that we faced, and continuing under this Government.

And all the while reducing the public sector deficit steadily to our target of delivering a surplus in 2019-20.

Reforming our schools and our vocational training; transforming student finance to ensure our universities have the funding they need to compete in the global marketplace for talent.

Fixing a welfare system that politicians – of all parties – have talked about for years, but always shied away from reforming. We’re fixing that welfare system so that work really will pay, all the time, for everyone.

And investing in infrastructure, right through the difficult years of fiscal austerity, and now increasing by 50% our investment in roads and rail to give Britain the networks it needs – as well as facilitating massive private investment in Britain’s creaking power generation sector.

In short, and if I may coin a phrase, we are fixing the roof.

And when it comes to the global economy, we reject the advice from those who say we should cut ourselves off from the rest of the world – somehow isolate ourselves from the world’s problems whether they are economic or political.

In a globalised, interconnected economy, sustainable economic growth will not come from isolation.

We have to engage with the fastest-growing economies of the world, and the economies with the greatest potential, like never before.

And we are.

Through the Spending Review, we have protected the crown jewel of the Foreign Office – our global diplomatic network – and given it a mandate to lead the charge for British businesses across the globe.

Now I know that Diplomats can’t do your overseas business for you. And we won’t try to.

But what we can do is coordinate British business approaches to key opportunity sectors; lobby foreign governments for access and for fair treatment; and help to create the most benign environment possible for British business through advocating and supporting liberalisation and reform in the fastest-growing economies.

We’re reforming UKTI, as Francis Maude I suspect has already explained to you this morning, making it leaner and more focused on the markets where we, Government, can make the biggest difference to what you, business, are doing.

And I can’t mention UKTI without thanking Lloyds for your support for the GREAT campaign, which is has done huge amounts to boost Britain as a brand around the world.

With China, we’re forging a new, 21st Century partnership – demonstrating in deeds our stated intention to be China’s partner of choice in the West; and to do that by being the Western market most open to Chinese investment.

And we are also opening up new markets for British businesses back in China, creating greater access to the world’s fastest-growing consumer market.

And it’s not just China.

We’re building a closer relationship with India, building on Prime Minister Modi’s visit at the end of last year and the agreements reached by the Chancellor and Finance Minister Jaitley on financial services, infrastructure and technology.

We’ve seen exports to South Korea more than double since 2010.

We’re the driving force behind efforts to deliver an EU-Japan Economic Partnership Agreement that could deliver an extra £6 billion in UK exports.

And now, Britain is the leading advocate, working with the US and other like-minded EU partners, for a new Transatlantic Trade Deal – TTIP – that has the potential to add almost £100bn annually to Europe’s GDP, and £10bn to Britain’s, bringing huge benefits for particularly the City, but for British businesses in general and for the British people.

Reforming the EU to make it more competitive

And a core part of our plans to boost the international competitiveness of the UK economy is the package of EU reforms that were outlined in documents published by Donald Tusk on Tuesday.

The Prime Minister has said this is a deal that is far from done.

And some of the most important details are still up for negotiation in the run up to the February European Council.

But I believe that the framework represented in that package, if – and only if – we can get agreement on the details, has the potential to address the four most important areas of concern about our EU membership for the British people.

The text draft delivers substantial progress in each of those areas – welfare, sovereignty, competitiveness and governance of the Eurozone.

Now I know that not all of these baskets of issues are as important to business as they are to the British electorate and I won’t go through the detail of all of them.

But I do want to address the two baskets that business leaders tell me are of greatest concern to them: the arrangements for a fair settlement between the Eurozone and the non-Eurozone countries in the EU; and the competitiveness agenda.

First, competitiveness.

We all know the problems created by the over-regulation and bureaucracy emanating from the Commission in Brussels that imposes burdens on business, limiting growth and costing jobs.

Making the EU more competitive in the global economy is crucial to Britain’s continued membership.

And the good news is that, after many years of a, frankly, cavalier attitude to Europe’s declining competitiveness, most of our EU partners, and certainly the Juncker Commission – one very nasty recession and 7 years of persistent high unemployment later – do now get it. That we do need to be competitive if we are going to maintain our current position.

The separate draft Council Declaration on competitiveness that was published on Tuesday sets out the significant steps the EU will take to deliver progress in all the areas that we’ve been pushing:

– progress towards completion of the single market, including in energy, digital and services;

– on completing international trade deals, including TTIP;
and, for the first time, introducing sector-specific regulatory burden-reduction targets, with an accountability mechanism, which will be particularly important to small and medium-sized businesses.

Secondly, in the equally crucial area of ensuring that Britain – and in particular, our hugely important financial services industry – will not lose out as a result of our decision not to join the Euro, we have secured the protections that we need.

We want the Eurozone to succeed. The Eurozone countries are our biggest market, and we want to be able to continue to grow our trade with them.

But we cannot allow Britain to be bullied into changes to facilitate Eurozone integration that would be bad for Britain.

We cannot accept the British economy, British businesses and British workers losing out as a result of changes imposed on the EU by the Eurozone countries who now form a Qualified Majority in the EU.

Now, for the first time, in these texts we have proper recognition that the EU has more than one currency, with explicit recognition that further Eurozone integration must not discriminate against non-Eurozone members, like the UK; that any discrimination based on the currency of a member state is unlawful.

If we can deliver this deal as drafted, never again will Britain be forced to bail out Eurozone countries; and never again could the EU attempt anything as clumsy as its “location policy” seeking to limit the clearance of Euro-denominated financial instruments to institutions located in Eurozone countries.

And underpinning these measures is a new mechanism – a brake that we can pull – to ensure that if these safeguards are not being properly applied in accordance with this agreement, the issue in dispute will be addressed at the European Council.

Now as I said earlier, this is far from being a done deal.

And there will be some robust discussions with the EU institutions and with our EU partners on these two baskets – and on the sovereignty and migration issues that are of even greater salience with the British people – in the run-up to the February Council in two weeks time.

But we are confident that we can reach an agreement that delivers what we need. But we are clear that we’re in no rush to do this.

Getting the right deal is more important than getting a quick deal; if it can be done at the February Council, good. If it can’t be done at the February council we’ll continue working on it. And only when the deal is done will we decide the timing of the referendum that will put it to the British people. But whether it’s sooner or later, that referendum is a commitment we have made and a commitment that will be delivered.

And as the public debate on our EU membership reaches its crescendo, I would urge all of you as business leaders, on whatever side of the argument you come down, to please get involved in that debate.

And I know, from my many discussions with business leaders, the frustrations that many of you have with the EU and actions that have, in the past, seemed like an attack directed at the success particularly of the financial services sector in this city.

But I also know that most of you will regard access to the single market, and Britain’s unique position as the first point of investment for many foreign companies into the EU, as of paramount importance to your future success.

And I say this to you: Business has a crucial role to play in this debate. These are complex economic issues and people who work for you will expect that you understand these issues better than they do, that business is in a position to make an objective, dispassionate judgement about the balance of advantage for Britain staying in the EU versus leaving it. And they deserve to hear it from those who are qualified to opine on all sides of this debate before they make up their minds, so that when they come to cast their votes, however they choose to vote, they have done so in full possession of the facts.

Delivering reform in the future

For my part, the most significant part of this deal is not the detail.

It’s something more fundamental.

It’s the fact that this negotiation has happened at all and that, if we get agreement at the Council meeting later this month, we will have delivered significant and enduring change to the way in which the European Union operates.

Because for the last forty years the European Community, now the European Union, has operated on a one-way ratchet.

It has accrued more and more powers from the Member States’ Governments, extending its areas of competence far beyond our membership of the single market that was the basis of the last European referendum in this country in 1975.

But if this deal is agreed and implemented we will have passed the peak of European Union interference in the UK.

The tide will be running in the right direction – and we see more and more people across Europe aligning themselves with our views on competitiveness, burden reduction and subsidiarity.

More and more governments being elected in the European Union countries that agree with our vision of the future of Europe.

The ratchet will have been broken – in favour of a more balanced, less ideological, more pragmatic, two-way mechanism.

Other countries, particularly those in the Eurozone, will wish – and will need – to integrate further in the future.

But Britain and the British people have never been signed up to ever closer union.

We have never believed in the one-way ticket to economic, social, fiscal and political union – the inevitable destination of the Eurozone, if it is to succeed.

And we have never believed that the key decisions affecting how this country is governed should be made in Brussels rather than just up the river, in Westminster.

The draft text presented this week demonstrates that powers can flow back from Brussels to the Member States; that restrictions can be applied to new migrants; and that the powers of Eurozone Member States can be fettered to protect the interests of the non-Eurozone Member States.

But let us be clear: whatever agreement is reached will not be the end of the process.

No-one is asking, no-one is suggesting, that Britain should stop fighting for open markets and free trade if we stay inside the European Union.

No-one is asking us to endorse as “final” or “perfect” any part of the EU arrangements.

Britain can, and will, continue to fight for an outward-facing, open-market, non-interventionist EU from the inside as we have done for years and, if I let you into a secret, as many of our fellow Member States would want us to carry on doing in the years ahead.

Britain is the second largest economy in the EU; and may well become the largest in the next 20 or so years.

And if the British people decide that our future is in the EU, that should be a future of leadership, a future in which Britain shapes the European Union for the future not grumbles from the sidelines about the direction of travel.

So Ladies and Gentlemen, I return to the theme I set out at the start

With a potentially toxic mix of instability in the international markets and a particularly volatile global security environment, charting a clear and certain course is vital to maintaining our economic security, the foundation upon which our national security is built.

Whether it’s the reforms to our tax system, to our welfare system or to the business environment here at home, the crucial international trading relationships we’re strengthening abroad, our commitments on Defence spending and the overseas aid budget or the renegotiation of the terms of our membership of the EU, we are taking the actions needed to ensure Britain’s prosperity.

And to ensure Britain’s national security.

We can’t be immune from external shocks.

And we cannot isolate ourselves from global threats.

But by enacting our bold reforms, backing business, backing job creation, strengthening our Armed Forces, boosting our competitiveness and building up global trade we will maintain and grow Britain’s position as one of the most competitive and dynamic developed economies in the world, and one of the most capable partners in defending the Rules-Based International System.

Business, and business leaders, are and will be a vital part of that success.

And I and all of my colleagues in Government look forward to continuing working with business to deliver it.

Thank you.

Philip Hammond – 2012 Speech to the Royal College of Defence Studies

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Below is the text of the speech made by Philip Hammond, the then Secretary of State for Defence, to the Royal College of Defence Studies on 23 July 2012.

Introduction

Thank you for inviting me here to speak to you.

And as you approach the end of your course I know you will have made the most of the opportunity presented here at the Royal College of Defence Studies to get to grips with some of the very complex issues facing defence and defence diplomacy.

Many of which are common to the United Kingdom and its allies and partners.

The international nature of this course is one of its strengths.

And your generation of leaders will have a key role in addressing these challenges; and in forging the bilateral and multilateral defence relationships that the defence and security arrangements of every country, even the United States, is likely to rely on in the future to protect its national security.

So I want to talk this morning about some of the strategic challenges we’re facing in UK defence and more widely.

And pose you some of the questions that will have to be answered during your generation’s tenure in the top jobs.

Strategic picture

Strategically, the world is a far less certain and, in some ways, a less threatening place than it was 25 years ago.

Then we faced an adversary with the means and the intent, if an unpredictable and paranoid leadership.

Nowadays at least the paranoid leaderships are still struggling to obtain the means!

More broadly technology is racing ahead; changing the way we protect critical infrastructure more likely to be rendered inoperable through a computer virus than a bombing raid, requiring multi-level C4ISTAR; capabilities which are not as obvious to the public as an aircraft carrier, a tank or a jet.

The rise of ‘invisible’ capabilities like this presents a challenge to politicians who need to demonstrate to the public who are paying for them, how we are spending their money and how we are keeping them safe.

At a geo-political level, the dispersion of power that began as the Berlin Wall crumbled has gathered pace with the emergence of new potential military powers and greater strategic competition between growing economies, both regionally and globally.

Alongside this, the impact of globalisation means there are diminishing levers available to individual national governments to effect change, manage their economies, and protect their national security.

The economic realities facing the mature economies show how linked we are; how easily contagion can spread.

In the medium term, those charged with the task of protecting national security, in economies set for relative decline as the pattern of wealth adjusts, will have to do so in an environment of constrained resources

This is the future in which you will lead in your respective services and in your respective countries.

And although this future will be unpredictable and volatile, we can clearly see some of the issues that will dominate.

Economic means

First, the economic backdrop.

Economic strength underpins national security.

It is a requirement for generating military capability.

Look at what is driving the changed pattern of military power today.

Look at what settled the Cold War.

Without strong economies and public finances it is impossible to build and sustain, in the long-term, the military capability required to project power and maintain strong defence.

That is why, today, the debt crisis should be considered the greatest strategic threat to the future security of western nations.

And it is also why, although NATO has often talked of distributing the burden of collective defence more equitably, in the current fiscal climate, it is essential that we no longer talk, but begin to act.

The reality is that too many member states are failing to meet their financial responsibilities to NATO, and so failing to maintain appropriate and proportionate capabilities.

Too many are opting out of operations or contributing but a fraction of what they should be capable of.

But we have to be realistic.

The economic and fiscal circumstances in which most developed countries find themselves makes this problem difficult to fix in the short term.

Across the alliance, aggregate defence expenditure is certain to fall in the short term and, at best, recover slowly in the medium term.

So more money is not going to be the answer.

So, the challenge is to maximise the capability we can squeeze out of the resources we have available.

Political will

Which brings me to my second point: alliance structures are only as strong as the political will of individual nations to meet their responsibilities.

It matters that NATO countries meet their commitments on funding defence, to ensure the means to protect our collective security.

But it is no good having the means if you lack the will to use them.

Libya showed what can be achieved when many of the stars are in alignment:

The UN Security Council, NATO, regional powers, the political will of those with the capabilities to act, and of course the will of the majority of the Libyan people.

But it also showed quite starkly the imbalances in NATO.

Imbalances in the hardware (and increasingly software) available to the alliance from national contributions.

But also imbalances in the will to act, the will to deploy, the determination to take part and commit nationally owned capabilities that have absorbed many billions of taxpayers’ cash in order to make us all collectively safer.

There are untapped reserves of resource in European NATO which need to be tapped to support our collective security.

Over the next few years, the United States will put into practice its ‘tilt’ to the Asia-Pacific theatre, a focus that is very much in our interests as the US rise to meet the strategic challenge set by the emergence of China.

The US will expect Europe to do more to of the heavy lifting to ensure security in our own region, and our near abroad: the Middle East, North Africa, and the Horn of Africa.

How European nations respond to this pivot will set the context for the multilateral environment British armed forces and others will operate in.

This brings me to my third point: cohesion of purpose.

Meeting threats

We need to confront, head on, a real tension within the NATO alliance: basically to answer the question, what is NATO for in the 21st century?

The threat from a monolithic Soviet Union no longer exists.

And the approach to Russia differs across the alliance.

For those of us further back, west of the old iron curtain, the threat is no longer territorial, but global terror and rogue states.

So a passive defence of national territory is no longer adequate protection for our citizens.

We are starting from a reality that it is much better to fight in the space of our adversaries rather than at home.

Of course this is relatively easier to do if your adversary is a terrorist, rather than a state.

And this requires rapidly deployable, adaptable, agile, flexible, expeditionary forces.

So this is what the UK’s strategic defence and security review was all about; responding to these 3 drivers: the economics, the evolving alliance pattern, and the evolving threat pattern.

Shaping the spread of capabilities we will maintain, in the face of fiscal restraint, to the future character of warfare, and to maintain national security by acting at distance.

But.

The future posture of Russia is by no means certain.

And with political change sweeping across North Africa and the Arab world, change that is far from at an end, far from predictable, and has the potential to leave a less secure and less safe neighbourhood, we cannot rule out the return of a strategic threat to territorial Europe.

So this has been about striking the right balance between our own direct national needs and those of the NATO alliance upon which we continue to rely for collective security.

And recognising the likely future shape of operations in that context.

The future shape of operations

You will have had the opportunity during your course to look at current operations and to draw lessons from them for the future character of warfare.

Libya showed the utility of precision weapons in an era where minimising collateral damage and civilian deaths will be part of the strategic objective.

And it also exposed shortfalls in the European contribution to NATO.

But Libya has tested another concept.

The utility of air power as an alternative to ‘boots on the ground’.

Libya has shown how air power can provide politicians like me with political choices short of intervention on the ground.

But I have not drawn the conclusion that ground intervention will be unnecessary in the future.

There was a ground campaign in Libya;

It could not have proceeded without NATO airpower support.

But it was decisive.

And it was undertaken by Libyans, not NATO troops.

After 10 years of enduring campaigns, you do not have to be a political sage to recognise that the public’s future appetite for open ended interventions is limited.

Of course, we do not yet know the end outcome of the Libya intervention.

Displacing the old regime was, relatively, the easy bit.

And what comes after is not yet completely clear.

So modern warfare requires firepower and political sensitivity;

And that requires a deep understanding of the situation on the ground.

In Afghanistan, our troops have had to wear the face of both the warrior and the diplomat, fighting one moment, and taking tea with the elders the next.

The political dimension of warfare is crucial to success.

You can win the battle but lose the war unless you are focussed on what you really want to achieve.

And it will usually be the case that force of arms alone cannot deliver victory.

That is certainly the case in Afghanistan.

That is why the comprehensive approach, marrying politics, finance, military capability, diplomacy, development, not just across national government, but internationally too, will be so important in the future.

So, against that backdrop, let me bring this discussion closer to home and say something about the future shape of the UK’s armed forces.

The future shape of UK armed forces

Afghanistan is still very much the priority in terms of operations.

But the end of the combat mission is now in view.

And, intellectually, we have moved on to look beyond 2014 at the shape of the forces we will need for the future.

The needs of the mission in Afghanistan, and before it Iraq, have dominated for a decade.

For all the dangers and complexities of those missions they have provided some predictability.

People have known, often 2 years in advance, when they are going to be deployed; they know how long they are going to be deployed for; often they have known exactly where they are going to be deployed to before they go.

We have bent our military, our army in particular into the shape required for this 6 month rotational enduring conflict in Afghanistan.

But, in the process, we have lost some contingent capability.

Post 2014, the move from enduring campaign to contingency signals an end to the predictability of the roulement cycle;

It heralds a future force geared toward being ready to deal with the unexpected and unplanned.

And we make this change against a background of fiscal constraint driven by the economic health of the country as a whole, and the legacy of mismanagement in the defence budget in particular.

The transformation we are undertaking is challenging, probably the most complex change programme being undertaken anywhere in the western world at the current time.

The black hole that existed in the defence budget, the weakness of the equipment programme, and the shape of the country’s finances, have militated against simply bailing the budget out.

It would be hard to justify excluding the defence budget, the fifth largest call on the public purse, from the programme to exert fiscal control.

Balancing the books and creating a sustainable forward defence programme has meant reducing personnel numbers, retiring some capabilities, and taking some calculated and managed risks.

But as I told an audience in Washington last week, it is far better to have a smaller but well-equipped and well-trained force; with an equipment programme that offers a high level of confidence that we will deliver it; giving our armed forces the ability to plan for the future.

With the announcements I have made over the last couple of months on the defence budget, the equipment programme, army 2020 and the reserves we have put in place the vision set out in the SDSR of sustainable armed forces, equipped with some of the most capable and most technically advanced platforms in the world, configured to respond to the unexpected and to go anywhere to do it.

And we have also set out a blueprint for the reform of the management of defence:

Renewing the way strategic direction is provided;

Pushing authority and accountability down the chain of command;

Encouraging innovation and budgetary responsibility;

And developing a new strategy for the procurement of defence equipment.

Seeking to instil private sector skills and disciplines to our acquisition process, driving up productivity, by bringing a private sector partner into the process.

And creating clearer and harder relationships between the different functions in the defence procurement chain.

To read some of the comment in the media, often fuelled by retired officers whose view of the world was shaped in the Cold War era, you would think that Britain was getting out of the force projection business altogether.

Nothing could be further from the truth.

Even when this programme is complete, we will still expect to have the fourth largest defence budget in the world;

Exceeding the NATO standard of 2% of GDP;

Spending £160 billion on our equipment programme over the next 10 years;

Delivering the next generation of military technology and platforms that will help provide a battle-winning edge;

So this is the picture:

Smaller armed forces, but better equipped and confident that they will receive the equipment that has been promised;

Agile, high-tech, capable of conducting the full spectrum of operations;

Structured to allow rapid reaction and expeditionary warfare;

Able to deploy overseas and sustain a brigade-sized force indefinitely, or a division-sized force in time of need.

Able to command in the coalition context and more interoperable with our main allies;

Fully integrated between regular and reserves, with predictable obligations for the reservists that will require a real commitment to service;

And a more systematic use of contractors for support and logistics; allowing greater focus of military manpower on fighting tasks;

And, crucially, structured to be able to generate mass and capabilities if the threat picture changes or the fiscal position eases.

Conclusion

These are the British armed forces that some of you will be leading in, or for our partners overseas, the British armed forces you will be operating with.

And many of you who are from overseas will be seeing similar transformations in your own militaries over the next few years.

All of you are here because you have been identified as having the qualities needed for top level responsibilities.

You know that the moral component of leadership is one of the most important.

If this transformation is to be realised, and national and collective security to be guaranteed, you will need to be focussed, positive, full of ideas, prepared to change, to challenge convention, and willing to drive change in others, inspiring those around you.

And there is a challenge at a political level too, for people like me.

As Secretary of State, I have responsibility for defence but as a cabinet member, I have responsibility to look wider and help to balance national priorities.

When an immediate or existential threat shrinks, the public appetite to fund defence shrinks with it.

We are lucky in the UK, particularly compared to other European nations, that the public feels a strong affinity with our armed forces and has a greater inclination to give defence a higher priority than many of our neighbours.

But the legacy of Iraq and Afghanistan has undoubtedly left us a public which is without appetite for enduring campaigns.

And politicians need to think carefully about how we are going to maintain public support for defence spending in the years ahead;

Especially when more and more of the capabilities we are investing in will not be traditional military assets, and indeed will often be invisible to taxpayers.

There are many actions in hand to manage the transition from a period of enduring campaigns to one of contingent readiness; and I have described a few today.

But we have answered by no means all the questions:

Questions about the future focus of NATO;

About how we maximise the military effect that we get from limited budgets across the alliance;

About the balance of capabilities between traditional kinetic effect and investment in C4ISTAR, cyber and space;

About the type of warfare we need to prepare to fight;

And about the future of European defence industries in the face of rapidly changing export markets and shrinking domestic purchasing power.

These, and many other questions, will form the challenges that the next generation of military and political leaders will face over the coming years.

And I look forward to hearing your thoughts on them!