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Below is the text of the speech made by Vince Cable, the Secretary of State for Business, Innovation and Skills, at Cambridge University on 23rd April 2014.

Cambridge contains many happy memories for me. It was here, more than 50 years ago, that I got to try my hand at acting and debating, where I first took an interest in politics and where – in hindsight – I sealed my fate by switching from natural sciences to studying economics.

Unusually for those times – in fact, it remains unusual today – I arrived in Cambridge with a decent idea of the direction my life might have taken had I gone to college rather than university. That wasn’t because of any advice I received at school, but because my father was a factory worker turned college lecturer who taught building trades. He cared deeply about his work – and about the value of training – but he also felt deep frustration about his own thwarted educational ambitions.

My subject this evening is the proper relationship between higher and further education. It arises from an awareness of the continuing gulf between the 2 systems, whether in terms of funding, of perceived esteem, of adequate pathways for students between the 2, of practical collaboration between HE and FE, or in terms of awareness among young people, their teachers and their parents.

As it happens, my launch point into this subject is a speech delivered by a hero of mine while I was a student at Fitzwilliam all those years ago. Tony Crosland’s vision of social democracy, set out in ‘The Future of Socialism’, inspired my early political life – and still does, in certain respects. In April 1965, Crosland – then Secretary of State for Education and Science – spoke at Woolwich Polytechnic on the need for ‘coordinating principles and…a general conception of objectives’ for HE and FE. What’s remarkable about that speech is how much of it continues to be relevant.

Crosland advocates a dual system of HE and FE, each with separate funding – as opposed to a unitary one in which universities sit at the top of an institutional ladder. Separation is necessary, he argues, because the ever increasing demand for vocational training cannot be fully met by universities, because a single hierarchical model inevitably diminishes the standards and self-assurance of colleges, and because FE must have capacity to be directly responsive to local and social needs.

He also focuses on the idea of polytechnics – a small number of new institutions with a clear purpose to concentrate on higher level skills, address the needs of industry and enjoy strong links to universities. His main warning resonates as much now as it did then:

We shall not survive in this world if we in Britain alone down-grade the non-university professional and technical sector. No other country in the Western world does so… Let us now move away from our snobbish caste-ridden hierarchical obsession with university status.

Almost 50 years since Crosland, then, we have similar concerns. For all the changes made over the decades in between – changes to our education systems, changes to how the world operates compared to the post-war era – many of the fundamental debates are also similar: about the importance of skills to sustainable economic growth, about the value of education to individual prosperity and wellbeing.

In particular, few people today would dissent from Crosland’s summary of what makes FE different and valuable: its “tradition of service to industry, business and the professions”; its delivery of training and qualifications required by the “all-important” technicians and managers in the UK workforce; and its courses for students supplementing their existing education or making up for missed opportunities earlier in their lives. “There are immense fields of talent and aspiration here,” he concluded. “Common justice and social need combine to demand that they should be harvested.”

It is worth briefly recalling what happened following those earlier political interventions on skills. The response to Cherwell’s warning was the creation of Colleges of Advanced Technology, like Aston, Loughborough and Surrey – conceived to rival the likes of Zurich, Charlottenburg and MIT. The CATs were absorbed by the university system in 1961, amid concerns that they lacked access to capital and were unable to recruit the best staff while falling under local authority funding. Crosland’s polytechnics, meanwhile, were incorporated as universities under the 1992 Act – Woolwich becoming the University of Greenwich – a nationalisation prompted by aversion to the same local government as much as for reasons of education or industrial policy.

Now, through the CATs and the polytechnics we gained some excellent universities, which brought with them genuine links to business, employer-designed degrees and strong research profiles. The polys, in particular, were pioneers in areas like sandwich courses – as Crosland noted – as well as modular courses, and they developed highly-regarded degrees in such professional disciplines as engineering, law and architecture.

But in gaining these universities, we lost something. Our post-secondary education has become distorted. The OECD concluded that our post-secondary vocational sub-degree sector is small by international standards – probably well under 10% of the youth cohort, compared to a third of young people elsewhere. In the US, more than 20% of the workforce have a post-secondary certificate or an associate degree as their highest qualification. In Austria and German, sub-degree provision accounts for around 50% of the cohort. In South Korea, one-third of the youth cohort enters junior college on 2-year programmes of higher vocational training. Elsewhere, countries with low volumes have sought to address the problem. Sweden, for example, trebled its numbers in higher VET programmes between 2001 and 2011.

We in England are out on a limb here – because, even Scotland has higher numbers gaining Higher National qualifications relative to bachelor degrees. It is unlikely that we have got things right and everyone else is wrong. The OECD identified a growing demand for post-secondary qualifications involving less than a bachelor’s degree. This is true for our labour market too. Employers in key sectors such as engineering and IT consistently tell me that they need workers with strong technical knowledge and skills – an area where the polytechnics excelled.

In a number of areas, technical skills shortages threatens to constrain growth. Our economy requires 830,000 new engineers over the next 8 years – purely to replace workers reaching retirement. The same thing is happening in the nuclear industry, where more than two-thirds of skilled workers are set to retire in the next decade. And in IT, more than two-thirds of employers report a lack of software engineers, which is hindering product development.

So clearly, there has been a hollowing out of our post-secondary provision.

Make no mistake. Our HE system is a great success, the engine behind the most productive research base in the G8. Despite growing competition, the UK still ranks first or second globally at research in most disciplines. UK HE output was more than £73 billion in 2011 to 2012, providing more than 750,000 full-time jobs. This equates to 2.8% of GDP – up from 2.3% in 2007 to 2008. Thanks to the funding reforms introduced, university finances have been put on a stable long-term footing – meaning increased resources for teaching and increased support for students from disadvantaged backgrounds. I have been particularly pleased to see applications from people from disadvantaged backgrounds reach record levels, and for English 18-year-olds in general, despite the declining demographics of that group, as well as recovery in the past year in applications from mature students.

There’s also much to be proud of in FE. We are on target to support 2 million apprentices over this Parliament. Colleges currently educate around 177,000 students at higher levels – offering many people the chance to live and study locally, and on a flexible, part-time basis. And, in a major success for our international education strategy, UK education providers have just won 4 contracts worth £850 million to establish 12 technical and vocational training colleges in Saudi Arabia. There is also plenty of innovative provision: the construction school at Hull college, which I visited last year, whose apprentices refurbish derelict housing to provide accommodation for families on low incomes; the Aviation Academy at Leeds Bradford International Airport, offering qualifications from Level 2 diplomas to a BSc in air transport management; Gateshead College’s simulated work facility located on-site at Nissan.

When I came into office in 2010, the one specific spending cut already pencilled in was for FE and training. While it didn’t make us popular, our decision to reform HE funding has not only strengthened the position of universities but – just as important, it freed up resources to support priority areas in FE such as basic skills and apprenticeships. We have also invested in the FE estate to the tune of almost £1.7 billion, enabling over 1,000 constructions and refurbishment projects across the country worth over £2.5 billion.

Nevertheless, serious weaknesses remain. High-level vocational training has fallen through the gap between our HE and FE systems, as I’ve already highlighted; relative to other countries, we are way behind where we need to be. Beyond that, it has to be said that funding for colleges, unlike that for universities, has shrunk. Allocations to colleges will have fallen by nearly a fifth in real terms by the end of this Parliament, while learner numbers have stayed near constant. Moreover, our further education system has become concentrated at low levels of training. For adults, the FE that government supports is geared more to addressing failures of the school system than meeting the requirements of employers. In such circumstances, it is far harder to, in Crosland’s words, “achieve the diversity in higher education which contemporary society needs.” Nor can we sensibly hope to achieve greater parity of esteem between HE and FE if students in the respective systems don’t enjoy parity in terms of resources.

So what should we do? I want to suggest a number of ways forward – some new, others already in train.

First, we need to fill that high-level vocational gap. Today, I want to set out the vision for a new generation of National Colleges: specialised institutions, acting as national centres of expertise, in key areas of the economy. They will be employer-focused, and combine academic knowledge with practical application.

We have already announced funding for 2 of these institutions. One is associated with High Speed 2, and will meet the needs of this major project as well as the wider rail industry. The other is the training facility – receiving £18 million of public investment – that’s destined for the Manufacturing Technology Centre in Coventry, where apprentices will get to qualify as incorporated engineers, there will opportunities for international secondments and progression to full degrees, and engineering graduates will earn chartered status.

In the near future, we will be publishing a National Colleges launch document, where we will invite employers in other key sectors to approach us with their ideas. Where there is evidence of a shortage in higher vocational skills, and employers are willing to invest time and resources to address it, then the government will invest alongside you. We want to hear from interested employers and we aim to announce the next set of National Colleges by the end of the year.

A second means to tackle the shortage of higher vocational skills is already available. Higher apprenticeships are an important solution to the sub-degree gap, and there are already some superb schemes, for which entry is as competitive as getting into Cambridge. Rolls Royce higher apprenticeships in engineering, for instance, take nearly 4 years and include degrees from the University of Warwick. Apprentices at Jaguar Land Rover can expect to be earning around £32,000 by the time they finish their course; they also collect a Warwick degree.

The kind of programme, including a sponsored degree, has huge advantages both for employers (who gain staff with theoretical as well as practical knowledge tailored to their specific needs) and for individuals (who gain a career-focused degree, earn good money while they study and graduate free without student loans).

Previous governments did not support this route effectively. Higher apprenticeship funding is difficult to claim and poorly administered. We are changing that by routing funding directly to employers, enabling them to purchase training for degree-level apprenticeships. In future, such apprenticeships can include full undergraduate and masters degrees, funded through employer and government co-investment.

This is an essential step to making higher apprenticeships the norm rather than a niche in the overall skills programme – making it as plausible to complete a degree via an apprenticeship as to go to university for 3 years. This is a huge opportunity for universities, who think of their customers in terms of employers as well as individuals. Doing so can attract significant investment, as well as introducing cutting-edge practice into their degree programmes – as Warwick has done.

Third, we need to trust FE institutions more. In overseas vocational systems, colleges have the power, like UK universities, to devise their own programmes and award their own qualifications. But in England, colleges are obliged to teach curricula handed to them by external awarding bodies, leaving little room to tailor provision to the needs of students or of their potential (or actual) employers. We need colleges with the power to decide what to teach and how. National Colleges will be able to do precisely that – setting the standards for their own qualifications, which other colleges will also be able to offer.

We want excellent existing colleges to set their own qualifications too – and to be able to validate the programmes of their peers. For example, Sir Tim Wilson recommended that when the opportunity to legislate arises, we should allow colleges with foundation degree awarding powers to accredit other foundation degree programmes. I agree with him.

This improving agenda cannot be restricted just to the higher levels of FE. Crosland was absolutely right when he insisted that “common justice and social need combine to demand” that the talents and aspirations of all students be nurtured and advanced, whether they seek professional careers, middle manager roles or to develop more basic skills. The Education and Training Foundation is a new body created and led by the sector itself to raise standards across the sector. It will be supporting implementation of the recommendations of Frank McLoughlin and his Commission on Adult Vocational Teaching and Learning. They include making sure that vocational programmes involve meaningful work placements and that there is proper employer representation on the governing bodies of colleges and training providers. We have also introduced a range of interventions to address poor quality, including a stronger process led by the FE Commissioner to ensure that rapid and robust action is taken to remedy poor performance in FE.

I should add, in passing, that we will not compromise on quality in HE either – where, for example, we are requiring all alternative providers to have existing courses independently assured and their management and financial sustainability scrutinised. As recipients of public funding via their students, we have also asked alternative providers to join HESA and provide information on what they provide for those students.

Next, we recognise that unlike HE students, FE students are not eligible for maintenance loans and grants. FE students normally study close to home, reliant on parental support and/or substantial amounts of paid part-time work. In many cases, parental support is limited; FE students typically come from low-income backgrounds. But, as FE becomes more specialised, we may need to think about provision for students studying for high level qualifications who may need to relocate to be close to national centres of expertise. This, along with the other points I have raised today, is an area that I think will require further investigation in the future.

Fifth, we need colleges and universities to work more closely together: to facilitate progression between FE and HE; to provide a coherent educational offer locally; to work with Local Enterprise Partnerships so that their growth plans can proceed with the skills elements in place. I know that this happens here and there. City and Islington College has strong progression pathways enabling students to go on to prestigious degrees, including medicine. Coventry University has set up Coventry University College, focused on sub-degree provision. Teesside is also ahead of the game, with a partnership between Teesside University and the Tees Valley further education colleges of some 20 years’ standing. It guarantees FE students a place on a degree programme once they’ve completed an Access to Higher Education Diploma. The Tees Valley LEP is now establishing a specialist STEM centre with the university and Middlesbrough College, supported by a £6.5 million grant from the Skills Funding Agency. I want to see far more initiatives of this kind arising from local recognition of local need.

Sixth, and finally, I come back to the slippery issue of esteem. Our stated goal is for people to regard academic and vocational routes to higher educational attainment as equally valid – and for higher level qualifications, academic and vocational to be of equal prestige. This will continue to be an uphill battle. I recently heard of a school’s astonishment when it learnt that one of its pupils opted to undertake a degree level apprenticeship at a leading employer rather than go to Oxbridge.

We urgently need balanced careers advice, with schools as conscious and supportive of vocational opportunities as academic ones. There’s still a lingering view in this country that apprenticeships are for people who don’t make it to university. This is wrong, and is would be met with bewilderment in other countries. We should be clear that there are degree- and masters- level apprenticeships, which are just as rigorous as degrees studied in the traditional way – and deliver equally good (or better) career prospects.

The Department for Education is developing a common application portal so that 16-year-olds can see to see the full range of options available to them. Similarly, if we are to have credible, high-level vocational programmes – which are a legitimate and equally prestigious alternative to the traditional undergraduate route – older school leavers should be able to consider them alongside university options. We already have a well-recognised and effective system for applying to university through UCAS, which operates independently of government. What is less well known is that UCAS also acts as a portal for candidates applying to study Higher National Certificates and Higher National Diplomas, including at FE Colleges. I have asked my department to work with UCAS to examine the scope for integrating higher level apprenticeships into their services.

In sum, this is a challenge where we must be both determined and patient. Over time, as the funding changes I’ve outlined boost the volume of higher apprenticeships sufficiently for them to become mainstream, they – and other options – should be seen as an increasingly attractive rival to the university degree.

My purpose here is most certainly not to shift attention away from higher education in this country. Our system is outstanding, and I want as many people to benefit from it as possible, once they have the appropriate qualifications. We have lifted number controls on universities, because it is good for individual opportunity and it is good for growth. But by tackling the sub-degree gap, by improving funding mechanisms, by changing popular attitudes, we can broaden choice for people and for the businesses who need capable staff.

Our HE and FE systems both have critical roles. Over the past half century, though, we have been more in thrall to the admirable vision of Lionel Robbins than we have to the equally pertinent vision of Tony Crosland. HE has grown in scale and prestige far ahead of FE, with adverse consequences. It is time to create the conditions whereby HE and FE can both fulfil their respective missions for the people of this country, and better combine to achieve shared national goals.

Below is the text of the speech made by Vince Cable, the Secretary of State for Business, Innovation and Skills, at the opening of the Catapult Centre for Offshore Renewable Energy Technology on 13th March 2014.

I am delighted to be back in Glasgow. And to be able to combine my job as Secretary of State – formally opening the Catapult Centre for Offshore Renewable Energy Technology at Strathclyde – with a visit to the university where I taught economics 4 decades ago, and to which I owe a great deal.

I am also here, in my UK ministerial role, to listen to and also represent the views of business. And since I am in Scotland I will engage with the issue of independence. Whatever view we might take on this issue, the question of existing political and economic arrangements is casting a blight over business investment and jobs at a time when the UK is seeking to build on the signs of recovery.

When I was at this university, I divided my working time between teaching and research (and, also, a large amount of time helping to run the city in the Labour council group). My research earned me a PhD, but it was somewhat esoteric and was probably only ever read by a handful of people. Nevertheless, putting aside the fancy equations which I introduced in order to impress the thesis examiners, I was dealing with a subject highly relevant today: the economics of integration. Indeed, we are now dealing with the economics of disintegration.

Before I address that issue it is worth mentioning that I was financed then, as most university researchers are today, by a UK research council. Scottish research universities receive about 13% of the total pot, which is a reflection of the high quality of research conducted here: way beyond Scotland’s 8% share of the UK population. I don’t know how many academics in Scotland have registered that this money would not be there after independence.

The exam question I set myself then was: what are the benefits and costs of integrating countries through regional common markets or similar arrangements? At the time, the early success of the European Union was inspiring countries in other parts of the world to copy its example – in Africa, Asia, the Middle East and Latin America, where I chose my case studies. The big lesson in hindsight is that economic integration has proved much harder than the theory suggested and has made little progress, with the exception of the North American Free Trade Area. The European model of integration has proved almost unique and is far too easily taken for granted.

Much the same applies to union between states of the kind achieved between England and Scotland in 1707 and maintained since. A good pub quiz question is: which countries have successfully and voluntarily merged since the Second World War? Tanganyika and Zanzibar? Perhaps. German reunification? But many multinational states have fractured: Pakistan, Yugoslavia, the Soviet Union, the United Arab Republic, Ethiopia, Sudan and Czechoslovakia. With the exception of the last, break up was violent or followed by violence. Please don’t take that as a warning about the UK. Yet experience does tell us that, in economies and politics as well as in relationships, divorce is invariably messy and painful and can be vicious. There are inevitable quarrels about borders, the allocation of oil and other natural resources, assets and debts, population movements and new citizenship definitions, rights and obligations. We should not underestimate the extent of goodwill required to achieve a velvet divorce. History teaches us that it is easier to break countries apart than to unify them – and the UK is an unusual and, I believe, a rather precious creation.

The central issue which my own research addressed was how to maintain regional (or national) integration in the face of persistent inequalities and imbalances. There is a theory of agglomeration, or ‘growth poles’, which suggests that, in the absence of strong corrective action, integration can lead to the polarisation of benefits. The European Union has been successful in narrowing such imbalances – labour migration being one important mechanism – though the current experience of some South European Eurozone countries vis-à-vis Germany may test that claim to destruction. And at a national level, a combination of regional policy, transfer payments and devolved government is recognised to be necessary to keep centrifugal forces in check.

There is an argument to the effect that London and the South East of England act as a destabilising source of imbalance in the UK. I have described London as a big suction machine. While this may be an issue between parts of North and South of England, it is not, however, obviously an issue between England and Scotland since Scotland has an employment rate of 73%, the highest country within the UK, and output per capita has been close to the UK average since the 1990s.

Ironically the issue of Scottish independence has surfaced as the economies have been converging, not diverging. There was a better basis for arguing that Scotland, especially the area formerly known as Clydesdale, experienced structural, disadvantage a generation ago. This was essentially the case I argued in the Red Papers for Scotland (edited by Gordon Brown), in which I contributed a piece arguing for radical devolution including home rule, an idea which was deeply unfashionable at the time. One creative outcome was a proposal which was worked up by a group of us – Glasgow University academics and politicians – which became the blueprint for the Scottish Development Agency, now Scottish Enterprise. It has served Scotland well over more than 3 decades, operating within the UK under different governments.

However, I have come to bring these issues up to date, not reminisce. There has been an exchange of reports by the UK and Scottish governments on the potential consequences of Scottish independence. I don’t just want to rehash the arguments but point to evidence on some of the main issues which have surfaced: the viability of continued monetary union; the likely trajectory of Scotland’s public finances; and the economic value to Scotland and the rest of the UK of the UK Single Market.

The issue of currency union is proving to be critical and the debate has been given non-partisan clarity by the Governor of the Bank of England. There are three currency options open to an independent Scotland; sterlingisation, adopting the euro and having an independent currency. However, the Scottish Government continues to propose the option of forming a sterling currency union.

Governor Carney has spelt out the essential preconditions for a successful, continued currency. It requires both high degrees of banking and fiscal integration of the sort we have now but that independence would fracture. An integrated financial sector requires a banking union such that any Scottish-based bank would have to be subject to UK-level financial regulation. Even then, UK tax payers would be exposed to external (Scottish) financial risks.

A further condition is fiscal integration, both to underpin the banking union and to mitigate the risk of Scotland borrowing in sterling at low interest rates and accumulating debt leading to default. Were Scotland to find itself with large debt and high interest rates, markets would doubt the durability of union, leading to politically challenging austerity or break up. The Eurozone crisis is a cautionary tale about the conditions required for successful monetary union which have a direct bearing on Scotland.

To meet these conditions would mean that Scottish independence would be highly circumscribed. Moreover, the UK government, including my colleague the Chief Secretary to the Treasury and the Shadow Chancellor have made it clear that it would not wish to be part of such a currency union with the risks and obligations involved. In the event of independence there will not be a currency union. The only way to keep the UK pound is to stay in the UK – that is part of the choice that people in Scotland are being asked to make. And this fact requires the campaigners for independence to have a plan b.

One possible plan b is a variant of monetary union which does not require the active cooperation of the continuing UK: so called ‘dollarization’. Several countries – Panama, El Salvador and Ecuador – have adopted the US dollar as their currency, as did Argentina before the arrangements collapsed. Hong Kong operates a currency board, which is similar to dollarization. Angus Armstrong has done some analysis of the option of sterlingisation for Scotland within the UK. He identifies the key challenge as the ability to offer lender of last resort facilities to financial institutions. Hong Kong does so to some degree but has fiscal reserves (accumulated surpluses) of 30% of GDP and $300 billion of foreign exchange reserves. Denmark has an analogous arrangement in relation to the Euro, as does Montenegro; but they do not have a significant banking sector.

Scotland, in contrast, would almost certainly start life as an independent country with a substantially more challenging financial position. It is simply not in a position to offer a credible facility and this applies in particular to Scottish banks which have assets totalling around 1,250% of an independent Scotland’s GDP The jibe about a small country with a big bank attached has practical consequences. The inevitable consequence, now being openly talked about, is that large financial institutions would decamp to the continuing UK. Leaving foreign banks operating on a branch basis and losing Scotland its invisible earnings from financial services. The recent comments from Standard Life and Alliance Trust predicting an exit from Scotland suggests that they have come to the same conclusion. Just as worrying is the fact that RBS and Lloyds (which incorporates the Bank of Scotland) have had to enter Scottish independence in their risk registers.

Academic analysis of the currency union options leads to the clear conclusion – spelt out by Armstrong and Ebell – that a separate currency for an independent Scotland could be the best option. But this would inevitably lead to a disruption of trade and capital flows within the British Isles and a long term divergence between Scotland and the continuing UK.

The second, associated issue relates to the fiscal challenges of an independent Scotland. Here, we need good analysis which takes us beyond the simple caricatures of public debate. In that debate, Alex Salmond argues that freed of the yoke of the UK, and with a freedom to utilise 90% of North Sea oil revenue, Scotland could become a new Norway: a land of milk and honey with Scandinavian public services and American taxes. The opposite caricature is that Scotland has been shielded from fiscal reality by the munificence of tax payers in the English Home Counties (via the Barnett formula) and is living beyond its means.

The future fiscal position of an independent Scotland hinges on 2 main uncertainties. The first relates to oil and gas revenues. These depend primarily on price, which is volatile and over which the Scottish Government has no control, and volumes which can be influenced positively by a favourable tax regime for exploration and production – though at the expense of short-term revenue. The reality is that the North Sea oilfields are way past their production peak and will deplete further over future decades. Forty years ago, “It’s Scotland’s oil” was quite an attractive slogan. But we are not living 40 years ago and the balance of advantage has changed. Costs are rising in more challenging deep water drilling and in accessing residual deposits in depleted fields.

The Scottish government is using very optimistic scenarios in which oil and gas prices are sufficiently strong to maintain fiscal stability post independence, at least in the short term, and the Scottish Government has unsurprisingly promoted them. However, that does not mean they are likely, let alone credible, and there are independent estimates of oil revenues by the IFS and the OBR which are significantly more pessimistic. McLaren and Armstrong conclude that plausible projections of North Sea oil related tax are less than the likely Barnett transfer and that the proposed oil fund is “unaffordable” with spending cuts required instead. Yesterday’s Government Expenditure and Revenue Scotland statistics showed the Scottish fiscal position now weaker than the rest of the UK, and oil and gas revenues are set to fall in the coming years.

The fiscal position is also complicated by the demographics of Scotland, which has a smaller working age population as Scotland ages faster.

Taking all the long-term structural factors together, Crawford and Tetlow at the IFS conclude that an independent Scotland would need to make permanent tax rises or spending cuts of over 4% per year to deal with these challenges, compared with 0.8% for the UK as a whole.

The third area of concern relates to the benefit of the British single market. This takes me back to the benefits of integration and the corresponding costs of disintegration. The benefits include freedom to trade in general and in particular for Scottish companies which sell 70% of their exports to the rest of the UK; the benefit of common standards and regulation and tax in reducing business costs; the benefits of scale and network externalities from shared services (road, rail, aviation, the Royal Mail, the Post Office Network) for some of which – like mail delivery – Scotland enjoys substantial cross-subsidy. Last week the Western link interconnector was launched, cementing Britain’s internal energy market, to the considerable advantage of Scotland’s renewable sector. And, or course, the UK Green Investment Bank is head-quartered in Scotland, based in Edinburgh.

The obvious question is: what is the counterfactual? No doubt many business functions could go on as before. We do not know, and that in itself is a source of uncertainty. The Scottish Government’s wish to create its own regulatory system; the commitment to renationalise Royal Mail in Scotland; potential problems with diverging VAT rates and a separate currency: all will reduce transactions and the benefit of integration. Some of the divergence would be limited by common adherence to EU Single Market rules, but the terms on which Scotland may be able to negotiate its way back into the EU remain unclear.

The most well known example of this effect is trade between the US and Canada. The research shows that after controlling for the effects of differences in regional incomes and distance between the various regions in the two countries, Canadian provinces traded around more with each other than with US states of a similar size and proximity.

All of these factors, taken together, suggest significant business costs, or at least uncertainties, around the economics of Scotland’s independence – with corresponding implications for jobs. What, however, matters more than politicians’ interpretations of the evidence is the reaction from business. A growing list are now stating their intention to consider relocating from Scotland in the event of independence: financial services companies worried about future regulatory safeguards (Standard Life, the Alliance Trust in Dundee); multinational companies concerned about the costs of maintaining separate head office operations and the business environment more generally (BP and Shell); Clydeside military shipbuilding; Scottish companies concerned about the overall impact on investment and competitiveness like Aggreko and the Weir Group, which first spoke up two years ago. Some business surveys suggest that a third or more of firms may consider moving, and 65% of FTSE 100 companies have been negative about the impact of independence on business.

I recognise that the decision, at the end of the day, involves emotional issues as well as rational calculation of gain and loss. There is a deep pride here and it is foolish for critics of independence to suggest that Scotland could not survive on its own and manage its own affairs. And having lived here, I am well aware of Scotland’s sense of national pride and identity – though this has been amply expressed through law, education, culture and sport within the UK. I discovered when I lived here that there were few more lonely experiences than being an Englishman on the terraces at Hampden Park during an England versus Scotland football international (now, sadly, discontinued). All the same, I don’t want to see Scotland leave the UK family.

But there is also a steady growth in what I call ‘multiple identity’: people who are entirely comfortable as – say – Glaswegians, Scots, British and Europeans. I look at my own family. I have 2 Scottish children, born here; a Scottish step daughter and 3 step grandchildren; a large family of Indian in-laws of various nationalities; 2 separate families of Hungarian in laws, 1 from Dundee; and a dozen or so nieces and nephews of mostly mixed parentage. The era of exclusive identity is over.

Below is the text of the speech made by Vince Cable, the Business Secretary, at the Mansion House in London on 6th March 2014.

My Lord Mayor, ladies and gentlemen, it is a pleasure to speak once again to this distinguished and important annual gathering. Some of you may not regard that as a bonus, but even those of you who aren’t fans of mine will, I hope, acknowledge the merits of stability and of continuity in carrying through some pretty radical reforms.

Coalition achievements

And there have been massive challenges. In the wake of the financial crisis, BIS has had to do a lot more with a lot less – 28% less, to be precise. When I and my team came into the department, it had undergone 4 name changes in 3 years and its future was in doubt.

But in 4 years we have carried through, successfully:

– a massive reform of university finance

– revived and dramatically expanded apprenticeships

– redrawn the landscape for local growth and business support

– intervened on a large scale to address the critical problems of business finance through the British Business Bank, start up loans, the Green Investment Bank, supply chain finance, the Regional Growth Fund and a new vehicle for export finance

– floated Royal Mail and modernised the Post Office

– rolled out German-style innovation centres, Catapults, to bring the best of British science into business applications

– established effective shareholder control over executive pay

– modernised intellectual property law

– pursued radical deregulation

– created an industrial strategy designed to create a long-term framework for public- private partnership in key sectors like motor vehicles, aerospace, creative industries and energy.

Only time will tell how useful these interventions have been, but I don’t think we can be faulted for lack of vigour or commitment.

By achieving so much, we have also demonstrated that parties can work together in the national interest. I don’t pull my punches in public debate – nor do some of my Conservative colleagues. But when we come into work, we do so as a team to deliver results for business and for the country.

We have a recovery – a private-sector-led recovery – which vindicates the difficult decisions we have had to make. The question now is whether this recovery is balanced and sustainable.

Business lending

I see two main dangers. The first I have spoken about at each of these annual events: the continuing problems for business, especially small and medium-sized companies, caused by restrictions on access to finance in the wake of the banking crisis. Net lending to SMEs from banks involved in the 1-year extension to Funding for Lending declined by £1.3 billion in between the second and fourth quarters last year, and yet net lending to households from the banks increased by £16 billion over that period. This is utterly perverse. The mortgage surge is fuelling a housing price boom in London and the South East; the SME lending squeeze is impeding recovery in business investment, exports and in the productive, real economy. Fortunately, the Governor of the Bank of England is alert to the house price danger, and I am confident that action will be taken to stop another damaging property bubble. On SME lending, I am confident that refocusing the Funding for Lending Scheme onto business lending, and the measures we are taking via increased competition and Business Bank funding will bear fruit: promoting new challenger banks and new kinds of lending like crowd funding, and creating incentives for risk capital. So, there is still a serious problem on business lending, but it has been recognised.

Skills

Let me focus instead on my other worry: skills. It has long been accepted that Britain has a skills problem: shortages of engineers, computer scientists, people in the building trades and specialists of all kinds. A distorted finance-based boom sucked too many of our best mathematicians and engineers into investment banking. The recession has made the problem worse by making some valuable skills redundant. There are far too many badly needed craftsmen driving taxis or selling insurance.

I want to major on this subject tonight partly because I am sharing speaking duties with Sir Mike Rake. Under Mike, the apprenticeship programme at BT has become one of the most prestigious and sought-after training schemes anywhere. It proves that when practical training is delivered in the right way, the latent snobbery surrounding academic versus vocational simply evaporates. I hope and trust you all noticed that this is National Apprenticeship Week.

Skills and training has too often been a boring, bland subject dominated by worthy anoraks. No longer. The young people leaving school this year can expect to be in the labour market for another 50 years. How do we equip them with the skills that will enable them to thrive over a half century? As well as the longevity of working life, consider the technological changes they are bound to encounter over that time.

There are some big and controversial dividing lines, and I want to confront them this evening.

Careers advice

The first is the poor quality of schools careers advice. In a CBI survey of young people last November, 93% said that they lacked the necessary information to make informed choices – highlighting a particular problem with inadequate or non-existent advice on vocational options; just 26% were told about apprenticeships, only 17% on vocational qualifications.

Successive governments have failed to grasp this issue properly. Teachers are overwhelmingly graduates. They know about the world of GCSEs, A Levels universities and UCAS points – and will invariably point clever and highly motivated children in that direction. Too few schools understand or value vocational skills qualifications or the needs of teenagers looking for work or work experience and lacking work readiness: the 60% who don’t go to university. Many schools simply ignore careers advice altogether. This must change. I want to see more projects like the brilliant Job Junction being piloted in Burnley and the Black Country borough of Sandwell – where mock job centres are established in collaboration with local business, advertising and explaining real jobs in schools and promoting awareness of a wide variety of vocational careers. I also welcomed Nick Clegg’s speech last week supporting tougher Ofsted scrutiny of schools’ performance on careers guidance.

Protecting further education and training

We must also address the level of government support for vocational education and training, and the further and adult education sector. Every conversation I have in government on spending priorities starts with the line, “Do you want to take money from universities and undergraduates or from training and further education to achieve your spending cuts?” It is a horribly 1-sided debate. Almost all the mandarins are graduates – mostly Russell Group graduates. So are cabinet ministers, MPs, journalists and TV producers, business chiefs and – I suspect – most people in this room. Top people who started their careers on the shop floor tend to be treated as anthropological curiosities – like tribesmen discovered in the Amazonian rain forest. I only know about that exotic world because my father was a factory worker turned FE college lecturer who taught building trades – and cared passionately about training.

When I came into office, the one specific spending cut already pencilled in was for FE and training. I am proud of the fact that I and my ministerial team resisted the easy option and reformed university financing instead. It didn’t make us popular on the streets, but it has strengthened HE and, just as important, freed up resources to support apprenticeships and training in general. As a result, the Prime Minister was able to say on Tuesday that we are on target to support two million apprentices over this Parliament.

I hope business will engage with the skills agenda. Our reforms mean that employers are now setting apprenticeship standards and shaping qualifications; yesterday we de-funded 5,000 qualifications that employers do not value. Business will soon be directly funded to buy training for their apprentices. By getting involved, business can ensure that future governments do not sacrifice investment in upcoming generations to make cosmetic short-term improvements in the public finances.

Immigration

Third, we cannot duck the issue of immigration. As industry leaders like James Dyson have pointed out, it is all very well ministers and others promising to emphasise engineering in schools, but business cannot afford to wait years for the specialists they need and which they can currently only obtain internationally. Business cannot understand why outstanding Chinese and Indian students who graduate from British universities with valuable skills can’t stay on and pursue their careers in British business.

I am well aware that this issue is politically toxic. Those of us who put our heads above the parapet and point out the positives of immigrant workers and students need a tin hat and as gas mask. And I am well aware that were it not for the freedom of speech accorded by being in a coalition government, I would long since have been despatched to an unmarked political grave for daring to say so.

I start from a fairly simple, basic economic proposition embedded in the EU Single Market: free trade: the free movement of goods, services and labour – is good. This is particularly true about the free movement of people bringing skills in demand. The scientific community understands this well. The spread of ideas across borders needs people to be able to move smoothly. But they’re not the only ones. Discussing America’s treatment of overseas students, for example, Facebook’s Mark Zuckerberg has said:

“In a knowledge economy the most important resources are the talented people we educated and attract to our country. Why do we kick out more than 40% of maths and science graduate students after educating them?”

He could have been speaking about the UK as well.

The most commonly expressed public concern is that people who come here to work somehow take away work from local workers. Net immigration rose significantly last year, but of the increase in net employment, most of it – nearly 90% – benefited UK nationals.

Somehow, many of the same people believe that migrants come here to sponge off our wonderfully generous welfare system or free ride on the NHS – presumably when they’re not working. Once again, while there will always be stories to titillate the tabloids, facts are thin on the ground – though we do know that fewer than 3% of migrants to the UK claim Jobseeker’s Allowance. There are a host of reasons to be a tourist to the UK, but its benefits system is not one of them. And we are tightening the rules.

I know this audience understands how openness fuelled our economic success historically. The City’s greatest entrepreneurs – the Rothschilds, Warburgs, Cazenoves – were immigrants. We still have a lot to offer: a strong advanced manufacturing sector, unbeatable professional business services, a higher education sector that remains the envy of the world, cutting edge science. And we have an industrial strategy that will reinforce and build on these positives. But none of these advantages can be fully exploited if we put up a sign saying ‘Closed for business’.

Getting the facts right

There are, of course, public concerns which elected politicians have to treat with respect. I don’t think anyone is arguing for unrestricted immigration – in particular of unskilled labour. There are abuses that have to be dealt with. And borders need to be properly policed. But we just have to stop treating people coming to work here as if they are a problem. We need to kill the scare stories.

A digest of evidence, the subject of some publicity over the past few days, confirms that migrants workers do not, overall, displace UK workers.

I appreciate that there are particular concerns over EU migrants, who enjoy freedom of movement. There are about 1.5 million EU migrants employed in the UK (and 2.3 million altogether), making up roughly 5% of the UK workforce. Meanwhile, around 2.2 million UK nationals live elsewhere in the EU – an important reminder that migration is far from a 1-way street. Moreover, British citizens returning to live in the UK have, on average, made up around 15% of immigration inflows over the last 5 years.

A marked reduction in immigration from the EU would mean, as the OBR have confirmed, an increase in the budget deficit and a much slower reduction in public debt. The same is true of overseas students who pay full market tuition fees, cross-subsidise British students and help to keep our universities financially viable.

Bearing down on economic migration is a clear example of a restriction on trade. In medieval times, guilds used to prevent travelling artisans from plying their trade outside their native area, with a deadening effect on competition and innovation. What was true then is true now. Bear down on immigrants, and you lose some of the most dynamic, innovative and imaginative workers in your economy. The costs are huge. In a report last year, the Centre for Economics and Business Research estimated that an EU-exit scenario with tighter migration controls would cost the country £60 billion a year at current prices.

Conclusion

I know from experience that these arguments are difficult on the doorstep, where – after years of pressure on living standards and worries about jobs and housing – immigration is deeply unpopular. But the answer I give, plagiarising my predecessor Lord Mandelson, is that I am “intensely relaxed” about people coming to work and study here and bringing necessary skills to Britain – provided that they pay their taxes and pay their way. And, actually, if you survey the public on migrants who learn English, work hard and pay taxes, you find – as the think tank British Future did in exploring attitudes to Bulgarian and Romanian migrants – that 72% believe we should welcome them.

Lower the temperature of the immigration debate, and we can create greater room to discuss the more significant, more challenging and more provocative issues around skills. That is where our long-term interests really lie.

Thank you for listening. I hope you enjoy the rest of the evening.

Below is the text of the speech made by the Business Secretary, Vince Cable, at the University of Warwick on 11th September 2013.

I am delighted to see so many serious people here from the business community. The idea of an industrial strategy for Britain is achieving significant traction.

Successive governments baulked at the concept, of course – a reaction to the 1960s and 70s when state involvement was seen as backward-looking, wasteful and meddlesome. Intellectual fashion turned towards a faith in the rationality and efficiency of markets – a consensus that lasted several decades and, in the UK, saw the virtual disappearance of a number of big industries.

Industrial strategy regains credibility

Several factors have caused that fashion to fray at the edges. The 2008 crash showed us that financial markets in particular can be irrational and inefficient. The success of countries like Germany has reinforced the value of long-term understanding between business and government on skills, technology, exports and business finance – while the long period of growth before the 2008 crash blinded many in business and government to the extent of Britain’s under performance in such areas. And, not least, there dawned an understanding that such is the weight of government spending in the economy that its purchasing decisions alone create an industrial strategy by default, if not by design.

We have progressed a long way since I first mooted the idea of a designed industrial strategy two years ago, acknowledging predecessors including Michael Heseltine and Peter Mandelson. Three simple – but, until recently, quite controversial – ideas have now been accepted and are being applied.

First, government must operate strategically over the long term. There are critically important sectors such as aerospace, energy and life sciences that have time horizons stretching well beyond a single parliament.

Second, there are some classic market failures – notably in skills and innovation – where active partnership between government and business can produce huge spill-over benefits. That partnership is a fundamental principle underpinning the entire industrial strategy, whether co-investment, breaking into new export markets or tackling skills shortages.

And third, government has to be joined up. Government procurement is one example of where we cannot operate in disconnected silos and fight just for the best price right now, without attending to longer-term economic benefits.

These insights, and commitments, have emerged against the backdrop of the severe difficulties Britain has recently faced: the UK is recovering from the most damaging financial crisis in generations, after a decade of growth built on unsustainable levels of debt. The Government inherited the largest deficit since the World War and, of the major economies, only Japan experienced a deeper recession.. The Government’s finances are being stabilised through structural deficit reduction. But the economy also needs rebalancing through a shift to exports and investment rather than debt-based consumption – specifically towards long-term investment in productive assets rather than short-term speculative property accumulation.

To succeed in this task is necessarily the work of many years. But we are seeing progress, and those who deserve the greatest credit for this are pragmatic British businesses and flexible British workers who kick-started the recovery. Government is behind them – behind you.

Achieving sustainable growth 

We announced a £1.6 billion package at Budget 2013, with matching private sector contributions, to support long-term R&D in aerospace, automotive and agri-tech.

We have extended protection for the science budget in 2015/16 – part of a Spending Round which also announced £1.1 billion for capital spending, rising with inflation to 2021, including an additional £600 million to develop eight technologies where the UK can lead globally.

As part of the Spending Round we also announced an extra £185 million for the Technology Strategy Board to expand its programmes that take ideas from concept to commercialisation. This includes increasing the number of business-focussed Catapults to nine centres – the latest two covering energy systems and diagnostics for stratified medicine.

And just this weekend, we announced further investment of £150 million through the Technology Strategy Board to support environmentally-friendly building projects.

One last example: we’ve committed £1 billion in additional funding for the Business Bank to facilitate lending to SMEs, alongside innovations to free up trade finance for exporters, and a Green Investment Bank which now has £3.8 billion to invest.

A modern industrial strategy, then, is about taking a long-term approach to growth, giving business certainty about future plans so they can invest with confidence. It means providing a spectrum of support to all firms. As well as the partnerships we have developed in 11 key sectors, we continue to work closely with other sectors where the partnership approach is useful, as with chemicals, railways and creative industries. Later this year, we’ll be publishing a small business strategy, setting out a cross-Government programme to further support start-ups and help existing SMEs fulfil their potential.

Today, I can update you on several initiatives supporting business across the economy.

Announcements

First, 39 projects – including Balfour Beatty, National Grid and Everton Football Club – have now been approved in round 2 of the Employer Ownership Pilots, for which we allocated a total of £240 million. The popularity of the pilots demonstrates employers’ appetite to direct the skills agenda. From 2015-16, we will operate a fund worth £100m annually for co-investment with business in skills.

Second, I announced plans back in 2011 to improve the global competitiveness of UK manufacturing supply chains. Today, I’m pleased to announce that five projects from aerospace, chemicals, electronics and life sciences will receive over £115 million of joint public and private investment from round three of AMSCI, the Advanced Manufacturing Supply Chain Initiative. This includes a £7 million grant to capitalise on export opportunities for printable electronics – a project which will create and safeguard almost 500 jobs. To date, more than 180 organisations have benefitted from AMSCI, the majority of them SMEs.

Third, and thanks in significant measure to companies present, we are further expanding See Inside Manufacturing, which is inspiring young people about future careers. It is growing to cover 10 sectors – with a special focus on young women and minorities, who tend to be under-represented in industry.

Now, all of this is very encouraging – but we can’t rest on our laurels. The kind of growth we want won’t simply emerge of its own volition. In fact, I see a number of dangers.

Risk avoidance

One is letting up just because we have had a few quarters of good economic data. It isn’t difficult to see evidence of confidence returning, and there are positive trends in production. Taken together with success stories like the car industry and export growth in emerging markets, we have the beginnings of a recovery story. But there are risks, not least the housing market getting out of control. Recovery will not be fully established until we see strong and sustained business investment.

Another danger. It is becoming clear that the financial crash, and the long preceding period of exchange rate over-valuations and consumer debt driven growth, did serious structural damage that will take time to repair. In some cases, there has been a semi-permanent loss of skills. Supply chains have been hollowed out, which are hard to replace. There are repeated reports that firms are anxious to buy from UK suppliers in the auto sector, say, or in textiles, as onshoring is seen as economically attractive. However, they can no longer find enough UK-based companies able to supply or willing to bid. The supply chain aspect of the industrial strategy is crucial to addressing this problem and boosting UK competitiveness.

Finally, credit conditions continue to be tighter and demand more muted, especially for start up and rapid growth companies which cannot finance themselves from capital markets or from cash flow, and which lack the collateral banks demand. There has been a 25 per cent real decline in SME lending since the 2008 peak and net lending continues to be largely negative. Gradually, this is turning around. New banks are slowly emerging, and the Government’s Business Bank will catalyse new bank and non-bank funding flows.

Prompt payment

There is one aspect of the credit squeeze which could be eased if manufacturers and retailers were to take a long-term view on the importance and resilience of their supply chains. In a credit squeeze, cash is king and there is plenty of evidence that large and powerful players in the market are hoarding cash while smaller suppliers face ever longer delays before getting paid. There is at least £500 billion provided to businesses through trade credit – making it one of the most significant sources of credit in the economy. But it is important that this system works for both customer and supplier – including smaller businesses.

I am glad that many of you in this room, and the majority of FTSE 100 companies, have signed up to the Government’s Prompt Payment Code. But all businesses should take responsibility for paying suppliers fairly and on time.

We are already setting an example in the public sector, with central government settling invoices within five days. I urge all of you to see what more you can do to get credit flowing more efficiently through your supply chains. We shall look further at what government can do on this issue by strengthening legislation and through its procurement practices.

Prospects

So I have identified three problem areas weighing against some of the positive trends starting to emerge in the real economy. At the Mansion House earlier this year, I set out a vision for the UK economy a decade hence. If we are to turn the British economy around on a sustainable basis there will have to be relatively rapid growth of exports and import substitutes. There could be rapid growth in exports of business and professional services, creative industries and education, but over half of all exports are manufactured goods.

Many people believe the decline of manufacturing is inevitable and irreversible. I don’t share their pessimism. The EEF are telling us that the number of manufacturers seeing growth in export sales rose to a two-year high in the past quarter. With a big push on emerging markets and the benefits of a competitive currency, manufacturing could potentially experience export-led growth of four per cent per annum or more.

There is also great potential for import substitution through supply chains. The Automotive Council believes it can realistically achieve an extra £3 billion of UK supply. At present, UK sources meet 40 per cent of motor vehicle consumption but this could rise to 60 per cent, as in France and Germany.

An encouraging example is today’s announcement that BP and its partners have awarded over £1 billion in contracts to UK-based companies to provide services and equipment for the major re-development of its Schiehallion and Loyal oil fields west of Shetland.

The other metric I’m looking at for big improvement is Britain’s share of research and development in GDP, especially commercial R&D. One model is JLR’s expanding R&D facilities at Gaydon, which has just created the CX-17 prototype and the new aluminium architecture. Another are the new Centres for Agricultural Innovation and the agri-tech catalyst – and we should be aiming to introduce comparable centres in other sectors.

Continuing to look ahead, one of the biggest transformations will be in finance. For a generation or more, Britain has had a world-class financial centre in London operating essentially as an enclave. Multinational companies have direct access to a sophisticated range of financial products but British SMEs make do with semi-inhospitable and – currently – highly restricted bank debt finance, with minimal access to equity finance. It is possible to see the outlines of a new structure in which specialist business lenders have developed low overhead models of delivery, complementing traditional banks with rediscovered relationship-based banking and virtual markets online for debt and equity. In any event, a generation of companies will have matured that survived the crisis through self financing and are less dependent on external finance.

But perhaps the most dramatic changes will be in the labour force. Many occupations in the greatest demand today did not exist a decade ago and the same will be true a decade hence. There are some generic disciplines based on STEM and IT skills – engineering in general and computer science – for which excess demand can be predicted a long time ahead, and there are signs that, at graduate level, the attractions of those occupational routes are being recognised. The same is true for advanced apprenticeships which will reach many more SMEs. We are also likely to see a shift towards more female participation, correcting an extraordinary gender bias in the UK, judged in comparative economic terms.

More generally, the UK has ground to make up. Our growth rate for creating advanced skills puts us 20th among the 27 OECD countries. As the industrial strategy takes hold, specific skills planning will develop. Crossrail, with support from the Skills Funding Agency, has created an academy for tunnellers – a facility which will hopefully support large infrastructure projects in future. In oil and gas, the sector strategy includes plans to re-train ex-military engineers to fill current skills gaps.

I would hope that the various sector councils are able to make tangible, practical, progress in the coming year, reinforcing government-industry partnerships. I would hope, for example, to see significant development in the offshore wind, nuclear and automotive supply chains. There will be new bidding rounds for AMSCI and the Regional Growth Fund, and further funding to support investment in skills – to maintain momentum and provide reassurance that government money is not just a “one off”. With economic news improving, we cannot lose sight of the long term-task of restructuring and rebalancing.

A year from now the politicians will be getting into election mode, yet the best test of the usefulness of our work on industrial strategy is that it is election-proof – that there is sufficient support across the business world and across party lines to maintain a long-term focus. I am now optimistic that this will happen.

Below is the text of the speech made by the Secretary of State for Business, Innovation and Skills, Vince Cable, at the Mansion House in London on 7th March 2013.

Many thanks for your invitation to speak to you a third time.

This time last year I talked about the impact of the financial crisis on business finance and the yawning gap between sophisticated global finance markets of the City of London and the underdeveloped, malfunctioning, domestic markets – particularly for SMEs. These patterns remain – and have been amplified by the continued aftershocks of the financial crisis.

In recent months, however, we have developed a variety of positive initiatives: supply chain finance for manufacturers; more guarantees for short-term SME trade finance; new forms of non-bank finance; the launching of the Green Investment Bank; a new government-backed business bank which will act as a catalyst for SME long-term credit and for new challenger banks. I’m looking forward to the FSA announcing rule changes in favour of smaller banks – who shouldn’t face the same capital requirements as larger institutions. And the Governor of the Bank of England spoke eloquently yesterday about the reforms needed in the semi state-owned banks.

At the same time, there has been an encouraging response from the private sector, with new banks and sources of funding gradually emerging, despite the difficult environment. None of these represents a single silver bullet, but cumulatively they will change the landscape of business finance. In a decade’s time banking will – I hope – be much more competitive, more diverse and more aligned with the needs of business.

Planning for the long term

Indeed, tonight, I very much want to look a decade ahead, or further. This partly reflects my training. My stint at Shell taught me the importance of standing back from the ephemera and trying to understand long-term trends; trying to think about the business environment and business decisions strategically rather than tactically. Shell isn’t alone. The best companies – Rolls Royce, Tata, Siemens, GE, Nissan – have a capacity for long-term planning and strategic thinking which puts government to shame.

The world I inhabit as a Minister is heavily influenced by the 24-hour news cycle and daily knockabout in the Commons. Long-term financial planning is a four-year public spending review and a five-year parliament. Politicians also have a duty to go beyond the standard myopic tribalism and work together – as our Coalition is doing. We also need a sensible, civilised dialogue with opposition parties – something I attempt, even though it occasionally lands me in trouble.

But short termism isn’t just a problem for politicians. Our financial markets are also obsessively short-termist. The practice of quarterly reporting may be lucrative for successful arbitrageurs and the serried ranks of financial intermediaries but it can be crippling for companies trying to invest for the longer term. It is a depressing commentary on parts of our investor community that companies that need long-term capital for technology development and investment are being pressured into buying back their own shares.

That is why I asked John Kay, together with Sir John Rose, Chris Hitchen and James Anderson to look at the issue of short termism, and we are now following through on its recommendations. Partly as a result of changes at a European level, I hope that we will soon be bidding farewell to quarterly reporting. And our executive pay reforms, which aim to restore the link between pay and long-term sustainable performance, will reinforce a more responsible long-term approach by those running our public companies.

Above all, the essence the Government’s industrial strategy that I set out in September last year is to establish a long-term collaborative approach between business and government. This is second nature in Germany, France, Japan, Korea and even in the supposedly free-market US. Businesses investing in sectors like aerospace, automobiles, energy and life sciences think and plan over timescales of 10, 20 or 30 years. Government needs to behave more like a business, planning in a long-term and strategic way.

Prediction vs preparation

So this evening, I’m asking you to think long term – to imagine the UK a decade or more into the future.

Of course there is irreducible uncertainty. Technological progress will produce new products and new jobs that we cannot currently envisage. It will be disruptive. Economic shocks; wars; political events may fundamentally change the world.

Think back, say, to 2003. Who, then, would have seen the price of oil staying above $100 per barrel for years (when I was at Shell, it was almost in single figures)? Who would have seen 10-year government bonds yielding below 2 percent? One might say the same about the collapse of the banking system, the Arab Spring, a twice-elected black President in the States.

Predicting, of course, is a mug’s game – virtually guaranteeing an undesired notoriety. It’s rather embarrassing for Einstein that he declared in 1932 that “There is not the slightest indication that nuclear energy will ever be obtainable” – worse for the late 19th century US commissioner of patents who urged President McKinley to shut down his own department because “Everything that can be invented has been invented.”

But predicting is different from being prepared and vigilant. And it is possible to see through the fog of uncertainty and envisage both bad and good circumstances for the UK.

Bad scenarios are easily recognisable in the prolonged stagnation of present-day Japan, for example, or in European countries loathe to address their longstanding competitiveness problems. The key lesson is that without sorting out and recapitalising damaged banks, without undertaking necessary reform, growth is very difficult. The Prime Minister made all that very clear in his speech earlier this afternoon.

The UK in 10 years’ time

So let me look at the more positive story and see where it takes us. Imagine a situation where recovery gradually gathers momentum. Growth is centred on exports and in particular on the rapidly growing emerging markets which we have neglected in the past, and whose growing middle classes will add trillions of dollars to world demand. Our advanced manufacturers, education and professional services industries overtake Italy and France in markets like Brazil and China and offer serious competition to Germany.

Our energy sector booms in the wake of opportunities created by a simultaneous upsurge in investment in gas and low-carbon electricity, including nuclear. Parts of north-east England and Scotland are thriving, with offshore contracting work and growing manufacturing businesses like Alstom. They take the methods they have honed in Britain around the world.

Britain is also a world leader in some of disruptive new IT based technologies and – outside the US – the UK is the go-to country for entrepreneurs wanting a supportive environment for innovation. Fenland is our Silicon Valley, with other strong clusters spreading in London’s Tech City, in Bristol, and other prominent cities.

Indeed, we see a revival of the British city, liberated by ‘city deals’, with advanced manufacturing reviving in Birmingham, Sheffield and Glasgow; media industries in Manchester, Liverpool, Newcastle and Dundee; biological sciences in Nottingham; financial services in Leeds and Edinburgh, the latter catalysed by the Green Investment Bank.

A decade from now, our banking system is largely repaired from the damage of the crash in 2008, and is unrecognisable. There are numerous small banks; the domestic and SME market is populated by mutuals like the Nationwide and the Co-op, overseas banks from Scandinavia, China and India, and innovative new channels like peer-to-peer finance.

British Universities, along with top US institutions, continue to dominate the world rankings as Chinese and other competitors fail to match the creative intellectual freedom linked to research and business which we can offer. Not just the usual suspects in HE, but Huddersfield’s work with SMEs reviving textiles, Plymouth’s in oceanography and Cranfield’s in aerospace. The world’s biggest university in South Asia is managed by the University of Central Lancashire – biggest, that is, if we exclude the Open University’s online distance learning platform, the standard mode of delivery for future university teaching.

Even a decade hence, there will be grumbles from business about the shortage of skilled workers, but there has been a revolution in apprenticeship training, increasingly the favoured career route for teenagers. Now it’s no longer just the likes of BT and Rolls Royce with first-rate apprenticeship programme. SMEs like London jewellers Jason Holt are creating their own training academies graduating hundreds of apprentices – and, as we now sit on the cusp of National Apprentice Week, the Government is continuing to provide funding SMEs to create bespoke apprenticeship programmes to help them grow.

There’s been a similar revolution in the supply of engineers, increasingly dominated by women. As I told the EEF on Tuesday, we’ve allowed a criminal waste of female talent. I’d compare manufacturing today to the NHS before female doctors began properly to fill its ranks; in the past 40 years, the number of male doctors has doubled, but female doctors have increased tenfold. This is what needs to happen in engineering. Some businesses, of course, already avoid this trap – Babcock International, for example, the engineering support services company, has shifted its recruitment to universities with a healthier gender mix, with more female graduates joining them each year.

Indeed, the transformation of the workplace in the wake of shared parental leave and flexible working gives rise to a male movement seeking quotas to prevent women from beginning to dominate the upper echelons of business, the professions, politics and the civil service. I glad that half of the BIS executive board are women, and I’ve recently written to the remaining FTSE100 companies with no women serving on their boards. I’m asking every company I meet what they’re doing to improve their recruitment practices, their retention of women and their plans to get able women to the top.

We also witness a triumph for the British view of Europe: open, flexible and outward looking. Facing the pressure of ageing populations and declining workforces, such openness will gradually be seen as a solution not a problem, just as it has always been an historic strength for the UK. All this in the context of a comprehensive trade deal achieved between the EU and the US, widened out to all comers through the WTO.

You may think I am getting carried away. But all these trends are recognisable in today’s world. Unless we think the unthinkable, we shall be overwhelmed by the pace of change.

Causes for optimism

Overall, I take a positive view of the UK’s prospects. Our core virtues as a country – our openness, willingness to change, our respect for the rules, our inventiveness – are well suited to the challenges of a fast-changing world.

And while in the short term the prolonged stagnation is painful, I can see encouraging signs in three areas. One is the falling rate of unemployment: lower than when we came into office; lower than in the US; record numbers of people in private sector jobs. Our labour markets are flexible and are working. The squeeze on real wages is not pleasant for those families affected but it is a lot better than 1930s-style mass unemployment. I have great respect for the pragmatism of employees in industry, whose willingness to work shorter shifts has kept businesses going. Unlike previous recessions, we are not heading towards a generation on the scrap heap.

A second cause for hope is the rapid growth of Britain’s export earnings in the major emerging markets, particularly Russia, China, Brazil and India. We started from a low base after a decade or more of serious underperformance. But a combination of better support from UKTI, a competitive exchange rate and some superb British companies with great products – shoemakers Loake and Royal Crown Derby, the fine china manufacturers among them – is working.

And third, there is an upsurge in entrepreneurship. Business start ups are at record levels. Communities and students run numerous entrepreneur societies, like the ones I encountered recently at Nottingham University. The number of people engaged in entrepreneurial activities has increased from 6 to 9 per cent in the last three years. This is one of the easiest places in the world to set up a business, and more and more people are taking advantage of that.

The role of government

But to provide a supportive environment, the government needs to make a clear commitment to long-term stability. As I stated earlier on, our financial horizons are extremely short-term by the standards of any large business, seldom committing to more than a couple of years ahead. In some areas this is unavoidable, of course, but for economic policy it represents a big missed opportunity. And while the number-one ask from business when this government came together was to sort out the chronic uncertainty caused by our huge deficit, it makes no sense to do this only by exporting instability into the private sector – nor other parts of the public sector.

As an illustration, the extraordinary performance of British science, which owes so much to individual genius and endeavour, has benefited from this government’s far-sighted commitment. We have maintained ring-fenced spending at the level we inherited from the previous administration and allocated significant amounts for capital investment. For example, public funding for the new Crick Institute, alongside universities and charities, will enable future generations of scientists to conduct path-breaking medical research – allowing time for the fruits of basic science to emerge and then benefit both patients and the economy.

In a similar fashion, my chief political project last year was to establish a firm case for an industrial strategy – words previously banished from Whitehall. That case has been won – and I think is now broadly accepted on Right and Left. Work is now well underway with industry to develop long-range strategies for 10 important sectors by this summer. As they emerge, it will become clear that they are not all about extra money, but rest on a structure of cooperation with industry: in procurement, regulation, export and trade policy – indeed, every area where government interfaces with business. But, as with science, the spending element is still important.

In the coming weeks, I’m confident that the government will demonstrate its commitment to long-term industrial investment – investment which pulls in a private sector commitment many times larger; which supports essential areas of industry; which proves to business and to investors that our strategy is no flash in the pan and that Britain intends to deliver on its promise to rebalance its economy. Compared to the often haphazard and ad hoc way such support has been given in the past, this will deliver far better value for money.

Conclusion

I say again that there is nothing to prevent Britain reasserting itself as a highly skilled, innovative, exporting nation. And just as business success requires planning and agility, so does effective government. Hoping for the best won’t cut it.

Below is the text of a speech made by the Secretary of State for Business, Innovation and Skills, Vince Cable, on 8th October 2012 at Lagos Business School in Nigeria.

It is a real privilege to start my visit in Lagos – a city which provides an impressive example of the entrepreneurship and the vibrancy of Nigerian/Sub-Saharan African economics.

Perhaps I should start on a personal note, so that you know where I come from and also to reassure you that I am not just repeating the mantras of a visiting Minister but speak from conviction.

I was last in Lagos on business visits in the mid 1990’s during the dark days of military rule, preparing a series of Nigerian scenarios for Shell as part of long-term planning. It hardly needs saying that the political and economic environment and outlook are now vastly better.

One of my scarier episodes was making a presentation of these scenarios to General Abacha and his military high command at an economic summit in Abuja. One of my stories I called the Road to Kinshasa: essentially a parable of how Nigeria could end up if it continued in its, then, trends (and which would inevitably lead to Shell and the investors disengaging from the country). My scenario also described an altogether happier outcome in which political and economic reform unleashed a period of sustained growth – which I estimated at 6% per annum: perhaps a little conservative seen a decade and a half later.

To be fair to the late President he listened politely and even burst into laughter when one of his Ministers – the finance minister – angrily interrupted me to say “there is no such thing as corruption in Nigeria”.

These visits saddened me since I could see the wasted potential. Indeed, I have always been an optimist about African development since I first worked in post-colonial Africa in the mid 1960’s, in Jomo Kenyatta’s Kenya as a civil servant in the Finance Ministry. Africa then, had – to say the least – plenty of challenges. South Africa and Rhodesia were still under racist governments; Portugal’s colonial engine was intact; the Congo was a disaster area; Nigeria was beset by civil war; shiny new regimes in Ghana and Guinea were badly tarnished. A book by the French agronomist Rene Dumont, A False Start in Africa, captured the spirit of the time. Yet it was clear that there was also vast entrepreneurial energy amongst smallholder farmers and businessmen as a rapidly growing, young, educated generation wanted change.

I later worked closely with people like Chief Emeka Anyaoku the inspirational and greatly respected Commonwealth Secretary General on the problems and potential of African development. In the last decade that potential has begun to be realised in many parts of the continent including Nigeria. One statistic alone would make any future investor sit up and take notice. There are over 40 million mobile phones in Nigeria.

The Economist newspaper ran a cover story with the title ‘Africa – The Hopeless Continent’. That was 10 years ago. Today, this has been replaced by ‘Africa Rising’ (last December’s issues). During this time six of the world’s 10 fastest growing countries were African. In 8 of the past 10 years Africa has grown faster than east Asia. Nigeria has managed 8% growth recently. The IMF expects Africa and Nigeria specifically to grow by nearly 6% this year, even allowing for the knock on effect of the northern hemisphere’s slowdown. This is about the same as Asia. Looking beyond 2012 there is every reason to believe that these rates of expansion can be sustained despite the lingering effects of the 2008 global financial crisis and weak growth in richer countries.

In contrast to past global downturns Africa has proved resilient this time around, experiencing both a smaller dip in growth and faster recovery. Indeed economic performance and prospects in sub-Saharan Africa have undergone a fundamental change since the mid 1990’s. Following a period of negative per capita growth between 1980 and 1995, sub-Saharan Africa has recoded an average increase in per capita GDP of close to 3% since 1995.

Several factors explain this turnaround. The wave of democratisation has been accompanied by more coordinated economic policies, leading to more market-orientated, business-friendly economies and more budget discipline. This in turn has resulted in significantly lower debt burdens. Nigeria’s reforms to the budget especially have undoubtedly made a difference – it has one of the world’s lowest debt to GDP ratios in marked contrast to the debt crisis three decades ago which led to rescheduling and the IMF.

As a result, Africa and Nigeria specifically have been better able to withstand the impact of the volatility we have seen in the global economy. High commodity prices and fewer links to the financial sector have certainly helped. Until recently resource rich countries likes Nigeria suffered from the so called ‘Dutch disease’ or ‘resource curse’ as oil wealth was wasted, and productive farming and industry were undermined by an over valued exchange rate. These problems remain but are less acute.

Clearly western markets are facing uncertainty at the moment and it is possible that even the Asian markets may have peaked for now. Africa stands to benefit and Nigeria, if recent growth trends are maintained, will be Africa’s largest economy before 2020.

 

The Business Enviroment

Nevertheless, there is no room for complacency. As you are well aware the problems are vast. In Nigeria 100 million out of 160 million are still ‘extremely poor’ on any international comparative basis and unemployment is endemic. And while the entrepreneurial energy of at least this part of Nigeria is palpable, Nigeria ranks 133rd in the world for the ease of doing business. All this requires actions to boost infrastructure, increase transparency and strengthen legal protections, in order to expand trade and attract inward investment.

The positive actions taken across Africa in response to the World Bank’s ‘Doing Business Index’, encompassing a number of areas such as business registration, land acquisition and tax reform are powerful symbols of that commitment.

I welcome the Nigerian Government’s commitment to reform. Our government is also committed to working with Nigerian authorities to make the business climate here more attractive to investors. Improvements in power supply, transportation and legislation that protects business investment can make a real difference to Nigeria’s already impressive growth rates.

The Petroleum Industry Bill is of particular significance for Nigeria. The bill has the potential to enhance transparency and accountability in the oil and gas sector. This would send out the strong message to international investors about Nigeria’s willingness to do business. It would also ensure that the Nigerian people can see how the natural wealth of their country is managed. However, this will only be achieved by a well-crafted bill that sets robust and transparent legal frameworks in place. The issue here is not what is good for the oil companies but what best helps the country maximise its potential. At present, even with recent recovery to 2 million barrels per day it is operating well below sustainable production levels.

The Nigerian Government has also signalled its willingness to take a tough stand on corruption – the collaboration between our two countries to bring about the prosecution of James Ibori sent out a strong message that corruption will not be tolerated. The recent communique agreed between Nigeria and the UK reinforces our joint work in this regard.

But the UK understand its responsibilities too: the UK bribery act sets out a zero tolerance policy on corruption and in part this is a message to UK investors that they must play by the rules in Africa and elsewhere.

 

UK/Nigeria Bilaterial Relations

This work is creating strong foundations that will enable Nigeria and the UK to build on the relationship that we already enjoy – politically, economically and culturally. Indeed in 2011 the UK’s exports of goods and service to Nigeria increased by 13% and trade overall grew by 35%. We are on track to meet our shared commitment to double trade to 8 billion by 2014 from 2010. Key sectors include petroleum and its associated product, industrial machinery, education, transport equipment and natural and manufactured gas. The business delegation that is accompanying me is active in these sectors.

The UK wants to work with Nigeria and form productive partnerships. The Nigeria/UK supply chain engagement programme has brought together UK and Nigerian companies to grow local capacity and to support development of Nigeria’s hydrocarbon resources.

This initiative has been successful as it was fully supported by Government and trade organisation stakeholders; Nigerian National Contact and Monitoring Board and PETAN (Petroleum Technology Association of Nigeria). UK companies have been able rapidly to expand the value and range of contracts by combining UK experience with local Nigerian capability. Larger UK companies including Wood Group, Invensys, Swagelok, Aker Solutions, Bel Valves, Fugro, have found main partners and supply chain companies to provide essential local sub contracting services and commodity supply to deliver expanded contracts. Many of the UK companies that have successfully located partners are SMEs that would otherwise find the time and cost to develop a market presence in Nigeria too challenging. So far, there have been 47 new partnerships between UK and Nigerian companies.

In addition, there are other areas where we can build new links for our mutual benefit. These include agriculture, ICT and security.

 

International Students

One area where the UK has a particular expertise and long association with Africa is in the area of education and skills. I would like to say a little more about education, in particular, as it is important to emphasise that the UK is keen to welcome international students to study at our universities – and the UK university degree is a sound investment for discerning students. I want to disabuse anyone of the idea that Britain does not welcome Nigerian students. We do.

The UK is the second most popular nation worldwide for students deciding to study abroad. According to the QS University rankings 2012, the UK is home to 4 of the world’s top 6 best universities – Cambridge, UCL, Oxford and Imperial College London – and more than 30 of the top 200. Once in the UK over 80% of all students rate their teaching and learning experience as good or excellent.

Furthermore, UK educated graduates achieve higher average salaries than those who study in their home country – not just because of the quality of our degree programme but through the process of improving their English language skills.

Perhaps most importantly, the UK offers a warm welcome to international students. We know that people can get a decent education in any number of countries. This is a competitive market and we will not take overseas students for granted. I was pleased to learn recently that Nigerian citizens are the third largest contingent of overseas students at UK universities.

Whilst student exchanges are important, opportunities for collaboration between Nigeria and the UK extend significantly beyond that. UK institutions can offer expertise in Governance models, professional development and curricular design, construction, management or financing. Many education systems, whether in emerging or developing markets, have complex needs. For them, we are adopting a new approach which we are calling system-to-system, facilitated and coordinated by the UK Government. The collaboration could be in any area of education, be it higher education, further education and skills or a range of non-education specific services such as consultancy, technological expertise or architecture.

Our countries are forging closer academic links in a number of other ways such as the education partnerships in Africa funded by my department and managed by the British Council, which has supported 72 projects involving 40 universities and 15 further education colleges in the UK, and 69 and 16 further education institutions in sub-Saharan Africa. Over the 18 months of the scheme, 388 African academics and students have visited the UK and there have been 305 visits from the UK to African partner institutions.

The UK’s Open University is leading an initiative to develop the distance learning skills of a group of academics from 7 universities in Nigeria. The ‘train the trainers’ is designed to help the 7 universities to expand their own distance learning activities and expand open distance learning capacity in Nigeria. The Universities are the Federal University of Technology (Yola), the University of Abuja, the University of Lagos, the University of Ibadan, the University of Maiduguri, the Obafemi Awolowo University, and the National Open University of Nigeria.

Professor Steve Swithenby, who is leading the initiative, explained, “each year there are about 800,000 qualified students who can’t find a place at a Nigerian university. Distance learning can provide a way forward for these young people. It will allow them to study while earning a living and will allow Nigeria to develop its economy from its present resource extraction and agricultural base.”

Last year more than 400,000 international students enrolled at UK universities. For the first time this was exceeded by the record 500,000 people who benefited from British higher education while living abroad.

To return to the point I made earlier, there have been suggestions that the UK is reducing the number of student visas it issues. I want to make it clear that in reality there is no cap of any kind. If an individual has the potential to benefit from a UK education and the ability to learn in English, our universities will look at their application with real interest.

 

Conclusion

We are committed to a relationship based on openness, equality and friendship, with Nigeria and with other nations right across the continent.

I have every confidence Nigeria will only enhance its position in the global economy and its reputation for dynamism in the years ahead. I wish you every success.

The below speech was given by the Secretary of State for Business, Innovation and Skills, Vince Cable, on 7th March 2012.

I would like to thank the Lord Mayor for inviting me to speak for the second year in succession at this event: an annual coming together of the City and rest – and best – of British business.

I would like to pay tribute to you, Lord Mayor, for your unstinting efforts to promote British business around the globe. During your term of office you will be visiting many of the most important emerging markets in South East Asia, Central America and the Middle East, showcasing what London and the UK has to offer. You do an outstanding job and I am grateful.

Until this Government, Secretaries of State seemed to rotate more frequently than Lord Mayors of London. We are taking a more settled and long term view. Some of you may regret that in my case and feel you are stuck with me longer than you would wish. But the advantage is a consistent approach and learning by experience.

I will start as I did last year and will in future years, by reminding everyone of the underlying and unifying purpose of the Coalition: to cut the deficit and sort out the country’s finances. In the case of my own department’s contributions to that difficult and painful task that means taking a 25% cut, while still delivering the science, skills and business support this country needs. We are doing that.

And across government, through similar efforts in every department, we are succeeding – the deficit is falling, and our interest rates well below where they were when we took power.

But we cannot emerge from this fiscal crisis without growth. This is the other overriding concern of the Coalition. And here we have just as strong a story to tell. Within BIS, we prioritised apprenticeships – record numbers over the next few years. We have defended the Science resource budget, despite all the fiscal pressures. We have launched the first Catapult centres that will drive technological innovation. We are setting up a Green Investment Bank to catalyse billions of pounds of low carbon investment. We have refocused UKTI on the emerging economies. We are gradually putting in place a strong industrial policy to reverse years of decline in manufacturing and position ourselves well for the growth opportunities of the future, be they in low carbon technology, creative industries and design or aerospace.

Elsewhere we are simplifying the planning system, putting business taxes on a downward trajectory, and lifting millions out of tax.

None of these steps are easy, but over the long term I am confident they will pay off.

In the short term, we know things are difficult. Soaring energy prices; chronic uncertainty in the EU; our country still recovering from an historic debt binge. No-one says it more often than I do: there will be nothing easy about this recovery. But with the government getting its own house in order, and backing business every way it can, I am confident that we are well placed for the future.

However, I am concerned that there is a missing piece of the puzzle.

It is well known that growth requires the lubrication of private finance. That is my subject tonight: the relationship between the global financial services industry of the City on the one hand and on the other the financing needs of what I loosely call the “real economy” of the UK: the tens – hundreds – of thousands of firms which together generate the goods and services which make up our national economy.

You, yourself, in your speech made an essential point when you said the relationship should be close and complementary: financial institutions hoovering up savings which are then deployed by business in productive uses. It sounds simple. But it isn’t working as it should, at least outside the world of the big corporates.

I would go so far as to say that we have a financial services industry in London that plays in the Champions League, with overseas owners to match, and a British business finance system which struggles in the second division. We have some of the world’s smartest, most creative, financiers, doing brilliantly in the City or Canary Wharf while there are also smart creative British entrepreneurs – or even run-of-the-mill smaller businesses – still struggling to raise finance to operate and expand. They depend, as one put it to me the other day, on the three ‘Fs’: friends, family and fools – shunned by banks, unable to access equity markets.

Let me try another colourful metaphor. I am struck by a parallel between the world I am describing and the world of the oil industry I left to go into Parliament. The upstream oil industry deploys the world’s best geologists and petroleum engineers: there are high standards of professionalism – and also high pay – but outside the perimeter fence in many countries there is a shortage of petrol, power supplies are intermittent and there is only a tenuous connection between the enclave of a global excellence and the local economy.

Many in the industry would (and did) say: that’s nothing to do with us. We pay shedloads of money to the Government in tax; why should we worry about what happens to the money and the country in which we operate? I exaggerate, obviously, for effect, but some of you will recognise some similarities, a similar disconnect, between the global financial markets of the City and our local economy in the UK.

The rational response is not to reject the oil industry – or London’s global financial centre. Indeed I regard the internationally traded activities of the City as a major plus for the UK. Like the oil industry, it is volatile, but properly managed and regulated it is a major revenue source for Government and a valuable export. Lord Mayor, you are absolutely right to talk about the City being a ‘unique selling point’ for UK PLC. Indeed, when I have been involved in trade diplomacy on behalf of UK PLC, in India, China, Brazil, Russia, Turkey, Vietnam, Indonesia and Japan in my capacity as President of the Board of Trade, I speak for City banks and insurers, lawyers and accountants, as well as manufacturers.

What does concern me is a disconnect with the rest of the economy.

And this cleavage between the financial sector and other businesses isn’t a new concern. Winston Churchill’s first big job in government was doing what I currently do, a hundred years ago, in the great liberal reforming administration in which he worked alongside the Chancellor, Lloyd George. Later, as Chancellor himself, Churchill’s frustration with a business environment that was proving devastating to traditional industry saw him make his much quoted comment about a desire to see industry content and finance less proud.

I suppose, actually, this could be described as an early form of ‘banker bashing’. But this Churchillian prose was a more eloquent description of what we today call rebalancing – and a recognition that these two great sectors are not separate but intimately linked.

What we face today is a modern version of this imbalance between the world of finance and the real economy, made many times worse by the 2008/9 banking crisis and its aftermath. Let me try to disentangle the two issues. The longer term problem is the big gap between small enterprises – which normally function on the basis of the owners’ equity and credit from banks – and the big quoted companies which can raise equity capital from stock markets and debt from capital markets. The gap – which was described in the interwar period as the Macmillan Gap after the Macmillan Commission which was set up to study it – relates to thousands of midsized but high growth companies which could not access equity and capital markets.

As the CBI has recently argued very forcefully, the problem remains. It is especially acute for innovative firms who find themselves trapped in a “valley of death” unable to raise funds to develop a proof of concept and cover the risks of early stage growth. These firms are often the ones most effective at producing growth and jobs. Last year saw the launch of the Business Growth Fund promoted and financed by the UK banks to the tune of £2.5bn, and it is now starting to invest: a laudable welcome initiative but modest in relation to the scale of the problem.

These problems have been overshadowed by the fallout from the banking crisis. As with every other banking crisis throughout history a period of exuberant, reckless lending is being followed by a period of deleveraging and credit restriction – a problem particularly acute in the UK where the size of our banking sector was – and is – vast compared to the underlying economy.

So, several years after the crash, we still have a big headache. The Governor of the Bank of England warned only last week that lending to small companies was the one piece of the puzzle missing for recovery. And although the approval rate of bank loans is high – 75% for SMEs – business remains frustrated by lack of access to capital of all kinds. The small number who actually get rejected are outnumbered by those who never try, perhaps scarred by recent experience, or simply scared of what might go wrong. For those who do get a loan, the frustration is often about cost and conditions.

This leaves a yawning mismatch between the needs of productive business and the finance available. Banks are trying to reduce risk. But business lending, especially to SMEs, is risky. Exporting to emerging markets is risky. Innovation is risky. I hardly need to tell a room full of successful business people that a flight from risk is a flight from business.

The clash between these two contrary aims is what has caused such frustration. I would urge you to listen and understand the frustration which is out there. Wherever I meet groups of business people around the country I am given fresh anecdotes about how hard it is to deal with the banks, how few choices there are, how swift and arbitrary the treatment can seem. I hear this weekly in my constituency surgery. I hear it from academics, business titans and even the right wing tabloid press, usually the first to scold politicians like me for interfering in business.

And quite apart from anecdotes, the regular analysis of lending trends by the Bank of England shows the seriousness of the position. The message is a simple one: Britain’s recovery is being imperilled by the parlous state of the very institutions that caused the crisis in the first place.

Policy makers have been grappling with this problem now for several years but there are no easy answers. Let me review the options.

First, we can sit patiently waiting for normality to return – markets to return to their senses and new good banks to emerge – the 19th century laissez faire solution. The problem is that, meantime, the recovery is held back.

Second, some argue that we should soften, for the moment, tough capital requirements on SME lending – adopt the “counter cyclical” regulatory standards that are often being discussed. A sensible idea, although one rendered legally difficult by our need to keep to international standards.

Third we can browbeat and beg the banks to lend more to business when they don’t want to. That is why we negotiated the Merlin agreements last year. It was criticised as naive and ineffectual, but I think it did have some beneficial effects in prompting more SME lending than would otherwise have occurred and has genuinely prompted a change back to business relationship banking in some banks. It has, in any event, run its course.

Fourth we are often urged to toughen up the Merlin approach for the partially state owned banks. As the Daily Mail puts it, “make the banks lend.” I have been an advocate of this approach; indeed it is embedded in the Coalition Agreement. But I recognise there are major consequences. There has been a lot of interest in an option I floated in a private letter to the PM and DPM about creating a British Business Bank out of RBS. Indeed a lot of businesses I speak to have been supportive of such an idea but this would not be straightforward. It would almost certainly be necessary to lengthen the period in public ownership. It may well mean state-controlled banks being able to lend at cheaper rates than new commercial banks, thereby affecting the development of more diverse finance. And even if they did these things, we would run into problems with EU state aid clearance.

Our focus at the moment is on credit easing where the government uses its own access to currently cheap bond finance to support cheaper and hopefully more plentiful bank credit. The Chancellor spoke about this yesterday to the EEF and confirmed that the scheme would be up and running by the Budget.

And last, the government can try to absorb some of the risk of lending. There is a variety of small schemes, led by the Enterprise Finance Guarantee Scheme, under which the government underwrites a share of the loan where, for example, there is insufficient security. We have venture capital funds that co-invest with the private sector; various measures to support export credit; schemes funded by the Regional Growth Fund to give firms the equity strength to borrow.

So no-one can deny that the Government is taking this problem seriously! We feel that we have shown our commitment, but also recognise that we cannot do it alone.

A different and longer-term approach to this whole problem is needed: one that harnesses the positive qualities of a premier league financial sector down to ordinary businesses; that provides British businesses with finance they need to survive and thrive. To bring UK business finance up to the higher divisions

That is why I have asked Tim Breedon, CEO of Legal and General, the Chairman of the Association of British Insurers, to lead a Taskforce to examine this question. How do we re-shape the finance landscape to make it serve better the needs of British businesses.

The arguments for diverse sources of finance are strong. We have seen the risks of over-reliance on bank lending. The UK needs a well-functioning non-bank ‘safety valve’.

Tim’s approach has been very wide-ranging. He has led an industry Taskforce bringing together businesses, investors and advisers. They have mobilised many experts, across the UK, to provide evidence and ideas. I applaud this level of co-operation and believe it essential to deliver the changes needed. Making it work depends substantially on business, and particularly the financial community, being positive and creative. The problems are not intractable, but will take positive thinking and creativity to solve.

The Taskforce is looking at ways to allow more businesses to raise finance directly or indirectly from capital markets. It is looking at how individuals are already finding ways to invest directly in businesses, through new and innovative channels. It is looking at how businesses themselves can fund other businesses, perhaps through their own supply chains. It is learning from what happens around the world; in the US, where trade finance is four times more significant than the UK; in Germany, where I’m told the state bank KfW provides a ‘Heineken Effect’, reaching the parts of business that other markets don’t reach.

I greatly look forward to receiving the Taskforce recommendations. I have encouraged them to be bold. I hope their work will represent a turning point in UK business finance.

My objective is clear and straightforward: to improve Britain’s finance landscape for the benefit of businesses and investors. I believe we need to seize the opportunity created by the crisis, to make a big difference; to tackle the long-term as well as short-term problems. Our government has an opportunity created by the crisis environment in which we operate, to make a big difference and tackle not just the immediate problems of the credit crunch but -with your help – to narrow the divide between finance and productive business which has existed for generations. To do that, we need your ideas, creative thinking and practical support.