Category: Economy

The speech made by Gordon Brown, the then Chancellor of the Exchequer, on 15 May 2000.

Our Children Are Our Future

Let me begin by paying tribute to the work of the Child Poverty Action Group:

born thirty five years ago as the family poverty group out of anger and outrage about poverty;
built by the dedicated commitment of volunteers who had a vision of the world not as it was but as it could be;
now a nationwide crusade for justice for the poor, with an established and well deserved reputation for advocacy and for authoritative research – that every day shines a spotlight on the needs and potential of our country’s children.

So I want today at the outset to congratulate all of you – staff, members, supporters, campaigners – on your thirty five year long crusade to end the scourge and tragedy of child poverty in our society.

You should take pride that your concern – child poverty – and your driving ambition – the eradication of child poverty – once written off as the goal of dreamers, for many years a call for justice unheard in a political wilderness – is the ambition not just of your organisation but now the ambition of this country’s Government.

Action on child poverty is the obligation this generation owes to the next: to millions of children who should not be growing up in poverty: children who because of poverty, deprivation and the lack of opportunity have been destined to fail even before their life’s journey has begun, children for whom we know – unless we act – life will never be fair. Children in deprived areas who need, deserve and must have a government on their side, a government committed to and fighting for social justice.

And we must never forget that poverty – above all the poverty of children – disfigures not just the lives of the poor but all our society.

Exactly one hundred years ago in 1900 the consequences of gross inequalities in childhood health were revealed by mass recruitment to the army for the Boer War.

Today as we tackle global competition in the new economy, the glaring inequalities in educational opportunity and skills make it once again central to our national interest to tackle child poverty.

Indeed in the new century economies that work for only the privileged few and not for everyone will ossify and their societies will become ever more divided and poor if they fail to encourage the latent potential of all their children.

Our five year olds who will finish school after 2010 and graduate from university and college after 2015 will be our teachers, our doctors and our scientists, our employers and our workforces. The future of our country lies with the hopes and dreams of these children.

In the old economy of the past, of the industrial age, where brawn counted more than brain, we could get away with investing only in some of the potential of some of our children. But in the new economy, which depends on knowledge, ingenuity and innovation, on mobilising the talents of all – getting the best out of everyone – it is essential to develop all the potential of all of our children. In other words policies for the good economy and the good society go together. We do well by doing good

But we recognise that for many children , that means special support, a government that fights on their behalf. We know that a child who grows up in a poor family is less likely to reach his or her full potential, less likely to stay on at school, or even attend school regularly, less likely to get qualifications ands go to college, more likely to be trapped in the worst job or no job at all, more likely to reproduce the cycle of deprivation in childhood, exclusion in youth and disappointment – that is life long.

We need to understand that these children are not just someone else’s children and someone else’s problem – they are the children of our country, the children of us all. And if we do not find it within ourselves to pay attention to them as young children today, they may force us to pay attention to them as troubled adults tomorrow.

So it must be the government’s objective to ensure that no child will go without help, that every child is included, that every child will have the chance to make the best of their lives, that we will never allow another generation of children to be discarded.

That is why since we came into power we have been determined to do more to help those left behind.

You would expect me as Chancellor to talk about money and I am happy to do that.

Between 1997 and 2001 for the family with one child, child benefit will have risen by £4.45 – 26 per cent above inflation.

For a low paid working family with one child under 11, the maximum amount of financial support for children will have risen by £26.90 – 97 per cent above inflation.

Many of our poorest families are now £50 a week better off.

Our priority has been to do most for the children that need most.

By next year compared to 1997 we will be investing an additional £7,000 million pounds a year in children’s financial support

The poorest 20 per cent of families receive not 20 per cent of that additional money but almost 50 per cent.

As a result we have taken more than one million children out of poverty.

The next step, is to take the second million out of poverty. And this will be a commitment of our next Election Manifesto as we meet our goal of reducing child poverty by half in 10 years and abolishing it in a generation.

So today I want to set out in detail our five point plan, a plan based on:

increased financial support;
a national child care strategy;
new investment in education;
special help in the poorest communities.

All guaranteed by a new alliance for children – local and national government working together with community and voluntary organisations with one common goal, the best possible start in life for every child.

Equality of opportunity

Let me summarise the philosophy that inspires our work.

Our starting point is a fundamental belief in the equal worth of every human being, and our duty to help each and everyone develop their potential to the full: for all children and all adults —-to help them bridge the gap between what they are and what they have it in themselves to become.

And if we are to allow all as individuals to develop that potential which exists within them, it is clear that as a society we must develop a more generous view of equality of opportunity than the old idea of a one-off equality of opportunity up till age 16.

Four years ago in the Smith Lecture, and subsequently in the Crosland Lecture in 1997, I outlined our commitment to equality of opportunity and fairness of outcome, a new view of equality that must be more than the old idea of a single chance to get your foot on a narrow ladder, one opportunity at school till 16, followed by an opportunity for 20 per cent to go into higher education. And for millions of people in Britain it has meant that if you missed that chance it was gone forever.

That was not equal opportunity, only the opportunity to become unequal: based on an old view that intelligence – or potential – was a fixed quantity, something given in limited measure in the genetic make-up of the new-born child.

But neither potential nor intelligence can be reduced to a single number in an iq test taken at the age of 11. And we now know that people cannot be ranked in a single hierarchy, or their talent regarded as fixed.

So people should not be written off at birth, 7, 11 or 16 or indeed at any time in their life. It is simply a denial of any belief in equality of opportunity if we assume that there is one type of intelligence, one means of assessing it, only one time when it should be assessed and only one chance of succeeding.

But we have still to act on the consequence of recognising these facts: that people have a richness and diversity of potential, that their talents take many forms – not just analytical intelligence but skills in communication, language, and working with other people – and that these talents can develop over a lifetime.

So, as I set out in the smith and Crosland lectures, I favour a rich and expansive view of equality of opportunity – with a duty on government in education, in employment and in the economy as a whole to continuously and relentlessly promote opportunity not just for some of the people some of the time but opportunity for all of the people all of the time.

And as I have already suggested what is right on ethical grounds is good for the economy too. In the industrial age, the denial of opportunity offended many people but was not necessarily a barrier to the success of the economy.

Today, in an economy where skills are the essential means of production, the denial of opportunity has become an unacceptable inefficiency and brake on prosperity.

In our information-age economy, the most important resource of a firm or a country is not its raw materials, or a favourable geographical location, but the skills, the talents and the potential of the whole workforce.

Indeed what matters most in the new economy is not what a company has as assets in its balance sheet, its physical capital, but what assets it has in the talent in its workforce. Its human capital.

So even if we could not persuade some to support action against, for example, child poverty for reasons of social justice, these people should now be driven to support action against child poverty for economic reasons.

For full prosperity for a company or country can only be delivered –and Britain properly equipped for the future —if we get the best out of all people – developing the full potential of all our young people, and that cannot happen without continuous and accessible equality of opportunity.

And this means that we must break down all the old barriers that in Britain hold people back and deny opportunity. Too often in the old Britain – the old Britain characterised by the old school tie and the old boy network – what counted was the privilege you were born to when what should have counted was the potential you were born with

What mattered too often was where you came from when what should have mattered was what you aspired to.

What was valued was often the connections you had when what should have been valued was the contribution you might make.

What was rewarded in the old Britain was too often background, class, inheritance, when it should have been merit, effort and contribution to the community.

So in the interests of opportunities for all our children and the health of our economy, I want Britain to move from the closed society it has been to the open society it can become.

From elitism in education to excellence that is accessible to all.

From enterprise too often confined to a closed circle of that elite to enterprise opened up to all.

From entrenched privileges for the few that disadvantaged the many to opportunity for all that benefits the whole country.

And once we take this view that what matters on both ethical and economic grounds is genuinely equal opportunities to realise potential, we are challenged not only to remove barriers of class, race, sex and other discrimination, but to positively shape and implement policies that will equalise opportunities for all. And in each case there must be a permanent duty on government not only to actively seek this objective, but to set out our national economic goals, as we have done, to achieve this.

Let us recall that in 1942 – 58 years ago – Sir William Beveridge identified five evils – ignorance, squalor, want and idleness, and disease which a new welfare state had to confront. He wrote about:

“An attack upon five giant evils – upon the physical want with which it is directly concerned, upon disease which often causes that want, and brings other troubles in its train, upon ignorance which no democracy can afford among its citizens, upon squalor … upon idleness which destroys wealth and corrupts men.”

Our goal today must be even more ambitious than the one Beveridge set us when he attacked these five giant evils.

In each of the areas he defined we must move forward from the Beveridge policies for subsistence and minimum standards to modern policies for maximum opportunity and fulfilment.

Instead of just securing freedom from want – sufficiency and minimum standards, our goal is prosperity for all, that by 2010 by committing ourselves to achieve a faster rise in productivity than our competitors and thus a faster rise in living standards, we can spread the benefits of prosperity to everyone. In this way economic stability and growth can be the foundation for social justice.

Second, instead of simply attacking unemployment, the goal of full and fulfilling employment; that by 2010 by opening employment opportunity to all, with a permanent duty on government to pursue this objective, we can have more in work than ever before.

Instead of simply attacking ignorance the goal of lifelong education for all; that by 2010 by expanding educational opportunity we achieve permanent recurrent or lifelong education – for any course, any study, any age – and fully extend educational opportunity to all so that no one is written off.

Instead of simply tackling disease, not just an NHS there when you need it but health and social policies that can prevent as well as cure disease and promote good health

And – what I want to concentrate on today -the fifth goal policies that will ensure the best possible start in life for every child.

But with this commitment to new opportunities and new rights comes also new obligations and new responsibilities upon all of us.

And I believe that as advocates for this coming decade of economic and social renewal we should reclaim not only the value of fairness, as we root out economic and social injustice but we should affirm the value of personal responsibility.

In the past we correctly accused the right of concentrating exclusively on individual responsibility and refusing to recognise social injustice – a neat device that allowed them to blame the victim, and abandon the poor.

But in the past as the left correctly called for social justice, we were accused of underestimating the importance of personal responsibility.

Indeed it was because we were caricatured as advocating rights without responsibilities that we were vulnerable to the attack of the right and their revolt against collective action, to the right’s dogma that individuals – even children – should be left to their destiny, that the state should stand aside if not wither away and that there was no such thing as society.

Now with our understanding that individual responsibility matters within a responsible society the argument of the right has fallen . And the way is open for that responsible society to draw support from the public as we tackle the structural injustices that exist. So just as our commitment to responsibility means that governments should not seek to substitute for but should support stable intact families, so too our commitment to social justice means that communities and governments must play their part in strengthening the capacity of parents to raise children, helping people struggling to balance work and families and tackling child poverty.

And to tackle child poverty we will first provide increased financial support for families.

Second, we will offer new help for parents in a national child care strategy.

Third, we will invest more in education and strengthen our schools.

Fourth, in areas of need, we will expand ‘Sure Start’ help – and help for children of all ages most at risk – by investing more in education, health and services to tackle the causes of poverty and we will do so by encouraging local action

Fifth, starting with our new children’s fund, a new alliance for children bringing together national and local government and voluntary and community groups.

First, improved financial provision.

Tragically, children have suffered most from the increases in poverty and inequality in our country.

In the last twenty years

The numbers of children in low income households rose sharply from 10 per cent to a shameful 34 per cent and the number of children in poor families tripled.

The evidence shows that financial support is essential to help counteract the disadvantages many children inherit from their background.

So when we came to power we inherited a child benefit of £11.05.

By next year it will be £15.50.

Even after inflation a rise of 26 per cent.

Child benefit is the country’s contribution to the investment in all our children. And that is why our plans for an integrated and seamless system of child support build on the foundation of universal child benefit.

Let me explain the building blocks.

On top of child benefit a new children’s tax credit is being introduced from 2001 giving an extra £8 a week to most families.

So the family with one child which received £11 a week in child benefit when this government came to power will, from next year, get £23 a week in child benefit and the children’s tax credit – double the level of child support we inherited.

For the poorest families with young children, income support for each child under 11, which was £16.90 when we came to office, is now £30.95 – almost twice as much.

But at the heart of this new approach is the working families tax credit which guarantees a minimum family income of over £200 a week, with no income tax before earnings of £235.

Working 35 hours at the minimum wage a family will receive around £85 more in work than on income support from April 2001, making work pay and freeing children from poverty.

Following our successful campaign to promote awareness of the working families tax credit, to which there have been 3 million enquiries so far, there are already over 1 million families receiving the working families tax credit.

By concentrating in our modern family policy on children, we are giving lower and middle income families help when they need it most – when they are bringing up their children.

The working families tax credit has been designed not just to help people into work but to help people move up the jobs ladder and into higher incomes.

The starting wage for the unemployed man or woman returning to work is typically only two thirds of the average hourly rate.

Under the old system of family credit, over 700,000 people faced marginal tax and benefit withdrawal rates of over 70%, now the WFTC has cut this figure by two thirds, helping people keep more of every extra pound they earn.

And by offering the chance to get higher skills and qualifications, the key to securing better wages and thus a further reduction in child poverty, we will expand the ladder of opportunity for families. From this summer, every adult in Britain will be able to open an individual learning account, and from this autumn study in the university for industry. The opportunity to secure or improve skills on the route to better jobs.

So we are not only using the benefit and tax system to help families with children and ensure work pays, but creating a family friendly tax system that no longer penalises effort but encourages it.

But we can do more.

Today there are four different payments for children.

A single seamless system, without disruptions in financial support, will provide a more secure income for families with children.

That is why we will introduce, starting in 2003, a new integrated child credit bringing together the children’s tax credit with the child premiums in income support and the working families tax credit. This will allow families? entitlement to income-related child payments to be assessed and paid on a common basis.

So instead of the three different income-related payments that we see today, there will a single income- related payment on top of child benefit.

When we came into power payments to children ranged from £11.05 to £28.

Under our new system if implemented in the coming year payments for children would range from not £11.05 but £15, and from that £15 to not £28 but £50.

A seamless system that dependent on need provides weekly support from £15 to £50.

And this single system will do more to help families in their transition from welfare to work.

Such an integrated credit, for those in and out of work, will be paid to the main carer, and it will be complemented for those in work by an employment tax credit paid through the wage packet.

In this way, we extend the principle of the working families tax credit – meeting its objectives of making work pay and supporting children – with the new employment tax credit and the integrated child credit together.

And as we develop policy over the coming years, there are other advances to be made and issues which need to be addressed: the issue of housing costs for the low-paid, the way housing benefit interacts with the tax and benefit system, poverty amongst larger families and poverty amongst families with just one part-time worker.

Children in lone parent households make up 50 percent of those in poverty, although they contain only a fifth of all children. In total, one and a half million children live in workless lone parent families on benefit.

And half of these children are over 5 years old and at school.

But while the lone mother rate of employment in the UK is only 45%, in the us it is nearly 70% and in France in excess of 80%.

If we were to reach international levels of work rates for single parents, 700,000 children could be lifted out of poverty.

Research shows that most lone parents would like to combine paid work with the vital job of being a parent.

However they face real barriers to doing so.

We have already begun to tackle these barriers, including by making work pay.

But those who work with lone parents – and lone parents themselves – have called on us to ease the transition between income support and paid work.

So to increase the choices available to lone parents we will, starting nationally from next April, offer choices to lone parents attending work-focussed interviews:

the choice to train for work with a new cash payment of £15 a week on top of benefits for training;
the choice of a few hours work a week, with the first £20 of earnings allowed with no reduction in benefit;
the choice of part-time work with a guaranteed £155 for 16 hours of work;
or the choice of full-time work on a guaranteed £214 a week;
and on every rung of this ladder of opportunity there will be help with child care.

And with the working families tax credit, we are guaranteeing that lone parents working 20 hours or more with small families or young children will be above the poverty line even after rent is paid. This is helped by the decision to disregard child maintenance completely when calculating lone parents working families tax credit.

Because we recognise that the time of transition from benefits to employment can be difficult, lone parents will benefit from a two week extension of income support payments on entering employment and a four week extension of housing benefit.

These transitional payments worth an average of £300- £400 will help to address the problem of financial uncertainty and make the move from welfare to work easier.

Childcare

And this government is not simply enabling parents to work, gain skills or study, but with the national childcare strategy, it is now possible for their children to be properly cared for if they are at work – in quality, affordable childcare.

Over the coming years high quality child care places will be created for one million children, giving a real chance for work for many parents.

For many children the hours between 4 and 6 are the most perilous hours and we should offer safe and engaging activities. In some cases this will mean keeping schools open longer.

The working families tax credit also helps to overcome the lack of access to high-quality, affordable childcare.

The family credit childcare disregard introduced in 1994 helped just 40,000 families.

While the childcare disregard provided no help to parents on the lowest incomes, the new childcare tax credit provides maximum help to lower-paid parents – up to £70 of help for families with one child and up to £105 for families with two or more children in qualifying childcare.

This is a sign of the government’s recognition that childcare costs impose a significant financial burden and it is important for our economy and our society that women and men in these families do not face significant disincentives to work.

Within six months of the introduction of the WFTC, 100,000 parents are taking up the childcare tax credit.

But children are often the most at risk in our society and we must further develop a continuum of child care which will protect, educate and stimulate our children, taking into consideration their social, health and emotional needs.

Education

Of course the best education standards are essential if we are to tackle inequalities in educational opportunity and give every child the best possible start in life and we must do so by not only insisting on established standards but by using the newest technology. That is why – working with local authorities – already we are investing an additional 2.5 billion pounds in schools this year, driving up the standards of the poorest to the best, why we have guaranteed nursery education for all four year olds and are expanding nursery education for three year olds – increasing from 34 per cent to 66 per cent the proportion who have access to free places by 2002.

That is why we have targeted lower class sizes for 5-7 year olds in primary schools, why it matters that there are significant improvements in reading, writing and maths, why David Blunkett will step up this drive for literacy and numeracy, with extra money for books, equipment and staffing in every one of our primary schools, and why in the comprehensive spending review,

We will announce further measures to drive up standards – giving every child the best start in life.

And it is why we put a special premium on ensuring equal access to the new computer technologies, by ensuring all schools are wired up to the Internet, by opening up computer learning centres in the poorest communities for teenagers, by our programme of loaning initially 100,000 computers to families who need them and by our new incentives for computer learning.

Sure Start

A strategy for employment and educational opportunity must go hand in hand with a strategy of counteracting disadvantage from the start of a child’s Life.

People rightly ask what opportunity is there for young children if they are left crippled and yards behind right at the start of the race of life and rightly demand that we broaden the circle of opportunity to include everyone.

Now that there is overwhelming evidence that the first three years of a child’s life are critical to their personal development and can have a lifelong impact on a child’s intellectual and emotional well-being, we must act, we want to ensure that every child is ready to learn when they are ready to go to school.

Sure Start is a new programme pioneering a co- ordinated approach to services for families with young children aged 0 to 3, tackling the causes of poverty – lack of educational opportunity, lack of parental support, lack of health advice by adopting an integrated approach to childcare, early education and play, health services and family support.

By allocating £450 million over three years to ensure that every child is ready to learn when they begin school, we will spend on average almost 1,000 more per child per year.

The 60 trailblazer areas – and 57 programmes —are based on real communities, from the smallest with just 350 children to the largest with 1500

With 69 areas selected for the second wave and then a third wave planned, we will by 2002 have established 250 local programmes, reaching almost 20 per cent of poor children under four.

And because we recognise the need to provide help where it is most needed special support will go to teenage parents, who are often as vulnerable as the children they are raising.

But let us be clear about the radicalism of the new proposal.

Sure Start brings a principle into action for the first time for many years – that services for the under-fives not only involve voluntary and charitable action at a local level but can be run locally through and by them.

And by learning from what works and from each other, we will spread the best practice as we move forward.

And just as we are tackling the causes of poverty through Sure Start for the under 4s, so we are now examining services to children of all ages where we want to back local initiatives such as the initiatives in mentoring of young people.

Children’s fund

So the new relationship between individual, community and government involves real devolution of power from national government to communities.

The proposed new children’s fund extends this principle.

Helping children, ensuring that they have the best start in life and the best opportunities in their futures, is not merely about improving their family income but about shared social responsibility.

We know child poverty cannot be removed by the action of government alone.

But by government working with parents, voluntary, charitable and community organisations.

And to meet this challenge and provide security for all our children, we must all accept our responsibilities – as parents, neighbours, citizens and community leaders.

At the centre of my vision of British society is a simple truth: not the individual glorying in isolation, sufficient unto himself, stranded or striving on his own, but the individual and family as part of a caring neighbourhood, a supportive community and a social network.

And in this vision of society there is a sense of belonging that goes outwards beyond the front door or the garden gate, a sense of belonging that expands outwards as we grow – from family, out to friends and neighbourhood – play groups and after school groups, children’s and youth organisations, trade unions, sports, community and religious organisations, voluntary organisations, local authorities – a sense of belonging that then ripples outwards again from work, school, and local community – and eventually outwards to far beyond our home town and region – to define our nation, our state and our country as a society.

This is my idea of Britain – because there is such a thing as society – a community of communities, tens of thousands of local neighbourhood civic associations, unions, charity and voluntary organisations, each one unique and every one special.

A Britain energised by a million centres of action and compassion, of concern and initiative that together embody a very British idea – that of civic society. And at the heart of our civic responsibilities is our duty that every child has the best start in life.

This is the thinking behind the new children’s fund

It will encourage local initiatives and community action in the war against child poverty.

It will offer government money to back non-government initiatives to tackle child poverty.

It will involve both the biggest voluntary and community organisations and the smallest.

It will support anti-poverty projects for children of all ages.

Its emphasis will be on prevention not simply coping with failure.

And it will operate not just at a national but also at a local level.

The network of local children’s funds – perhaps up to 50 – that we plan to establish will be designed to mobilise the forces of compassion and care in every community in our country, supporting the most innovative local solutions, meeting children’s aspirations and needs.

And at the national level, we will seek to build a new alliance for children.

An alliance of government, community organisations, voluntary and charitable sector, parents – all those who share the ambition, your ambition, of ending child poverty in our country and ensuring every child has the best start in life.

It is a movement based on faith in the future, a crusade for nothing less than the kind of society our children will inherit.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, in London on 15 June 2000.

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

In thanking you for your invitation to speak at this evening’s Lord Mayor’s dinner to the bankers and merchants of the City of London, the first in a new century, let me at the outset pay tribute to the work the City of London does, the contribution you as representatives of the financial and business sector make to the British economy and the difference you make – a financial services sector that accounts for one pound in every 16 of our national income, employs over 1 million people, and is second to none in the world.

Just as the City of London achieved its pre-eminence over the centuries by meeting again and again the challenges posed by economic change at home and abroad, you can take pride in the fact that by putting to work enduring British qualities – our creativity, our enterprise, our belief in duty and fair play, and our openness to the world – we are a leader in Europe and the world:

the London Stock Exchange, the largest trading centre for foreign equities in the world;
the Foreign Exchange Market – with a daily turnover of over 600 billion dollars – the largest and most important in the world.
And amidst the new developments this year – the introduction of new technologies, the proposed merger between the London Stock Exchange and Deutsche Borse, the Royal Assent this week for the Financial Services and Markets Act and the new Authority under Howard Davies’ leadership – we see in practice the City’s continued ability to respond to and master change.

And this is my theme tonight: that having as a country found a new strength to take the tough decisions to create economic stability, we in Britain must find the same strength to make the reforms in our labour, capital and product markets that are essential to higher productivity and thus greater prosperity for our country.

Stability

When I first spoke to you three years ago in June 1997, I spoke of our resolution to achieve monetary and fiscal stability, as the only sound platform for prosperity.

In today’s global economy, no nation can secure the sustainable investment it needs unless its economy is built on the rock of stability.

In Britain I saw – as you saw – the past instability caused by inconsistent rules, ever changing targets, ad hoc haphazard and often over-politicised decision-making procedures and lack of transparency.

Our new economic approach sought to learn from past mistakes, is founded on stability, is designed to make sense of the new world of liberalised financial markets and, while often characterised as simply Bank of England independence, it is in fact built upon four propositions.

Because there is no long-term trade-off between inflation and unemployment, the first lesson we have learned is the management of demand alone will not deliver high and stable levels of employment.

In global capital markets there is little scope for the national fine-tuning of the past which tried to exploit that supposed long-term trade-off between inflation and unemployment. It leads us to reject short-termist dashes for growth.

But equally in today’s de-regulated, liberalised financial markets, national governments cannot deliver stability by using flawed intermediate policy rules relating money demand and inflation.

So the second lesson we have learned is that monetary rules that assume a fixed relationship between money and inflation do not produce reliable targets for policy and do not deliver the stability we seek.

But the alternative should not be a return to discretion without rules.

The answer is not ‘no rules’, but the right rules. So the third lesson to learn is that in an open economy, the discretion necessary for effective economic policy is possible only within a monetary and fiscal framework that commands market credibility and public trust.

The fourth lesson follows from this: that credibility depends upon clearly defined long-term policy objectives, clear and accountable divisions of responsibility, and maximum openness and transparency .

So in Britain we have set clear policy objectives:

in our case, price stability through a symmetrical inflation target and sustainable public finances through applying the golden rule that over the economic cycle revenues should cover consumption – in other words a balanced current budget – combined with a prudent approach to public debt.
Second, well-understood and consistent rules of procedure for monetary and fiscal policy-making:

in our case, a new system of monetary policy-making, at the heart of which is the independence of the Bank of England, and the open letter system between Governor and Chancellor. And an equivalent and equally important set of fiscal procedures legally enshrined in the Code for Fiscal Stability.

Third, openness, accountability and transparency to keep markets and the public properly informed and to ensure that objectives and institutions are not only credible but seen to be credible:

in our case, an open system of decision-making in monetary policy through the publication of minutes, a well understood system of voting and full reporting to parliament; and in fiscal policy an open and transparent system under which Government allows its actions to be subject to full scrutiny, and ensures that key fiscal assumptions are independently audited.
Similar lessons have been learned in Europe where a similar approach with the same objective, to achieve monetary and fiscal stability, is being pursued.

In the euro area, there is a similar recognition that the old fine-tuning cannot work, a similar understanding that in liberalised markets rigid monetary targets cannot, on their own, deliver stability, a similar insight that the discretion necessary for effective economic policy is possible only within a framework that commands market credibility and public trust; and growing agreement that credibility depends upon clearly defined long-term policy objectives.

Hence in the euro area the pre-commitment to low inflation and fiscal discipline where inflation has been effectively brought down in the 1990’s from 4.4 per cent to 1.3 per cent and borrowing successfully cut from 5.5 per cent of national income to 1.2 per cent.

Hence also central bank independence and the terms of the stability and growth pact; and hence too the growth of an open process of multilateral surveillance within Europe involving peer review.

As I said to the House of Lords Select Committee in January last year “the issues of transparency in decision making, which we dealt with in our reform of the Bank of England, and the symmetry of the inflation target, which have proved to be central to the success of the United Kingdom’s new monetary framework, will also be issues for future debate in Europe.”

Mr Mayor,

I said in October 1997 that in principle “the potential benefits of a successful single currency are obvious- in terms of trade, transparency of costs and currency stability” . As the Secretary for Trade has said, 50 per cent of trade is now with the euro area, and the UK and euro areas are each others largest trade and investment partners.

In 1997 I also said that the Government had resolved the question of principle. While we recognise the constitutional issue as a factor in the decision, we do not consider it a bar to entry if there is clear and unambiguous evidence of the economic benefits of joining, and if the people had the final say in a referendum.

The 1997 Statement also set five economic tests which are the necessary economic pre-requisites for membership of a successful currency union. The tests, for which this Government and this Treasury is the guardian, are real:

first, sustainable convergence between Britain and the economies of a single currency;
second, whether there is sufficient flexibility to cope with economic change;
third, the effect on investment;
fourth, the impact on our financial services industry; and
fifth, whether it is good for employment.
We are committed early in the next Parliament to making an economic assessment of the case for British membership, based on these tests.

In pursuit of this strategy , to prepare and then decide, we published earlier this year our second National Changeover Plan, having introduced new legislation to ensure departmental preparations. It is a measure of our commitment to an open process of preparations that we have a euro standing committee with business and the City and are in regular contact with business in every region, to discuss preparations and how these can be made in the most stable way. The policy of ‘prepare and decide’ will continue to be implemented in full consultation with business and the City.

There are those who would refuse to join the euro on principle. They would refuse to join even if the economic tests showed it to be in the national economic interest to do so. That is not our position. As the Government statement said in October 1997, a successful single currency “would help us create the conditions for higher and more productive investment in Britain and far greater trade and business in Europe”.

Some opponents allege that we intend to fudge the tests, that our intention is to join as quickly as we can get away with, irrespective of whether there is the sustainable convergence we need , and thus the tests are merely a political and tactical device to disguise what is a hidden agenda.

I reject this view. As the Prime Minister has said, the tests must be met. We cannot pre-judge the five economic tests. To do so before we have secured sustainable convergence would risk repeating past failures, mistaking exchange rate stability for stability across the economy and prejudicing our commitment to move Britain from the instabilities of a stop-go economy to greater long-term stability.

The Government will not agree to a short-termist approach that would put at risk economic stability or the discipline that has created sustained growth, rising investment and over 900,000 jobs since 1997.

So the policy that the five economic tests must be met, and that the people would have the final say, the policy set out in October 1997, repeated by the Prime Minister in February 1999, has not changed and will not change.

I understand the recent difficulties that the sterling-euro exchange rate has caused and I welcome the positive response of manufacturing which has increased productivity by 5 per cent over the past year.

But the policies which I am sometimes asked to follow to bring the exchange rate down or even to set an exchange rate target alongside the inflation rate target would today risk the very outcome all of you want to avoid – a return to stop-go.

We are determined to avoid repeating past economic instability caused by the succession of ever-changing targets – not just the money targets we saw in the early 1980’s but the dual exchange rate and inflation targets of the late 1980’s and early 1990’s. In these years, the then Government chose in succession £m3, m1, then m0 , then when these failed shadowing the Deutschmark, then the exchange rate mechanism, as the economy moved from one stop-go cycle to another.

Under the Bank of England legislation, I write a formal letter every year to the Governor to set a target for the Bank of England.

This I did last month. The objective of British monetary policy today is – and remains – clear and unambiguous – to meet a symmetric inflation target at 2.5 per cent with inflation outcomes below target viewed just as seriously as outcomes above target.

For an economy that has been laid low too often by violent stop-go cycles, that long-term stability must come first and must be entrenched across the whole economy.

Pre-emptive action by the Bank of England – under the wise leadership of Eddie George and I thank also the two retiring members William Buiter and Charles Goodhart for their work on the committee- has allowed us both to meet our inflation target and sustain growth. And because this is what I want us to continue to do, we will support our monetary authorities in the difficult decisions they have to take to ensure that we meet the inflation target and sustain high and stable levels of growth and employment.

And already we are seeing here in Britain the rewards of creating Bank of England independence and tough fiscal rules.

This week’s latest figures confirm this.

For the third year running inflation is this year in line with our target and is at historically low levels. We will continue to achieve low inflation. And our forecast is that the economy will grow steadily – by between 2.75 and 3.25 per cent this year, with growth forecast to be 2.25 – 2.75 per cent next year and the year after.

Long-term interest rates – once 2 per cent or more above Germany’s – are now at the level of Germany, showing that people have confidence in a low inflation future for Britain, enabling businesses to plan for the longer term with greater confidence.

And having imposed new fiscal disciplines, we have cut borrowing by over £40 billion in our first three years and we are on course to meet our two strict fiscal rules.

And it is because we sought to learn from the political mistakes of the last forty years that this Government will maintain its prudent and tough approach. The figures I announced in the Budget mean that we will meet our fiscal rules over the cycle. Indeed that we will meet our fiscal rules even in the most cautious case, on the most cautious assumptions, including the most cautious view of trend growth at 2.25 per cent.

And as I announced in the Budget, I have decided to lock in a greater fiscal tightening this year and next year than we promised in last year’s Budget and Pre-Budget report.

We are therefore able to repay debt – last year 18 billion pounds, this year 6 billion pounds, and next year 5 billion pounds.

And in deploying the proceeds of our auction of the spectrum which raised £22 billion we will – as I have announced this week – reduce debt and debt interest payments and in doing so proceed with proper prudence and utmost caution.

The same toughness and discipline we have shown in the last three years will continue in the coming years.

Indeed it is only by building from a platform of stability and meeting our tough fiscal rules, that we will be able to deliver both stable growth and investment in public services.

And it is from this platform of monetary and fiscal discipline that you have been able to create 100,000 more small businesses employing people, from 1.2 million to 1.3 million, with last year 7 billion pounds more in business investment and 12 billion pounds more inward investment into the United Kingdom.

And as a Government, we are determined to continue to back your efforts as businesses by maintaining our disciplined approach.

Productivity

Stability is of course even more important because Britain, like almost every major industrialised country, is in the midst of a period of restructuring of our economy.

We know that increasingly every product and almost every service will be exposed to global competition, and we know also that continuous and rapid innovation in our technologies will compel unprecedented flexibility and adaptability in skills and knowledge.

The innovation-rich economy will require an opportunity-rich society.

So this is not a time for complacency, not a time to pause, not a time to relax our efforts.

To those urging us to slow the pace of change, or simply stick to the old ways, whether it be old labour market policies, old attitudes to enterprise or old approaches to competition, I reply that if we slow the pace of change we will fall behind our competitors.

Britain cannot assume either that the new information technologies will automatically bring the higher productivity growth now seen in the United States.

To equip ourselves best to meet and master these challenges, we need as a country to raise our game.

We have some of the greatest companies, some world class sectors, some global champions, many represented here this evening, in whom we do and should take pride, and once again we have record levels of inward investment in our country.

But over the last 50 years, productivity growth in Britain has been just over two and a half per cent a year, compared to between three and a half per cent and four per cent among our main European competitors.

In recent times productivity has been increasing – especially in manufacturing, where we have seen a 5 per cent growth in the last year – but the increase is not fast enough.

Meeting the productivity challenge – closing the gap with our competitors – must be the priority over the next few years.

Only with rising productivity can we meet people’s long-term expectations for rising standards of living without causing inflation or unemployment.

It makes it all the more important that stage by stage, continuing with the Pre-Budget report and the next Budget, we remove the barriers to enterprise, investment and productivity growth.

Let me give one illustration for this more general point.

When we came into Government and cut the long-term rate of capital gains tax for business assets held for ten years or more, capital gains tax had been fixed at 40 per cent for almost ten years.

Amidst all the other priorities, we decided that long-term investment and enterprise would benefit from radical change, so this April we cut capital gains rates for business assets from 40 per cent to 20 per cent after three years; and to 10 per cent after four years.

Having made these decisions, I also looked at what I could do to recognize the importance of investors in small and medium sized companies, and business angels – and to the growing numbers of Britain’s unquoted companies. Now they will benefit for the first time from a cut from 40p to 10p after four years.

But just as we have reformed and cut capital gains tax we have reformed and cut the main rate of corporation tax from 33p to 30p, making ours the lowest rate in the history of UK corporation tax, the lowest of all major industrialised countries.

And we are determined to build on our lower corporate tax rates and the interest relief we give on investment overseas and make Britain an increasingly attractive environment for multinational companies.

Our new enterprise management incentive scheme is also designed for the future, for emerging hi-tech companies. To motivate, recruit and reward Britain’s real risk takers, growing hi-tech firms recruiting essential personnel are now able able to offer share option incentives of 100,000 pounds for up to 15 employees. And we have made a change in work permit rules to enable key information technology employees and businessmen and women to be attracted to Britain.

It is now well understood also that two thirds of growth is the result of innovation. Not only therefore does our new research and development tax credit support nearly a quarter of new investment in small and medium-sized business research and development, but with our 1.4 billion investment in science, our new University Challenge funds, and our eight Centres of Enterprise around the UK, we are honouring the spirit of British invention, and encouraging the commercialisation of invention.

And to make Britain the best environment for e-commerce and catch up with America as swiftly as possible, we are introducing 100 per cent allowances for the next three years for any small business buying computers, or investing in e-commerce and new information technology.

We know that the extent of competition at home is the key to competitiveness abroad. We know that open not closed economies are the driving force in productivity growth. And we know that it is the global reach of business, not protectionism, that is the key to dynamism and growth. So having made the competition authority independent and having accepted the main Cruickshank recommendations on small business banking, we will go further to encourage new entrants and to promote a more competitive environment in utilities, energy, e-commerce and telecoms and the professions.

And in the labour market, greater adaptability to change is needed if there is to be employment and economic opportunity for all. Because we recognise that people will have to change jobs more often, that skills are at a premium, that reform has been needed from the 1980’s onwards to create more flexibility and upgrade our skills, we will invest in education and equip not just the few but everyone to cope with and master change.

While we are rightly proud that our capital markets are world leaders, I want us to ensure that investors have every opportunity and encouragement to back dynamic small and growing companies. So we will want to do more, as the Myners Review intends, to encourage the venture capital industry for start-up and early stage ventures.

And I want Britain to play its part in leading the development of the pan European capital markets – pushing for rapid implementation of the capital markets action plan – so that Europe too can develop venture and risk capital markets that bring jobs and growth.

So I conclude my speech where I started.

We should see the billions of trade and the 3 million jobs that come from the European single market as only a beginning. Instead of seeing Britain posed against Europe, we should see Britain working constructively in Europe to complete the single market in energy, telecommunications, the utilities and financial services. In this lies more business and more jobs for Britain and Europe together. And we will continue to build support for further economic reform in Europe and demonstrate that, instead of Britain having to choose between Europe and America , the way ahead is closer cooperation between the continents of Europe and America in the interests of the greater prosperity of both.

And it is for the best economic reasons therefore that in Europe we will continue to support fair tax competition, and not tax harmonisation.

And we will continue to argue the case for exchange of information and continue to refuse to allow a withholding tax to be imposed on the City of London.

My vision is of a Britain which puts to good use enduring British values, our enterprise, our adaptability, our commitment to fair play and internationalism; a Britain where there is economic stability rather than the old stop-go ; a Britain which plays its full part in Europe and the world and is not detached or isolated from it; a Britain that is more business-friendly than ever and rewards the innovator and risk-taker; a Britain which encourages new companies to start, to invest, to grow, and to expand, and where the opportunities and benefits of enterprise, employment and prosperity are shared by all regions and open to all people.

Working together to achieve this offers the best future for our country.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, to the Newspaper Conference on 22 July 1999.

Introduction

Every generation has to apply its values to new circumstances.

But our generation has more reasons to do this than most.

The last time economic and social changes of the magnitude we are now seeing took place was in the 19th century as we moved from an agrarian to an industrial age.

The changes we face in the 21st century economy involve permanent economic revolution: continuous and rapid innovation that compels unprecedented flexibility and adaptability in skills and knowledge.

Increasingly every good and every service will be exposed to relentless global competition.

And to equip ourselves best to meet and master these challenges, we need a pro-enterprise, pro-opportunity Britain.

Indeed the key insight of the 1990s is that the modernisation of the economy can be achieved only by spreading opportunity more widely in employment, education and the economy generally.

So as the century ends we are leaving behind in the old century the old British conflicts between a left that undervalued enterprise and a right that undervalued fairness.

And let me today set down the steps in economic and social policy we are taking to create this enterprising and fair Britain, the stages on our journey, the challenges we are meeting and still have to meet.

When we came into government, we set as our central economic objective, achieving in a new world. The 1944 aim of high and stable levels of growth and employment. And the first task for government was to deliver a platform of stability based on low inflation and sound public finances.

Economic stability

In 1997 we faced the prospect of another inflationary spiral, derailing the British economy – what would have been yet one more damaging episode in the repeated cycles of boom and bust that have marked British macroeconomic policy management in the last 30 years.

So to get inflation and the public finances under control, we broke decisively with the old short-termist, and unstable record of macroeconomic policy-making and put in place a new monetary and fiscal framework – not only making the Bank of England independent but defining new objectives and setting down clear rules and open procedures for making decisions – a new inflation target and new fiscal rules.

And as a result of the decisions we took, inflation has been brought down, and long-term interest rates and mortgage rates are now their lowest for over thirty years. By taking the same tough action to tackle the fiscal deficit which we inherited, we not only cut public borrowing in our first two years by 32 billion Pounds, but also put in place a long-term fiscal framework, underpinned by legislation, with clear rules that, over the cycle, there is a current budget balance and prudent levels of debt.

And this same commitment to stability and prosperity and to the national economic interest will guide us in our approach to European Monetary Union – with our determination to apply the five economic tests on jobs, investment, financial services, flexibility and convergence and our promise that in any decision the British people will have the final say.

But while stability is a necessary pre-condition to deliver our objectives for growth and employment, it is not sufficient. If we are to bridge the productivity gap with our competitors and raise the long term growth rate of the economy we must combine our strategy for stability with major structural reforms of our product, capital and labour markets to create a new British enterprise economy.

Raising the growth rate

While 30 years ago governments responded to the productivity challenge with top-down plans, and tax incentives and grants primarily for physical investment, today it is more complex – involving the modernisation of capital, labour and product markets, and creating an economy with an enterprise culture open to all.

I want Britain to be a world leader in enterprise – a Britain in which greater competition at home is recognised to be the key to greater competitiveness abroad.

First, because we believe investment in enterprise is the key to success in the new economy, our new British enterprise economy has seen the main rate of corporation tax cut from 33p to 30p, the lowest rate in the history of UK corporation tax, the lowest of all major industrialised countries, the small companies tax cut from 23p to 20p, with a new starting rate of 10p. And an assurance given to business for the remainder of this Parliament that instead of business tax rates we inherited of 33 and 23, our rates will be 30, 20 10p or lower – together with economic stability, the biggest boost to investment we can give.

We have reformed capital gains tax to reward committed long term investment, to nourish a new enterprise economy open to all the talents, creating, for the first time, a long term rate of only 10 per cent for business investment.

Second, because competition is the spur to efficiency and innovation, the new British enterprise economy will have the most open competition policy this country has ever seen.

Not only is competition the best guarantee of rewards for innovation and hard work but it offers the best prospect of a better deal for consumers and lower prices. It is wholly unacceptable to this government that some consumer goods can still cost twice as much in Britain as in America and we propose tough action.

In 1997 so that interest rate decisions would be set for the long term needs of the economy and the public, the government made the Bank of England, Britain’s monetary authority, independent of government.

Now, so that competition will be encouraged for the long term needs of the economy and the public, we are making our competition authority independent, free of political influence, opening up the utilities, consumer goods and financial services to even greater competition.

So just as the days of uneconomic state subsidies and picking winners are over, so too we will end the days of political decisions about mergers.

Where there are barriers to competition we will tackle them.

Third, the new British enterprise economy needs to create the new high tech companies of tomorrow.

So to motivate, recruit and reward Britain’s real risk takers, the innovators creating wealth and jobs in Britain today, we have created a targeted tax cut for those managers who are prepared to move from safe, secure jobs to risk their time, effort and savings to create wealth for our country. Next year we will introduce measures so that growing enterprises will be able to offer their key personnel tax-advantaged options over shares up to £100,000.

Fourth, innovation is the key to the success of the new British enterprise economy open to all the talents. So we will have a tax cut for innovation and R&D that will become one of the best incentives for innovation anywhere in the industrialised world.

Our new R and D tax credit gives even the newest and smallest business, even before they make their first profits, cash help to research and develop their innovations. At a cost of £150 million, this targeted tax cut ensures that almost one third of small business research and development costs will be underwritten by government.

But we need to do even more to turn scientific inventions in Britain into jobs for Britain by honouring the spirit of invention, facilitating the exploitation of invention and encouraging the commercialisation of invention. The seedbed is basic science so we are investing an extra 1.4 billion Pounds in basic scientific research.

Our University Challenge Fund is designed to provide seedcorn finance to commercialise inventions.

And to develop business expertise in science and to transfer technology from the science lab to the marketplace, the government is creating new Institutes of Enterprise.

Britain’s venture capital industry has been strong on management buyouts but weak on high tech, high risk ventures. So we are encouraging early stage, high technology companies, through a new venture capital challenge fund and we will be introducing incentives to promote corporate venturing.

Fifth, to give all who create wealth a greater stake in the wealth they create the new British enterprise economy will be genuinely open to all, with a new programme of shares for all, in which employees will be able, for the first time, to buy shares in their own companies from their pre-tax income. Every employer will be able to match, tax-free, what each employee buys. The only condition is that the scheme must be offered across the company’s entire workforce.

Finally, Britain’s new enterprise economy needs a national effort to meet our biggest economic challenge of all: that everyone can master the new information technologies maximising the potential of computers, the internet and electronic commerce.

Our 1.7 billion pound “computers for all” programme will enable small businesses, individuals, families, schools and libraries to use and learn more about computers, modems and related equipment – and will create a national network of 1,000 computer learning centres in these schools, colleges, libraries, internet cafes and on the high street.

All these measures with one purpose only, that the whole of Britain is equipped for the new information age.

Employment

Achieving an economy that is enterprising and fair demands a new employment policy that equips people to succeed.

When we came into office, four and a half million adults lived in households where nobody worked, double the level of 20 years ago.

Nearly one in five children were growing up in households where no-one is working, twice the rate of France and four times the rate of Germany.

And the reason that this issue of unemployment poses a massive challenge is that it is now the primary cause of poverty.

20 years ago, pensioners made up the largest section of those in poverty, today it is those living in workless, working age households.

Simply compensating people for their poverty through benefits is not enough, the task must be to deal with the causes of poverty. The best form of welfare is work.

Our strategy has been to tackle the barriers that people face to getting into work – the lack of employment, the unemployment and poverty traps, the absence of necessary skills, even the absence of child care.

Already over 280,000 young people have joined the New Deal and over 105,000 have found jobs – the vast majority sustained jobs. A further 71,000 are gaining valuable experience on New Deal options. And 51,000 employers have signed up to the New Deal. Since the election, long-term and youth unemployment has more than halved.

Now we have extended this approach to the long-term sick and disabled, partners of the unemployed, lone parents and, soon, to the over 50s.

When this government came to power, with no minimum wage in place and the tax and benefits system unreformed, many of those without work faced an unemployment trap, where work paid less than benefits, and the low-paid in work faced a poverty trap which meant that they faced marginal tax and benefit rates of 80, 90 or even over 100 per cent.

To make work pay we have introduced the national minimum wage and are now introducing the Working Families Tax Credit.

Under the old system the tax system set a personal allowance that failed to ensure that work paid, and also made thousands pay tax even as they claimed benefits.

In the new tax system working families will be guaranteed a minimum income, and by step-by-step integration of tax and in-work benefits, this minimum income will be paid through targeted tax cuts and tax credits. In future no-one in work should have to go to the benefits office to receive a living income.

From October of this year, the Working Families Tax Credit will mean that every working family with someone working full-time will be guaranteed a minimum income of 200 pounds a week, more than 10,000 pounds a year. No net income tax will be paid until earnings reach 235 pounds a week.

A family with two children earning 200 Pounds a week will receive an additional income of at least 60 Pounds a week.

With earnings of 250 Pounds a week, at least 42 Pounds a week more.

And with earnings of 300 Pounds a week, at least 23 Pounds a week more.

And let me say that, in September, we will be launching a major campaign, including local and national TV and press advertising to tell people about the Working Families Tax Credit and ensure they receive what they are entitled to.

Our measures so far lift one and a quarter million people out of poverty – 800,000 of them children.

Taking all our reforms together – working families tax credit, children’s tax credit, rises in child benefit and other tax changes – a family on 13,000 pounds a year will gain up to 50 pounds a week, 2,500 pounds a year.

The next step is to extend the principle of the WFTC.

And our long-term aim – which we began in the Budget with an employment credit for the over fifties returning to work – is an employment tax credit, paid through the wage packet, which would be available to households without children as well as households with children.

To make work pay we have introduced the minimum wage and a new system of in-work tax credits. To reward work and encourage job creation we have introduced the new 10p starting rate of tax, reform of employees’ national insurance to eliminate the perverse entry fee and align the starting point for national insurance with that of income tax and reforms to employers’ national insurance to help create entry-level jobs. And to ensure people have the skills for jobs, we are not only investing 19 billion pounds more in education but setting up Individual Learning Accounts and a University for Industry.

Breaking the cycle of poverty

We say – indeed we all agree – that every child should have the best possible start in life. And this government sees it as a national goal. This is why Tony Blair has said we will abolish child poverty over 20 years. The Working Families Tax Credit is important to this objective. So too is improving public services – health visitors, nurseries, playgroups, childcare, learning support – in the poorest communities with our Sure Start programme, and mobilising the forces of concern and compassion in each and every community of our country.

Child poverty is unacceptable and these measures show our determination that every child in our country is able to fulfil his or her potential.

Conclusion

And what unites everything we do as a government – delivering economic stability, nurturing economic dynamism, ensuring economic and employment opportunity for all, making work pay, improving public services and tackling child poverty – is that this is a government on the side of Britain’s working families. Creating stability in which families can flourish.

Delivering higher living standards with the lowest mortgage rates for 33 years.

Helping businesses to grow with a favourable tax regime.

Putting our young people back to work with the New Deal.

Making work pay more than benefits with the minimum wage and Working Families Tax Credit.

Tackling poverty and inequality at source with, by the end of the Parliament 6 billion in children and families.

And improving public services with investment- 40 billion Pounds for health and education – and reform.

So, my vision is of a Britain where there is economic stability for investment rather than economic or political instability; a Britain which is business-friendly, working with business rather than in isolation from it; a Britain which tackles our biggest problem welfare dependency and unemployment, the key to unlocking funds for the reform of our other public services; a Britain that makes the vision of our country as a world leader in education the centre point of both our economic and social ambitions for the long term.

A Britain where public and private sectors, instead of fighting each other, work constructively together with a new sense of national economic purpose, fostering enterprise and fairness, is shared right across the economy. The challenges are enormous and many, but if we work together the prize is a modern economy more fit for the challenges ahead, ready to ensure employment opportunity and greater prosperity for all our people in the years ahead.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, in New York, the United States, on 16 September 1999.

Thank you very much for inviting me here today. I am delighted to have the opportunity to come to New York and in particular to address such a distinguished audience.

Arriving from London to New York reminds me of how our two dynamic trading cities sum up much of what is best in Britain and the United States. Both cities are founded on trade – gateways that have succeeded by opening up to the wider world. Both are cities that have developed from world ports into the two world financial centres, beneficiaries from free trade, not protectionism, and providing the liquid capital which is the life blood of today’s global economy.

And both of us, Britain and the USA, are stronger not just because of a shared history that links our countries but because of our shared values that bind us even more closely together: a commitment to liberty and to opportunity for all; a belief in work and enterprise; and a dedication to an openness that is outward-looking and internationalist, demonstrated in our shared commitment that economic expansion through open markets is key to growth and prosperity.

I want to talk today about how we build the foundation of stability in the global economy and the steps we have taken in Britain to steer a course of stability and steady growth.

First, stability in the global economy

Only a year ago, an increasingly turbulent and inadequately supervised financial system threatened global instability.

Since the height of the financial instability last September, the world has taken rapid and decisive action and the world has started to put in place a new long term disciplines to promote greater stability.

World economic growth prospects are now substantially better than they appeared just a few months ago. But this is no time for complacency. We must not forget that a year of instability saw the biggest growth economies of the last decade in East Asia suffering larger contractions in output even than experienced in the great depression of the 1930s; Russia going into default; in America the mounting of one of the biggest ever emergency refinancings, not for a bank, but for a hedge fund; free enterprise Hong Kong taking publicly-owned stakes in all its private companies; and Japan nationalising its banks.

These developments reflect a world economy transformed from the relatively sheltered national economies we knew in the Bretton Woods era, barriers behind which governments could hide their mistakes, to a global market place where national governments, dependent for investment funds on the day to day confidence of international investors, must pursue consistent and credible policies that guarantee stability.

The task in our generation is to put in place a new framework for global stability in a new economy. Our predecessors did this for the post-war world of distinct national economies. They created not just new international institutions – the IMF, the World Bank, the GATT, as well as the UN – and a whole set of new rules for a new international economy, but gave expression to a new public purpose based on high ideals, and a commitment to economic progress and social justice.

We must now apply the high ideals of the post war world to the new world, creating new rules that effectively and fairly meet the demands of the new global market place – open not sheltered economies, international not national capital markets, global not local competition. It must be grounded in new rights and responsibilities, enshrined in new disciplines and rules that are agreed nationally and applied internationally.

There has been a great deal of work over the last year on drawing up proposals to reform the international financial architecture. We have made significant progress. Our task at the Interim Committee and Development Committee meetings in Washington next weekend is to make a reality of our commitment to reform in four key areas of reform:

first, a framework of internationally agreed codes and standards, new economic disciplines, to be accepted and implemented by countries which participate in the international financial system;
second, global not just national financial regulation. We need to make the international and national bodies responsible for financial sector supervision work together more effectively;
third, a new framework for crisis prevention and crisis resolution based on a partnership between public and private sectors;
fourth, social progress with new social principles at the IMF and World Bank, allied to our initiatives for immediate debt reduction.

First, a framework of internationally agreed codes and standards, new economic disciplines, to be accepted and implemented by countries which participate in the international financial system.

These codes and standards, these new disciplines, are not incidental to the new financial architecture. They are the new architecture. They will deliver the transparency and accountability which I believe is the only answer to the uncertainty and unpredictability of ever more rapid financial flows.

It is only by taking the right actions in their own jurisdictions that the countries of the international financial community can deliver financial stability at a global level. It is only in this way that we can achieve global stability consistent with national sovereignty.

In today’s global economy, governments need to deliver stability by setting out clear objectives for fiscal and monetary policy and to put in place open and transparent procedures. This is critical for investor confidence in the wake of the financial crises of the past two years. Without transparency and the proper procedures that the codes of conduct will require, investors may not make the long term commitments on the scale necessary for jobs, growth and social progress.

The codes will cover fiscal policy, financial and monetary policy, corporate governance, best practice for financial institutions and regulators, and accounting standards. They will require accurate reporting to the international community, by each national economy, of all relevant information – for example, the size of a budget deficit, the state of bank reserves and the level of currency liabilities.

The proposed codes and principles are now being developed. The IMF has finalised the codes of conduct for fiscal transparency. It is in the process of finalising the code of transparency for monetary and financial policies, which we will endorse at the IMF Interim Committee at the end of this month. And the OECD has now finalised its code of good practice in corporate governance.

The codes of conduct will only work if there is an effective surveillance mechanism to monitor their implementation. This surveillance process must be built around the IMF’s Article IV process. This does not mean the IMF should expand its expertise to cover all the codes. Rather it should draw on the expertise of the World Bank and other bodies, and find ways of feeding this into the Article IV process. To achieve this aim, I have proposed that the fund set up a special unit charged with the coordination of this surveillance process. I look forward to discussing this and other ideas in Washington next week.

In promoting these new disciplines of openness and transparency, the IMF knows it has a special responsibility to lead by example. I welcome the reforms already agreed by the IMF board to promote the publication of letters of intent, and the pilot project for publication of Article IV reports.

But I encourage the Fund to continue to look further at ways to promote greater transparency and so reinforce public support for its activities and to improve the IMF’s own accountability. I welcome the recent external evaluations of IMF surveillance and IMF research. I believe these have shown their value and show that we need to put in place a mechanism for systematic external review. For that reason, I have proposed the creation a new evaluation unit, inside the IMF, but reporting directly to the Fund’s shareholders, and in public, on its performance.

Next weekend in Washington we will also discuss a number of proposals to strengthen the IMF’s interim committee, and to establish a new informal mechanism for dialogue on key issues.

And because today’s financial markets are global, we need not only proper national supervision but also a second fundamental reform – global financial regulation. We need to make the international and national bodies responsible for financial sector supervision work together more effectively.

That is why Britain proposed last Autumn bringing together the IMF, the World Bank and key regulatory authorities in a new permanent Committee for Global Financial Regulation charged with delivering the global objective of a stable financial system.

The Financial Stability Forum has now been established. This is a new process which makes cooperation between the IFIS and the regulators a fact of life. The Forum has made a successful start agreeing to establish working groups to coordinate the work of the international financial community on the implications of highly-leveraged institutions, offshore centres and short-term capital flows. The Forum’s work will make co-operation between international institutions and national regulators a fact of international financial life. I believe in time it can become the world’s early warning system for regional and global financial market risk.

Third, we need to agree improved mechanisms for preventing and resolving crises. The deep and protracted nature of the financial crises of the last two years has highlighted the need for better mechanisms for crisis prevention and resolution. These must provide the right incentives and ensure that all parties which benefit from the international financial system play their part in maintaining stability.

In place of the old approach, we need a modern framework ,rooted in transparency and reliable surveillance, and built on public and private sectors both accepting their responsibilities. It should be the duty of the public sector to inform, the duty of the international financial institutions to monitor and the duty of the public and private sector to engage.

We must ensure that both public and private sectors contribute to maintaining stability. At their summit in Cologne last June, the G7 agreed a new framework for private sector involvement in crisis resolution. This is designed to help promote more orderly crisis resolution, by shaping private sector expectations of how crises will be handled in the future and guiding policy makers in deciding how best to respond.

The framework involves a detailed statement of the actions the official sector may take in seeking to resolve crises. And equally important, the principles and considerations which will guide action. Of course the situations in which countries find themselves will vary from one another, and it would be inappropriate to apply a ‘one size fits all’ response to every case. But it is critical that we now agree that we will take decisions in a way that is consistent with the overall framework, to ensure that we shape expectations and send the appropriate signals to the private and public sectors.

There is a fourth area of reform. We must remember that the post-war international settlement was about more than exchange rates, the mechanics of financial arrangements, or the shaping of institutions. The architects of 1945 also defined a new public purpose: the belief that public action on a new and wider stage could promote prosperity and social justice for all by each co-operating with every other. Governments had to work collectively if they were to achieve either justice or stability.

Sound economies, as many now acknowledge, depend not simply on robust and transparent economic and financial systems, but on welfare and social systems that build social cohesion and trust … so we must implement reforms to ensure that the benefits and opportunities of the global economy can be shared by all.

In addition to the code of good practices in fiscal, financial and monetary policy, the World Bank and UN have been asked to develop and implement principles of good practice in social policy. These principles, which were endorsed last spring by the development committee, should be used by the IMF and World Bank to shape the design of adjustment programmes, in order to ensure that the burden of adjustment is not placed on the poor and most vulnerable. They should be drawn upon by the IMF and World Bank not only at times of crisis, but also in normal times, to help countries put in place strong social systems and mechanisms for helping the most vulnerable in advance of crises.

Together with the implementation of the social principles, we must take further action to tackle poverty. The international community is committed to halving by 2015 the proportion of people living in extreme poverty. But our goal demands urgent action from the world’s richest countries.

The HIPC initiative, to reduce the debt burden of the poorest countries, plays a central role in achieving this aim. But it is currently delivering too little too late. Countries are left shackled to unsustainable debts and as a consequence, suffer slower economic growth, slower development and are unable to deliver poverty reduction. That is why the G7 agreed in Cologne proposals for a more ambitious HIPC initiative to deliver faster, wider, deeper debt relief, remove unsustainable debt burdens and allow resources to be reallocated to programmes that reduce poverty.

The challenge we have set ourselves is to ensure three quarters of eligible countries qualify for debt relief by 2000. At the forthcoming meetings of the IMF and World Bank in Washington, we will be taking steps to implement the new HIPC initiative and to release the resources locked up in the IMF’s gold reserves to deliver more funds for debt relief. We will also agree a framework for delivering a strengthened link between debt relief and poverty reduction, through reform of the IMF and World Bank programmes. Sustainable development, debt relief and poverty reduction are, for me, inseparable parts of one policy.

Stability in Britain

Global financial stability depends on individual national governments pursuing strong domestic policies. There are two supremely important tasks which national governments must undertake in order to succeed in the global marketplace – first, building a platform of stability based on openness and transparency in policy making, and second pursuing structural economic reform to promote productivity and employment.

In today’s global economy, there is little place for the fine tuning of the past which tried to exploit a supposed long-term trade-off between inflation and unemployment which proved elusive. But equally in today’s deregulated liberalised financial markets, governments can no longer try to deliver stability through the rigid application of rigid monetary targets.

Instead, the answer to the uncertainty and unpredictability of ever more rapid financial flows is clear long-term policy objectives, the certainty and predictability of well-understood procedural rules for monetary and fiscal policy, and an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

Take Britain, which we know has been more subject than most economies to the instability of boom bust cycles and constantly changing policies:

in the 1960s and 70s attempted trade-offs between inflation and unemployment which each time ended with higher inflation and higher unemployment;
in the 1980s, rigid pursuit of fixed intermediate monetary and exchange rate targets in the belief that this produced a predictable outcome of low inflation but which fell apart in the face of deregulation and capital market liberalisation;
and then following sterling’s departure from the ERM, a half-hearted attempt to meet an ambiguous inflation target based on inadequate procedures and institutional shortcomings which made the decision-making process personalised and politicised.
We now recognise that long-term, open and transparent decision-making procedures which command credibility provide a better route to stability than fixed monetary or exchange rate rules.

On the continent of Europe, where the search for macro-economic stability is being pursued through monetary union, the same lessons are being learnt:

a commitment to monetary stability through the creation of an independent European Central Bank;
a commitment to fiscal sustainability through the stability and growth pact of the European Union;
and a system of multilateral surveillance within Europe involving more commitment to fiscal targets and rigorous peer review.

As I said in my October 1997 statement, we are committed to making an economic assessment of the case for British membership. The decisive test as to whether and when we will enter will be based on the five economic tests:

first, whether there can be sustainable convergence between Britain and the economies of a single currency;
second, whether there is sufficient flexibility to cope with economic change;
third, the effect on investment;
fourth, the impact on our financial services industry;
fifth, whether it is good for employment.

In February, we published an outline national changeover plan which set out the practical steps needed for the UK to join the euro. Our strategy, to prepare and then decide, is being pursued.

Let me outline the steps we have taken in Britain since 1997 to put in place a platform for stability.

The British economy of 1997 was set to repeat the same cycle of boom and bust that had been seen over the past 20 years. There were strong inflationary pressures in the system. Consumer spending was growing at an unsustainable rate and inflation was set to rise sharply above target; there was a large structural deficit on the public finances. Public sector net borrowing stood at £28 billion.

So, against a background of mounting uncertainty and instability in the global economy, we set about establishing a new economic framework to secure long-term economic stability and put an end to the damaging cycle of boom and bust.

One of our first steps after the election was to make the Bank of England independent, ensuring that interest rate decisions are taken in the best long-term interests of the economy, not for short-term political considerations.

As important as the creation of a new framework for monetary policy, has been the creation of a new fiscal policy framework. These frameworks put in place a platform of stability founded first on setting out clear long-term policy objectives, second on the certainty and predictability of well-understood procedural rules for monetary and fiscal policy, and third on an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

First, clear long term policy objectives:

the monetary framework promotes price stability through a pre-announced inflation target – a symmetrical target. Inflation outcomes below target are viewed just as seriously as outcomes above target;
in fiscal policy, we have set two strict fiscal rules to ensure sustainable public finances: the golden rule requires that over the cycle we balance the current budget, and the sustainable investment rule requires that, as we borrow for investment, debt is set at a prudent and stable level.

Second, well understood procedural rules:

we have put in place a new system of monetary policy-making – government setting the inflation target, a clear remit for the Monetary Policy Committee of the Bank of England to meet this target and the open letter system; and an equivalent and equally important set of fiscal procedures legally enshrined in the Code for Fiscal Stability.

Third, we need to promote the openness and transparency that keeps markets properly informed and ensures that objectives and institutions are seen to be credible:

the monetary framework put in place an open system of decision making in monetary policy through the publication of the minutes of Monetary Policy Committee meetings and the Bank of England inflation report, and a system of voting and full reporting to Parliament. In this way we have enhanced the transparency and openness of monetary policy in Britain. And I think it has led to a greater public understanding of why decisions are made. This should help reduce inflation expectations among the public;
and the Code for Fiscal Stability requires the Government to conduct fiscal policy in a transparent and responsible way, with key fiscal assumptions independently audited.

With these reforms I believe that we have now a sound and credible platform for stability for the British economy.

Over the last 10 months inflation has remained within 0.5 percentage points of the Government’s target. Headline inflation is down to 1.1 per cent and underlying inflation at 2.1 per cent – around its lowest level for almost 5 years, and inflation is expected to remain close to target.

Short-term interest rates peaked at half their early 1990s level and have fallen from 7_% in October to 5.25% now. Long-term interest rates and mortgage rates are their lowest levels for over 30 years. The 10 year bond differential with Germany has fallen from 1.7 percentage points in April 1997 to around 0.7 percentage points now.

Public borrowing has been reduced by £31 billion over the past two years – a cumulative fiscal tightening of 3_ per cent of GDP, the largest fiscal tightening since 1981 – and we will continue to lock in that fiscal tightening by keeping the public finances under control, while allowing fiscal policy to continue to support monetary policy in the next stage of the cycle. As a result of our cautious and prudent approach to managing the public finances, we remain on track to meet the fiscal rules while guaranteeing an extra £40 billion for schools and hospitals over the next three years and more than doubling public investment, including in transport and our infrastructure.

So against a difficult world economic background, through early and decisive action on monetary and fiscal policy, both financial markets and the British public see that this Government is delivering – for the first time in this generation – economic stability. We have brought inflation to its target and the fiscal deficit under control. And at the same time, the economy has continued to grow and create jobs throughout this year with the consensus of outside forecasts now predicting growth in 1999 of 1.4 per cent – within the Government’s own forecast range of 1 to 1.5 per cent.

But now that we are creating a platform for stability, we must now use this opportunity to create a high investment, high productivity, high employment and high growth British economy.

Raising the level of growth

In Britain’s past expectations of boom and bust led to short term investment decisions or decisions not to invest. And to a take-it-while-you-can short-termism in wage bargaining. Indeed, the result was a vicious circle of low investment, wage inflation, low growth and repeated cycles of boom and bust.

The opportunity exists now in Britain for a new virtuous cycle of low inflation, high investment, and high and stable levels of growth. Our task now is to raise our national economic potential.

First of all, by bridging the productivity gap with our international partners. This year’s Pre-Budget Report will focus on the next stage of reforms to labour, capital and product markets which we need to exploit the growth potential of Britain. For the key to delivering higher levels of growth and jobs is, of course, not just stability but high investment and wealth creation, including in the new technologies of the future.

I forecast in the Budget that, consistent with our inflation target, the UK economy had the potential to grow by I to 1.5 per cent this year and then by 2.25-2.75 next year, and 2.75-3.25 in the year following. These ranges are not just differences in decimal points. They are ranges of sustainable growth that can ultimately be measured in many more jobs – and a significantly higher level of prosperity. My new forecast will come in the Pre-Budget Report.

But in Britain we are working for stability and steady growth, and we can reachour full national economic potential if we take the right long-term decisions.

It is only by tough discipline in monetary and fiscal policy that we have created a platform of stability over the last two years. We will not make the mistake of past governments which relaxed the moment the economy started to grow. The same tough grip will continue. There will be no short-termist dash for growth. Instead, through tough discipline we will make the most of the opportunity for sustainable growth.

The Monetary Policy Committee has demonstrated that it will remain resolute and pro-active in its determination to keep inflation on target over the coming years.

There are some who criticise the Bank of England and say inflation can only be controlled by ignoring growth. And there are of course those who say we should grow by ignoring inflation. But far from choking off recovery, pre-emptive action is essential in order both to sustain growth and meet our inflation target.

I am equally determined that we will meet our commitment to the tough fiscal rules I have set for the economic cycle, and to continue to base our fiscal projections on a deliberately cautious assessment of growth. We will not make the mistake of our predecessors of being incautious about the state of public finances and irresponsible in promises about public spending and taxation.

I believe that the British economy has the potential to reach the upper end of our growth ranges and in a way consistent with meeting our inflation target. But we can only do so if we combine prudence with long-term economic reform and modernisation of our economy. The four conditions for our economy achieving that sustainable growth are:

first, a pro-active monetary policy and prudent fiscal policy;
second, strengthening the programme to move the unemployed from welfare to work;
third, responsibility and an avoidance of short-termism in pay and wage bargaining across the private and public sectors;
fourth, a commitment to what matters for higher productivity – namely, high quality long term investment in science and innovation, new technology and skills.

All of these conditions must be met. And if we can achieve these, then I believe that the upper end of our growth ranges is within our reach. In this way, by taking a long term view, Britain can steer a course for stability and steady growth.

Conclusion

This is an age of great challenges but also great opportunities.

I have set out today the action we are taking in Britain, in Europe and in the global economy to steer a course of stability and steady growth.

What we must together create is a new economic constitution for a global economy, born out of new realities, grounded in new rights and responsibilities, enshrined in codes of conduct that are agreed nationally and applied internationally, rediscovering public purpose in the international economy and bringing to life again the high ideals of 1945.

We need to build quickly, not debate indefinitely. The challenge now is to implement the reforms we have agreed. We must not fail in the implementation of the new economic constitution we have set out. Our task at the Interim Committee and Development Committee meetings in Washington next weekend is to take concrete steps to deliver the four key areas of reform I have outlined today: a framework of new codes and standards; a new system of global financial regulation; an improved mechanism for crisis prevention and resolution; implementing the new social principles and HIPC initiative to deliver faster, wider, deeper debt relief, remove unsustainable debt burdens and allow resources to be reallocated to programmes that reduce poverty.

This is a programme of reform for our generation. It is more than simply a collection of proposals. It rests on a modern vision of government, doing the right thing, but not everything; of markets working, but not always perfectly; of principles of economic and social justice that reflect our best values and ultimately deliver stability and steady growth.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, on 19 October 1999.

INTRODUCTION

My first words from the Treasury, as I became Chancellor and announced the independence of the Bank of England, were to reaffirm, for this Government, our commitment to the goal first set out in 1944 of high and stable levels of growth and employment.

Now in this Mais Lecture – which has been, from time to time, a platform for politicians of all parties to reflect, to analyse and – as is the case with us politicians – often to get things wrong, I will seek to detail the conditions in our times under which the high ideals and public purpose contained in this economic goal of 1944 can be achieved.

Full employment – defined as in 1944 as ‘high and stable levels of employment’ – was a reality for the twenty years after the Second World War. But rising unemployment in the 1970’s was followed in the 1980s by unemployment rising to above 3 million, beyond its peak in the 1930s. As recently as 1997, 20 per cent of working age households – one in five- had no one in work.

Some believe that full employment can be restored only by a return to macroeconomic fine tuning. Others believe that in the new more open economy governments cannot hope to meet the 1944 objectives. I reject both the dogma of insisting on old ways and the defeatism of abandoning the objectives.

So since 1997 the new Government has been putting in place a new framework to deliver the objectives of high and stable levels of growth and employment. And as I said in New York last month there are four conditions which must all be met – and met together – if we are to deliver in our generation those objectives of 1944:

• first: stability – a pro-active monetary policy and prudent fiscal policy to deliver the necessary platform of stability;
• second: employability – a strengthening of the programme to move the unemployed from welfare to work;
• third: productivity – a commitment to high quality long term investment in science and innovation, new technology and skills;
• fourth: responsibility – avoiding short termism in pay and wage bargaining across the private and public sectors, and building a shared sense of national purpose.

I will show that these conditions – requirements for stability, employability, productivity and responsibility – are and have always been the necessary conditions for full employment.

The first condition, stability, is needed to ensure a sustainable high demand for labour. The second , employability, promotes a sustainable high supply of labour. The third, raising productivity, provides a sustainable basis for rising living standards. And the fourth, responsibility in bargaining, ensures a sustainable basis for combining full employment with low inflation.

And I will show that the failure to meet these conditions led to persistently high unemployment in Britain in recent decades. And I will demonstrate how by putting these conditions in place we are restoring the goal of full employment for the next century.

THE 1944 WHITE PAPER

If we start with that famous 1944 White Paper, we see that the government of the time was clear that if full employment was to be sustained all these conditions – stability, employability, productivity and responsibility – had to be in place.

While the 1944 White Paper asserted the need for active macroeconomic policy – to balance supply and demand, it also recognised there was no long run gain by trading lower unemployment for higher inflation. Indeed, the 1944 White Paper included an explicit requirement for stability. And I quote: “action taken by the government to maintain expenditure will be fruitless unless wages and prices are kept reasonably stable. This is of vital importance to any employment policy”.

As important for future generations, was the White Paper’s recognition that macro-economic action was a necessary but not sufficient condition for full employment and that policies for stability had to be accompanied by policies for employability, productivity and responsibility, not least in pay.

The 1944 White Paper stated that “it would be a disaster if the intention of the government to maintain total expenditure were interpreted as exonerating the citizen from the duty of fending for himself and resulted in a weakening of personal enterprise”. It required that ‘ every individual must exercise to the full his own initiative in adapting himself to changing circumstances. The government….. will also seek to prevent mobility of labour being impeded…” and said “workers must be ready and able to move freely between one occupation and another.”

And the 1944 vision was explicit about responsibility in pay, saying ‘if we are to operate with success a policy for maintaining a high and stable level of employment, it will be essential that employers and workers should exercise moderation in wages matters’.

So while that White Paper is remembered for its commitment to pro-active monetary and fiscal policy, it should also be remembered for its emphasis on employability, productivity and responsibility not least in pay. And the evidence suggests that it was the accumulating failure – cycle by cycle – to meet not just one but all four of these conditions together that led to the rise of unemployment from the late 1960s onwards.

First the post war years.

The 1945 Government was resolved that Britain never would return to the unemployment of the 1930s. Indeed over the first two decades it seemed that it was possible to sustain both low inflation and low unemployment, a period many have called a golden age for the British economy.

But we all now accept that a more detailed historical examination reveals that successive governments left unaddressed underlying long -term weaknesses. Once price and capital controls were dismantled, these weaknesses began to be revealed in low productivity and recurrent balance of payments difficulties.

Governments repeatedly attempted to address these problems – through policies to enhance employability, productivity and responsibility. Indeed, the theme of the 1960s was a productivity revolution to be achieved through national planning, of the 70s a social contract which would responsibly resolve distributional conflicts, of the 80s deregulation which would “set the economy free”.

Supply side action to improve productivity, included the NEDC, the national plan, regional plans, the IRC, and later the NEB – all attempts to harness new technology to the productivity challenge and secure high growth.

Supply side action to enhance employability on the labour market ranged from selective employment taxes to trade union reforms.

But the swift succession of improvisations to control pay – which ranged from guiding lights and pay pauses, to latterly “severe restraint” and the social contract – showed just how elusive was the shared purpose necessary for pay responsibility to work.

In their desire to maintain the 1944 objectives, even as supply side action failed, governments resorted to attempting to control the economic cycle through doses of reflation.

And every time the economy grew from the fifties onwards, a familiar pattern of events unfolded – a pattern we characterise as the British disease of stop go – rising consumption unsupported by sufficient investment, growing bottlenecks and balance of payments problems as the Sterling fixed exchange rate link came under pressure – and then monetary and fiscal retrenchment as growth in the economy had to be reined back.

Unemployment around 300,000 in the mid fifties rose to over half a million in the late sixties and 1 million by the late seventies, and with hindsight we can conclude that at no time in this period was Britain meeting all the conditions judged in 1944 to be necessary for full employment.

• despite the promise of stability, no credible institutional arrangements were put in place to deliver that stability;
• despite talk of rights and responsibilities in the labour market no serious reform of the Welfare State was instituted, even though – from the late 1960s onwards – growing global competition and new technologies were transforming our labour markets;
• despite repeated expressions of concern about our productivity gap, no long term strategy for tackling it ever succeeded;
• while pay restraint was a central issue for most of the period, the initiatives that were introduced to ensure pay responsibility were invariably short term and were not underpinned by a broadly based consensus that resolved the difficult issues.

Each time governments sought to restore the shared, long-term purpose of 1945, they found it more – not less – difficult and attempts to do so descended into a mixture of exhortation- like the “I’m backing Britain campaign”- and a British version of corporatism — vested interests cooking up compromises in smoke filled rooms in London, far removed from the workplaces where such agreements would have to be sustained. The national consensus -which Mr Wilson sought around his national plan, Mr Heath sought around low inflation, Mr Callaghan sought around the social contract- broke down in a series of divisive conflicts – state versus market, capital versus labour, public versus private.

And the more governments failed on pay, productivity and industrial relations, the more they fell back on short-term ‘Fine tuning’ in a doomed attempt to square the circle and deliver higher living standards and jobs despite sluggish productivity growth: problems massively compounded by the collapse of the Bretton Woods system of fixed exchange rates and the 1973 oil shock.

So the golden age gave way to the era of boom and bust. With each successive cycle, a clear pattern developed. Unsustainable growth, leading to stagnation, and cycle by cycle to ever higher levels of inflation and unemployment. Inflation rising from 3 per cent in the late fifties to 9 per cent in the early seventies and more than 20 per cent by 1975. Unemployment, ratcheted up every cycle and doubling over the period.

What began in 1944 as a comprehensive long term strategy for growth and employment built on a commitment to stability, employability, productivity and responsibility had by the 70s descended into short termism and rising unemployment.

Quite simply governments could not deliver growth and employment through a macro- policy designed to exploit a supposed short-term trade off between higher inflation and lower unemployment.

A crude version of the 1944 policy- using macro policy to expand demand and micro policy to control inflation – simply could not work.

And it was this insight that the 1979 government seized upon with what they termed a medium term financial strategy to return Britain to economic stability.

But the they went further than simply arguing that ‘fine tuning ‘ was the problem. For them the very idea that dynamic economies required active governments was the problem.

As they stated, their policies reflected a neo liberal view of the state:

• first, the application of rigid monetary targets to control inflation— choosing in succession £M3, M1, then M0 , then when they failed shadowing the Deutschmark, then the Exchange Rate Mechanism as the chosen instrument for monetary control;
• second, a belief in deregulation as the key to employability – in the absence of an active labour market policy or an active, reformed Welfare State;
• third, as the route to higher productivity, again deregulation alone in capital and product markets – a philosophy of “the best government as the least government”;
• fourth, the rejection of consensus.

The clearest intellectual statement of the new position was Nigel Lawson’s Mais Lecture in 1984. Its central thesis was that the proper role of macro-economic and micro-economic policy “is precisely the opposite of that assigned to it by the conventional postwar wisdom”.

The conquest of inflation, not the pursuit of unemployment, should be the objective of macro-economic policy. The creation of conditions conducive to growth and employment, not the suppression of price rises, should be the objective of micro-economic policy.

On one point, arguing against a crude version of the 1944 policy- using macro policy to expand demand and micro policy to control inflation – he drew the right lesson from the failures of previous decades .

But far from tackling the boom-bust cycle endemic to the British economy, the early 1980s and 90s saw two of the deepest recessions since 1945. And even at the peak of growth in 1988, unemployment was still over 2 million. Before it rose again to 3 million in 1993.

As the late eighties boom showed the Government eventually relapsed into the very short termism it had come into government to reverse. Just as the fine tuners had in the 1970s given way to the monetarists, so now monetarism lapsed into fine tuning.

By the mid 1990s, the British economy was set to repeat the familiar cycle of stop go that had been seen over the past 20 years. By 1997 there were strong inflationary pressures in the system. Consumer spending was growing at an unsustainable rate and inflation was set to rise sharply above target; there was a large structural deficit on the public finances. Public Sector Net Borrowing stood at £28 billion.

THE NEW ECONOMIC FRAMEWORK

So against a background of mounting uncertainty and then instability in the global economy, we set about establishing a new economic framework to achieve the four conditions for high and stable levels of growth and employment to promote new policies for stability, employability, productivity and responsibility.

We started by recognising we had to achieve these 1944 objectives in a radically different context – integrated global capital markets, greater international competition , and a premium on skills and innovation as the key to competitive advantage.

A PLATFORM OF STABILITY

The first condition is a platform of economic stability built around explicit objectives for low and stable inflation and sound public finances – in our case an inflation target and a golden rule- along with a commitment to openness and transparency.
The new post- monetarist economics is built upon four propositions:

• because there is no long term trade off between inflation and unemployment, demand management alone cannot deliver high and stable levels of employment;
• in an open economy rigid monetary rules that assume a fixed relationship between money and inflation do not produce reliable targets for policy;
• the discretion necessary for effective economic policy is possible only within a framework that commands market credibility and public trust;
• that credibility depends upon clearly defined long-term policy objectives, maximum openness and transparency, and clear and accountable divisions of responsibility.

Let me review each proposition one by one.

A few decades ago many economists believed that tolerating higher inflation would allow higher long-term growth and employment.

Indeed, for a time after 1945, it did – as I have said – appear possible to “fine-tune” in this way – to trade a little more inflation for a little less unemployment – exploiting what economists call the Phillips curve.

But the immediate post war perio presented a very special case – an economy recovering from war that was experiencing rapid growth within a rigid system of price and capital controls. We now know that even at this time ‘Fine tuning ‘ merely suppressed inflationary pressures by causing balance of payments deficits.

And by the 1960s and 1970s, when governments tried to lower unemployment by stimulating demand , they faced not only balance of payments crises but stagflation as both inflation and unemployment rose together.

Milton Friedman argued in his 1968 American Economic Association Presidential Lecture that the long term effect of trying to buy less unemployment with more inflation is simply to ratchet up both.

And here in Britain conclusive evidence for this proposition came in the 1980s experience of high inflation and high unemployment occurring together.

So because there is no long term trade off between inflation and unemployment, demand management alone cannot deliver high and stable levels of employment.

Friedman was right in this part of his diagnosis: we have to reject short termist dashes for growth. But the experience of these years also points to the solution.

My conclusion is that because there is no long term trade off between inflation and unemployment delivering full employment requires a focus on not just one but on all the levers of economic policy.

The second proposition in the new post- monetarist economics is that applying rigid monetary targets in a world of open and liberalised financial markets cannot secure stability.

Here experience shows that while Friedman’s diagnosis was right his prescription was wrong.

Fixed intermediate monetary targets assume a stable demand for money and therefore a predictable relationship between money and inflation.

But since the 1970s, global capital flows, financial deregulation and changing technology have brought such volatility in the demand for money that across the world fixed monetary regimes have proved unworkable.

So why, even as monetary targets failed, did the British Government persist in pursuing them? Why even as they failed was their answer more of the same?

The answer is that they felt the only way to be credible was by meeting fixed monetary rules.

And when one target failed they chose not to question the idea of intermediate targeting but to find a new variable to target, hence the bewildering succession of monetary targets from £M3 to M0 , then shadowing the Deutschmark, then the Exchange Rate Mechanism as the chosen instrument for monetary control.

As with fine tuning, the rigid application of fixed monetary targets was based on the experience of sheltered national economies and on apparently stable and predictable relationships which have broken down in modern liberalised global markets.

And yet the more they failed, the more policymakers felt they had to tie their hands, first by adding even more monetary targets and then by switching to exchange rate targets. But having staked their anti-inflationary credentials on following these rules, the government – and the economy – paid a heavy price. The price was recession, unemployment – and increasing public mistrust in the capacity of British institutions to deliver the goals they set.

What conclusion can be drawn from all this?

Governments are in theory free to run the economy as they see fit. They have, in theory, unfettered discretion.

And it is not only the fact that they have this unfettered discretion but the suspicion they might abuse it that leads to market distrust and thus to higher long term interest rates.

That is why governments have sought to limit their discretion through rules.

The monetarist error was to tie policy to flawed intermediate policy rules governing the relationship between money demand and inflation.

But the alternative should not be a return to discretion without rules, to a crude version of ‘fine tuning’.

The answer is not no rules, but the right rules.

The post monetarist path to stability requires the discipline of a long term institutional framework.

So my second proposition- that in a world of open capital markets fixed monetary targets buy neither credibility nor stability – leads directly to my third.

The third proposition is that in this open economy the discretion necessary for effective economic policy is possible only within a framework that commands market credibility and public trust.

Let me explain what I mean when I talk of the new monetary discipline: in the new open economy subject to instantaneous and massive flows of capital the penalties for failure are ever more heavy and the rewards for success are even greater.

Governments which lack credibility-which are pursuing policies which are not seen to be sustainable- are punished not only more swiftly than in the past but more severely and at a greater cost to their future credibility.

The British experience of the 1990s is a case in point. It shows that once targets are breached it is hard to rebuild credibility by setting new targets.

Credibility, once lost, is hard to regain.

The economy then pays the price in higher long term interest rates and slower growth.

On the other hand governments which pursue, and are judged by the markets to be pursuing sound monetary and fiscal policies, can attract inflows of investment capital more quickly, in greater volume and at a lower cost than even ten years ago.

The gain is even greater than that. If governments are judged to be pursuing sound, long-term policies, then they will also be trusted to do what is essential- to respond flexibly to the unexpected economic events.

That inevitably arise in an increasingly integrated but more volatile global economy.

So in the era of global capital markets, it is only within a credible framework that governments will command the trust they need to exercise the flexibility they require.

This leads to my fourth proposition – a credible framework means working within clearly defined long-term policy objectives, maximum openness and transparency, and clear and accountable divisions of responsibility.

It is essential that governments set objectives that are clearly defined and against which their performance can be judged.

That is why we have introduced clear fiscal rules, defined explicitly for the economic cycle.

That is why, also, we have a clearly defined inflation target. Let me say why it is so important that our inflation target is a symmetrical target. Just as there is no gain in attempting to trade higher inflation for higher employment, so there is no advantage in aiming for ever lower inflation if it is at the expense of growth and jobs.

If the target was not symmetric – for example, if in the UK case it was 2_ per cent or less rather than 2.5 per cent – policy-makers might have an incentive to reduce inflation well below target at the cost of output and jobs. Instead a symmetrical target means that deviations below target are treated in the same way as deviations above the target.

But to be credible, the monetary and fiscal framework must also be open, transparent and accountable.

The greater the degree of secrecy the greater the suspicion that the truth is being obscured and the books cooked.

But the greater the degree of transparency— the more information that is published on why decisions are made and the more the safeguards against the manipulation of information – the less likely is it that investors will be suspicious of the government’s intentions.

That openness needs to be underpinned by accountability and responsibility.

So public trust can be built only on a foundation of credible institutions, clear objectives, and a proper institutional framework. The flaw in the previous Government’s economic policy was not just the failure of monetary targets. It was that the “medium-term financial strategy” had no credible foundation – it was neither consistent in objectives, nor transparent in its operation, nor underpinned by credible institutional reforms .

Failure led, after 1992, to some reform. The inflation target was an important step forward. But it was ambiguously defined and it was not underpinned by anything other than an improvised and still highly personalised institutional framework. Minutes of meetings between the Bank of England and the Chancellor were published, but they could not allay the suspicion that policy was being manipulated for political ends. In fact despite the then government’s commitment to an inflation target of 2.5 per cent or less, financial market expectations of inflation 10 years ahead were not 2.5 per cent or less but 4.3 per cent in April 1997, and never below 4 per cent for the whole period. Long term interest rates remained 1.7 percent higher in Britain than in Germany.

This has changed significantly in the last two years, long term inflation expectations have fallen from 4.3 per cent to 2.4 per cent, a figure consistent with the government’s inflation target; the differential between British and German long term interest rates has fallen from 1.7 per cent, to just 0.2 percentage points.

I believe the explanation for this improvement lies in the immediate and decisive steps that our new Government took in May 1997 -to set clear monetary and fiscal objectives, to put in place orderly procedures including a new division of responsibility between the Treasury and an independent central bank, and to insist on the maximum openness and transparency.

Contrary to Nigel Lawson’s distinction between the roles of macro economic and micro economic policy as set out in his 1984 lecture, we recognise that the role of a macro economic policy is not simply to bear down on inflation but by creating a platform of stability to promote growth and employment; and that an active supply side policy is necessary not only to improve productivity and employment, but to make it possible to sustain low inflation alongside high and stable levels of growth and employment. In other words, macroeconomic and microeconomic policy are both essential – working together – to growth and employment.

In short we have sought to learn the lessons of the postwar years and build a new platform of stability. Making the Bank of England independent was and is only one of the institutional reforms that form our new post monetarist approach to economic policy.

First, clear long term policy objectives:

• a pre-announced and symmetrical inflation target;
• and strict fiscal rules to ensure sustainable public finances.

Second, well understood procedural rules:

• a clear remit for the Monetary Policy Committee of the Bank of England to meet the inflation target set by government supported by the open letter system and the Code for Fiscal Stability;
• and effective co-ordination between fiscal and monetary policy – including the presence of the Treasury representative at the Monetary Policy Committee meetings.

Third, openness and transparency to keep markets properly informed, ensuring that institutions, objectives and the means of achieving the objectives are seen to be credible:

• publication of the minutes and votes of Monetary Policy Committee meetings;
• and transparency in fiscal policy including the independent auditing of key fiscal assumptions.

It is the same search for stability in an open economy that has led to European Monetary Union.

And at the global level, the same lessons are being learned. In Washington last month, the IMF agreed a new framework of codes and standards, new economic disciplines for openness and transparency to be accepted and implemented by all countries which participate in the international financial system. These codes and standards – including fiscal, financial and monetary policy – will require that countries set out clear long term objectives, put in place proper procedures, and promote the openness and transparency necessary to keep markets informed.

With the reforms we have already made in Britain, I believe that we have now – for the first time in this generation – a sound and credible platform for long term stability for the British economy.

We will not make the old mistake of relaxing our fiscal discipline the moment the economy starts to grow. The same tough grip will continue.

The Monetary Policy Committee will be and must continue to be vigilant and forward-looking in its decisions, as we build a culture of low inflation that delivers stability and steady growth.

We will not repeat the mistake of the late 80s. Those who today are arguing that economic stability comes by opposing necessary changes in interest rates and by avoiding the tough decisions necessary to meet the inflation target would risk returning to the boom and bust of the past. We can achieve high and stable levels of employment and meet our inflation target. Indeed we will not achieve and sustain full employment for the long term by failing to meet our inflation target.

This credible platform of stability, built from the solid foundations I have just described, allows people to plan and invest for the long-term. This is our first condition for full employment.

WELFARE TO WORK

The second condition for full employment is an active labour market policy matching rights and responsibilities.

The idea of a fixed natural rate of unemployment consistent with stable inflation was discredited by the evidence of the 1980s.

For even when the economy was growing at an unsustainable pace— above 5 per cent in 1988-, in all regions of the country there were high levels of vacancies including vacancies for the unskilled alongside high unemployment.

How did this happen? Part of the explanation was the ‘scarring’ effect on skills and employability inflicted by the deep and long recession of the 80s.

Partly also the mismatch between the skills and expectations of redundant manufacturing workers – and the new jobs in service industries.

Partly the failure to reform the Welfare State especially its unemployment and poverty traps which, for many, meant work did not pay.

So there was a rise in what, in the 1980s, economists termed ‘the non accelerating inflation rate of unemployment’ or the NAIRU.

Whether measured by the relationship between wage inflation and unemployment —as Phillips stressed in the 1950s —–or vacancies and unemployment as Beveridge had highlighted in the 1940s —- Britain had clearly seen a dramatic structural deterioration in the UK labour market. The same level of wage pressure or vacancies existed alongside much higher levels of unemployment than in the past.

So the new government has taken a decisively different approach to employment policy over the past two years aimed at reducing the NAIRU.

All our reforms are designed for the modern dynamic labour market, now being transformed by the new information technologies. We recognise that people will have to change jobs more often, that skills are at a premium and that reform was needed in the 1980s to create more flexibility.

The New Deal which offers opportunities to work but demands obligations to do so is the first comprehensive approach to long term unemployment. Designed to reengage the unemployed with the labour market, it addresses both the scarring effect of unemployment and the mismatch between jobs and skills. The Working Families Tax Credit and associated reforms that integrate tax and benefit are, for the first time, making work pay more than benefits, and our educational reforms including lifelong learning ,the university for industry, individual learning accounts and our computers for all initiative will tackle skill deficiencies.

The last 2 years have brought record levels of employment and sharp falls in youth and long term unemployment – early signs that our policies are having an impact. But with still 1.2 million claimant unemployed and others excluded from the labour market – even at a time when there are around one million vacancies spread throughout all areas of the country -there is much more to do. The Working Families Tax Credit is now being extended to new employment credits for the disabled and for those over fifty. And as the New Deal extends its scope from the under- 25s to the long term unemployed opportunities to work and obligations to work will be extended together.

The more our welfare to work reforms allow the long-term unemployed to re-enter the active labour market, the more it will be possible to reduce unemployment without increasing inflationary pressures. And the more our tax and benefit reforms remove unnecessary barriers to work, and the more our structural reforms promote the skills for work, the more it is possible to envisage long-term increases in employment, without the fuelling of inflationary pressures.

PRODUCTIVITY

Next our third condition : only with rising productivity can we meet peoples long-term expectations for rising standards of living without causing inflation or unemployment.

It is important to be clear about the relationship between productivity, employment and living standards.

Low productivity can exist side by side with low unemployment if people accept that living standards are not going to rise -as happened to the United States in the 1980s.

But rising productivity can exist side by side with high unemployment if we pay ourselves more than the economy can afford. If people demand short term rewards which cannot be justified by economy-wide productivity growth, the result is first inflation and then the loss of jobs. That has been the historic British problem – repeated bouts of wage inflation unmatched by productivity growth leading in the end to higher unemployment.

Indeed between 1950 and 1996 productivity growth in Britain was only 2.6 per cent a year compared to 3.7 per cent and 3.9 per cent in France and Germany.

But if we can now achieve rising productivity, bridging the gap with our competitors, high levels of employment and rising living standards can go together.

Britain cannot assume that the new information technologies will automatically bring the higher productivity growth now seen in the United States. So we must work through a new agenda that involves a shared national effort to raise our game.

Policies to encourage higher productivity will be the theme of the Government’s Pre-Budget Report on the 9th of November.

While 30 years ago governments responded to the productivity challenge with top-down plans, and grant aid primarily for physical investment, today the productivity agenda is more complex and more challenging. So we are developing new and radical policies for the modernisation of capital and product markets, the encouragement of innovation and an enterprise culture open to all, as well as the building of a modern skills base.

RESPONSIBILITY IN PAY-SETTING

I come now to our fourth and final condition for full employment -responsibility, not least in pay, and by responsibility I mean, as I have stressed throughout this lecture, a willingness to put the long term above the short term, a willingness to build a shared common purpose.

To succeed we must all be long termists now.

The reality of the more complex and flexible labour markets of Britain today is that pay decisions are dictated not by the few in smoke filled rooms but made by millions of employees and employers across the country.

And the more that we are all persuaded to take a long-term view of what the economy can afford, the more jobs we will create, the more we can keep inflation under control so interest rates can be as low as possible.

The Bank of England have to meet an inflation target of 2.5 per cent. The target has to be met. Unacceptably high wage rises will not therefore lead to higher inflation but higher interest rates. It is in no one’s interest if today’s pay rise threatens to become tomorrow’s mortgage rise.

The worst form of short-termism would be to pay ourselves more today at the cost of higher interest rates tomorrow, fewer jobs the next year and lower living standards in the years to come.

So wage responsibility – to rescue a useful phrase from a woeful context- is a price worth paying to achieve jobs now and prosperity in the long term. It is moderation for a purpose.

But responsibility means not just responsibility in pay but building a shared commitment to achieve all the conditions necessary for full employment – in other words to work together as a country to promote stability employability and higher productivity too.

It is undeniable that the shared economic purpose of 1945 broke down in fifty years of endless and sterile divisions between capital and labour, between state and market and between public and private sectors, denying Britain the national direction it needed.

Britain and the British people can now move beyond these outdated conflicts.

Building a consensus around the need for stability, employability, productivity and responsibility we can define a new a shared economic purpose for our country.

The conditions for full employment can be met. And the surest way is that the whole country is determined to meet them.