Tag: 1999

The speech made by Gordon Brown, the then Chancellor of the Exchequer, on 27 May 1999.

Let me start this evening by congratulating the IFS on 30 years of outstanding work in their field. Born under a previous Labour government, its reputation built initially from work on corporation and capital gains taxes, its sponsors as varied as the Economic and Social Research Council and Marks and Spencer, the IFS has – in just three decades – under distinguished directors and excellent staff – established itself as an indispensable British institution. And as every government finds sometimes to its cost, an institution that is rigorous in research, proudly impartial and objective in analysis, forward- looking in the causes it adopts and fiercely independent – yielding to no-one, friend or foe, on its way.

When we came into government, we set as our central economic objective the 1944 White Paper aim of high and stable levels of growth and employment together.

I want to talk tonight about how in the 1990s, the Government is seeking to meet these same objectives in completely transformed circumstances.

And I want to describe the new role for the Treasury, working with other departments, to meet these goals.

Of course, the first task for Government must be to deliver a platform of stability based on low inflation and sound public finances.

But, as I made clear in a speech on the role of the Treasury as we prepared for government in 1996, I do not believe that in the modern world you can have a successful Ministry of Finance unless it plays its proper role in successfully equipping British people and British companies to succeed.

Indeed, it is only by equipping people for change and strengthening the supply-side of the economy that we can put past instability behind us.

So our task now as a government is to use this platform of stability that we are creating to fulfill our long-term ambitions for our country – delivering higher levels of sustainable growth, employment opportunity for all and creating a fairer society.

Some seek to claim that the best government is the least government – that there is nothing Government can do to improve our productivity performance, get people back to work or tackle the cycle of poverty and deprivation that has been a feature of Britain in the last 20 years.

Others have argued that delivering high growth and full employment can be done simply by old-style demand management. And that the only answer to poverty is to compensate the poor for their situation rather than tackling the underlying causes.

I reject both these approaches. And tonight I want to set out what these long-term challenges demand of modern government and the Treasury – a long-term commitment to stability, to raising the trend growth rate, to delivering employment opportunity for all, and by tackling child poverty ensuring everyone has the chance to realise their potential.

Stability

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

In these circumstances, the first thing that the Treasury had to do was to get inflation and the public finances under control and break decisively with the short-termist, secretive and unstable record of macroeconomic policy-making of the past two decades by setting a credible framework.

We took early action to put in place a framework for economic stability – not only making the Bank of England independent but putting in place a new long-term monetary framework based on clear rules and open procedures. And as a result of the decisions that we took, inflation has been brought down to historically low levels.

We also took the same tough action to tackle the fiscal deficit which we inherited: not just cutting public borrowing in our first two years by £31 billion, but also putting in place a long-term fiscal framework, underpinned by legislation, with clear rules that, over the cycle, there is a current budget balance and prudent levels of debt.

This platform of stability, as I set out to the CBI last week, is founded on clear rules: first setting out long-term policy objectives; second, the certainty and predictability of well-understood procedures for monetary and fiscal policy; and third, on an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

We have also brought stability to our relations with Europe. For the first time we are committed in principle to economic and monetary union. We are working with our European partners to make sure EMU is a success. The UK has also been working with our international partners to help create the conditions for stability, prosperity and poverty reduction throughout the world.

Some said, when on our first weekend in office we gave responsibility for interest rate decisions to the Bank of England, that the Chancellor and the Treasury would have nothing to do.

But I was clear then that we were only putting in place the foundations that would provide a platform of stability from which we could build to achieve our objectives of high and stable levels of growth and employment.

In other words stability is a necessary pre-condition to deliver our objectives for growth and employment, but it is not sufficient. An economy cannot fly on only one wing.

Indeed the experience of the last twenty years shows that simply trying to control inflation alone without tackling the underlying causes of sluggish productivity growth and inflationary pressure has proven to deliver neither stability nor the high and stable levels of growth and employment that we set as our central objective on coming into government.

Raising our growth rate

So let me turn first to raising our long-term growth rate.

Some people argue that governments cannot affect the trend growth rate of the British economy. I reject this pessimistic view. Our task as a government is to raise the sustainable trend rate of growth of our economy from the low level we inherited. That is our ambition and in the next decade we will achieve it in new ways.

Fifty years of our economic history from 1945 was marred by a succession of sterile and self defeating conflicts between state and market, managements and workforce, public and private sectors.

We need a new national purpose based on an end to short-termism and an understanding of the need to take a long term view, government, industry and the financial community:

government – by ensuring lasting stability and removing the barriers to growth;
industry – by investing for the long term; and
the financial community by refusing to resort to the short-termism and stop-go attitudes which have bedevilled us since the war.

So our analysis suggests that we must combine our strategy for stability with major structural reforms of our product, capital and labour markets.

One measure of productivity is output per worker. On this basis when we came into government, we inherited an economy with productivity gap approaching 40 per cent with the United States and 20 per cent with France and Germany, and a trend rate of growth which meant that a substantial productivity gap was set to remain.

Alternatively you can measure productivity as output per hour worked rather than on the basis of output per worker. Because a UK worker works fewer hours than in United States but more than in Europe, we do better against the us, but even worse against Europe. However there is still a considerable gap with the us of about 25 per cent.

The IFS have suggested that we should measure productivity as total factor productivity, a measure which strips out the contribution from capital and labour intensity. On this basis the UK’s productivity gap narrows to 10-20 per cent compared to the US and to Europe. Although this is a useful measure it does not reflect the chronic under-investment in physical capital in this country over decades. It is that low level of investment that has led to lower levels of labour productivity.

In every year since at least 1960, the UK has invested a lower share of GDP than the OECD average and capital stock per hour is much lower in the UK than for our competitors – 31 per cent higher in the US, 36 per cent higher in France, 55 per cent higher in Germany. Raising productivity per worker in the UK requires a period of sustained high investment so that we can close the gap in capital stock per worker with our competitors.

Of course, how the extra investment is used, its effectiveness, is just as important as the volume of investment which is why the productivity agenda is so important.

So I do not believe that any of us – analysts, employers, employees, politicians – can wish away the productivity challenge that Britain faces. While 30 years ago governments responded to the productivity challenge with top-down plans, and tax incentives and grants primarily for physical investment, today it is more complex – involving the modernisation of capital and product markets, the encouragement of innovation and an enterprise culture open to all, and the building of a modern skills base.

Enterprise, investment and risk-takers

First, we moved decisively in our first two budgets to encourage new businesses with a cut in the small companies’ tax from 23p to 20p. To encourage start-ups we have introduced a new 10p rate of corporation tax for small companies and a new 10p rate of income tax which will help the self-employed. And to encourage growth we have provided 40 per cent investment incentives for small businesses and medium sized businesses; provided additional support for venture capital; and reformed the capital gains tax system with a long term rate of 10 per cent to promote and reward long-term business investment.

Recent work by the OECD has highlighted the problems which small businesses face in raising finance where they have little track record.

As part of this reform of capital markets the challenge for Britain is to create a stronger venture capital industry and to make sure there is enough venture capital for hi-risk, early stage and start-up companies.

Some argue that the capital gains tax system is too blunt an instrument to encourage long term investment by individuals. They also argue that companies and investors will not respond to tax incentives to encourage investment. But these are often the same analysts who are quick to point out the power of incentives in our tax system to tax avoidance. Our shared task is to ensure we put in place incentives to encourage long term improvements to productivity not short term tax avoidance.

We are putting in place measures to encourage investment in early stage, high technology companies, through a new £20 million Venture Capital Challenge run jointly with the private sector; and will be introducing incentives to promote corporate venturing.

And next year we will introduce a new Enterprise Management Incentive measure to provide help where it is most needed to smaller companies with potential for rapid growth which are seeking to recruit or retain key personnel by offering equity remuneration. So the scheme will allow tax relief for incentives of up to £100,000.

But we need to give all who create wealth a greater stake in the wealth they create.

There is clear evidence that giving people a genuine stake in their company’s future delivers real improvements in performance and productivity. One study from the US has shown that in 73 per cent of cases, firms significantly improved their performance in the five years after establishing an employee share ownership scheme. And on average, these firms increased sales and employment by 5 per cent more than similar firms without schemes. In this country, the value of employee share ownership is widely agreed.

We are introducing a new programme of shares for all, in which employees will be able, for the first time, to buy shares in their own companies from their pre-tax income. Every employer will be able to match, tax-free, what each employee buys. The only condition is that the scheme must be offered across the company’s entire workforce.

Innovation

Second, we need to do more to turn scientific inventions in Britain into jobs for Britain by honouring the spirit of invention, facilitating the exploitation of invention and encouraging the commercialisation of invention. Higher productivity in part depends on inventions which are created in Britain being developed and manufactured in Britain.

The seedbed is basic science so we are investing an extra £1.4 billion in basic scientific research.

And we are putting in place a new R&D tax credit to encourage small business investment in R&D. Work by the OECD suggests that R&D investment contributes to productivity growth and tax credits will encourage more R&D investment by the private sector. We expect the R&D tax credit to benefit over 3,000 companies and help support at least £700 million of R&D spending.

Our University Challenge Fund is designed to help turn British inventions into businesses here, and the new British Institutes of Enterprise will provide management skills and advice on commercial expectations to ensure the innovations that are developed in the UK are turned into products manufactured in the UK, creating good paying jobs in the UK.

Competition and regulation

Third, the sharpest spur to innovation, efficiency and improvement is competition. Work by Steve Nickell at the Centre for Economic Performance indicates the positive effect of competition on productivity. It is competition which drives companies to invest in people and equipment, to match the best in management and marketing and to innovate in process and products.

This requires reform of our product markets – tackling vested interests, exposing management to international best practice and bringing down unnecessary market barriers to new entrants and new ideas.

So Steve Byers is now proposing as fundamental a long term reform of competition policy as we have achieved for monetary policy – a new long term framework with clear objectives and rules, free of political interference.

We have rewritten this country’s out-dated framework of competition law. We have given the Office of Fair Trading new powers and new money to police anti-competitive practices which damage businesses and consumers alike. This is one of the most important legislative reforms of this Parliament. Now we will be consulting on the next stage, withdrawing ministers from the decision process on merger cases.

And we have launched a major independent review of competition in our banking sector in which Don Cruickshank is working with the banks to examine the obstacles to firms getting the finance they need to start and to grow.

The future agenda

We have made progress on a number of areas but there is more to be done.

With the help of Lord Haskins we are considering ways of reducing the impact of regulation on productivity and growth, we are looking at improving the efficiency of the planning process, at meeting ambitious targets for electronic commerce to help make the UK the best place to trade electronically by the end of this Parliament, establishing Regional Development Agencies and considering how urban policy can improve economic competitiveness in our towns and cities.

The drive to improve productivity is an ongoing task which the Treasury has a responsibility to help meet, including through the work of the new Cabinet Committee on Productivity at which Cabinet Ministers from a range of key government departments are represented.

We are also continually looking at ways to improve public sector productivity including through public private partnerships and in public sector procurement. We have set tough targets for outputs from every department in our public service agreements. And we are learning from the Public Services Productivity Panel – a new advisory committee of outside experts from the private sector. Leading businessmen and women, bringing into the public sector, expertise of managing change in large complex organisations.

In Europe too we need to pursue a strategy of structural reform; reforming labour markets to create jobs; reforming product and capital markets to raise investment and build dynamic economies. We welcome the initiative for an employment and economic reform pact of EU countries to further European commitment to create the conditions for high and sustainable levels of employment and growth.

To those who say the Government’s approach to productivity is piecemeal, I would respond that nobody is claiming there are simple solutions, silver bullets. None of the economists and business people I have spoken to have suggested there are. This is not a challenge which can be met by one budget alone, or one single new act of Parliament can meet and beat. It is a long-term challenge for every department and for all of us working together.

Employment

Achieving the 1944 aims in the new global economy and changed labour market also requires an employment policy that equips people to succeed by being adaptable, flexible and educated. Our aims are high and stable levels of growth and high and stable levels of employment. The key insight of the 1990s is that the modernisation of the economy can be achieved only by spreading opportunity more widely in employment, earning power and education.

Some argue that the only role for government is further deregulation of the labour market – that we can never strike the right balance between minimum standards and open markets.

They argue instead for a deregulated labour market underpinned by a minimalist welfare state which acts only as a safety net.

Others have argued that tax and benefit reform cannot improve the working of the labour market and expand opportunity, and argue instead for more regulation at work and for a more generous – but unreformed – welfare state which still only compensates people for poverty and lack of opportunity.

We must be more ambitious and tackle the underlying causes of deprivation.

Our approach is to build a new and modernised welfare state around principles – that, in addition, to its traditional and necessary function of giving security to those who cannot work, for those who can work, the welfare state should promote work, make work pay and give people the skills they needed to get better jobs.

The modernisation of our approach to the welfare state, which we argued for in Opposition and have been implementing in Government, is necessary because of the transformation of the labour market in the preceding two decades:

Women are now working in far greater numbers than ever before.

The return to skills in today’s labour market is qualitatively greater than ever before and correspondingly, the penalty for lack of skills greater.

It is a measure of the challenge we face that nearly fifty percent of people with no qualifications are either unemployed or outside the labour market.

The labour market is characterised by part-time working and self-employment as never before.

And we face a problem of structural unemployment – large sections of the population excluded from work – as never before.

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

Nearly 1 in 5 children were growing up in households where no-one is working, twice the rate of France and four times the rate of Germany.

And the reason that this issue of worklessness poses a particular challenge for this government is that it is now the primary cause of poverty in Britain today.

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

And two thirds of working age households on persistently low incomes have nobody in work, with eight out of ten having no full-time work.

The best form of welfare for these groups is work. Simply compensating people for their poverty through benefits is not enough, the task must be to deal with the causes of poverty. We must give people the chance to work, if they can.

Indeed, the Treasury paper we published earlier this year, tackling poverty and extending opportunity shows that over the period 1991-95, 80 per cent of the bottom quintile who moved into work moved out of the bottom income group.

And our strategy has been to tackle the barriers that people face to getting into work – the lack of work opportunity, the unemployment and poverty traps, the lack of necessary skills.

And our measures must recognise that different groups have different needs – lone parents, less than 50 per cent of whom are in work; young people, among whom the unemployment rate was 13 per cent at the time of the election, approaching double the rate for the population as a whole; partners of the unemployed, only half as likely to move back into work as those with partners in work; the long-term sick and disabled, one million of whom are without work but say they want to work; and the over 50s, among whom nearly 30 per cent of men are either unemployed or inactive.

First, providing opportunities to work.

Unemployment when young is more likely to mean persistent periods of unemployment when older.

On average, men who before the age of 23 have been unemployed for 12 months or more will in the following decade spend 15 times more time out of work than those who were never unemployed.

Research now shows that while people without skills are more likely to become unemployed, long-term unemployment also erodes people’s skills and employability.

Once long-term unemployment is entrenched, it requires much more than traditional demand management to solve it.

By increasing the effective supply of labour – the pool of employees and skills able to compete for work in the economy – we can increase the sustainable level of employment, consistent with low inflation.

So I do not accept that there are a fixed number of jobs in the economy and micro-economic policies have no effect on this.

Since we came into Government, employment has risen by well over 400,000, unemployment has fallen substantially on both the claimant count and the ILO measure and record numbers of people are moving out of economic inactivity.

But our aim is to deliver employment opportunity for all – the modern definition of full employment.

If we are to maximise the effective supply of labour, it is clear that labour market programmes must be oriented to getting people back into work before they lose touch with the labour market – matching new opportunities with new responsibilities for the unemployed to take up the opportunities.

Matching rights with responsibilities is at the heart of the new deal programme. And it is why we have made our biggest investment in the New Deal for young people.

And while it is early to come to firm conclusions about the scale of the New Deal’s success, I think it is clear that it is showing very encouraging results.

Already over a quarter of a million young people have joined the New Deal and over 95,000 have found jobs – the vast majority sustained jobs. A further 64,000 are gaining valuable experience on New Deal options. And 47,000 employers have signed up to the New Deal. Since the election, long-term youth unemployment has halved.

One of the most important innovations of the New Deal, in my view, is the system of personal advisors – so that every individual is designated an adviser with the knowledge and skills to advise them on what work options are open to them.

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

Furthermore, with the single work-focused gateway – “ONE”, we are moving towards a situation where nobody who signs on for benefit will simply be written off, without advice and support about how they can get back into work.

Second, making work pay

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

Now there are some who argue that improving work incentives at the bottom end of the labour market will not make a difference to the number of people moving into work.

This fails to appreciate the new dynamism which is developing in the modern labour market – there are now over 3 million moves every year from unemployment or inactivity into employment.

The Canadian self-sufficiency project examined the effects of a time limited in-work payment for lone parents and suggested that it doubled the likelihood that they would move into full-time work.

In addition, new research by Gregg, Johnson and Reed co-ordinated by the Institute of Fiscal Studies, examines the actual employment decisions made by 12,000 people over a 15 month period.

It suggests that every £10 increase in the return to work increases the likelihood of moving into work by around 2 percentage points for women and half that for men.

The evidence is increasingly that incentives do matter at especially at the low-income level of the labour market.

That is why, just as we have ruled out penal tax rates at the top of the labour market, we are taking action to make work pay and tackle poverty traps at the bottom.

As the foundation of this strategy, we have introduced the National Minimum Wage.

Because we are determined that this commitment to making work pay is consistent with our central objective of high employment, the minimum wage has been set at a sensible level which will not damage employment.

And it is right that the youth minimum is set at a prudent level, thereby ensuring that our New Deal strategy is not put at risk.

But our commitment to making work pay and to high levels of employment can only be met by combining a sensible and prudent minimum wage with a generous and fair system of in-work support.

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

Our goal for the new tax system, is that those who work will be guaranteed a minimum income, and by step-by-step integration of tax and in-work benefits this minimum income will be paid through targeted tax cuts and tax credits. No-one who is in work should, in future, have to go to the benefits office to receive a living income.

There will be some who say that the use of the tax system in this way disturbs the aim of a simplified tax system.

Let me take this view head-on. The problem with the old tax system was not simply that it was complex. It was characterised by reliefs and subsidies not based on or justified by clear aims and objectives.

We have acted to remove reliefs in the personal and corporate tax system which although no longer justified had remained for too long. Whether it be taking the decision to end Mortgage Interest Relief and Married Couple’s Allowance, or Advance Corporation Tax or introducing a Climate Change Levy, I believe that people will look back at the first budgets of this Government as a period when major tax reform was enacted.

I believe that the tax system is about more than simply raising revenue in the simplest way, it must also help us to work towards our wider goals – of encouraging work as well as promoting enterprise and supporting families.

That is why we are introducing measures to support those in work.

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

The building blocks of this new system are therefore the minimum wage which sets a rate below which no employer can pay, and building on this a Working Families’ Tax Credit which, even this year, delivers an hourly income of £6 an hour or more.

For those receiving this minimum income guarantee through the wage packet, the rewards from work will be far clearer than ever before, the duplication of receiving benefits and at the same time paying tax will be eradicated and the damaging polarisation between taxpayers and benefit claimants will be removed.

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

Of course, barriers to work across the workforce are different for different groups – for families with children, those without children, older workers and single people.

Our long-term aim is an employment tax credit, paid through the wage packet, which would be available to households without children as well as households with children.

As a first step in the Budget, we began the move towards an employment credit with a minimum income guarantee for over 50s returning to work.

Nearly 30 per cent of men over 50 are outside the labour force, twice as many as 20 years ago.

For those unemployed for six months or more, we will create a new employment credit which will guarantee a minimum income of 9,000 pounds a year, for their first year back in full-time work, at least 170 pounds a week.

So to make work pay we have introduced the minimum wage and a new system of in-work tax credits. We have also reduced taxes to reward work and encourage job creation.

The new 10p starting rate of tax, reform of employees’ national insurance to eliminate the perverse entry fee and align the starting point for national insurance with that of income tax and reforms to employers’ national insurance to help create entry-level jobs.

This is a radical and long-overdue streamlining of the income tax and national insurance systems. It will halve the income tax bills for nearly 1.5 million low-paid workers, take 900,000 people out of National Insurance and tax altogether and remove substantial distortions in the labour market.

And we have cut the numbers facing marginal deduction rates over 70 per cent by two-thirds.

A further step in this better deal for work is to include help with housing costs, not just help with rent but also help for homeowners going back to work. Taking a job should not put people in danger of losing their homes.

And the Government will be producing a Green Paper on Housing later in the year.

Third, opportunities for skills

We recognise that bringing out the best in people – by policies that ensure opportunities for skills – is the best route to prosperity in the modern world.

That is why we are committed to widening opportunities in education and training: higher standards in our schools and lifelong learning.

And in order to raise staying on rates at schools and colleges, we are piloting Educational Maintenance Allowances, which are available at a higher level to those who need them most, thereby enabling us to more effectively target resources.

About 80 per cent of people in employment today will still be in the workforce in 10 years time. And yet only a fraction of today’s workforce are upgrading their skills – while their skills are all the time becoming obsolete.

It is because experience shows that training while in work is more valuable than training while waiting for work that we are emphasising the starter job, getting back to work quickly and encouraging people to work their way up the skills ladder.

Our proposals for Individual Learning Accounts and a University for Industry recognise the new reality that not only should people upgrade their skills throughout life but they should be encouraged to take responsibility for doing so.

Breaking the cycle of poverty

Our aim is not just to deliver high and stable levels of growth and employment today but for the future. We must recognise that our economy can never reach its full potential unless everyone in our country has the opportunity to develop their talents to the full.

Children are, rightly, the responsibility of the families in which they grow up. But they are more than this – invest in our children and we invest in the future of our country.

We say – indeed we all agree – that every child should have the best possible start in life. And this Government sees it as a national goal. This is why Tony Blair has said we will abolish child poverty over 20 years.

It is not enough to tackle absolute poverty and simply prevent destitution.

We should do more. It is not fair that children should be disadvantaged from the start of their lives because of who their parents are, what school they go to and where they live.

Ensuring each child has good start in life takes more than just money but cannot be done without money. We must ensure that children grow up in surroundings which enable their needs to be met.

So Government must play its part by using its system of child support to tackle the disadvantages that come from low incomes and poor parental support.

The truth about Britain today is that millions of children are born into poverty.

The facts of child poverty in Britain in 1997 are that: over four million children – more than a third of all children – lived in low income families. And very many of them will remain poor for a large part of their childhood – up to a quarter of all children are persistently in low income families.

The problems of poverty and deprivation start with the very young. Babies born to fathers in social class five are more likely to be low birth-weight. And low birth-weight is a key fact in a child’s subsequent development and opportunity.

Furthermore, poor children are less likely to get qualifications and to stay on at school. They start to fall behind their better-off peers from a very young age – the evidence shows that class differences in educational development are apparent by 22 months.

Recent research commissioned by the Smith Institute shows that class background had as strong an impact on the academic achievement of children born in 1970 – and reaching adulthood in the late 1980s – as those born in 1958.

The son of an educated professional father on average achieved qualifications two and a half levels higher than the son of an unskilled father who left school at sixteen. And the results for the 1970 generation are roughly the same as for 1958.

All of us have a part to play in a partnership to tackle child poverty and help all our children fulfil their potential and we are determined to tackle that vicious cycle of poverty, inadequate opportunities, and low aspirations.

The evidence on child poverty shows the need for early intervention to give very young children the best start in life and it shows the need not only for financial support but for proper support services to help families.

So we are investing £540 million over the next three years in the new Sure Start programme providing integrated services for children under four and their families to promote the child’s physical, intellectual, social and emotional development.

On the birth of a child we know that parents face particularly heavy financial burdens, so in the Budget I announced a new Sure Start maternity grant at double the rate of the old maternity payment, benefiting around 250,000 families. And to encourage good healthcare at an early age the additional amount is linked to contact with a healthcare professional.

And in both of the last two budgets – alongside our commitment to getting people into work and making work pay – we have also taken steps to increase direct financial support for children provided through the benefits and tax system.

Our approach is based on two principles: we must substantially increase support for families with children and we must do so in the fairest way.

As our manifesto promised, child benefit itself will remain as it is, paid to all mothers, and rising annually with inflation.

As a recognition of its role, we have raised the level of universal child benefit from 11.05 pounds a week for the first child to 14.40 pounds today and 15 pounds from next April.

The new Children’s Tax Credit, replacing the Married Couple’s Allowance, will provide more help for families when they need it most – when they are bringing up children.

But because of our commitment that substantial extra resources for children should be allocated in a fair way, the Children’s Tax Credit will be tapered for higher rate taxpayers.

And with the Children’s Tax Credit added to Child Benefit, families who were receiving 11 pounds a week in 1997 for their first child will, by April 2001, be receiving 23 pounds a week, 1,200 pounds a year.

Finally, for the poorest families in work and out of work, we are substantially increasing the rates of support for all children under eleven.

When we came to office, parents on income support received 8 pounds a week less for a child under eleven than a child over eleven. But there is no justification for this differential, particularly as families with younger children are more likely to live in poverty.

So, with the measures we have taken in successive budgets, from next April the under-eleven rate will have been raised to the level for 11-16 year-olds, an increase in support of over 400 pounds a year for each child under eleven for all families on income support

The maximum support for the first child will be 40 pounds a week, 2,000 pounds a year for families when they need it most.

Our measures so far lift one and a quarter million people out of poverty – 700,000 of them children.

Taking all our reforms together – Working Families Tax Credit, Children’s Tax Credit, rises in Child Benefit and other tax changes – a family on 13,000 pounds a year will gain up to 50 pounds a week, 2,500 pounds a year.

However, building upon the foundation of universal child benefit, we want to and will go further in improving child support and tackling child poverty.

We are examining, for the longer-term, the case for integrating the new Children’s Tax Credit with the child premia in income support and the working families tax credit- an integrated child credit. This could allow families entitlement to income-related child payments to be assessed and paid on a common basis.

A single seamless system, without disruptions in financial support, would provide a secure income for families with children in their transition from welfare to work. Such an integrated credit, for those in and out of work, could be paid to the main carer, complemented by an employment tax credit paid through the wage packet to working households.

Again as I said before, our approach is based on two principles: we must substantially increase support for families with children and we must do so in the fairest way.

Where we pay families an income-related benefit for children, it makes sense to take into account the circumstances of the family when we provide the support.

In all our reforms we will honour the important principles of independent taxation: that we will never allow the wife or partner to be regarded as the chattel as was the case until the late 1980s; everyone should be treated equally in the tax system and everyone should have the right to their own personal allowance whatever their household status.

Child poverty is unacceptable and these measures show our determination to help all our children fulfil their potential.

Conclusion

I said three years ago that a new Treasury under Labour would take its responsibility for the modernisation of Britain seriously.

That it would, be the guardian of the public finances and the guarantor of monetary stability, but that a Labour Treasury would need to be not just a Ministry of Finance, but also a Ministry working with other departments to deliver long-term economic and social renewal.

To achieve this, it needed to be innovative rather than obstructive; open rather than secretive; creating new ideas and not stifling them.

Above all, that we would underpin our economic policy with a proper understanding of the challenges of the global economy and the modern relevance of our values by putting a radical commitment to equality of opportunity at the centre of our mission. Fulfilling the 1944 White Paper aims of growth and employment and doing so to the benefit of all our citizens.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, at the CBI Annual Dinner on 18 May 1999.

INTRODUCTION

I am delighted to be here this evening and to start by paying tribute to the work you do, the service you give, the contribution you, as business leaders, make to the economy, to employment and to prosperity for Britain. It is your belief in the potential of Britain and of the British people that makes us optimistic about the future of the British economy as we approach the millennium.

A little over two years ago I addressed this dinner, it was only a little over two weeks after we came into government.

I used that opportunity to set out our ambitions for Britain – our plans for building a platform of economic stability in Britain, our commitment to identify and remove the barriers to growth and productivity, our ambition to put work at the centre of the welfare state, our aim for constructive engagement with Europe. And I said then that we could only achieve these goals, restoring a sense of national purpose, if we worked together.

Now two years on I want to report back to you on what progress we have made together and what we have still to achieve together to realise our ambitions for Britain.

Stability

Let me start by talking about stability.

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

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

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

We established a monetary policy committee with a target for inflation of 2½ per cent, and today I am writing to the Governor to confirm this remit for another year. Over the last 10 months inflation has remained within 0.2 percentage points of the Government’s target. Today’s figures show headline inflation down to 1.6 per cent and underlying inflation at 2.4 per cent – its lowest level for over 4 years, and it is expected to remain close to target.

Short-term interest rates peaked at half their early 1990s level and have fallen from 7½% in October to 5¼% now. Long-term interest rates are at their lowest for over 40 years and mortgage rates are their lowest for 33 years. The 10 year bond differential with Germany has fallen from 1.7 percentage points in April 1997 to around 0.7 percentage points now.

We have also put in place a new fiscal policy framework set out in the Code for Fiscal Stability requiring the Government to conduct fiscal policy in a transparent and responsible way. And we have set two strict fiscal rules: the golden rule requires that over the cycle we balance the current budget, and the sustainable investment rule requires that, as we borrow for investment, debt is set at a prudent and stable level.

Public borrowing has been reduced by £31 billion over the past two years – a cumulative fiscal tightening of 3¼ per cent of GDP, the largest fiscal tightening since 1981 – and the March Budget continues to lock in that fiscal tightening by keeping the public finances under control, while allowing fiscal policy to continue to support monetary policy in the next stage of the cycle. As a result of our cautious and prudent approach to managing the public finances, we remain on track to meet the fiscal rules while guaranteeing an extra £40 billion for schools and hospitals over the next three years and more than doubling public investment, including in transport and our infrastructure.

This has been a difficult time for the global economy – a quarter of the world is now in recession and world growth has halved. Exports to parts of Asia are down more than 50 per cent. The turbulence of last autumn has eased but it is too early to say that the period of global financial instability is over. But as a result of tough and decisive action to build a platform of stability I believe we can now say that the Government has been able to steer a course of stability – based on low inflation and sound public finances – and we are now laying the foundations for sustainable growth.

The platform of stability which we are putting in place is founded first on setting out clear long-term policy objectives, second on the certainty and predictability of well-understood procedural rules for monetary and fiscal policy, and third on an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

So the experience of the last two years now allows us to draw some lessons:

First, the MPC has only one target – a symmetrical inflation target. I am determined to avoid economic instability caused by the ever-changing money targets of the early 1980s and the dual exchange rate and inflation targets of the late 1980s and early 1990s. The Bank of England was quite right to say, when publishing its inflation report last week, that the objective of monetary policy is clear and unambiguous with a symmetric inflation target so that inflation outcomes below target are viewed just as seriously as outcomes above target. The symmetrical target, combined with tight fiscal policy and the earlier tightening of monetary policy, has enabled the MPC to reduce interest rates quickly to keep inflation at or around the target. I do understand the worries of exporters over the current strength of sterling, but what would be an even greater worry would be any risk of a return to the boom-bust we saw in the 1980s and early 90s, when inflation was allowed to run out of control, over 150,000 businesses went under and thousands faced mortgage misery and negative equity.

Second, by publishing the minutes and the inflation report along with MPC members’ regular appearances before the select committees, we have enhanced the transparency and openness of monetary policy, and I think it has led to a greater public understanding of why decisions are made. This should help reduce inflation expectations among the public and the MPC has a role to play in this. All of us must show responsibility on pay, and not take the short-termist approach of paying ourselves more today at the cost of higher interest rates, fewer jobs and slower growth tomorrow.

Third, and contrary to the fears of some commentators two years ago, an equally clear framework for fiscal policy, including the presence of the Treasury representative at MPC meetings, has greatly improved the coordination of monetary and fiscal policy. Under the previous arrangements the Chancellor announced his fiscal policy in the Budget – and invariably cut interest rates claiming that his Budget decisions justified it. I am convinced there is much more educated discussion of the interaction of monetary and fiscal policy than ever occurred under the previous arrangements, and much better decision-making.

Finally, I believe all of us benefit from selecting MPC members on the basis of relevant skills and expertise rather than on the basis of regional, sectoral or other interest groups. The MPC have a duty to keep in touch with all regions and sectors of the economy through the bank’s regional offices and agents, and the Court of Directors has the duty to see that this happens. I want to thank both the Governor, the MPC and the Court for their hard work and in particular this evening I would like to congratulate Alan Budd who is retiring on 31 may for his valuable work on the MPC and welcome Sushil Wadwahni who joins as his successor.

With these reforms we have been building a platform of stability for the British economy.

Removing the barriers to growth

Stability is the necessary pre-condition not the sufficient condition for a successful economy.

Britain can tonight celebrate great British success stories. World class firms beating competition round the globe. Many now taking over or becoming the senior partner in mergers with transatlantic competitors, world class firms, many represented here this evening, in whose achievements we should all take pride.

And I want to suggest that economic success in the knowledge-based economy of the future depends upon us doing more to encourage innovation. Creating a culture that favours enterprise for all. Building the knowledge and skills base of the economy. Fostering the digital computer revolution and engaging constructively with Europe.

And in building for our future, we build from the great British strengths; the British genius – our belief in work, enterprise and fair play, our creativity and willingness to adapt and to take an outward looking approach to the world. The same strengths which built manufacturing in the 19th Century, are the platform on which to build our strengths for the 21st Century, in every manufacturing and service industry in every part of the UK.

Innovation

So first, let us do more to back the inventor and the innovator.

Britain is developing a reputation for inventiveness that extends well beyond the traditional inventions for which we are famed. And to let the creative talents of our country flourish, we should create a winner’s circle stretching from invention to commercial exploitation and manufacturing of the inventions here in Britain.

So I lay great importance on the new R&D tax credit to encourage small business investment in R&D, and the £1.4 billion being invested in basic scientific research.

Our university challenge fund is designed to help turn British inventions into businesses here, and the new British institutes of enterprise will provide management skills and advice on commercial expectation to ensure the innovations that are developed in the UK are turned into products manufactured in the UK, creating good paying jobs in the UK.

We have put in place measures to encourage investment in early stage, high technology companies, through new £20 million venture capital challenge run jointly with the private sector; and a commitment to introduce incentives to promote corporate venturing on which we would welcome your views.

Enterprise

I turn to the broader question of how in Britain we can broaden the enterprise culture.

Too often in the past we posed a false choice between those who supported fairness and those who supported enterprise. The nation was divided between those who said enterprise required us to ditch a fair society and those who said fairness could only be bought at the cost of enterprise.

I believe my own party failed in the 1980s to show that enterprise and fairness depend upon each other and how extending opportunity to work, to work your way up, to start a business promoted both enterprise and fairness. Now I believe we are all ready to leave behind the old divisions and to build a modern culture of enterprise, open to all and benefiting all.

And that enterprise starts in the school, not in the boardroom. I want all large firms to consider seconding managers to schools; and you will benefit from the new tax relief. And we are encouraging schools to link up with the world of work and to link up with established businesses.

Linking the world of work to the world of business will involve today’s entrepreneurs encouraging the next generation of entrepreneurs.

Today, much is changing. Recent studies of young people found that up to 20 per cent say they would like to start their own businesses.

In two Budgets we have moved decisively to encourage new businesses with a cut in the small business tax from 23p to 20p. To encourage start-ups we have introduced a new 10p rate of corporation tax and a new 10p rate of income tax which will help the self-employed. And to encourage growth we have provided 40 per cent investment incentives for small businesses and medium sized businesses; provided additional support for venture capital; and reformed the capital gains tax system to promote and reward long-term investment.

And next year we will introduce the new enterprise management incentive measure to provide help where it is most needed to smaller companies with potential for rapid growth which are seeking to recruit or retain key personnel by offering equity remuneration. So the share option plan will allow tax relief for incentives of up to £100,000.

At each point we want to be on businesses’ side removing the hurdles to growth that stand in their way access to bank finance in starting up, access to venture capital funds when expanding, access to export markets when going international.

Skills

Now, we need to teach our children and adults the skills they need to succeed in the new economy.

As we know the countries which invest in their one national resource: the people, will be the ones that master the new technology and the new competitive pressures. So we have made radical changes to encourage people to work, to work themselves up the employment ladder and to get the skills for work.

And I am grateful to many of the 47,000 companies represented here today who have helped a quarter of a million young people and 100,000 long term unemployed to join the New Deal and for your support in the tax and benefit changes we are making the cuts in national insurance, the changes in employer contributions, the working families tax credit, the 10p rate of income tax which people are starting to see the effect of this week and the cut in the basic rate of income tax to 22p, that are designed to create the best incentives to take a job, for employers – to cut the costs of hiring and for hard working employees to reward work and effort.

But we have a long way still to go.

Today, as you know, many high tech companies cannot find the highly skilled workers they need to continue growing.

And the quality of skills among young people available to employers as they leave the New Deal gateway has to be improved.

And while we will continue to make short-term improvements, the key is to implement a long term strategy to ensure our population is skilled for the next century with a rigorous approach to standards throughout our schools with demanding targets for literacy, numeracy, school leaving qualifications and attainment by the age of nineteen. Our aim is quite simply to raise all of Britain to the standards of the best of Britain. And we will not shirk from the modernisation that is essential in schools’ reform, teaching standards, discipline and investment that is essential, both in schools and in reform of further and higher education.

Information technology

Britain cannot afford to be left behind in the computer revolution.

These computer and information technology advances affect every company, however large, every service, however small.

In the Budget I allocated an additional half a billion pounds to launch a 1.7 billion pound “computers for all” initiative, a nationwide effort enlisting schools, colleges and companies, public and private sectors across the board to make Britain a leader in the information economy.

Within three years, we want one million small businesses able to benefit from a commerce.

I want British business to work with government to move ahead in the world of information and technology. We want a whole new network of computer learning with one purpose only, that the whole of Britain is equipped for the information age.

Constructive engagement with Europe

There is another building block that for too many years we have undervalued – a strong and lasting trading relationship with Europe.

For the first time we are committed in principle to economic and monetary union. We are working with our European partners to make sure emu is a success. Economic reform is crucial for the European economy to tackle unemployment and ensure the flexibility required to live with a single interest rate. Second, we see no constitutional barrier that prevents us joining.

Third, we are committed to making an economic rather than political assessment the decisive test as to whether and when we will enter and finally we have committed our country to full preparations that will allow us to make a decision early in the next Parliament, subject to a referendum. Our strategy, to prepare and then decide, is being pursued.

In February, we published an outline national changeover plan which set out the practical steps needed for the UK to join the euro.

I am conscious that the public sector must be prepared to take a lead in making preparations. And I can tell you that every Government department is playing its part.

I am very grateful to the CBI for their continuing help on preparing business for the euro. CBI was one of the organisations that helped us in putting together the outline national changeover plan. And I want to thank Lord Marshall, your previous president, and Sir Clive Thompson your current president for their valuable work on the standing committee for euro preparations, Kate Barker for her work on Lord Simon’s business advisory group and many others who represent the CBI on our detailed working groups and on the euro regional fora.

Conclusion

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

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

The speech made by Gordon Brown, the Chancellor of the Exchequer, at the TUC Conference on 13 May 1999.

Introduction

In thanking you for the opportunity to address trades unionists on Europe, let me first of all pay tribute to the internationalism of British trades unionism over a century and more of its existence.

Even from its modest beginning in its first years, the trades unions movement was at the forefront of the British movement to end colonialism.

British trades unionists, including many of our leaders like Jack Jones, led in the fight against fascism in Spain in the 1930s; British trades unionists were at the head of the fight against apartheid from the 50s, recognising that an injustice anywhere was a threat to justice everywhere; and since the mid-eighties it is British working people and trades unions that have been principal leaders in putting the case for Europe.

It was the trades unions who led the fight for regional funds; for a social dimension for Europe; for the social chapter; more recently seeking to make Europe a people’s Europe.

And it is the internationalism of the TUC which has led it to help trade unionists in Eastern Europe prepare for the new realities that enlargement of the EU will bring.

It has been trade unionists, because of the recognition of the shared needs, mutual interests and linked destinies that bind working people together everywhere, that have demonstrated the wider vision of Britain in Europe.

A Britain not isolated but internationalist; a Britain not detached but engaged; a Britain not on the margins but right at the centre. A Britain cooperating, engaging and leading in Europe.

And now as we face the next challenge of Europe to build an economic policy that ensures a dynamic job creating economy and a fair society, I believe that Britain and British working people can lead again

The challenge is a European way in which social justice and economic efficiency can be reconciled.

The challenge is in fact to realise in the modern world the central economic and social objectives that have underpinned our history for the years since 1944 – the commitment to high and stable levels of growth and employment.

The United States has job creation without achieving the levels of social cohesion they want. Europe has social cohesion but for many years has failed in job creation. And 17 million are unemployed.

I start from the view that in the modern world, enterprise and fairness not only go together but depend upon each other, and that a solution to unemployment depends on applying policies for economic progress and social justice.

It is in this context – building a strong economy and a fair society for the new world – that the debate about Europe’s future should take place and it is in that context too that the arguments about monetary union should be examined.

And I will answer those who wrongly, in my view, believe Britain does best when we stand alone, free of long-term continental attachments, those who claim that joining Europe was one of the wrong turnings of our 20th century history, and those who wrongly assert that Britain’s traditional way of life and sovereignty are in danger of being submerged, and thus argue that Britain’s future lies outside Europe.

Those who say there is an insuperable constitutional objection to a single currency have failed to take on board that where a pooling of political and economic sovereignty has been in the British interest – as in NATO and indeed in the existing single market of the European union – we have been willing and sufficiently adaptable to embrace it is in the British interest.

I will argue that engaging constructively with Europe as the trades unions have done is our best way forward; that British values have much to contribute to the development of the new Europe; and that the new European way, to be successful and to mark out Europe in the world, must combine our commitments to economic progress with our dedication to social cohesion and social justice.

We start from our economic objectives – the objectives for 1944 – as pressing in the new conditions of modern world as they were to the 1940s – are high and stable levels of growth and employment.

And that to achieve these two objectives in the modern global marketplace we need to do two things together.

First, we must build a solid foundation of economic stability.

And secondly, we must develop a policy for job creation which requires economic reform.

Stability

First, stability.

Let us remember just how much the world has changed. The post 1945 economy was a world of closed financial markets.

Today we live in a global economy of rapid international financial flows.

And it is because investment funds will only come to those countries that show they can pursue policies that achieve economic stability that so much emphasis has to be placed on achieving monetary and fiscal stability.

Today growth and employment cannot come through the rigid application of monetary targets within one country.

Nor can growth and employment be guaranteed by the old fine-tuning that in its later days failed to recognise that there is no longer any trade off-between inflation and growth.

Instead, growth and employment and the stability on which they are founded comes first from setting out clear long-term policy objectives, second from the certainty and predictability of well-understood procedural rules for monetary and fiscal policy, and third from an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

That is why when we came into power in May 1997 we created a new monetary policy, making the bank of England independent, setting out an inflation target, setting out rules under which interest rate decisions were made and communicated – and why also we set out a new fiscal policy – again clear rules, the golden rule and the sustainable investment rule, clear procedures, a three year long term spending settlement. And again openness, a proper system of audit and disclosure in the code for fiscal stability.

In mainland Europe, too, the same search for macro-economic stability is being pursued through monetary union, the same pressures come from the new global marketplace and the same lessons are being learnt:

To realise the commitment to monetary stability the creation of an independent European central bank;

To achieve fiscal sustainability the stability and growth pact of the European union;

Side by side with the new discussions on employment and growth to create a more dynamic job-creating economy.

The European road to stability through the single currency is intended to remove unnecessary currency speculation within Europe, to reduce transaction costs that are a barrier and expense to industry, and to keep long term interest rates low.

And behind all these declared objectives is the same growth and employment objectives as in 1944 – to make our economies work more dynamically and more successfully in the interests of jobs and prosperity, an environment in which new firms and new jobs can flourish.

So the single currency is born out of a changed economic environment; is built on a platform of fiscal stability; up and working in Europe over the last five months it is indeed reducing currency transaction costs, and within Europe curbing currency speculation.

We are the first British government to declare for the principle of monetary union. The first to state that there is no over-riding constitutional bar to membership.

The first to make clear and unambiguous economic benefit to the country the decisive test. And the first to offer its strong and constructive support to our European partners to create more employment and more prosperity.

Of course the single currency raises important constitutional questions about the sharing of economic sovereignty – questions this government have not run from – but, having declared for the principle, the question that we have been addressing since my statement to the commons in 1997 is whether the single currency is in our national economic interests, whether there are clear and unambiguous economic benefits.

So we have committed ourselves to make its economic advantages the decisive test as to whether we will enter. We have set out five clear economic tests:

First. Whether there can be sustainable convergence between Britain and the economies of a single currency.

We need to be confident that the UK economic cycle has converged with that of other European countries, and this convergence is likely to be sustained, so that the British economy can have stability and prosperity with a common European monetary policy.

Second. Whether there is sufficient flexibility to cope with economic change.

To be successful in a monetary union, Britain would need flexibility to adjust to change and to unexpected economic events. To deal with some of the challenges we face in Britain the government has begun to implement a programme for investing in education and training, helping people from welfare into work and improving the workings of our markets.

Third. The effect on investment.

We need to be confident that joining EMU would create better conditions for businesses to make long-term decisions to invest in Britain. Above all, business needs long-term economic stability and a well-functioning European single market.

Fourth. The impact on our financial services industry.

EMU will affect that industry more directly and more immediately than any other sectors of the economy. we are confident that the industry has the potential to thrive whether the UK is in or out of EMU, so long as it is properly prepared. But the benefits of new opportunities from a single currency could, however, be easier to tap from within the euro zone. This could help the city of London strengthen its position as the leading financial centre in Europe.

Fifth. Whether it is good for employment.

For this government and for millions of people this is the most practical question. Our employment-creating measures, and welfare reforms must accompany any move to a single currency. Ultimately, whether a single currency is good for jobs in practice comes back to sustainable convergence.

Preparations

So economic and monetary union presents British business and British people with many challenges. And our view is that we must make the preparations that will allow us to make a genuine decision, subject to a referendum.

Last year we found that only 30 per cent of firms thought they needed to prepare for the euro and only 5 per cent had done anything. So as a result of recommendations made by the business advisory group, we decided to tackle this directly – through direct mailing of 1.6 million firms and a series of television adverts.

Twice as many businesses are now making preparations.

We brought together firms, business advisers, trades unions, and government through 12 new euro forums in every region of the country.

We have put in place arrangements to enable firms to pay taxes, file accounts and issue and re-denominate shares, receive certain agricultural grants and grants under regional selective assistance in euros.

In February, we published an outline national changeover plan which set out the practical steps needed for the UK to join the euro.

We set out the stage-by-stage procedures that will need to be followed, spelling out the practical implications of changing to the euro and giving new advice to companies on the way to take forward their preparations.

We can also learn more from the experience of the eleven countries who joined in the first wave, and adopt their best practice.

Finally, I am conscious that the public sector must be prepared to take a lead in making preparations. And I can tell you that every government department is playing its part. Each department now has a minister responsible for euro preparations and each will now report regularly on preparations they are making.

We value the important contribution which the TUC is making to the preparations process. John Monks is on the standing committee on euro preparations and David Lea is on the business advisory group. I am grateful for their contribution and I hope the TUC will continue to be actively involved in ensuring Britain and British business is prepared.

Economic reform

So, ensuring a foundation of economic stability is central to meeting our economic objectives of high and stable levels of growth and employment. It is a necessary condition of success. But it is not a sufficient condition. In a successful economic policy we need to get both macro and micro policy right. It is not enough for economic policy to fly on one wing. We need both wings to fly, hence our stress on job creation and economic reform.

Europe has 17 million unemployed. 5 million young people are out of work. 5 million are long term unemployed.

And while 10 per cent of the unemployed in the United States have been unemployed for more than a year nearly 50 per cent of Europe’s unemployed are long term unemployed.

So we have a major challenge ahead if we are to create a dynamic job creating economy and if we are to solve the problem of long-term structural unemployment.

We know enough now to recognise that in a fast-moving world of constant innovation and technological change, the real issue is how government can equip people for the challenges of the future.

It is wrong to say nothing will ever change and its wrong to leave people wholly defenceless against global market forces. It is right to help equip people for the tasks ahead.

That is the basis of our welfare to work strategy in Britain, now being discussed in Europe. It is targeted at the groups that right across Europe suffer a lack of job opportunities: the young, lone parents, the long-term unemployed and the disabled, offering opportunities for the training and skills necessary for work with the obligation to seek work – rights and responsibilities hand in hand. And there are signs that this strategy is already working. Indeed both youth and long-term unemployment have fallen by half since this government came to office.

Central to that is a commitment to equip people for change by investment in education and training.

80 per cent of those who will be in the labour force in ten years time are already in the workforce today.

Even in the most training-conscious countries in Europe only a fraction of today’s workforce are upgrading their skills which are all the time becoming obsolete.

Across Europe we have to do more in lifelong learning. In Britain we have made a start with proposals for individual learning accounts and for a university for industry which will use modern interactive technologies to make it possible for people to learn from televisions and computers in their homes.

Creating new opportunities for work and creating educational opportunities must be complemented by another measure – to make work pay. to move people from poverty out of work to poverty in work is unacceptable. So we have begun to address this problem with a radical reform of our tax and benefit system that provides tax credits for those in work on low pay and a new 10p rate of income tax to help people keep more of what they earn.

So the way forward is not simply to return to the old systems which cannot cope with the world of technological and financial change but nor is it the equally outdated notion of leaving people ill-equipped and powerless in the face of the huge insecurities of change – responsibilities without rights. The new way forward is an active welfare state with an employment policy centred on new opportunities for work. And in Europe we are making progress.

As a central element of the UK presidency of the European union we pushed forward work on the reform of European employment practices. National action plans, initiated by us and agreed at the Luxembourg summit, have facilitated the exchange of best practice, learning from each other and better targeting of policies.

The first set of European employment guidelines have already been agreed and these are being updated for 1999. The national employment action plans show what concrete actions member states are taking and the plans help to share best practice. Each individual country now sets down how they will get young unemployed men and women into the labour force, often for the first time, and how they will get the long term unemployed back to work. And this is an ongoing process. The next set of action plans will be submitted by member states early next year.

But this is just the beginning of a new approach. A top priority should be to consider the lessons from the employment action plans. Under our presidency we initiated the process of review of the action plans so that we could start a real debate on the best employment policies. No one country has all the answers for tackling unemployment and raising employment. We want to share best practice with other countries. We want to know which policies work and which do not work. We welcome the European Commission’s evaluation of the action plans.

We will continue to learn from each other.

We welcome the initiative for a pact of EU countries to further our commitment to create the conditions for high and sustainable levels of employment and growth.

But we must do more. We need a European strategy on structural reform; reforming labour markets to create jobs; reforming product and capital markets to raise investment and build dynamic economies.

My EU colleagues agree with me about the importance of economic reform in Europe for job creation. That is why we have changed the title of the pact to reflect the role of economic reform to “The European employment pact – closer cooperation to boost employment and economic reforms in Europe.”

Employment policy needs backing up by a strong regional policy and social policy too. That is why in our first week in office we took action to deliver on our commitment to sign up to the social chapter and to make it UK law.

In March, at the Berlin European Council, the government achieved a very good deal for the UK on the European.

Structural funds to back up our employment policies. Over the next seven years, the UK will benefit from funding for economic development and regeneration in the regions.

West Wales & the Valleys, South Yorkshire and Cornwall as well as Merseyside will now be receiving the highest value category of funding, objective 1. Northern Ireland will have a unique package of support worth £900m. and we secured funding equivalent to objective 1 for the Highlands & Islands, some £200m in the next funding period.

After negotiations in Berlin more than double the number of people in Britain will be covered by regional structural funds, compared to the only 6.5m under the European commission’s original proposals.

And I would like to pay tribute to Neil Kinnock who as commissioner in charge of transport policy has made great progress in trans-European networks demonstrating his commitment to a dynamic and forward- looking europe.

Of course Europe needs to modernise as Britain is modernising. we want europe to be more open, more competitive, more flexible, to set its sights on moving beyond the sterile debate between regulation and deregulation with a new emphasis on skills, productivity and employment opportunity. Europe needs structural economic reforms alongside its enlargement. Employment measures must be backed up by reform in two areas – competition policy and industrial policy.

First, competition policy. Throughout Europe there is too much monopoly. We must reform our product markets to help Europe become competitive and dynamic and reform our capital markets to help Europe become more investment friendly.

We need policies that offer greater competition in product markets through an extension of competition to attack cartels, monopolies, and vested interests, to benefit the consumer and build a dynamic economy as an essential element of a new third way.

Second, our investment policy needs to complement our employment and economic policy.

The venture capital market has the potential to be a significant creator of high quality jobs and companies. But it is much smaller in Europe than that of the USA. I believe that there is a new interest throughout Europe in examining how to enlist capital and investment funds as a more effective route to job creation.

Let us recognise that today the equity market in Europe is much smaller than in the USA. More efficient equity markets have a potential to expand significantly to the benefit of investment and jobs.

So in a new investment policy for Europe the challenge for Europe is to create a strong venture capital industry and to orient venture capital to hi-tech risk, early stage and start-up companies.

Despite having the biggest single market in the world, European entrepreneurs are too dependent on bank loans and overdrafts and have problems obtaining equity finance.

So to create more jobs we need a new approach in Europe to risk-taking, we need to increase the number of entrepreneurs and to raise the survival rate of small businesses. so we must destroy the barriers that exist – fiscal, regulatory, economic, cultural – as a matter of urgency.

In this way we can build a new Europe with a tradition of social partnership. A Europe better equipped for the modern global economy for more investment, more employment, more competition and more flexibility. By committing ourselves in this new Europe to maximising opportunity for all, and to getting the best out of people and their potential, Europe can be both enterprising and socially cohesive.

Context

Finally, let me put our European policy in the context of our policy as a government.

To those who believe that Britain does best isolated and detached, let me say that the opposite is true.

While Britain’s relationship with Europe has neither been exclusive nor constant, any study of our history does show not just that we have always been a European power but that Britain has been European for good pragmatic reasons.

We should dismiss the notion that our history suggests being British is synonymous with being anti-European.

As the experience of the first half of this century showed – in two world wars – Britain did not and would not relinquish our role in Europe or abdicate responsibility for the progress of the continent.

Europe, by virtue of history as well as geography, is where we are. 50 per cent of our trade is with Europe. So our approach must be guided by, as always, a common sense engagement in pursuit of our national interest.

The idea that we could withdraw from Europe or be outside Europe’s mainstream and instead become a Hong Kong of Europe – a low wage competitor with the Far East – or a tax haven servicing major trading blocs – the idea of a greater Guernsey – only needs a minute’s consideration to be rejected. Britain, which has been a European first rank power for several centuries, often holding the balance of power within Europe, would become a spectator in Europe’s future development.

Rigid and inflexible ideology has never been the British way and under this government will never be.

It is through a close constructive relationship with our European partners that Britain will not only enjoy greater prosperity but continue to have influence and continue to make a positive contribution on the world stage. the more influence we have in Paris and Bonn, the more influence we have in Washington. Our Atlantic alliance is not in contradiction with our European commitments. British interests are best served by being strong in Europe.

So history suggests to me that there are no grounds for believing that to be pro-British it is necessary to be anti-European. indeed, history suggests that far from being isolationist Britain has always thrived when it is outward looking and internationalist.

And I believe that British values have much to offer Europe as it develops. Being in and leading in Europe means we contribute British ideas to the development of the European Union.

Our British qualities that will help Europe are openness to trade and our outward looking and internationalist instincts and connections which stretch across the world; our creativity as a nation and our adaptability; our insistence on the importance of public service and openness in the running of institutions; and other values we share with others which stress the importance of hard work, self improvement through education and fair play and opportunity for all.

These are all British qualities – qualities many of which we share with other countries, qualities that I want to bring to British engagement in Europe. These are the very qualities that can help the nations of Europe go forward together into a more prosperous 21st century.

So to those who say that the future means Britain submerged in Europe, I say the opposite: with an emphasis on these qualities Europe can learn from Britain, just as we in Britain can learn from the rest of Europe.

So the British way is not to retreat into a narrow insularity and defensive isolationism, but to be open, confidently outward-looking and to lead by example.

As we prepare for the future that is what we must now do.