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The speech made by Alistair Darling, the then Chief Secretary to the Treasury, on 14 January 1998.

“OUR ECONOMIC APPROACH”

Introduction

UK Economy

The world has been transformed over the last few years.  We live in a global economy.  We are moving towards a single global economy in many respects.  Industries typically span geographical and political boundaries.  No country can go it alone, in economic terms.  Our objective is to ensure Britain is equipped to rise to the challenge of the world’s new and fast changing economies.

The key objective of our economic policy is to achieve high and stable levels of growth and employment, to allow everyone to share in higher living standards.

The need for stability

Over the past  forty years, our economy has had an unenviable history of boom and bust.  Stop-go has meant higher interest rates, less investment, fewer successful companies and lost jobs. It has been the inevitable result of a failure to take a long-term view, and to bow to short term pressures – political and economic.

The economy we inherited in May was in danger of over-heating, with unsustainable growth in demand and a threat of inflation rising well above its target.  And despite five years of upswing, public borrowing was too high for the point in the economic cycle.  The national debt doubled in the six years from 1990.  And at this stage of the cycle the we should not be adding to that problem.  This year alone the taxpayer will pay out 25 billion Pounds in interest payments on debt – more than we spend on our schools.

So we need to address the fundamental weaknesses in the economy. Instability, under-investment, the need to improve education and skills and the need for welfare reform – all of which have been neglected for too long.

In the eight months since we took office we have begun to put in place the building blocks we need:

• first, the need to achieve stability and to raise the  rate of sustainable growth;
• second, to increase productivity; and
• third the need to remove barriers to growth, invest in education and modernise the   welfare state, and tackle the need to expand markets.

In the short time since the election, we have begun to lay the foundations to secure Britain’s long-term economic future.

Openness and transparency

Stability will of course depend, to a large extent, on markets having confidence in the commitment of Government to prudent and sound management of the economy.  So economic policy must be open and transparent.  Openness builds confidence and credibility. It is essential in today’s global economy.

And in our fiscal and monetary policies, we have set out open and transparent frameworks that have clearly enhanced our credibility.

The Government will now publish a Pre-Budget consultation document each year setting out the economic issues we face.  Operational independence for the Bank of England.  The new code for fiscal stability.  All these measures add to openness and transparency, and will enhance credibility in our determination to look to the long term.

So the building blocks are there.  Firstly stability.

Stability

Long-term stability – in monetary and fiscal policies, low inflation and sound public finances – is an essential pre-condition for high levels of growth and employment.

Monetary policy

That is why one of our first acts in office was to establish a wholly new monetary policy framework for the UK.

This framework gives operational independence to the Bank of England for setting interest rates to meet the Government’s inflation target, while enhancing accountability and ensuring policy is conducted in an open way.  We now have one of the most open procedures for making monetary policies decisions in the world.  Since the new monetary framework was announced, long-term interest rates have fallen by more than a full percentage point, partly reflecting a fall in inflation expectations.  Clear evidence that anti-inflation credibility has been enhanced.

Fiscal policy

As with our approach to monetary policy, so in fiscal policy we have established clear rules, a new discipline, openness and accountability.

A key element of the new fiscal framework is the adoption of two strict fiscal rules:

• first, the golden rule, that on average over the economic cycle, the government will borrow only to finance its investment;
• and second that, as a proportion of national income, public debt will be held at a prudent and stable level on average over the cycle.

Our tough approach to public borrowing, embodied in a five-year deficit reduction plan, means, from public sector borrowing of 7 per cent of GDP four years ago, we are now set  to cut the deficit to 1 1/4 per cent in the current financial year and just 1/2 per cent next year.

And the new Code for Fiscal Stability will require the Government to produce estimates of the cyclically-adjusted fiscal position and long-term projections, so that past policy mistakes are not repeated.  We are determined not to repeat the mistakes of the late 1980s, where the signals were misread.  Over-optimistic assumptions led to an unsustainable boom, followed by one of the deepest recessions this country has ever seen.

We will maintain strict discipline in public spending, rooting out waste and inefficiency as part of the Comprehensive Spending Review.  This review will not only achieve discipline in the public finance but it will also set our spending priorities for the rest of this Parliament and beyond.

Together these tough fiscal rules, the deficit reduction plan and a root and branch review of public sector efficiency will ensure a break from the short-termism and expediency of the past.  And our fiscal policy will be more credible for being open and accountable and will ensure new long-term stability for the public finances.

Productivity

The second key challenge is to raise productivity.

Government and industry must work together to remove systematically all barriers to raising productivity:  in product markets through encouraging competition and innovation;  in capital markets through measures to enhance growth and investment, not least for innovative small businesses;  and in the workplace through encouraging the creativity and flexibility of inventors, managers and workforces.  We need to rediscover our capacity to invent and see that there is profitable production.

We are examining how, to improve productivity, we can help leading-edge businesses gain funds to develop new technologies; how we can improve Britain’s poor record of investment in research and development; and how we can make it easier for small businesses to draw on venture capital to create jobs and a more entrepreneurial culture.

We have taken measures to tackle long-term under-investment in both capacity and skills, including a cut in corporation tax to its lowest ever level.  We are determined to increase investment in education – the key to our future.

But we still need further structural reforms if we are to encourage a more dynamic economy through increased competition and through reforms in welfare and employment policy. We are committed to a wholesale modernisation of the welfare state.

Employment

And to achieve high and stable levels of growth and employment we must ensure that people are skilled and employable and making work pay.  Today sees further reports of skills shortages, which constrain our ability to expand.

We are addressing the obstacles that prevent people taking up and benefiting from work:

• the absence of marketable skills;
• the failure of the tax and benefits system to make work worthwhile;
• the poverty and unemployment traps that for far too many mean that work does not pay;
• the lack of employment opportunities;
• and the scarcity of affordable child care.

Reform to both the tax and benefit system is needed as part of the modernisation of the welfare state, that has remained largely unreformed since its foundation in the 1940s.

And the Government’s welfare to work initiative will get the young and long-term employed from welfare into work.

Since May we have made a start by announcing a New Deal worth almost 4 billion Pounds,  providing jobs for young unemployed, the long-term unemployed, and to lone parents [and the long-term sick and disabled].

Helping lone parents into work is one of the most effective long-term ways to tackle  family poverty.

We are also introducing a plan to extend out-of-school childcare clubs to every community in Britain.  Funds will be available to set-up as many as 30,000 new out-of-school clubs, which will provide places for nearly 1 million children.

Last week we launched the New Deal for the young and long-term unemployed. There will be 12 pathfinder projects to give those under the age of 25 and unemployed for more than 6 months the skills to get them back to work and give them the skills they need.

All these measures are focussed on getting the young and long-term unemployed from welfare to work.  And they are all part of our strategy to meet the challenge of increasing employment opportunities for all.

Europe

Key to our economic approach is our European strategy.  In October the Chancellor declared for the principle of the single currency.  There is no constitutional bar to entry.

But any decisions to join must be based on a hard headed assessment of the economic benefits of joining.  We must have satisfactory answers to these questions:

• would joining EMU create better conditions for firms making long-term decisions to invest in Britain?;
• how would our financial services be affected?;
• would there be sufficient convergence between economies so Britain could live comfortably with Euro interest  rates?;
• is our economy sufficiently flexible to deal with any emergent problems?;
• and will joining Europe promote higher growth, stability and a lasting increase in jobs?

On the basis of these fives tests, the Government has decided that it would not be in our economic interest to join in the first wave in 1999.  We need a settled period of convergence before we can make a decision on membership.

So we will join a single currency when and if it is in our economic interest.  But we believe there are potentially clear benefits for business and that is why we have begun making extensive preparations, helping and advising business with the euro.

Pay

The Government is taking the long term view. Our strategy is based around building a stable framework for fiscal and monetary policy, encouraging investment in our economic infrastructure, the education and skills of our workforce and rebuilding the welfare state around the work ethic.

The challenge is to steer a long-term course towards sustainable growth.  Where prosperity can increase year on year, where public finances can deliver the public services we want and need.

We have put the policies in place to bring this about.  But if we are to succeed we must maintain the strict discipline necessary to put the public finances on a sound footing and keep them there.

We are not going to repeat the mistakes of the past, where the economic signals were misunderstood and an unsustainable boom led to bust – with all the consequences that brought about.

Central to this aim is the need to ensure that pay increases are affordable right across the board, from boardroom to the shop floor, in both the public and private sectors.  People have to understand that to bring about long-term stable growth, pay increases must be fair and affordable.

For its part, the Government will be applying these principles to public sector pay.  We are determined to deliver long-term growth and prosperity.  It is essential, if we are to succeed in rebuilding this country and increasing prosperity for all the people in a sustainable way.

Conclusion

We are governing for the long term.  The building blocks are being put in place to bring the long term prosperity we all want to see.  This means we have to take tough decisions now.  But it is right that on pay, as with every other issue, we avoid measures that bring short term gain but long term pain.  This is the approach the British people expect of us.  It is what we promised at the election.  And we are delivering on our promises.