Category: Economy

The statement made by Rishi Sunak, the Chancellor of the Exchequer, in the House of Commons on 23 March 2022.

Mr Speaker,

As I stand here, men, women and children are huddled in basements across Ukraine seeking protection.

Soldiers and citizens alike have taken up arms to defend their land and families.

The sorrow we feel for their suffering, and admiration for their bravery…

…is only matched by the gratitude we feel for the security in which we live.

And what underpins that security…is the strength of our economy.

It gives us the ability to fund the armed forces we need to maintain our liberty.

The resources we need to support our allies.

The power to impose sanctions which cause severe economic costs.

And the flexibility to support businesses and individuals through crises as they emerge

But Mr Speaker, we should be in no doubt, behind Putin’s invasion is a dangerous calculation:

That democracies are divided, politically weak, and economically insecure.

Incapable of making tough long-term decisions to strengthen our economies.

Mr Speaker, this calculation is mistaken.

What the authoritarian mind perceives as division – we know are the passionate disagreements at the heart of our living, breathing democracy.

What they see as chaos – we know is the freedom to be dynamic and innovative.

What they call the inherent weakness of open societies and free economies – we know is the source of our strength.

We will confront this challenge to our values not just in the arms and resources we send to Ukraine…

…but in strengthening our economy here at home.

So when I talk about security, yes – I mean responding to the war in Ukraine.

But I also mean the security of a faster growing economy.

The security of more resilient public finances.

And security for working families as we help with the cost of living.

Mr Speaker,

Today’s statement builds a stronger, more secure economy for the United Kingdom.

We have a moral responsibility to use our economic strength to support Ukraine and…

…working with international partners…

…to impose severe costs on Putin’s regime.

We are supplying military aid to help Ukraine defend its borders.

Providing around £400m in economic and humanitarian aid…

…as well as up to $0.5bn in multilateral financial guarantees.

And launching the new ‘Homes for Ukraine’ scheme…

…to make sure those forced to flee have a route to safety here in the UK.

And we are imposing sanctions of unprecedented scale and scope:

We’ve sanctioned over 1,000 individuals, entities, and subsidiaries.

Frozen the assets of major Russian banks.

Imposed punitive tariffs on key products.

Restricted Russia’s access to sterling clearing…

To insurance.

To the UK’s capital markets.

To SWIFT.

And we’ve targeted the Russian Central Bank, too.

Be in no doubt: these sanctions, coordinated with our allies, are working.

The Russian Rouble plummeted to record lows.

The Moscow stock exchange has been largely suspended for a month.

And the Central Bank of Russia has been forced to more than double interest rates to 20%.

We warned that an aggressive, unprovoked invasion would be met with severe economic costs – and it has.

I’m proud to say – as the whole House will say:

We stand with Ukraine.

But Mr Speaker,

The actions we have taken to sanction Putin’s regime are not cost free for us at home.

The invasion of Ukraine presents a risk to our recovery – as it does to countries around the world.

We came into this crisis with our economy growing faster than expected…

…with the UK having the highest growth rate in the G7 last year.

But the OBR has said specifically:

“There is unusually high uncertainty around the outlook”;

It is too early to know the full impact of the Ukraine war on the UK economy.

But their initial view, combined with high global inflation and continuing supply chain pressures, means the OBR now forecast growth this year of 3.8%.

The OBR then expect the economy to grow by 1.8% in 2023, and 2.1%, 1.8% and 1.7% in the following three years.

The House will take comfort that the lower growth outlook has not affected our strong jobs performance:

Unemployment is now forecast to be lower, in every year of the forecast.

It is already at 3.9% – back to the low levels we saw before the pandemic.

But Mr Speaker, the war’s most significant impact domestically is on the cost of living.

Covid and global factors meant goods and energy prices were already high:

Statistics published this morning show that inflation in February was 6.2%…

…lower than the US and broadly in line with the Euro area.

Disruptions to global supply chains and energy markets…

…combined with the economic response to Putin’s aggression…

…mean the OBR expect inflation to rise further, averaging 7.4% this year.

As I said last month, the government will support the British people as they deal with the rising costs of energy.

People should know that we will stand by them, as we have throughout the last two years.

That’s why we’ve announced a £9bn plan to help around 28 million households…

…pay around half of the April increase in the energy price cap.

And people should be reassured that the energy price cap will protect their energy bills, between now and the autumn.

But I want to help people now.

So I’m announcing three immediate measures.

First, I’m going to help motorists.

Today I can announce for only the second time in 20 years, fuel duty will be cut.

Not by 1, not even by 2, but by 5 pence per litre.

The biggest cut to all fuel duty rates – ever.

And while some have called for the cut to last until August, I have decided it will be in place until March next year – a full 12 months.

Together with the freeze, it’s a tax cut this year for hard-working families and businesses worth over £5 billion.

And it will take effect from 6pm tonight.

Second, as energy costs rise, we know that energy efficiency will make a big difference to bills.

But if homeowners want to install energy saving materials…

…at the moment only some items qualify for a 5% VAT relief…

…and there are complex rules about who is eligible.

The relief used to be more generous but from 2019 the European Court of Justice required us to restrict its eligibility.

But…thanks to Brexit…we’re no longer constrained by EU law.

So, I can announce for the next five years…

…homeowners having materials like solar panels, heat pumps, or insulation installed…

…will no longer pay 5% VAT– they will pay zero.

We’ll also reverse the EU’s decision to take wind and water turbines out of scope – and zero rate them as well.

And we’ll abolish all the red tape imposed on us by the EU.

A family having a solar panel installed will see tax savings worth £1,000.

And savings on their energy bill of over £300 per year.

And Mr Speaker, this policy highlights the deficiencies in the Northern Ireland Protocol…

…because we won’t immediately be able to apply it to Northern Ireland.

But we will be raising it with the Commission as a matter of urgency.

And I want to reassure Members from Northern Ireland…

…that the Executive will receive a Barnett share of the value of the relief until it can be introduced UK-wide.

And the Prime Minister will bring forward further measures to reinforce our long-term energy security, in the coming weeks.

And finally, I want to do more to help our most vulnerable households with rising costs. They need targeted support.

So I am doubling the Household Support Fund to £1bn with £500m of new funding

Local Authorities are best placed to help those in need in their local areas.

and they will receive this funding from April.

Mr Speaker,

We can only afford to provide this extra support because of our stronger economy…

…and the tough but responsible decisions we’ve taken to rebuild our fiscal resilience.

Today’s forecasts confirm even after the measures I’m announcing today, we are meeting all our fiscal rules.

Underlying debt is expected to fall steadily from 83.5% of GDP in 2022-23 to 79.8% in 2026-27.

Borrowing as a percentage of GDP is 5.4% this year, 3.9% next year, then 1.9%, 1.3%, 1.2% and 1.1% in the following years.

At a time when the OBR has said that our fiscal headroom could be …

…“wiped out by relatively small changes to the economic outlook” …

…it is right that the central fiscal judgement I am making today is to meet our fiscal rules with a margin of safety.

The OBR have not accounted for the full impacts of the war in Ukraine…

…and we should be prepared for the economy and public finances to worsen – potentially significantly.

And the cost of borrowing is continuing to rise.

In the next financial year, we’re forecast to spend £83bn on debt interest – the highest on record.

And almost four times the amount we spent last year.

That’s why, Mr Speaker, we have already taken difficult decisions with the public finances;

And that’s why we will continue to weigh carefully calls for additional public spending.

More borrowing is not cost or risk free.

I said it last autumn, and I say it again today: borrowing down; debt down

So Mr Speaker,

Our response to the immediate crisis in Ukraine has been unwavering.

But we must be equally bold in response to the deeper, and more fundamental challenge Putin poses to our values.

We must show the world that freedom and democracy remain the best route to peace, prosperity, and happiness.

We will do so by strengthening our economy here at home.

To that end, we are helping families with the cost of living;

Creating the conditions for accelerated growth and productivity;

And making sure the proceeds of growth are shared fairly.

That is not the work of any one statement.

But it does begin today – and with one of our most important levers: the tax system.

I told the House last Autumn my overarching ambition was to reduce taxes by the end of this Parliament.

And we will do so – in a way that is responsible and sustainable.

Today, I am publishing a Tax Plan.

We will take a principled approach to cutting taxes:

Maintaining space against our fiscal rules – as I have done today.

Continuing to be disciplined, with the first call on any extra resources being lower taxes, not higher spending.

And, of course, carefully considering the broader macroeconomic outlook.

With those principles in mind, our new Tax Plan will build a stronger economy by reducing and reforming taxes over this Parliament, in three ways:

First, we will help families with the cost of living.

Second, we will create the conditions for higher growth.

And third, we will share the proceeds of growth fairly. Ensuring people are left with more of their own money.

Let me take each in turn.

Mr Speaker,

There is now a dedicated funding source for the country’s top priority – the NHS and social care.

Providing funding over the long-term, as demand grows.

With every penny going straight to health and care.

If it goes…then so does the funding.

And that funding is needed now.

Especially as my RHF the Health Secretary’s plans to reform healthcare, will ensure every pound of taxpayers’ money is well spent.

When I said we were a government for public services, a government for the NHS, I didn’t just mean ‘when it was easy’… it is a total commitment.

So, it is right that the health and care levy stays.

But a long-term funding solution for the NHS and social care is not incompatible with reducing taxes on working families.

Over the last decade, it has been our mission to promote tax cuts for working people and simplify the system.

That’s why the government raised the income tax personal allowance from £6,500 in 2010 to the new level of £12,570.

But the equivalent thresholds in National Insurance – which define how much people can earn NICs-free – are still around £3,000 less.

The Prime Minister pledged in the 2019 election we would increase those thresholds.

We made a big step towards that goal in my first Budget in 2020, increasing the National Insurance threshold to £9,500.

Today, we take the next step.

Our current plan is to increase the NICs threshold this year by £300.

I’m not going to do that.

I’m going to increase it by the full £3,000.

Delivering our promise to fully equalise the NICs and income tax thresholds.

And not incrementally over many years, but in one go, this year.

From this July, people will be able to earn £12,570 a year without paying a single penny of income tax or National Insurance.

That’s a £6 billion personal tax cut for 30 million people across the United Kingdom.

A tax cut for employees worth over £330 a year.

The largest increase in a basic rate threshold – ever.

And the largest single personal tax cut in a decade.

The Institute for Fiscal Studies has called it: “the best way to help low and middle earners through the tax system”.

It creates what the Centre for Policy Studies has called a “universal working income”.

It is a tax cut that rewards work.

And, Mr Speaker, around 70% of all workers will have their taxes cut by more than the amount they’ll pay through the new Levy.

Once again showing it is this government delivering for hardworking families and helping with the cost of living.

So, Mr Speaker,

The first part of our Tax Plan for a stronger economy is to support families with the cost of living.

But as I set out in last month’s Mais lecture…

…to lift our growth and productivity we need the private sector to train more, invest more, and innovate more.

People. Capital. Ideas.

That’s how we’ll create a new culture of enterprise – the second part of our Tax Plan.

The plan sets out tax cutting options on business investment and innovation, with final decisions to be announced in the Autumn Budget.

But these are significant and complex questions, so we will work with businesses over the summer to get the answers right.

Let me explain to the House the direction of travel.

First, people.

We lag international peers in adult technical skills:

Just 18% of 25-64 year olds’ hold vocational qualifications, a third lower than the OECD average.

And UK employers spend just half the European average on training their employees.

So, we will consider whether the current tax system, including the operation of the Apprenticeship Levy…

…is doing enough to incentivise businesses to invest in the right kinds of training.

Second, ideas.

Over the last fifty years, innovation drove around half the UK’s productivity growth.

But since the financial crisis, the rate of increase has slowed more than in other countries.

And our lower rate of innovation explains almost all our productivity gap with the United States.

Right now, we know that the amount businesses spend on R&D as a percentage of GDP is less than half the OECD average.

And that is despite us spending more on tax reliefs than almost every other country.

Something is not working.

So we’ll reform R&D tax credits so that they’re effective and better value for money.

We’ll expand the generosity of the reliefs to include data, cloud computing, and pure maths.

And we’ll consider, in the autumn, whether to make the R&D expenditure credit more generous.

Third, capital.

Weak private sector investment is a longstanding cause of our productivity gap internationally:

Capital investment by UK businesses is considerably lower than the OECD average of 14%.

And it accounts for fully half our productivity gap with France and Germany.

Once the Super Deduction ends next year, our overall tax treatment for capital investment will be far less generous than other advanced economies.

We’re going to fix that.

In the Autumn Budget, we will cut the tax rates on business investment.

And I look forward to discussing the best way to do that with businesses.

People. Capital. Ideas.

Three priorities for business tax cuts this autumn.

But, Mr Speaker, I want to help smaller businesses right now.

So let me remind the House of our plan:

Our business rates discount will take effect in April for retail, hospitality, and leisure businesses.

They’ll get a 50% discount on their business rates bill, up to £110,000.

A typical pub will save £5,000.

That’s a tax cut for hundreds of thousands of small businesses worth £1.7 billion.

Taking effect in just one weeks’ time.

Our Help to Grow: Management scheme offers businesses mini-MBAs, 90% funded by government – a benefit worth several thousand pounds.

And Help to Grow: Digital gives businesses a 50% discount on buying new software worth up to £5,000.

We’ve also increased the Annual Investment Allowance to £1 million;

So that all small and medium sized businesses will feel the benefit of full expensing.

But Mr Speaker, I want to respond to the specific calls from small businesses, with one further announcement today.

The Employment Allowance cuts small businesses’ tax bills, making it cheaper to employ workers.

In my first Budget two years ago, I increased that allowance.

Today, I am going further.

From April, the Employment Allowance will increase to £5,000.

That’s a new tax cut worth up to £1,000 for half a million small businesses – starting in just two weeks’ time.

So, Mr Speaker,

Future tax cuts on business investment and innovation.

A business rates discount worth £1.7 billion.

Help to Grow schemes worth thousands of pounds per business.

An annual investment allowance worth up to £1 million.

And a new tax cut on the costs of employment worth £1,000 per company.

Once again, Mr Speaker, it is this government delivering for British business.

Mr Speaker,

The tax plan I’ve announced today will help people and businesses deal with rising costs.

Will help raise the future growth rate of this country.

But we want the proceeds of growth shared fairly – the third objective of our tax plan.

The knowledge you can keep more of what you earn is a powerful incentive for people to work hard.

It means greater economic security, and we know that individuals spend their money better than governments do.

We’ve already announced today the equalisation of personal tax thresholds, giving over 30 million workers a tax cut worth over £330.

And, over time, I want to go further.

But tax cuts must be paid for.

They must be prioritised.

And they must fit the economic circumstances of the time.

A clear goal for previous Chancellors… … has been to cut Income Tax…

The fact this has happened only twice in 20 years tells you how hard it is to do.

Covid and the war in Ukraine have only added to the difficulty of achieving this by the end of this Parliament.

I am sure all Members of the House recognise and understand those challenges.

It would clearly be irresponsible to meet this ambition this year.

And yet…I refuse to let that ambition whither and drift.

By 2024, the OBR currently expect inflation to be back under control, debt falling sustainably, and the economy growing.

Our fiscal rules are met with a clear margin of safety.

And so my final announcement today is this:

I can confirm, before the end of this Parliament, in 2024, for the first time in sixteen years…

…the basic rate of income tax will be cut from 20 to 19 pence in the pound.

A tax cut for workers, for pensioners, for savers.

A £5bn tax cut for 30 million people.

Let me be clear with the House: It is fully costed and fully paid for in the plans announced today.

Last year, I told the House I would cut taxes for hardworking families…

…but I would do so in a responsible and sustainable way…

…and today, I am delivering on that promise.

So let me say this …

Cutting taxes is not easy, it requires hard work, prioritisation…

…and the willingness to make difficult and often unpopular arguments elsewhere.

It is only because this government has been prepared to make those difficult but responsible choices to fix our public finances…

…that I can stand here and tell this House that not only are taxes being cut…

…but that debt is also falling…whilst public spending is increasing.

This doesn’t happen by accident Mr Speaker…

We can deliver for the British people today and into the future…

We have a plan.

A plan that reforms and improves public services.

A plan to grow our economy

A plan to level up across the United Kingdom.

A plan that helps families with the cost of living.

And yes, a tax plan…

…that cuts taxes on working families by over £330.

Cuts taxes on fuel by 5p per litre.

Cuts taxes on business.

And yes… for the first time in a long time…

Cuts income tax.

Mr Speaker, let me end by simply saying this:

My Tax Plan delivers the biggest net cut to personal taxes in over a quarter of a century.

And I commend it to the House.

The speech made by Rishi Sunak, the Chancellor of the Exchequer, on 24 February 2022.

Thank you for that warm welcome.

Many of you will have woken up this morning to scenes of explosions in cities across Ukraine. The whole world is rightly appalled at Russia’s unprovoked aggression. The Prime Minister has called this an attack without provocation and without any credible excuse

When the sovereign freedom of one democratic nation is threatened, wherever they may be in the world, democracy everywhere is challenged.

As such, if our commitment to freedom is to mean anything, we must, acting in unison with our allies, apply severe economic cost to these actions.

The Prime Minister will be making a statement in parliament later today, and you can expect significant further sanctions to be brought forward.

I have spoken with the Governor of the Bank of England this morning, and we are closely coordinating across the financial authorities to monitor financial stability .

And we are also keeping a careful watch on energy markets. As a result of Russia’s actions we are already seeing volatility in wholesale gas prices.

We are with Ukraine and its people at this difficult time.

And as I stand here in front of all of you, able to debate ideas, to disagree with one another, but in the knowledge that we will leave as friends and in safety…

…I am reminded that such things are all too easily taken for granted.

And it is all the more important that we never cease to extol the virtue of democracy and the freedom it brings here at home, as well as around the world.

President, Dean, ladies and gentleman let me now turn to todays lecture

As we come out of the Covid crisis, much like almost every other crisis in recent history where government has been forced to act in an extraordinary manner, people are asking whether this level of intervention is the new normal. Some actively argue for it, and claim it is the foundation of a new economic model, where government is a permanently bigger presence in the market and our lives.

I want to use today’s Mais lecture to talk to you about a different vision for our economy, the future economy we must build. An economy where businesses are investing more; where people of all ages are supported to learn; and, most importantly, where ideas and innovation constantly transform our lives.

In short, a future economy built on a new culture of enterprise.

And whilst a culture is made up of many things… one way of understanding it is the collective mass of the millions of decisions made by people and businesses.

I can’t make decisions for people, and nor should I. It is the job of government to create the conditions, not determine the outcome. But I am clear that we need to change.

I am optimistic about the future of this country and people’s desire to do things differently; to be bold and focused.

We must put all our energies into three priorities: Capital. People. Ideas. And if we can do that, then we can rejuvenate our national productivity, restore hope and opportunity as we level up, and have confidence in our future happiness, prosperity and security.

Our new culture of enterprise will take as its starting point a strong belief in a simple, enduring proposition: that the best way to organise our economy is around free market principles.

Adam Smith famously remarked in the Wealth of Nations that “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love”. Very few comments in economic history have been as wise, as influential, or as widely misinterpreted as this one.

Wise – because at its heart economic life is about all of us – and should benefit all of us.

The result of human action but not of human design; influential – because systems built around the ideas of an open market economy have proven themselves through the overwhelming might of historical evidence; and yet widely misrepresented – because Adam Smith did not think the underlying driver of the market is greed but the universal and laudable desire to better the condition of ourselves and those we love.

Smiths account of the market economy, is not as some have suggested a values free construct which rationalised social choice. Markets do not operate independently of societies; rather they are reliant on law and norms, to generate the crucial currency of trust. But more than this Adam Smith told us that even in markets peoples choices are not solely born of economic , they are enthused with empathy and the moral imagination.

As he says at the start of his first great work, The Theory of Moral Sentiments:

However selfish soever man may be supposed…

…there are evidently some principles in his nature, which interest him in the fortune of others…

…and render their happiness necessary to him…

…though he derives nothing from it except the pleasure of seeing it.

In his Mais lecture, the late Jonathan Sacks took this idea further…

…arguing not just that the market was a moral force for good…

…but that morality was its very foundation.

Through the freedom to exercise our own wants, desires, and actions.

The dignity of being able to support ourselves through the product of our own labour.

And the moral responsibility that can only come from being exposed to the consequences – whether good or bad – of our own actions.

I believe that a system built around the free exchange of goods and services, the responsibility of the individual, the division of labour – is the morally right way to organise our economy.

And it works.

As a machine for innovation and growth the free market is positively correlated with almost everything we imagine is desirable for humanity: higher living standards, greater wellbeing, longer lives lived in greater leisure, freedom and peace. The arc of human history has taught us that more than any other economic system, the free market provides the best possible route to achieving the most happiness and security for the greatest number of people.

For all that there is a moral and material case for the market, I recognise its limits.

First, because change is inherent in a free market; the “perennial gales” of disruption and dislocation are the price we pay for the promise of a better standard of living. The moral case for the market rests not just on freedom.

It is not enough to say to someone whose job has moved overseas, whose wages aren’t growing, or whose occupation is no longer deemed useful: be grateful for your freedom. Yes, you can have freedom without dignity, but I doubt many of us in this room would choose it or think it a particularly edifying existence.

So it is incumbent on government to support people, especially those unable to support themselves, and through the welfare state, public services and education. Its why we raised the National Living Wage, cut the tax rate in Universal Credit, and are so focused on reducing regional inequality and levelling up.

Second, the free market creates the wealth that allows us to support our families and our communities. But we need to guard against the market reaching too far into these realms, eroding the bonds between us, and turning a market economy into a market society.

And third, the market has limits in dealing with externalities like climate change, and periods of profound disruption like wars, financial crises, or pandemics. Having been part of a government that had to actively shutdown the economy, and introduced interventions like the furlough, I know this as well as anyone.

But the biggest challenge the free market faces today is where new growth will come from. And that’s why we need a new culture of enterprise.

We are caught in what we might call a ‘great slowing down’ across the western world, that began even before the Covid pause. Productivity, living standards, and dynamism are not growing fast enough.

And the impact of these trends on people is being exacerbated by high inflation. This is primarily a global problem, driven by higher energy and goods prices.

The government is dealing with high inflation by helping people with those extra costs, and through the monetary policy framework.

But over the longer-term, the most important thing we can do is rejuvenate our productivity.

Because when the economy and our standard of living are not growing fast enough, consent for the system is undermined. If we cannot accelerate growth, people will begin to lose faith in the moral and material case for free markets.

Alternative sources of economic and political security will become more appealing.

I am confident and optimistic about the future of liberal democracies, but nothing has a right to exist. So it is precisely in order to preserve the freedoms that only come from market economies that political leaders must ensure that they are successful.

So the question we face today is urgent and it is consequential: How do we accelerate growth, and, in doing so, restore people’s faith in the free market?

Now my answer to that question is to foster a new culture of enterprise. But before I explain that, I want to take on two alternative but false ideas about where growth is going to come from.

The first is that the answer to everything is more Government.

The idea that we must spend ever more, regardless of the impact on borrowing and debt, on the assumption that all spending is good and will naturally transform productivity, if only there was more of it.

And hand in hand with those calls for higher spending are calls for more government intervention. We have seen a steady drift away from some of the very principles that make the free market effective.

We can see this in the assumption that government should decide which sectors will be important in the future; should take a view on more and more prices in the economy; and the growing tolerance for businesses to be reliant on taxpayers’ support and never allowed to fail. Corporate welfare and ill-thought through subsidies are unfair to taxpayers, who pick up the bill.

And unfair to other firms – including those not yet created – who could do better.

I have deliberately left party politics almost entirely absent from this speech save for one point I wish to make – and it is actually about Conservative voters.

In my experience, and perhaps contrary to received wisdom, it doesn’t matter whether you’re from the North or the South, live in a village, town or a city, there is a common set of values. They’re as opposed to bigger government in the Tees Valley as they are in the Thames Valley.

What people everywhere want is the opportunity to succeed for themselves.

That is why the Prime Minister is completely right that levelling up cannot be delivered through the public sector alone. Instead, as he said last year: “levelling up can only be achieved with a strong and dynamic wealth-creating economy”.

And that’s why we should always remember the principled truth at the heart of the free market: economic success comes from people and businesses – from individuals given the freedom to pursue their own ideas in their own interest in their own way.

In Harold Wilson’s celebrated 1963 speech about the white heat of technology, he quoted Jonathan Swift: “Whoever could make two ears of corn, or two blades of grass, to grow upon a spot of ground where only one grew before, would deserve better of mankind, and do more essential service to his country, than the whole race of politicians put together”. We’re still learning this lesson 60 years later.

If the first false idea about how to increase growth was that governments should spend more and do more, the second is that the answer is unfunded tax cuts.

I firmly believe in lower taxes. The most powerful case for the dynamic market economy is that it brings economic freedom and prosperity. And the best expression of that freedom is for all of us to be able to make decisions about how to save, invest or use the money we earn. The marginal pound our country produces is far better spent by individuals and businesses than government.

So I am disheartened when I hear the flippant claim that ‘tax cuts always pay for themselves’. They do not. Cutting tax sustainably requires hard work, prioritisation, and the willingness to make difficult and often unpopular arguments elsewhere. And it is hard to cut taxes at a time when demands on the state are growing.

Our society is ageing. I believe that a wealthy and civilised country should offer older people dignity in retirement. But we need to acknowledge that this requires higher public spending on pensions, health, and social care, unless political leaders are prepared to have difficult conversations with the public. Health spending is already growing at three times the rate of education. And the legacy of covid is that annual vaccination programmes, antivirals, and testing, will add annual extra costs in the billions of pounds.

As a Conservative Chancellor, I am often urged to follow Thatcher and Lawson’s legacy. They are sound lodestars to navigate by. But we sometimes only hear a partial account of their approach. Observers are quick to highlight the downward trajectory of the tax burden during the 1980s – which was, clearly, a historic and necessary achievement. But they are perhaps less quick to remember, that only once the deficit was under control, did they begin cutting taxes.

“The notion that tax cuts, without any spending cuts or substitute source of revenue, will so stimulate the economy that the Budget balance will improve, enabling further tax cuts to be made…is a spurious kind of virtuous circle [and] emphatically not part of my thinking”. Not my words – those of Nigel Lawson.

Thatcher herself recalled, in her memoirs, ahead of the 1981 Budget: “I was horrified at the thought of reversing even some of the progress we had made on bringing down Labour’s tax rates”, she said. “Yet I knew in my heart of hearts there was only one right decision, and that it now had to be made”. In that Budget they froze the income tax personal allowance – a decision I also had to take, with equal reluctance, forty years later.

I am going to deliver a lower tax economy but I am going to do so in a responsible way, and in a way that tackles our long term challenges.

The trap of both those ideas – that we can simply grow the economy with public spending, or supposedly self-funding tax cuts – is that they are both highly seductive, easy answers. Neither are serious or credible; neither on their own will transform growth; and because they ignore the trade-offs inherent in economic policy, both are irresponsible.

So how do we accelerate growth and rejuvenate our national productivity? I believe the most important role for government is to create the conditions for the private sector to do things differently – a new culture of enterprise.

In part, that means creating a stable foundation, by reinforcing some of those enduring principles of free market economics: sound money, respect for the rule of law, protections for private property rights, openness and free trade, a stable relationship with allies, regulation that encourages competition and innovation, and, especially at a time of high inflation, an independent central bank with a clear and unambiguous mandate for low and stable inflation.

All of that provides the foundation for growth. But it will not accelerate growth in and of itself. So we will use the tax and regulatory levers at our disposal to foster the new culture of enterprise that will create our future economy.

Everyone listening to this lecture will have their own view about how to do that. There are many good ideas that can make a difference – some incremental, some more significant. The only way we can make a difference to the most stubborn and difficult problems is to focus; to decide where our efforts can have the biggest impact and relentlessly pursue those few chosen goals with all the energy and resources at our disposal. By trying to deliver everything we achieve nothing.

So in accelerating growth, I have three priorities. Priorities that I believe will foster a new culture of enterprise and deliver a higher growth rate. The first is to encourage greater levels of capital investment by our businesses. Second, we need to improve the technical skills of the tens of millions of people already in work. And third, we want to make this the most innovative economy in the world by driving up business investment in research and development.

Capital. People. Ideas. Three priorities to deliver higher productivity, tied with one golden thread: that what government does is far less important than creating the conditions for private businesses and individuals to thrive. Let me take each priority in turn.

During the 19th and 20th centuries, a flood of capital investment drove what Daniel Boorstin called: “countless, little noticed revolutions…that touched [our lives] everywhere and every day.” Capital paid for the railways that transported people and goods more quickly and cheaply. For the cables and pylons that carried electricity into factories and homes, replacing darkness with light. For the machines that freed people from backbreaking manual labour.

In recent decades, here in the UK, that stream of new capital has slowed. Even in the decade before the global financial crisis, capital deepening grew UK productivity by just 0.4ppt per year, less than half the OECD average. And this is a longstanding cause of our productivity weakness internationally: Resolution Foundation and London School of Economics research has shown that lower capital per hour worked is perhaps the single biggest explanation for our productivity gap with France and Germany, accounting for around half.

Why is investment so low? My analysis is clear: the problem is no longer the Government; businesses simply aren’t investing enough. Public sector net investment as a share of GDP is reaching its highest sustained level since the 1970s. Over this Parliament, Government fixed capital formation will increase from 2.75% of GDP to over 3% of GDP – closer to the OECD average and ahead of our peers like Germany. It will take time for that investment to make a difference – but the plans are set, the capital is there and it will happen.

But government investment in capital is much less important than the significantly greater sums of capital invested by private businesses. However, capital investment by UK businesses averages just 10% of GDP, considerably lower than the current OECD average of 14%.

The lower level of capital investment we see by UK businesses is not primarily driven by the sectoral composition of our economy, or by differences in firm size, and is observed across all regions. This is a pervasive economy wide issue, it has been persistent for decades, and we must fix it to improve productivity, growth, and living standards. Indeed, we need the private sector to invest to level up this country.

None of this is to blame firms. I know there has been a cloud of uncertainty hanging over the British economy in recent years. But that cloud is lifting: the form of Brexit is clear, with a comprehensive free trade agreement; we are moving on to living with Covid more quickly than elsewhere; we’ve set out plans for our most capital-intensive ambitions, like Net Zero.

However, in looking for a potential answer to this challenge, it is worth noting one area we do stand out as an outlier relative to our international peers. And that is in the generosity of our tax system towards capital investment.

An analysis of the Net Present Values of different countries’ tax treatment of long-lived capital assets like plant and machinery shows that despite the UK’s highly competitive headline corporation tax rates, the overall tax treatment provided for capital investment is much less generous than the OECD average. It is unclear that cutting the headline corporation tax rate did lead to a step change in business investment; we need our future tax policy to be targeted and strategic.

So as I develop a business tax strategy for the years ahead, it seems likely to me that a priority will be to cut taxes on business investment.
My second priority is to increase the technical skill level of people who are already in work.

Providing our people with a world class education is one of government’s greatest responsibilities. This is a moral imperative. Education is the most powerful weapon we have in our fight to level up. And as new technology expands the skills our workers will need, our training system needs to match it. We need to move decisively from a belief that ‘education’ is a moment that exists at the start of your life, to one where it is a central experience throughout your whole life.

School and university performance has improved dramatically in recent years. Look at the PISA tables – we now perform well compared to other western democracies; the result of significant public service reform, not public spending. And our universities are already world class: the number of people here in Britain with tertiary level qualifications is now at internationally high levels.

But when four in five of our 2030 workforce are already in work, the additional contribution education can make to productivity and growth is through adult skills.

We lag behind international peers in adult technical skills: just 18% of 25-64 year olds hold vocational qualifications, a third lower than the OECD average.

To resolve this, we need to engage and partner with private businesses. Not least because the people we want to support are already working in companies today, not sitting in classrooms. And above all, because the private sector is the best judge of where the jobs and skills of tomorrow lie.

So it should concern us that UK employers spend just half the European average on training their employees. Many employers don’t offer training at all. And less than 10% of the spending on training by UK employers goes to high-quality formal training offered by external providers.

Of course, I know and visit many employers who are shining examples doing a fantastic job in upskilling their workforces, but sadly they are the exception and not the rule.

Clearly, the government has a role to play. Our introduction of the Lifelong Learning Entitlement, Skills Bootcamps, T Levels and improved funding for post 16 education and colleges will all help.

But we need to do more to improve awareness and perception of the quality of our technical qualifications, and link them more closely to good employment outcomes.

So We’ll reform the complexity and confusion in the current system; right now, people have to navigate a menu of around 4,000 qualifications at level 3 and over 3,000 at levels 4 and 5.

And lastly, as I develop the tax strategy for the years ahead, we should examine whether the current system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training. For a long time, economists thought the dominant factors driving economic growth were capital and people. Economic research shows us, there’s now a third: innovation. For me, if we want to drive up future growth and productivity, then the highest of the three priorities should be to ensure the UK economy is the most innovative in the world.

I studied and worked in California, surrounded by Silicon Valley start-ups, living and breathing that entrepreneurial culture. And one of my Professors at Stanford University was the brilliant and inspiring economist Paul Romer, who won the Nobel Prize for a new growth theory focused on innovation and ideas.

His big insight is worth pausing on: Ideas are what he called non-rivalrous. I still remember him explaining this in a lecture by comparing ideas to recipes. A recipe allows anyone to make something wonderful from a set of ingredients. But critically my using the recipe does not stop you doing the same. And, even better, people can create new recipes, which are cheap and easy to replicate and share. The combination of these qualities means ideas have no diminishing returns – a powerful source of future growth.

One of the biggest debates in economics right now is about whether innovation is still transformative – or whether it’s part of the great slowing down I talked about earlier. Two eminent economists have actually bet each other $400 on this very point.

On one side is Professor Robert Gordon, who argues that innovation is no longer happening across the economy in the same way as it did in the 20th century – instead, its narrowed to the domains of information, communication, and entertainment.

On the other side of the bet is Professor Erik Brynjolfsson, another Stanford economist, whose view hinges on the idea that artificial intelligence is a general-purpose technology, like steam power, electricity and information technologies. AI, in his view, is going to affect almost every industry, in areas as diverse as biotech and medicine, energy, retail, finance, manufacturing and even professional services.

Now I suspect it would be a conflict of interest for the Chancellor to bet on the outcome of economic statistics…but I am an optimist, and I’m with Brynjolfsson. In 1987, another Nobel Prize winner, Professor Robert Solow, remarked that “You see the computer age everywhere but in the productivity statistics.” He was right in 1987 – and the productivity statistics improved almost as soon as he said it. I think that that we are in the same place now: the effect of AI will soon become apparent; it is plausible to believe we are passing the bottom of the productivity J curve.

And this isn’t just about AI. The price of clean energy like offshore wind and solar has fallen dramatically. Electric vehicles are doubling up as batteries to store power for the grid. And Covid has accelerated innovation in many fields, like the adoption of digital technology by firms or mRNA vaccines.

So how do we make sure the UK is well placed to benefit from this new wave of innovation? In order to accelerate growth, this must be our highest priority.

Over the last fifty years, innovation broadly defined as multifactor productivity drove around half of the UK’s productivity growth. But the rate of increase has slowed considerably since the financial crisis, and more so than in other countries. This difference in multi factor productivity explains almost all our productivity gap with the United States.

To address this, we in Government will play our part: Outside the EU, we now have greater freedoms and flexibility than we’ve had in forty years. And we’re going to use those freedoms to ensure our regulatory systems in technology, life sciences, financial services and beyond support innovation.

We’re also improving access to finance through initiatives like British Patient Capital, the Future Fund, tax reliefs for investing in start-ups, reforming Solvency II and the charge cap to unlock pensions and insurance industry capital, and reforming our Listings Rules to make it easier for companies to raise public funding.

Furthermore We recognise the research from the OECD, McKinsey and others that shows we are falling behind our peers when it comes to our small and medium sized businesses adopting digital technology and innovative management practices. So we created and funded our landmark Help to Grow programmes to support SMEs to adopt productivity enhancing software and to get mini-MBAs.

And we recognise that nearly half of our STEM researchers in this country are immigrants and half of our most innovative companies have an immigrant founder. Part of the reason to end free movement of labour was to rebuild public consent in our immigration system. Precisely because we can now decide as a country who comes here, based not on their nationality but on their skill level, I believe we now have the public’s backing to create one of the world’s most attractive visa regimes for entrepreneurs and highly skilled people. We are delivering exactly that – and it will have a significant impact on our levels of innovation. Less “build it and they will come” and more “let them come and they will build it”.

And, of course, we will deliver our pledge to increase public investment in R&D to £22bn a year. As it is, total UK fiscal support for R&D, at 0.9% of GDP, is already in line with the OECD average, but it will increase by 50%], and is forecast to move to the top quartile over this Parliament.

But the target for government investment in R&D is only part of the story. In fact, our overriding challenge is increasing the amount of business investment in R&D. It is this investment that will ultimately drive the jobs, productivity, and growth of the future, and here we are significantly lagging. Self-financed business R&D as a % of GDP is less than half the OECD average. And as Cambridge economist Dr David Connell’s research shows, whilst other nations’ businesses have increased the share of GDP they devote to R&D investment by 50% in recent decades, UK business investment in R&D has stayed flat or even fallen.

So what should we do to support greater private sector investment in R&D? One obvious answer is to look at our tax regime. On the face of it, we have one of the most generous tax regimes for R&D investment anywhere in the world, measured by how much we spend on it compared to other nations. But in spite of spending huge and rapidly growing sums, clearly it is not working as well as it should. In the UK, business spending on R&D amounts to just four times the value of R&D tax relief. The OECD average? 15 times.

So as I deliver the tax strategy for the years ahead, it would be sensible to make sure our tax regime for innovation is globally competitive and so properly incentivises higher business investment in R&D.

Capital. People. Ideas. Three priorities to foster a new culture of enterprise. That’s how we’ll rejuvenate our national productivity; that’s how we’ll build a future economy that restores hope and opportunity.

But in closing, hope and opportunity should not be just the preserve of the citizens of the United Kingdom. As the situation develops in Ukraine, this moment reveals something about the UK’s global role.

The basis of our influence in the world…

…and ability to be a force for good…

…is going to be in large part based on the strength of our economy.

That economic strength gives us the resources to both invest more in defence and come to the aid of countries who need our assistance.

It gives us the ability to increase the security of our energy supply.

It gives us the diplomatic power to shape the rules of the international order and, when countries breach those rules, the weight to impose meaningful sanctions.

No nation has a right to lead. To a seat at the top table. It must be earned.

That’s why I’ve set out today a radically different vision of our future economy, built on a new culture of enterprise.

Not only to deliver prosperity for all our citizens. But also to advance our values on the world stage.

That’s the promise of the free market, and the greater goal of security and human happiness cannot be achieved without it.

That is what I believe.