Tag: Gordon Brown

The speech made by Gordon Brown, the then Chancellor of the Exchequer, to the CBI Conference in Birmingham on 1 November 1999.

I am delighted to join you once again here in Birmingham on the first full day of your conference. I am grateful for the opportunity to speak with you about the challenges we face in Britain and Europe; and in doing so to pay tribute to the contribution you and your companies make to the prosperity of Britain; and today at his last conference as Director General to be able to thank Adair Turner for the work he has done, the service he has given and the difference he has made.

Now the international attention this conference receives tells us much about the global economy in which British business now operates. How in a few short years we have moved from sheltered to open economies, from local to global competition, from national to world wide financial markets, from location, raw materials, indigenous capital as sources of national competitive advantage, to skills, knowledge and creativity as what makes a difference.

So today I want to share with you the government’s thinking not just on the challenges of stability and productivity in the British economy but on how the British economy can gain greater benefit from its participation in Europe.  And I want to suggest that our plans for economic reform in Britain must be complemented by a push for economic reform in Europe.

We seek a Europe that is more open, more competitive, more flexible, with its sights on higher productivity, employment and growth – with modernisation of labour, capital and product markets to bring it about.

IN BRITAIN

A year ago when I spoke to you, it was against a background of mounting uncertainty and instability in the global economy.

Since the height of the danger last year, the world has taken rapid and decisive action and has started to put in place new long term disciplines in global financial markets.

And here at home, we now have in place a new monetary and fiscal framework which means we work within clearly defined long-term policy objectives – a 2.5 per cent symmetrical inflation target, and a golden rule for the public finances – we have set procedures for decision-making – Bank of England independence and a Code of Fiscal Stability – and we have maximum openness and transparency, with clear and accountable divisions of responsibility.

Over the last 16 months inflation has remained within 0.5 percentage points of the government’s target.  Headline inflation is down to 1.1 per cent and underlying inflation is at 2.1 per cent – around its lowest level for almost 5 years – and in future inflation is expected to remain close to target.

Indeed while the financial market expectation of inflation 10 years ahead was inflation at 4.3 per cent two and a half years ago, even when there was a 2.5 per cent target, today  the long term inflation expectation has fallen to around 2.4 per cent, a figure consistent with the government’s symmetrical inflation target.

Let me say why the symmetrical inflation target is good for the economy.  Just as there is no gain in attempting to trade higher inflation for higher employment, so there is no advantage in aiming for ever lower inflation if it is at the expense of growth and jobs.

Short-term interest rates peaked at 7.5 per cent in June last year, half their early 1990s level, and today long-term interest rates and mortgage rates are around their lowest levels for over 30 years.  The 10 year bond differential with Germany has fallen from 1.7 percentage points in April 1997 to around 0.5 percentage points now.

And in fiscal policy, our two strict fiscal rules are helping to ensure sustainable public finances.  Public borrowing has been reduced by £30 billion over the past two years and we will continue to lock in that fiscal tightening by keeping the public finances under control, while fiscal policy continues to support monetary policy in the next stage of the cycle.

So against a difficult world economic background, through early and decisive action on monetary and fiscal policy, both financial markets and the British public know that this government is delivering economic stability.

While I recognise the difficulties exporters in particular have faced, the economy has continued to grow and 700,000 more people are in employment than two and a half years ago.

We will not make the old mistake – the mistake of the 1980s – of relaxing our fiscal discipline the moment the economy starts to grow.  Your Budget submission has asked us to maintain our fiscal discipline. I can assure you that the same tough grip will continue.

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

And because, under the new system, unacceptably high wage rises, that are not justified by economy-wide productivity improvements,  will not lead to higher inflation, but to higher interest rates, it is in no one’s interest if today’s pay rise threatens to become tomorrow’s mortgage and interest rate rises.

But now that we are creating a platform for stability, we must use this opportunity to move from the old vicious circle of low investment, low productivity, and a return to stop go to a new virtuous circle of investment, productivity, and steady growth.

But it is a fact that in every post war British recovery, British investment has been too low, British productivity growth too little, the rise in wages too fast – and as a country we have complacently and fruitlessly exhausted our energies in debates about dividing up the national economic cake instead of concentrating on how we invest and grow.

So this point of the economic cycle, this time of opportunity for Britain, is not the time to return to the old short termist ways, but to challenge ourselves and make the reforms necessary for steady growth and for success in the knowledge economy.

In the past politicians – indeed I and my predecessors – have been accused of saying one thing to one audience and another thing to another.  So I want to share with you today the agenda for modernisation that I first set out speaking at the Labour party conference.

I said there that we must never again be seen as anti-success, anti-competition, anti-profit, anti-markets.

And I said that the new economy will need more competition, more entrepreneurship, more flexibility, and more long term investment. I said that companies, indeed countries, which fail to adapt, reform and lead the way will simply be left behind. So we must do all we can to create the most favourable environment for investment in the world and this is what we are trying to do – not just keeping inflation low and keeping long term interest rates as low as possible, but cutting corporation tax for companies from 33 to 30 pence – now the lowest rate in the history of British corporation tax, the lowest rate of any major country in Europe and the lowest rate of any major industrialised country anywhere, including Japan and the United States.

And to encourage investment in new companies, we have cut small business tax from 23 to 20p and introduced a new starting rate of tax for small companies of 10p in the pound.  Every company making profits of up to £50,000 will benefit.

Because we recognise that competition at home helps not only efficiency at home but competitiveness abroad, we are creating a new independent Competition Authority which will be – like the Bank of England – free of political influence.

And because we recognise the increased importance of innovation to economic growth we have invested £1 billion more in science, created a new University Challenge Fund to commercialise British inventions and to bring management skills into engineering and science we are creating eight new institutes of enterprise.

And it is because we understand the importance of e-commerce that we have set ourselves the task of making Britain by 2002 the most favourable environment in which to conduct e-commerce – creating a new legal framework for e-commerce, giving new incentives for businesses moving on to e-commerce and putting government services themselves on line, and gearing our education and training system to the Internet revolution.

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

And I am grateful to the 60,000 employers in Britain who have signed up to participate in the new deal. In the last 2 years, youth unemployment has been cut by half under the Welfare to Work programme that demands responsibility as well as gives opportunity.

Next week I will take the agenda forward in the Pre Budget Report with proposals for the modernisation of capital and product markets, the encouragement of innovation and the encouragement of an enterprise culture, as well as the building of a modern skills base.

I want a Britain where there is work is for all, and enterprise is open to all.

People say that in the eighties Mrs Thatcher created an enterprising society, but we must always be looking for new ways to promote enterprise and open enterprise up to all.

Indeed, we must do far better than we have in the past. We must go beyond what was achieved in the eighties. And we must give the many, not just the few,  the chance to turn their ideas into profitable businesses, to start firms, create jobs and win business for Britain.  I want Britain to be, in every area, a creative, innovative and enterprising economy.

And I want to send a message to entrepreneurs in every part of the country that this Government means enterprise and the rewards of enterprise are open to all.

Last Budget I said I would consult on introducing a new incentive scheme for dynamic managers building up new businesses. Now I am ready to make a new one million pound offer to help small companies and to reward their dynamic managers.

The new Enterprise Management Incentive scheme will allow up to 10 key employees in growing companies to be given options over up to £100,000 of shares, free of income tax – a one million pound tax incentive to help businesses grow.

And of course, they will also benefit from the reduction in long term capital gains tax from 40p to 10p.

EUROPE

Reform in Britain must be matched by an equal resolve to for reform in Europe.

Europe is where we are, where we trade, from where thousands of businesses and millions of jobs come.

First the single currency.

Our strategy is to prepare and decide.

It is a strategy I first set out in 1997.  It starts from our determination to pursue  the national economic interest.  It is based on the five tests – the investment, employment, financial services, convergence and flexibility tests – and it is a policy that will be pursued with consistency.

And it was in 1997 that I first said that if membership was to be a realistic option then we must prepare and then decide.

We would not leave Britain unprepared for any decision it wanted to make.

And we must prepare together – not one or two businesses, but government and business working together.

Your President, Sir Clive Thompson, sits on our national standing committee. So too does your past President, Lord Marshall.

And I am publishing today our report on preparations so far, the detailed work we have been doing together:

• the first outline National Changeover Plan published and out for consultation with business;
• the 12 regional groups that are tackling real issues at a local level and in which the CBI is playing an invaluable role;
• 800,000 businesses have received our euro preparations leaflet;
• 400,000 have asked for our follow-up fact sheets on the euro;
• business to business case studies have been published across a range of sectors, from machine tools to retail.
• the numbers of businesses who say they are prepared for the euro have trebled.

And the public sector is taking a lead:

• every department has a Minister responsible for euro preparations;
• new legislation for preparations in our Finance and Social Security Bills;
• preparations across the whole of central government, every department now preparing its own outline departmental changeover plan by the end of the year.

These are the preparations we are making together.

Because we are resolved we will not leave Britain economically unprepared.

And around these preparations there will, of course, be a major national debate.

Indeed we know that the terms of this debate already extend beyond the issue of the single currency itself to the broader issue of Britain’s European future.

That issue, Britain’s relationship with Europe, and what form that relationship takes, is a question that every generation in this country has had to ask and answer.

So in this generation, for our time, let us remind ourselves why Europe is so important to our economy.

At one time the case for Europe was, simply, peace – setting aside old enmities and feuds, contributing to a framework that has helped secure half a century of peace in Western Europe. And today in the 1990s we have the opportunity to cement peace and democracy in Central and Eastern Europe as we have done in the West.

But today the case for Britain in Europe must be not only that working together we can maintain peace but that working together we can maximise prosperity.

Indeed I believe that supported by fact and evidence we can make the following propositions about our future in Europe, propositions that counter myths often sustained only by prejudice and dogma.

First, being in Europe strengthens Britain because over three million jobs depend upon Britain in Europe.

It is a fact that today a total of over three quarters of a million United Kingdom companies – thousands from every region of the UK – now trade with the rest of the European Union.

It is a fact that in the 1970s when we joined Europe less than £5 billions of trade was with the rest of Europe.

Today in it is a fact that £117 billions of our trade – £96 billions in goods, £21 billions in services – half of our total trade – is with the rest of Europe.

When trade with Europe was around 40 per cent the CBI produced evidence that  2.5 million jobs depended upon it.

Now at over 50 per cent – up to 3.5 million jobs are directly affected.

Other countries, like America, are far less exposed to trade outside their borders.

Only 12 per cent of US national income is from trade.

While 28 per cent of Britain’s national income comes from trade.

And as the share of trade with Europe grows our commitment to that European trade must not diminish.

So as a trading nation, the greater the stability in our relationship with our major trading partners the greater the benefit to us.

I believe that those who seek to renegotiate the very basis of our membership with Europe, even when they simultaneously protest they do not want to leave, put at risk the stability that is so central to modern business and investment decisions.

Anyone involved in investment decisions knows that stability can be undermined in a whole range of ways.

Here in the CBI you know as business leaders that political arguments have economic consequences.

The real risk of endless talk of renegotiation – the risk to British business – is if investors start to  believe that Britain is semi detached and no longer serious about full engagement in Europe.

I tell you honestly that Labour Party of the 1980s was wrong and irresponsible to become, contrary to its history, an anti European party and to ignore the central importance of our European connection to our prosperity and employment.

But I believe that having learned that historical lesson we can say today in the 1990s those ?anti Europeans that continually pose Britain against Europe are also refusing to acknowledge the central importance of Europe to the jobs and prosperity of Britain.?

For that reason I believe that government and business must join together in putting the case unequivocally for Britain in Europe – a stronger Britain on the basis of a secure relationship with Europe.

My second proposition is that the more we extend the Single Market the better it is for Britain.

It is a fact that Europe gives us access to a market of 375 million and potentially 100 more million people.

As you, Britain’s businesses, have rightly said, the challenge today is not to restrict the Single Market or retreat from it, but to extend the Single Market.

To extend it in areas where it is still incomplete – in energy, utilities, telecoms, financial services.

Completing the Single Market is in the interests of British businesses and jobs.

The Cecchini report said that when it was fully operational, the Single Market would cut costs by up to 20 per cent in some industries, cut prices by 6 per cent and throughout Europe add 1.8 million in jobs and increase output by 4.5 per cent.

A report in 1996 showed that with the Single Market nearly 1 million extra jobs had come, output had risen by nearly 1.5 per cent, inflation was lower, manufacturing trade had been boosted by more than 20 per cent and Europe’s share of global foreign investment had risen from below 30 per cent to more than 40 per cent.

So having secured initial benefits from the Single Market, we have still a long way to go.

It is to complete the Single Market in utilities, energy and telecoms, that we have insisted on action plans.

It is to complete the Single Market in financial services that we have insisted on action to free up Europe’s capital markets, removing outstanding barriers, and promoting more choice and better value in pensions, insurance, savings and mortgages for people across Europe.

And it is to complete the Single Market and create a level playing field for British companies that we have opposed state subsidies whether through public expenditure or through discriminatory tax practices.

I can say today by tackling unfair tax competition, the new proposed Code of Conduct will create a fairer playing field for British companies bidding for business in Europe.

And those who criticise this work towards strengthening the Single Market make exactly the same mistake as those who in the past have defended unfair state subsidies.

So extending the Single Market is in the British national economic interest.

My third proposition is that Britain does not have to choose between America and Europe but Britain is well placed as the bridge between America and Europe.

Britain receives forty per cent of US investment in Europe.

More than two and half thousand US companies are based in Britain.

We know that American companies invest in Britain not just because it is Britain, but because Britain is part of Europe.

We are indeed the bridgehead from which those companies trade in mainland Europe.

It is a total myth that America wants Britain to detach itself from Europe.

Far from Americans seeing Britain better off detached from Europe, they themselves take the view that the more influence we have in Berlin and Paris, the more influence we have in Washington.

Indeed I believe that Britain will benefit from stronger links between Europe and America.

And it is in the interests of British business and British jobs not to detach Britain from Europe but to build even stronger links between Europe and America.

The way forward is not Britain choosing between Europe and America but Britain bringing Europe and America closer together.

And that brings me to my fourth proposition about Britain’s European future.

My fourth proposition is that Britain is building alliances to reform Europe.

Although reform has been necessary for years, enlargement – and global financial change – makes reform urgent and pressing.

It is a fact that the next major European Summit, the Portuguese Summit, is about economic reform, and Britain is leading Europe with our reform proposals.

The new competition and capital market policy which we are pushing – which will also help end our exclusion from mainland markets – and the new employment action plans would mean more business and jobs for Britain.

The old pressures for tax harmonisation are already now being vigorously pushed back as we argue for the principles of tax competition.

We have been urging countries to come together to insist the European Budget is brought under control.

Britain’s initiative on fraud – to set up an independent fraud office – has now been accepted.

Widespread reform of the Commission must now take place.

And right across Europe the drive is now starting for the same opening up of competition so that consumer prices in the European Single Market are brought down to the levels of the American single market.

A reformed Europe would mean more jobs for Britain.

Those genuinely committed to advancing Britain’s national interest should support rather than disparage a businesslike approach to making the reform agenda work.

And that leads to my fifth proposition.

Ruling out the single currency on principle is not in Britain’s economic interests.

Some would join tomorrow as a matter of conviction.

Others would rule out joining for ever in the name of political sovereignty even if it were in the national economic interest to join.

I say that the national economic interest should be the decisive factor.

It is a fact that the majority of the British people support clear headed pragmatic and if I may say so a business-like approach to our national economic interests.

This is the sensible approach which we are pursuing. The strategy I outlined to you – of prepare and decide.

We cannot move to a single currency except through meeting our economic tests.

And that is why I say I am an unapologetic guardian of our five economic tests.

Our strategy is therefore to prepare and decide.

So our approach in Britain in Europe is clear.

Britain is in Europe and in Europe to stay.

Britain is in Europe because it makes for a stronger Britain.

CONCLUSION

So let me conclude.

My vision is of a Britain in which by discipline and prudence we achieve stability and steady growth.

By reforming the welfare state and through our productivity agenda, we create new jobs and new business success not just this year but for our future.

And by playing our part in Europe and the world we maximise the opportunities for trade and prosperity.

I think we are all agreed not only on what needs to be done but on how to do it.

Success depends  on the efforts of every company in this hall, and every worker in that company.

It is undeniable that for fifty years the British economy and Britain suffered from old and self defeating conflicts between capital and labour, between state and market and between public and private sectors, denying Britain a shared national economic purpose.

I believe in the 1990s Britain and the British people have moved beyond outdated divisions.

Today we also have it within our grasp to move from the old stop go and short termist days of the past.

I believe that by building a new consensus on what we have to achieve together we can define anew a shared economic purpose for our country and do so together.

And that is the work of the next year and the next decade.

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.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, at the Mansion House in London on 10 June 1999.

Introduction

My Lord Mayor, Mr Governor, My Lords, Aldermen, Mr Recorder, Sheriffs, Ladies and Gentlemen,

I am delighted to be here this evening, to be able to speak with you, Lord Mayor, and the Governor of the Bank on the three great issues that together constitute our national economic interest – economic stability, economic reform and engagement with Europe; and to start by paying tribute to the work which the City and our financial services industries do in pursuit of our interests: the service you give, the contribution you make, the dedication and expertise you show.

As we move towards the end of both a century and a millennium, it is instructive to look back here in London, one of the few world cities with a thousand year history, on the progress, and achievements of the City of London, the key to which have always been – as the attendance tonight from round the world demonstrates – London’s global reach, forever looking outwards to the challenges and opportunities of the wider world.

So that now today the City of London and our financial services industry accounts for 7 per cent of our national income, employing over 1 million people. The London Stock Exchange is the largest trade centre for foreign equities in the world. And the foreign exchange market – with a daily turnover of around 500 billion dollars – is the largest and most important in the world. And this year you have risen to yet another new challenge – that of introducing the new euro currency and attracting the business that flows from it.

Now let me address the questions of stability, economic reform and Europe.

Monetary and fiscal stability

The events of the last two years demonstrate beyond all doubt that in a world of ever more rapid international financial flows, monetary and fiscal stability is the precondition of economic success.

Indeed in these deregulated, liberalised financial markets, growth and prosperity just cannot be achieved by the old ways, either by fine tuning or by applying rigid monetary aggregates.

• In the 1960s and 70s, the attempted trade-offs between inflation and unemployment ended each time ended in higher inflation and higher unemployment;
• in the 1980s, rigid intermediate monetary and then exchange rate targets failed, overtaken by capital market liberalisation;
• and then following sterling’s departure from the ERM, an ambiguous inflation target, in the absence of a proper long term framework, was not enough.

The way forward is for governments to consciously pursue monetary and fiscal stability – through setting clear objectives, establishing proper rules, and requiring openness and transparency – the new rules of the game. Particularly important for a Britain which has been more subject than most economies to the instability of boom-bust cycles and constantly changing policies.

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

So we put in place a wholly new long term framework of monetary and fiscal policy based on:

• first, clear objectives: price stability through a pre-announced inflation target – a symmetrical target – and sustainable public finances through tough fiscal rules: the golden rule that requires that over the cycle we balance the current budget, and the sustainable investment rule requires that, as we borrow for investment, debt is held to a prudent and stable level;
• second, well understood rules: a new system of monetary policy-making, at the heart of which is the independence of the Bank of England, and its open letter system, and an equivalent and equally important set of fiscal procedures legally enshrined in the code for fiscal stability; and
• third, transparency in policy-making: an open system of decision-making in monetary policy through the publication of minutes, a system of voting and full reporting to parliament; and in fiscal policy the same openness and disclosure with key fiscal assumptions independently audited.

Today, two years on, by applying our fiscal rules we have reduced the inherited deficit by 32 billion pounds; budgeted well within our public spending ceilings; and brought debt down towards 40 per cent of GDP.

As a result of this cautious and prudent approach, we remain on track to meet the fiscal rules while at the same time guaranteeing an extra 40 billion pounds for schools and hospitals.

The monetary rules are well established too, and I want to take this opportunity to thank the Governor, the MPC and the Bank’s Court for their successful establishment of the new system.

Transparency and openness has, in my view, led to greater public understanding of why decisions are made in ways that will make the public realise the benefits of keeping inflation low and ensure that employers and workforces see for themselves the short-termism of paying ourselves more today at the cost of higher interest rates, fewer jobs and slower growth tomorrow.

Two years ago commentators expressed fears about how monetary and fiscal policy would be coordinated. Under the old system the Chancellor announced his fiscal policy in the Budget – and invariably cut interest rates a day or two later claiming credit for the wisdom of his budget decisions. I am convinced that today there is a much more informed discussion of the interaction of monetary and fiscal policy – and as a result much better coordination.

Now the results in monetary policy in what has been a difficult and troubled period for the global economy: over the last 10 months inflation has remained within 0.2 percentage points of the 2½ per cent target and, even more important, it is expected – in future – to remain close to target.

Long-term interest rates and mortgage rates are at their lowest levels for over 30 years.

It is because inflation trends are subdued that the bank has been able to cut interest rates by 25 basis points today, the 7th cut in the last 9 months.

In contrast to the early 1980s and 1990s monetary policy has been able to respond positively at the right time in the economic cycle, and has thus been able to make its contribution to stability and growth.

Now of course I understand exporters’ concern about the pound.

But it is important to recognise that while exchange rates affect inflationary expectations the MPC has only one target – its symmetrical inflation target.

Anyone who thinks that either dropping the inflation target to replace it by an exchange rate target or running inflation and exchange rate targets at the same time is the right way to achieve domestic stability or convergence is failing to learn the lessons of the 1980s. We would end up with neither stability nor convergence.

The Bank of England was quite right to say, when publishing its latest inflation report, that the objective of British 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.

So while this has been a period of instability for the world economy, we have, as a result of decisive and timely action on the fiscal deficit and on interest rates, been able not only to steer a course of stability but to lay the foundations for high and stable growth and employment.

Removing the barriers to growth

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

In the last full international economic cycle (1982-1993) the growth rate in the UK averaged 2.3 per cent, whereas it was 2.9 per cent in the G7, 3 per cent in the US, and 3.4 per cent in Germany.

Our challenge is to raise the trend rate of growth in the UK, and to achieve this we must do more to encourage science and innovation, creativity and enterprise, skills and knowledge – the drivers of productivity and growth today.

First, Britain is developing a reputation for inventiveness that extends well beyond the traditional inventions for which we are famed. To let the creative talents of our country flourish, we must expand the circle of innovators from invention to commercial exploitation and manufacture of new products here in Britain.

So I lay great importance on the £1.4 billion additional funds being invested in basic scientific research; the new R&D tax credit to encourage R&D on the university challenge fund that is helping to turn British inventions into British products, businesses and jobs; and the new British institutes of enterprise that will provide management help to our inventors and innovators. Shortly we will consult on a matter I hope will be of interest to many here – new incentives to promote corporate venturing.

There is the broader question of how in Britain we can encourage and broaden new entrepreneurship. At each point we want to be on the side of business, removing the barriers to growth – improving access to start-up finance and venture capital, to export markets when going international, and widening access for all to the skilled workforces we need.

Under the new enterprise management incentive, companies seeking to recruit or retain key personnel will be able to secure tax relief for equity remuneration up to 100,000 pounds.

This is one of many new incentives for investment and growth – a cut in the small business tax from 23p to 20p, a new 10p rate, 40 per cent investment incentives for small and medium sized businesses; new incentives to encourage venture capital; a 10p long term rate of capital gains tax; and new employee share ownership incentives that allow employees to buy shares in their own companies from their pre-tax income and employers to match them, also tax free.

These are significant tax cuts and simplifications in taxation, the test throughout being what will increase productivity and employment opportunity. The same test we will apply in removing unnecessary business regulation. The internet and electronic commerce offer new scope to cut red tape. So our small business service – an open door, one stop service for small companies – will give help with running a payroll for new employers starting out, the inland revenue will offer a new business helpline and we will soon offer discounts for internet filing of tax returns.

And let me also stress the importance I attach to the extension of competition and to the Financial Services and Markets Bill in advancing our productivity agenda. With our new highly successful Financial Services Authority, under the excellent leadership of Howard Davies, an authority whose powers will be confirmed shortly by the Financial Services and Markets bill, and our robust stand defending London’s interests in the European savings directive. London’s position is one we are determined to maintain and advance.

I can confirm this evening that by working together to exclude the eurobond market we are already securing results: the ECOFIN Council and the European Commission have come to accept our case, agreed a further review and asked us to submit our proposals for excluding the eurobond market. We will not only defend Britain’s interests in this area but, if necessary, not hesitate to veto any proposal which damages our financial markets.

Stability for the future, economic reform for our future. Now the importance of the skills of people to our future.

This spring a number of landmarks have been reached.

• I can report that nearly 50,000 businesses have joined the new deal that helps get the unemployed from welfare to work;
• as a result of your efforts a quarter of a million young people have now joined for work and training;
• 100,000 long term unemployed adults have been signed up;
• and I can also report that over 400,000 more men and women are in work than 2 years ago, more men and women in work than ever before.

And we are making work pay more than benefits by cuts in national insurance for 20 million employees, reforms in employer contributions to cut the costs of hiring, the 10p rate of income tax, the cut in the basic rate of income tax to 22p and, what will be to the benefit of jobs and companies, the working families tax credit which creates the best incentives to take a job, and reward work and effort for hard-working employees.

But we have a long way still to go to make us the best skilled country in Europe. For the many companies who cannot find the highly skilled workers they need to continue growing, let me say that we are implementing a long term programme to build skills and remove skill shortages – with a rigorous approach to standards throughout our schools, with demanding targets for literacy, numeracy, school qualifications and educational attainment, not shirking from schools’ reform, demanding higher teaching standards and discipline – and as we make the investment that is essential to raise all of Britain to the standards of the best.

Europe

So we are putting in place stability and major economic reforms. We need also constructive engagement with Europe and the trading world.

No one should doubt that as a country we are in Europe and in Europe to stay.

Since half our trade is with mainland Europe the national economic interest demands that we work constructively within the European Union to achieve the labour market product market and capital market reforms essential for European growth.

Indeed British proposals to tackle structural unemployment, to complete the single market in financial services and utilities, and to tackle fraud and waste are giving Europe a modern reform agenda based on the best of British values: openness, adaptability, the work ethic, fair play and looking outwards to the world.

It is also in the national economic interest that we refuse to make the mistakes of the past by dogmatically ruling out a single currency.

Ours is the first government to say that, while we appreciate the constitutional issues involved, the test should be the national economic interest, that we should apply five economic tests – on investment, financial services, jobs, flexibility, convergence – in assessing membership and that in the interests of the public having a realistic choice we should, with the public sector leading, make the necessary preparations for that choice to be available.

Conclusion

So, my vision is of a Britain where there is economic stability, rising productivity and growth based on innovation, enterprise and skills, and constructive engagement with Europe and the trading world.

As we approach a new century the challenges are enormous and many, but by working together, applying the enduring British values – being open and outward-looking, creative, fair and adaptable to the new challenges ahead, the prize is a modern successful economy, ready to ensure employment opportunity and greater prosperity for all our people in the years ahead.

Just as the City works best when the City works together, so all of us in Britain work best when the whole of Britain works together.

And that is what I hope we will continue to do.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, to the News International Conference on 17 July 1998.

INTRODUCTION

I am delighted to have the opportunity to make this contribution to your conference, and I wanted to accept the invitation – not so much to discuss day to day policies, but to take the chance to explore the broader themes that underpin the new uk government’s approach to the challenges ahead, an approach that I believe has lessons beyond our own borders.

Indeed, I am sure that from wherever in the world you do business or report the news, recent weeks will again have demonstrated what we all know – that the size the speed and sheer ingenuity of global markets make them more dynamic and more volatile than their old national counterparts.

Against this background, perhaps the major challenge facing politicians is how, in that more fast changing and yet more insecure environment, we encourage and reward the dynamism and ambition on which modern economic success depends – and how we combine this with the stability and cohesion this now more insecure generation so obviously require and want.

Successful economies in a global marketplace will need more competition more entrepreneurship, more flexibility to adapt. Countries that do not have this are already suffering lost markets, stagnation and economic decline.

And successful societies will need to work harder to build the cohesion and trust which is necessary to cope with the insecurity of permanent change. Not to achieve this, we already know, can lead to economic protectionism, social breakdown and – in some countries – ethnic nationalism.

You catch glimpses of these changes in the concerns that people express. When people talk, for example, about their own economic insecurity, and about restricting imports, or worry about the damage of a dependency culture and express anxieties about economic security and social division, they reflect, for me, what will become some of the defining issues of our times and demand new responses from politicians.

Now for most of the century, most would argue that parties of the right have tended to champion dynamism and entrepreneurship. Parties of the left have tended to champion security and a framework of social rights.

Consequently, parties of the right concentrated on questions of wealth creation; parties of the left tended to focus on issues of distribution.

Put crudely the right liked talking about the good economy while the left liked talking about the good society.

But today, when the challenge of a global marketplace is to combine the dynamism we need with the cohesion people yearn for, it is obsolete politics to perpetuate that old and sterile left right divide. We can no longer afford to make the mistake of the old left which in a closed national economy could, for periods, indulge social policy at the expense of economic efficiency as they tried to trade off dynamism for protecting the status quo.

Nor, in the more insecure global marketplace, can the right any longer deny the important contribution a good society makes to a good economy.

So I would like, today, to set out the new government’s vision of what will underpin and advance both the dynamism required and the cohesion we need.

An agenda of national politics for the global marketplace – of relevance not just to Britain and Europe but more widely – an agenda for stability, competition, the promotion of work, education and enterprise, and social cohesion, and – as I will address in my final section – international co-operation.

I will argue that what unites this agenda is a new politics of opportunity and responsibility – where opportunity for all is matched by shared obligations accepted by all. I will set out how the government is trying to make stability, dynamism, cohesion and opportunity a reality – and point to the next stage of this agenda of modernization, the next wave of reform.

And I also want to share with you how in the national politics of the united kingdom, Tony Blair and his government are engaging with the new global economy and trying to give expression to this new politics. Of course, government has taught me the difficulty and complexity of translating general global understandings into practical measures that affect. But we have made a start, as I will show today.

Stability

First, stability. The first objective national governments must have, in a global marketplace, is to maximise economic stability. We have learnt that monetary and fiscal stability is a necessary pre-condition for national economic success. For in a global economy, funds will flow to those countries whose policies inspire confidence. And investors punish mistakes more quickly and more severely than in the past.

Both the old keynesian fine-tuning, and the rigid application of fixed monetary targets, were policies designed for sheltered national economies and based on apparently stable and predictable relationships which have now broken down in our modern, liberalised and global capital markets.

So our policy has been to set a new long-term framework for monetary and fiscal policy that can command new confidence. The way forward is, in my view, to recognize that long term, open and transparent decision-making procedures which command credibility provide a better route to stability than fixed monetary or exchange rate rules.

That is why, when we came into power in Britain last may, we took the view that to find the right route to long-term stability we needed a wholehearted commitment to well understood long-term objectives: the 2.5 per cent inflation target and clearly defined fiscal rules – and proper procedural rules based on open institutions.

So our first act in government was to grant operational independence to the Bank of England and so establish a clear and well understood pattern of making decisions – through the new monetary committee of the Bank of England with its regular decision making process – all underpinned by commitment to openness and transparency. I believe this new system of monetary decision-making – free of the suspicion of short-term political manipulation – is best for Britain.

But we also had to act decisively to prevent a return to the boom-bust economic cycles which have served the UK so badly in recent decades. When we came into power, it was clear that necessary interest rate decisions had not been taken and that inflation was forecast to head well above 4 per cent. Inflation was getting back into the system and a slowing of economic activity was essential to get the economy back on track for sustainable growth – which is why we raised interest rates at once and have tightened fiscal policy decisively over the past year.

And we applied the same approach to fiscal policy- tough rules, clear procedures , independent monitoring. Our rules – the golden rule, and the sustainable investment rule – are being met over this parliament. We have reduced public borrowing from 27 billion pounds to 8 billion pounds – a tightening which is locked in from last fiscal year into the next and amounts, as we promised in our march budget, to 3.5 per cent of GDP – the largest fiscal tightening since 1981. We have kept within the tight spending ceilings we set in our manifesto for the first two years of the government . And now, with the announcements of the results of our comprehensive spending review, we have reaffirmed that our two fiscal rules will be met over the next three years as we run current budget surpluses over the rest of the parliament.

We have been prepared to sell off assets that we do not need to release funds for what we do need, and the principle of public private partnerships has been extended into new areas, making public money go further.

People said that the new government would never keep to its spending limits or take tough decisions on fiscal or monetary policy, or that we would refuse to sell assets and government-owned companies. It has done all these things and will continue to keep to the targets we have set. A policy based on a new understanding of modern economic policy in a new international economy.

Competition, enterprise and dynamism

But stability is only a means to an end – a necessary platform which allows businesses and individuals to plan ahead with greater certainty. The second challenge national politicians face is to promote productivity and growth by creating an environment that encourages and rewards competitiveness and high productivity. And to do nothing to frustrate the potential for dynamism of the economy.

It may surprise you that I want to aggressively promote and extend competition. I believe that when we look at Britain’s relative economic decline over this century, one of the central causes is that there has not been enough competition, dynamism and entrepreneurship in many areas of our economy.

People say that Mrs Thatcher created an enterprising society. I say there is still not enough enterprise and we have to do better. I want Britain to be, in every area, a creative innovative and enterprising economy.

I want more people starting small businesses, more people self-employed and – by reforming capital gains tax, cutting corporation tax to the lowest level of the G7, by cutting small business tax to 20p in the pound, and by stimulating the venture capital industry – we are trying to clear away the barriers that frustrate new entrepreneurs entering the market place.

We must match the success of the venture capital markets in the usa and to orient our venture capital industry to hi tech early stage and start up companies, encouraging a new approach to risk taking and increasing the number of entrepreneurs.

And I have already said that in future budgets I will take measures that are demonstrated to be necessary to ensure our capital markets work better. We are determined to surmount the barriers – fiscal, regulatory, economic and cultural – that have frustrated the growth of enterprise in Britain.

Companies that are sheltered from competition in the national economy are much less likely successfully to compete in the global economy. Our policy is for greater competition – an opening up of competition through the new competition bill to all areas of the economy from the utilities to the professions.

People are increasingly asking why, in a global market place, prices for the same goods vary so much between countries. For example, according to the OECD, household appliances like washing machines and dishwashers are about 30% more expensive in the United Kingdom than in the United States, prices in restaurants and hotels are more than 50% higher and furniture is nearly 60% more expensive. Of course, size of markets, national regulations and different tax regimes are part of the answer. But there is no doubt that insufficient competition with cosy cartels is a further explanation – which means consumers are often paying over the odds. In Britain and Europe we will continue our enquiry into securing a fairer deal for the consumer.

So I believe there is a case for promoting a new competition agenda worldwide. Europe has to clean up its act. In the next year we will be pushing hard for greater openness in telecommunications, energy and financial services in Europe.

And we will go further. Just as in monetary policy we made the monetary authority, the Bank of England independent, so too there is a case for longer term consideration of whether there should be a greater degree of independence for competition authorities than already exists – in Britain and Europe too. And while an international competition authority is a long way away, we will encourage the multilateral negotiations for cooperation between competition authorities to open up global markets.

So the new economy is one where competition is extended and enhanced, and where the consumer has a right to expect the best deal.

And let no one be in any doubt about our commitment to free trade and our resistance to protectionism. Our plans involve breaking down more barriers to goods and services. That is why we are not only interested in the world trade organizations proposals for change but in the idea of a great transatlantic marketplace stretching across europe and america involving some 600 million consumers and citizens. I want to see new progress on the transatlantic economic partnership, confirming the strong relationship between the USA, Britain and Europe. And we will continue to press for trade barriers to come down.

Employment and social cohesion

The third challenge for national politicians in a global economy is less tangible but no less important. In an economy where jobs are less secure and lost more regularly, the task is to revitalise the work ethic in our society and to actively promote the ethic of self improvement – and, in doing so, to equip people to cope with change.

I grew up as the son of a presbyterian minister in a scottish industrial town. And anyone like me who was brought up in a community shaped by a long historical adherence to the work ethic – and then the blight of long-term unemployment – knows the importance of creating new opportunity for work and also matching it with responsibility to work.

Our aim in reforming the welfare state is quite simple – to reduce dependency by making sure that more people take responsibility for their lives.

Not by abandoning people who need new opportunity, but by matching the opportunities we can provide for training and work with obligations and responsibilities to take them up.

This is the new agenda. To back it up we have set up a welfare state review and we will promote a new round of labour market reform to promote flexibility and adaptability. Our policy is to make opportunity available but in return for adaptability and flexibility in employment.

For the central question is not whether we preserve old vested interests or restricted practices – that agenda we reject – but how we ensure that every person is properly equipped to meet the challenges of the new economy.

It is for this reason that our national economic interest demands reform of our national system of education. The challenge of the future is not that a few do well by the age of 16 but that all have the opportunities to learn throughout their life.

Despite all our great traditions in education, Britain has performed badly in education compared to other countries. So we have embarked on educational reforms that are at least as radical as our reforms in welfare. The new investments we are now making in education will have to be matched by structural reforms – money but only for modernization, new resources but only in return for reform. So we will reform teacher training, introduce a new qualification for head teachers, monitor and inspect every education authority, and set targets to raise literacy and numeracy, cut truancy and to ensure that far more have qualifications when they leave school.

Until this year, 30 per cent of our young people went into higher education, but the costs of grants and fees set a limit on student numbers. We have introduced new fees and loans as we have reformed the financing of our universities and colleges. New opportunities will be provided to half a million more students. But in return the individual must repay part of the country’s contribution to his and her learning.

Perhaps our biggest long term educational reform will be the individual learning account, where government will provide help for individuals to open an education account to pay for life-long learning, to be backed up by a university for industry, which will offer to millions in their homes, through satellite, cable and terrestrial TV new opportunities to learn and upgrade their skills – helping people to help themselves.

But in each area – not just education but all our public services – our policy towards public money is that there must be reform in return for resources. Reform is not optional. The resources are conditional.

So we have set targets in each area and demanding efficiency standards which must be met. We have agreed new public private partnerships – in education and science to name two – which represent the biggest, reform in public services. To those who think that while the investment takes place, the reform will never happen, I have a message: the special cabinet committee that the Prime Minster has asked me to chair, a committee that will report to him and will monitor and scrutinize performance in every department, will deliver our promise to reform. Just as the century started with a radical government of reform, so it is ending with a radical reforming government.

Our education and employment policies are critical because they unite two objectives promoting economic dynamism and social cohesion – an agenda which touches all aspects of our economic and social policy.

The old certainties which many of us took for granted when we were growing up – strong families, weekly church attendance, stable communities – our traditional institutions are now under pressure. And this social insecurity reinforces the economic insecurity I have already mentioned and undermines dynamism and creativity.

Government cannot, of course, alone provide the answer. But families need help – not least in balancing work and family responsibilities, but also in tackling juvenile delinquency, and problems with drugs, and in helping people cope with change.

So policies for social cohesion – which promote opportunity in a supportive community – do not aspire to stop the clock, or guarantee outcomes like jobs for life or rights irrespective of responsibilities, or level down.

The new politics is about enabling people to take more responsibility for their own lives by treating people fairly, maximising opportunity, and modernising the public services, that British people have chosen to have and continue to support like our National Health Service, that people in Britain see as essential to a decent society.

But here again, in health, we have invested money but only in return for modernization. Hospitals will now have to produce league tables on performance. The hospitals that are 20 per cent less efficient than the best will now be subject to targets and timetables for improvement. Budgets that have run over will be subject to limits. More private capital will be involved in hospital building. There will be no let up in our reform agenda – far from it, for in Britain’s public services, a whole new wave of reform is on the way.

So we are undertaking a reform agenda and it is because of this modernisation that we can do more to build a more dynamic economy and a stronger society.

Opportunity for all

There is a thread that runs through all of these policies. It is the idea of opportunity for all – equality of opportunity – that encapsulates our approach.

A dynamic economy depends on companies recruiting the best people and getting the best out of people. To narrow the pool of talent by perpetuating old privileges or practising discrimination is an inefficiency no economy can afford. The modern economy must draw on the widest pool of talent. So the dynamism we need requires opportunity for all.

But equality of opportunity is as important in achieving social cohesion. For society to maintain social cohesion in the midst of economic insecurity it must retain legitimacy and trust. And to do so people must feel that they have a fair chance. There can be no room in a society that values work, effort and merit for perpetuating old establishment elites that unfairly hold people back and deny opportunity.

So what underpins and advances both the dynamism our economy requires and the cohesion that is sought is the vision of a society where there is opportunity for all in return for obligations shared by all.

The opportunity which matters depends on the exercise of personal responsibility; contains within it the notion of self-improvement; does not seek to replace individual responsibility with state responsibility; is not about equalising outcomes but equal opportunity; and equal opportunity requires Governments to act.

So for me a vital key to the dynamism and cohesion we need is opportunity for all in return for obligations shared by all.

So what are the opportunities I am talking about- the opportunity for decent education, the opportunity to get the chance of a job, the opportunity to start a business, the opportunity to have equal access to our culture, the opportunity to participate in the political system of the country if that is what you want.

All opportunities that should be realisable and not be frustrated by inherited Privilege, by aristocracy, by elites, monopolies cartels or vested interest. Opportunities that men and women should have a fair chance of taking up.

But equality of opportunity cannot be achieved by markets alone, however dynamic, by individualism however enterprising, or by charities or voluntary or community organizations however well meaning.

It is only government that can ensure equality of opportunity is not an illusion but is made a reality.

But it is a new role for Government – not as command and control but as enabler, empowerer. Put simply, to rephrase a famous phrase – ask not what Government can do for you, ask what it can enable you to do for yourself.

Individuals accepting personal responsibility, the Government matching it with opportunity.

It is the extension of opportunity, whether it be by competition policies that open up opportunity to start a business, or through education policies that open up opportunities for those denied education, that can help make our economy more dynamic, our society more cohesive.

People label this approach in different ways – a new citizenship, enlightened self-interest, empowerment, stake-holding, the third way. Some insightful commentators have spoken of a politics that recognizes a desire for belonging as well as for belongings. People’s desires not just to consume but also to contribute. Not just society that values getting but a society that values giving.

I do not want to make this argument anything other than straightforward. These are simple – some might even say traditional values – finding an expression in a new politics: opportunity for all matched by obligations shared by all – a new politics of opportunity and obligation. And around this our policies for stability, enterprise, work and social responsibility are built.

National Governments in the global economy

So having talked about some of the reforms the new Government has begun, domestically, and the philosophy that underpins them, let me conclude by saying something about my final point – the growing need for international co-operation between national Governments in the global economy.

The challenge for all national Governments is how to advance the national economic interest in this new global marketplace. And the role of national Governments cannot be to retreat behind old frontiers – that just will not work, the new frontier is that there are no frontiers – but to play a full and constructive part in shaping the international agenda. And this is what the Government is seeking to do.

While the recent turmoil in World Economies is centred in a handful of Asian countries, and with its effects most sharply felt in Asia, it is a global problem not an Asian problem. And it is a problem of the modern age. It could not have happened in this way when finance was confined within sheltered national systems, as they were when the international institutions like the IMF were established.

The turbulent period is not over. Government must remain vigilant, not least against the threat of protectionism which must not be allowed to return as inevitable adjustments take place over the next year.

But we are also now in a period of reflection about the lessons we can learn and on the way the international monetary system is set up. The institutions and systems we have were created in the main for the old world of national economies. We need to devise new rules, and where necessary reform institutions for the new world of global markets.

What the world needs is an approach that combines the continued flow of international finance with the right kind of national and international operational rules of the game and public policy framework. The challenge we face is to build the operational rules and institutional architecture we need for the global financial, and thus the stability we need.

First, we need to strengthen the regulation and supervision of financial institutions.

Second, we need in every country open accountable and transparent decision- making which informs and educates the public and the markets in a way that commands credibility.

Third, when crises do occur we need to find new and better ways to involve the private as well as public sector in their resolution.

Fourth, at all times and particularly at times of crisis we must finds ways to reinforce social cohesion. There need not be a shared understanding of the need for reform and appreciation of the social problems.

Which is why, at the recent G7 meeting, I proposed four codes of conduct to guide international policymaking: on fiscal policy, monetary and financial policy, corporate governance and welfare state reform.

And on the continent of Europe, too, where the search for macro-economic stability is being pursued through monetary union, the same lessons are being learnt: that fine tuning cannot work, that fiscal and monetary disciplines are essential, that prudent management of public finances must be combined with action to create a low inflation environment.

And the British message from our European Presidency is that there must be structural reform in capital, labour and product markets throughout Europe.

But of course we all know the search for stability has led Europe to new proposals that will be implemented next year – to create both a single currency and a growth and stability pact to ensure sustainable public finances.

What is the position Britain should take?

One of the enduring responsibilities of National Governments in global markets is to advance the national economic interest and this forms the basis of our approach to the current debate about the single currency. And I have just set out why we are determined to see Britain fully integrated into a world economy based on free trade, open markets and greater competition.

We have no intention of surrendering or subjugating the British national interest. Our’s is a mature patriotism. Just as we have no intention of doing anything other than strengthen our participation in the world economy.

What we have to do is look at how Britain, with 50 per cent of its trade with Europe, will be affected by the single currency.

The single currency – the Euro – will cover an area that accounts for 20 per cent of the world’s trade – as much as the united states. It will be an important – indeed global – currency.

As far as Britain’s position is concerned, my statement to the house of commons last October is and will continue to be the policy of the government.

I said that, in principle, we could see benefits in monetary union. I did not say there are no constitutional implications of a single currency.

What I did say is that it is because of this that the economic benefits to theUK, as set out in our five economic tests, must be clear and unambiguous.

To rule out monetary union in principle, and to be prepared to do so even if the economic benefits were overwhelming, is not the right way to advance the British national interest.

So this is our policy and it will not change – any decision on membership of the single currency will be made in the national economic interest. The benefits of the single currency will be subjected to five economic tests because its benefits must be clear and ambiguous. And if any decision is recommended, there will be referendum of the people.

But let me just add that more than half of our trade is with Europe, and rather than standing on the sidelines unable to influence the course of the European debate, the government will be engaged and constructive in setting out our ideas for its future.

Conclusion

I hope I have been able to convey not just the sense of the new politics, but the purpose and commitment of Tony Blair’s new government.

Not just the reforms we are undertaking but the reasons we have adopted a new approach.

And not just the program itself but the principles that underlie the program.

I hope I have conveyed a sense of the importance and urgency of developing a politics that advances opportunity and recognises responsibility.

It is a cause, which I believe addresses the economic and social needs of our time.

I have talked about the dynamism our economy needs and the social cohesion people yearn for.

I have suggested we need a new politics of economic opportunity and social obligation.

There was a fashionable view that we had reached the end of history. There is no end of history. There are still divisions that have to be healed, wrongs that have to be righted, vested interests that have to be opened up, goods that have to be promoted, potential that ought to have the chance of being developed.

Great causes to argue and fight for.

And that’s probably good news not just for those of us who believe that to be the case but for a global media that I hope will continue to be interested in what we say.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, in Ottawa on 30 September 1998.

NEW GLOBAL STRUCTURES FOR THE NEW GLOBAL AGE

INTRODUCTION

Our meeting here in Ottawa reaffirms the partnership between our countries that is an indispensable foundation of international stability and prosperity.

Never in all of economic history have so many depended so much on genuine economic cooperation among all the nations of the world.

Our shared commitment to open trade and orderly progress has been a driving force for growth in all our countries – even in countries that not so long ago seemed likely to be permanently left behind.

We must never forget that the path of open trade and open capital markets that we have travelled in the last 30 or 40 years has brought unprecedented growth, greater opportunity and the prospect of better lives for millions across the world. But there is still massive poverty in a world where millions are denied opportunity, and the new economy has brought greater risks of insecurity as well as new opportunities.

What began last year as a local and regional crises centred in a handful of Asian countries, with its effects most sharply felt in Asia, has spread from Asia to Europe and North and South America becoming what is now a global problem affecting us all.

No sensible policy-maker wants to turn the clock back to protectionism and insularity. But to move forward, we need vigilant and active governments, acting together through reformed international institutions, to ensure that the prosperity that has been achieved by some can be extended to all.

Today’s problems are problems of the modern age. They could not have happened in the way they have when finance was confined within sheltered and wholly national financial systems. So these are new global problems which will require new global solutions.

So it is particularly appropriate for me to set out a new agenda for reform at this meeting of Commonwealth nations, with finance ministers representing all regions of the world from developing,emerging markets and developed nations – and to do so the week before the meetings of the IMF and the World Bank in Washington.

The key challenge now is to devise procedures and institutions – nothing less than new international rules of the game – that help deliver greater stability, and prosperity for all our citizens in industrialised and industrialising economies alike.

THE CURRENT SITUATION

First the current situation.

With Japan and one quarter of the world in recession, growth in world output and trade will weaken over the next year.

Asia’s unprecedented slowdown is turning out to be deeper then expected, but in some of the affected countries progress in restoring economic stability is being made.

With some currency appreciation in both Thailand and Korea,interest rates have been reduced to below pre-crisis levels. And the latest trade data show that export volumes grew rapidly in the first quarter.

The continued pursuit of transparent and credible policies,through IMF programmes, has brought further signs of recovery.

But there is a long way to go and macro economics policy should now be focussed, on creating the right conditions to support domestic demand and export-led growth.

As the recent G7 statement has made clear, the G7 countries-North America, Europe and Japan – as well as the IMF and the World Bank, stand ready to support all emerging market countries which are prepared to embark on strong sound policies which will involve structural reform.

But when the balance of risks in the world economy has shifted from inflation to slower growth, the G7 countries must now assume greater responsibility.

The necessary improvement in trade balances in affected countries could either come from domestic stagnation or export-led growth. It is in our shared interests to achieve this export led growth , but this will only be possible if, by sustaining world demand, the industrialised world is the engine for that growth.

As I said in Japan recently, all industrialised countries must now bear their fair share of the burden of adjustment. No one country can either escape its responsibility or be required to bear the whole burden with all the risks in protectionist sentiment that this would entail.

I believe that from our respective continents each G7 member should now resolve to play our rightful role and take action to ensure that our economies can both sustain growth and remain open to trade:

in the UK we have taken the tough action on monetary and fiscal policy which allows us to steer the course of stability in an uncertain and unstable world and will continue to promote domestic demand growth, open trade, investment and employment opportunity for all; in Europe too, as the statement following last weekend’s meeting of Europe’s finance ministers and central bank governors demonstrated, we will be working to ensure that the euro promotes stability and growth. And the European contribution will include a commitment to employment creation within a policy of structural reform;

and the vigilant action of the US Federal Reserve yesterday is designed to sustain domestic demand growth. I know that the US government believes that maintaining free trade, free from protectionism, is an important element of its response. I know also that the administration is working very hard to ensure ratification of the NAB and the IMF quota increase. We should support and encourage them to step up their efforts in these areas;

I know too from my recent visit to Japan that my Japanese colleagues are focussed on their efforts to stimulate domestic demand through fiscal and monetary policy. And, to help restore market and consumer confidence, the Japanese government must lay out a clear timetable for action to restore health to the banking and financial sector. But vigilance today must be matched by a willingness to reform the international financial system to secure greater stability tomorrow.

THE UNDERLYING CAUSES OF THE EMERGING MARKETS CRISIS

Recent years have witnessed global capital flows on an unprecedented scale. Net private capital flows to emerging markets has risen from $31 billion in 1990 to $241 billion in 1996 (before falling back to $174 billion last year). Yet massive flows one way one year can become massive flows the other way the next. In Asia’s case net inflows of $40 billion in 1996 turning to net outflows of over $30 billion in 1997- a turnaround, which in contrast to the Mexican crisis years, has not been offset by a reallocation of flows to emerging markets elsewhere. Instead a general flight to quality and safe-haven buying has occurred. And as global investors have been radically changing their attitudes towards risk, borrowers in Latin America and the Caribbean have faced a steep rise in bond spreads. In many countries in the region these have now risen to rates not seen since the Mexican crisis in 1995. Stock markets have also fallen sharply, down 30 to 40 per cent in Brazil and Argentina since early August. But the emerging market contagion has been even wider than that – in South Africa the rand has fallen to record lows.

Better risk management in future will lead to more stable capital flows. But it is a matter of concern that many emerging market economies are now being been caught up in the turmoil, regardless of the strength of their macro-economic fundamentals.

What we are facing however is a temporary setback, to progress in global trade and investment, not a permanent retreat indeed I believe that the essential answer to the problems of the moment is not less globalization, but more. In other words not new national structures to separate and isolate economies, but stronger international structures to make globalization work in harder times as well as easy ones.

But we must understand we are in a new world.

Trying to turn the clock back by re-erecting national financial barriers is neither realistic nor sensible.

International investment flows bring huge benefits to all countries.

And we must build new operational rules and the institutional architecture we need for the global financial system of the coming century.

First, we must tackle the weaknesses in economic and financial policy, and in corporate governance, which the crisis has exposed in many emerging markets.

In many cases, excessive short-term foreign currency borrowing occurred because of the perception of an absence of currency risk due to exchange rate pegs, implicit and explicit government guarantees and directed lending practices which compounded the inefficient allocation of capital.

Borrowing was in many cases used to finance investment in economically unsound projects and governance in the corporate and financial sectors was often weak. In some cases, currencies became uncompetitive, resulting in large current account deficits. Moreover, when the financial crisis hit, fiscal policy was, in retrospect, kept too tight.

However at the root of these problems was a destabilising lack of transparency in economic policy-making right across key economic and financial indicators which in turn led to confusion and undermined market confidence.

Second, this was compounded by weak financial supervision, poor corporate governance, and ineffective prudential regulation,which has led some to raise questions about the speed and desirability of capital liberalisation.

Recent events have demonstrated the dangers countries run when they open their capital markets in this new global economy if their financial systems are weak or vulnerable.

Third, recent months have exposed problems of transparency, poor risk assessment and inadequate supervision in developed countries’ financial markets too indeed in the past week we have witnessed.

The vulnerability and riskiness of some highly leveraged,secretive and speculative hedge funds. But we have also found some major household financial institutions, with ordinary household deposits backed up by implicit and explicit guarantees, risking and then losing substantial sums first in emerging markets and then through hedge funds , a combined exposure which, in some cases, was not known in advance.

So the difficulties are not just a problem for emerging markets. While all too many analyses of the current crisis focus exclusively on the problems in debtor countries, it is a fact that there have also been problems in creditor countries.

Fourth, the international community did not understand sufficiently early the true nature of Asia’s problems and how best to tackle them.

In most cases these were not traditional sovereign debt problems or fiscal problems but instead private sector debt and financial sector problems. We did not have in place procedures and mechanisms to identify problems before they become crises and to manage crises once they began.

Fifth, this crisis is about people and not just about economic statistics. Insufficient attention has been paid to the human side of the crisis and our common responsibilities to put in place help for the poor and the unemployed. We must never forget that behind the headlines and the numbers flickering on dealers’ screens are men and women whose jobs, incomes and futures are threatened by these events.

And when the response to the crisis will inevitably involve difficulties and obstacles which will have to be overcome, we have so far failed to build a shared understanding of the need for reforms, securing a social consensus behind them, just as we have failed to alleviate the impact of recession on the poor and the unemployed.

Five weaknesses – weaknesses in economic and financial policies,underdeveloped financial sectors in emerging markets, ineffective supervision, poor crisis management, unacceptable social protection – but together they expose an even more fundamental common problem. For fifty years we have had national policies for regulation,supervision and crisis management for what were essentially independent relatively sheltered national economies with discrete national capital markets and limited and slow moving international capital flows.

We are now in the era of interdependent and instantaneous capital markets.

Individual economies can no longer shelter themselves from massive fast moving and sometimes destabilising global financial flows , and it is obvious that if we are to respond to this, we need reform at both national and global levels.

First, national policies for supervision regulation and crisis management will have to keep pace with the speed and scale of global financial markets.

And second, as British Prime Minister Tony Blair said in New York last week, a new global framework will have to offer, at an international level, new and more sophisticated regimes for transparency, supervision, crisis management and stability similar to those which we have been developing at the national level to deal with domestic instability.

So the challenge we face is not to weaken support for the IMF and World Bank and other international institutions at a time when the need for surveillance and coordination across the world is more pressing but to strengthen them by building the operational rules and institutional architecture for the new global financial system.

AN AGENDA FOR REFORM

So let me now therefore set out my specific proposals.

First, to tackle national weaknesses in economic and financial policy and governance in a global economy requires not only sound policies but also sound procedures and institutional arrangements.

So what are the “rules of the game” and what are the institutional changes we need?

There is in my view only one answer to the uncertainty and unpredictability of ever more rapid financial flows.

In today’s global economy, governments need to deliver stability by setting out clear objectives for fiscal and monetary policy and having the openness and transparency necessary to give credibility to the process.

Greater openness in procedures as well as in the dissemination of information will not only reduce the likelihood of market corrections by revealing potential weaknesses at an earlier stage but will generate a better understanding of the reasoning behind decisions and encourage better decisions and wider support for the policies.

The international financial institutions have a vital role to play in boosting the international credibility of national policymaking by setting standards for policy making, and monitoring or policing those standards through regular surveillance and endorsement of sound reforms. These new disciplines are the key building blocks of the new international financial architecture.

Last year we proposed at the annual meetings a code of good practice for fiscal policy to introduce greater transparency and new disciplines into the world financial system and ensure that countries undertaking good policies are properly recognized.

Already the IMF has published this Fiscal Code and is now preparing a guidance manual on how to implement the code.

The right next step for us to take is to extend the principle of transparency and openness into monetary and financial information and procedures. At the Spring Meetings in Washington this year,I asked the Fund to look at the case for extending these principles to develop a code of transparency on monetary and financial policy.

A code which requires countries to provide a complete picture of usable central bank reserves, including any forward liabilities,foreign currency liabilities of the commercial banks and indicators of the health of the financial sectors, with suggestions for improving and speeding up publication of data on international banking flows.

While I welcome the fact that the Fund board will be considering the code of transparency on monetary and financial policy later this year, I urge the Fund to take forward work on developing and implementing the code as quickly as possible, in consultation with the World Bank and the Bank for International Settlements.

There is a third set of procedures that should be formulated into a code of practice to improve transparency in the corporate sector since crises can arise as a result of private sectorim balances and poor corporate governance, as in Indonesia.

This suggests we need more work to establish more stringent international codes in areas like accounting standards,insolvency regimes, corporate governance, securities markets and other aspects of private sector behaviour.

Some of the work on developing a code of good practices on corporate governance is already underway. For example, the OECD is producing a report on standards and guidelines on corporate governance which should be ready by spring of next year. But again we need to develop and implement the code, as soon as possible and put in place the procedures to ensure effective implementation. This will require close collaboration with the IMF, World Bank and the OECD.

These codes will help produce an environment in which financial markets can operate better. They should reduce the risk of future failures, and mean that when failures do occur the financial system is robust enough to withstand them. But they will also, I believe, do something more profound, but also vital to success.

By improving public understanding of why and how decisions are made, by improving the accountability of governments, companies and international institutions. They will help build public understanding and support for the policies that deliver economic growth and prosperity. And as we all know, the existence of that public support can be an essential ingredient in building the market confidence needed for success.

But for these three codes to be effective we must ensure that institutions are equipped to monitor and implement the new rules of the game. As I have set out, this means an enhanced role for the international financial institutions in implementing and promoting the codes for fiscal transparency, and for monetary and financial policy. Monitoring these codes is an essential part of the Fund’s surveillance work.

All three codes should be used by Fund and Bank staff during Article IV consultations and Country Assistance Strategies. I believe that the IMF and the World Bank should publish assessments of how well all countries, both developed and developing, are implementing the codes.

So far our approach has been a voluntary one. But countries that want to be part of the global economic system cannot pick and mix which good and bad policies they want to pursue. That is why we should consider whether all countries should accept regular surveillance of how they are meeting the codes.

Where possible the results of this surveillance should be made public. We should consider the case for publishing in a timely and systematic way all the key surveillance and programme documents, Press Information Notices, Article IV reports, and country assistance strategies should all be made public. In most cases there is a strong argument for publishing letters of intent thereby making it clear to the public what has been agreed between the authorities and the IMF.

But the IMF and World Bank’s surveillance will at times involve confidential discussions, particularly when a country is heading in a dangerous direction. In such circumstances it may well be best for the Fund to give a private warning to the government.

But if the Fund is ignored and the situation gets worse the Fund should make use of “tiered responses”. For example the Fund could warn a country that it would give it a public ‘yellow card”if policies were not changed within a reasonable time limit.

That is also why I believe proper implementation should be a condition of IMF and World Bank support and why immediate action to promote transparency in policy making, financial sector reform and corporate governance should be key components in any reform programme which the IMF and World Bank agree in the coming months. And that is also why a soundly-based IMF programme along these lines should be pre-condition for a any G7 national support. Because through the effective implementation of the codes we can extend good fiscal policy, monetary policy and corporate governance throughout the world and help prevent crises occurring.

We must also find ways to improve the IMF’s own accountability,to ensure that it performs its responsibilities in an open and transparent way that enhances public confidence. We need a systematic approach to internal and external evaluation of the Fund’s own activities, including a new full-time evaluation unit inside the IMF but reporting directly to the Fund’s shareholders,and in public, on its performance.

Financial sector reform in emerging markets

Second, the problem of weak supervision and lack of prudential standards in supervision in emerging markets.

There are those who argue that instability is the inevitable result of free capital movements across national boundaries,while others blame speculators who exploit capital mobility for short-term profit. What is clear is that short-term capital flows can be destabilising and can disrupt markets when investors are insufficiently informed and educated and institutions lack credibility.

I do not believe that a permanent retreat to capital controls, as an alternative to reform, is the answer. Doing so simply damages the prospects for stability and growth.

I continue to favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation.

But the need for caution in implementation is now clearer, and more important, than ever. Orderly liberalisation will require sound banking and financial systems and appropriate macroeconomic policies, consistent with our monetary and financial policy code. Without these important pre-conditions being in place, countries will remain vulnerable to capital market volatility.

The IMF and World Bank must deepen our understanding of the pre-conditions for successful capital market liberalisation by emerging market economies. We need to make clear the risks of moving too fast if these pre-conditions are not in place.

Equally, countries that seize upon unilateral actions as a substitute for necessary reform and co-operation damage the prospects for their own economies and the world system.

One useful contribution to this process is the Commonwealth code of good practice for promoting private capital flows and coping with capital market volatility, agreed last year and based on an exchange of experiences amongst Commonwealth partners. The code is based on sound principles of openness and transparency, good governance and strong policy credibility, and the need for a co-operative international approach between the official community and private investors. It recognises both the potential benefits and the potential risks associated with private capital flows, and describes a range of policy options which countries might use depending on their particular circumstances.

But neither the IMF nor the World Bank alone are currently equipped to carry out the surveillance and assist in the development of emerging countries’ financial systems to help them build the capability for capital liberalisation, pointing out the regulatory weaknesses and vulnerabilities which must first be addressed.

That is why I proposed at the spring meetings an institutional innovation, creating a joint department of the IMF and World Bank to carry out this work. I know that some tentative steps in this direction have already been agreed. But I remain convinced that the bolder option is worth serious consideration. It could be implemented quickly, and with goodwill from both institutions could be made to work to improve advice and help to emerging market countries pursuing reform.

Supervision of global financial markets

But there is a second, broader, role which a joint department could play in co-operation with other international regulators.

The events of recent months have pointed out inadequacies in our understanding of the interrelationships between financial markets between countries, particularly between developed and emerging market economies, inadequacies in the quality of risk assessment and gaps in the international regulatory system.

Events in Asia have demonstrated the dangers emerging market countries run in this new global economy when their financial systems are weak or vulnerable. But they have also demonstrated that the stability of financial centres in developed countries are also threatened by instability and speculation and have also demonstrated the importance of better risk assessment.

Developing better standards and systems for financial supervision and regulation within each country will help to combat this but the international financial institutions have a vital role to play.

There are important jobs being done by the international regulatory organisations in setting standards for financial supervision and regulation within each country. The Basle committee has published a comprehensive set of core principles for banking supervision. Implementation of these will strengthen banking systems and is essential for promoting stability in the global financial system.

I welcome its establishment of a liaison group and consultation group to monitor their implementation within Basle participants. This process needs to be strengthened and broadened. I encourage all countries who have not yet adopted Basle minimum standards to do so as a matter of urgency.

I urge the Fund and Bank to work closely together with the Basle committee and other international financial regulators to exchange information, ideas and experience – and to include supervisors in Fund and Bank missions. They should also look at setting target dates for implementation of Basle minimum standards. And should consider asking each country to provide an annual assessment of how far it meets the Basle principles.

I also welcome the Basle committee’s work on improving transparency and risk assessment. Events in the banking sector in the last few weeks have emphasised in particular the importance of its work on an improved supervisory framework for banks’ derivatives and trading activities, and on developing codes for the management of credit and operational risks. I hope these codes can be implemented as soon as possible.

Out of these developments comes the recognition that our institutional response will need to go beyond the existing surveillance role of the IMF and the necessary provision of technical assistance and financial support by the Fund and Bankto help countries restructure their financial systems.

We need regular and timely international surveillance of all countries’ financial systems and of international capital flows,not just to point out weaknesses, but to ensure these weaknesses are addressed and to identify systemic risks to the global financial system. We need to incorporate the expertise of national and international supervisors and regulators, who can bring to the international system their experience of strengthening financial sectors and dealing with systemic risk atthe national level.

This means developing a new international framework to bring together the IMF, the World Bank, the Basle committee, and other international regulatory groupings to focus on global financial stability and supervision. I believe we need to consider far-reaching reforms.

While there is no need for a wholly new and self-standing institution, there is a clear need for much closer co- ordination and coherence between, and reform of, existing institutions. That is why we must urgently examine the scope for a new and permanent Standing Committee for Global Financial Regulation, bringing together not only the Fund and Bank, but also Basle and other regulatory groupings on a regular – perhaps monthly – basis. This would recognise that the key challenge facing the global economy occurs in areas where all these organisations have responsibility and expertise. It would be charged with developing and implementing a mechanism to ensure that the “rules of the game” – the necessary international standards for financial regulation and supervision – are put in place and properly co-ordinated.

This Standing Committee for Global Financial Regulation could also play an important role in strengthening the incentives on the private sector to improve its risk assessment. It could act as the focal point for better information sharing between the international financial institutions, governments, and the private sector – so that the risks are fully revealed. Recent events have shown that it is particularly important that we have greater transparency of hedge funds, which wherever they are formally registered can have an impact on global financial markets. But recent events have also suggested that better information may not be enough. We also need to consider strengthening prudential regulation in both emerging and industrialised countries and particularly for cross-border activities. The Basle committee is looking at the scope for revising its capital ratios as they apply to short-term lending, and I encourage it to put forward proposals as a matter of urgency.

The Standing Committee for Global Financial Regulation could also help to find better ways to identify systemic risk. In the UK, we published last year a Memorandum Of Understanding, setting clear divisions of responsibilities and establishing a regular system of meetings and surveillance to ensure cooperation between our national financial institutions to identify and address systemic risk at an early stage. This sets out a clear framework for regular cooperation between the Treasury – which is responsible for ensuring the whole system works in the public interest protecting the interests of taxpayers, the Bank of England – which is responsible for the stability of the system as a whole – and the new Financial Services Authority – which is responsible for supervising and monitoring financial institutions. But systemic risk is not confined to national boundaries. What we need is an international memorandum of understanding which would establish the proper division or responsibility at the international level. We need to explore how this could be done to reduce the chance of crises occurring.

Dealing with crises

Just as we need new international machinery for crisis prevention,so we also need a better, more systematic approach – involving public and private sectors – to dealing with crises when they do occur. We need to ensure that the international community is able to respond to short -term liquidity crises in countries that are committed to reform, and to help such countries maintain access to the capital markets.

In a crisis, the first need is always to act quickly to stabilise the situation. But we have to find ways to do this without bailing out private investors. We need private companies to take risks, but with a proper assessment of those risks and to take responsibility when things go wrong. And we need public institutions that help to make clear what the risks are, and provide a framework when things go wrong – a framework to which the private sector contributes as well as the public sector.

There is action to be taken here at the national level. For example, the avoidance of misconceived implicit or explicit government guarantees of private liabilities, and the improvement of national bankruptcy laws. Action on both is now underway in several Asian countries.

At the international level, I would like to see the IMF indicate that in the event of a crisis, and where a country adopts good policies, it may be prepared to sanction temporary debt standstills, by lending into arrears, in order to enable countries to reach agreements with creditors on debt rescheduling. By making this clear in advance, private lenders would know that in future crises they would be expected to contribute to the solution as part of any IMF-led rescue.

And there needs to be a mechanism for the Fund to liaise with private sector creditors and national authorities to discuss the handling of debt problems at times of potential crisis.

The IMF should remain at the centre of this framework, which should include the new standing committee for global financial regulation to co-ordinate the identification of systemic risk. We need to have clearly defined procedures for deciding when and how to provide liquidity support. And we will need to address many difficult and complicated issues as a mater of urgency, not least the future funding of the IMF.

A code of good practice on social policy

Fifth, we need to respond to the human dimension of the crisis. I want today to set out my proposal for a code of good practice no social policy. A proposal I will be putting to my colleagues in Washington next week.

We need to set out guidelines for dealing with the social consequences of the global economic problems. And we should not see this just in narrow terms of creating social safety nets.

Rather we should be trying to create opportunities for all to contribute as well as benefit, through training, education and in other ways – in other words modern, active welfare systems.

Good economies, as many now acknowledge, depend on good social relationships and therefore on the building of trust. And countries and companies engaging in reform need a shared understanding of the challenges they have to meet, whether it is by dialogue, social partnership, policies that lead to a sense of fairness because there is equality of opportunity or by other means by which democratic participation is improved.

Creating national support for the policies needed for economic growth depends on there being adequate systems for helping people who are victims of economic crises. This is indeed a clear role for government in the new fast changing global economy: not guaranteeing that nothing will change, or leaving people defenceless against change, but helping equip people to adapt to and master change.

So we should aim to create decent working conditions everywhere. All the international institutions should share in the task of promoting core labour standards in all countries and decent levels of social welfare and protection.

We need to promote the international development targets on universal primary education and on reduction in infant and maternal mortality rates, as well as provision of clean water and sanitary conditions for all.

The World Bank should help governments in all affected countries in Asia to get social support systems in place as soon as possible.

It is the poor and the unemployed who have most to lose if reform fails, and it is because we are committed to putting their interests at the heart of our response that we need this code of good practice on social policy.

And the World Bank has a key role to play in developing and promoting a social code, to ensure that governments have in place policies to strengthen social systems and tackle the social impact of sudden shocks to the financial system.

In the design of IMF programmes to help countries in crisis the IMF and the World Bank must also ensure that the reforms they demand are consistent with the code of good practice and, as far as possible, preserve investment in the social, education and employment programmes which are the foundation for growth. I hope that, with the support of the development committee, the World Bank working closely with the IMF will draw up such a code of good practice on social policy as soon as possible.

CONCLUSION

Let me say in conclusion that in the new global economy, neither the United Kingdom, you – our Commonwealth partners, nor any other country can afford the easy illusion of isolationism. We are all shaped by and must work together to shape the forces at work in our global economy.

These four codes of good conduct for policy-making, codes agreed by the international institutions, but accepted by national governments and the radical institutional changes I have set out today would, in my view, offer a new framework for economic development.

This will give new hope to the poorest and most vulnerable countries. But it needs to be combined with measures to reduce unsustainable debt. I shall have more to say on this later today. The HIPC process must be accelerated and we must do more beyond HIPC for those countries facing unsustainable domestic debt. By increasing the number of countries in the HIPC process to reach decision point before 2000, speeding up debt relief to post-conflict countries especially those with arrears to the international financial institutions, and securing a wide-ranging review of the HIPC initiative by the middle of 1999 to include consideration of debt sustain ability criteria. We are determined to secure maximum progress by the millennium.

The questions I have dealt with today are sophisticated and technical. But we must never forget that they are also human questions. They involve the living standards of people as well as the level of financial transactions. They involve not only the value of capital or trade or investment, but the deepest values of our societies.

The responsibility of all of us who lead in the era of globalization is to meet the authentic problems of our times with a vision, an intelligence, and an energy which will make the world economy stronger, more stable, and more prosperous – ultimately more open not just to the free flow of goods, but to the rising tide of people’s aspirations everywhere.

The speech made by Gordon Brown, the Chancellor of the Exchequer, in Tokyo on 16 September 1998.

1. Introduction

I want to begin by thanking you for the invitation to speak to this distinguished audience at this decisive time for the world economy. I am pleased to have the opportunity to share with you our analysis of the serious challenges we face, which we must urgently address both individually and collectively. We have  experienced the opportunities that flow from the new age of globalization.  We have benefited from the accelerating integration of the international economy.  Now we must manage it though more difficult times.

And I welcome this dialogue with key policy makers in Tokyo – because Japan has a key role to play not only in ensuring recovery from present difficulties, but in constructing permanent structures for stable long term global prosperity.

Japan is a highly valued economic partner across the world. In Asia, it is of course the largest economic force, accounting for 61 per cent of Asian GDP. In Europe too, we value highly the strong and successful trade, foreign direct investment and financial relationships that have grown so rapidly in recent decades to our mutual benefit. And Britain, in particular, has very good reason to value our strong relationship with Japan. Last year, Japanese direct investment in the UK stood at £2.6bn, nearly 40% of total Japanese investment in the EU.

My visit today, representing the British Government, the current chair of the G7, reaffirms the partnership between the G7 countries as an indisputable foundation for international stability and prosperity.  Our shared commitment to open trade and orderly progress among the G7 has been a driving force for growth – – even in countries that not so long before seemed likely to be permanently left behind.

Now the trend is stalled, and in some places even reversed – but I believe that is a temporary setback, not a permanent condition.  I believe that the essential answer to the problems of the moment is not less globalization – – not new national structures to separate and isolate economies, but stronger international structures to make globalization work in harder times as well as easy ones.  Our urgent need is closer co-operation, continuing dialogue, and an unwavering commitment to open commerce.  We must not let temporary instability put global progress at risk.

As the economic weather turns, as a storm in one region threatens to spread, there are easy but dangerous shelters – a return to protectionism, the breakdown of co-operation, the rise of beggar thy neighbour policies.  But this can only yield furtherdeterioration, not renewed growth.

Protectionism anywhere is a threat to prosperity everywhere.  Closing off national economies only increases national and international instability. And in Asia and across the world, it is the poorest, the most vulnerable members of society who suffer the most from financial crisis and stagnation.

So I come here today to affirm our common resolve  to pursue a strategy of international stability and renewed growth.  All countries must actively work together to sustain domestic demand and maintain open markets for investment and trade upon which our shared prosperity depends. What is necessary is closer international co-operation to achieve stability and sustained growth, open trade and strengthened financial systems.

That is a point upon which all G7 finance ministers have been agreed in our dialogue in recent weeks. And I am pleased to be here to discuss these issues in person with my colleague, Kiichi Miyazawa, as I will be in the coming weeks with other finance minister colleagues.

Recent events, coming after the onset of instability in Asia last year, also emphasise the importance of the work that is being done  in the G7, the IMF and World Bank and other international groups to consider how to promote sound domestic policy-making and strengthen the international financial system. The globalization of the economy and the expansion – and recent instability – of world capital markets present new challenges for both emerging markets economies and industrialised countries alike. The challenge of devising  procedures and institutions which establish internationally agreed rules of the game, recognising the proper role of government in delivering greater stability, prosperity and opportunity for all citizens within an open global economy, is the key challenge which faces us.

So today, I will explain what governments must do now to address the instability we currently face. And I will set out some of the key issues that need to be addressed at the annual meetings of the IMF and World Bank in Washington next month.

2. The world economic situation

Our starting point must be to recognise the strengths which explain developments in the world economy during the 1990s,  but also the weaknesses in national and international policy-making that have been exposed by recent events. The two driving forces for change have been technological change which made possible a global marketplace and the lowering of barriers to trade and capital flows as more and more countries wanted to be part of this global marketplace.

Since the establishment of the GATT in 1947 average industrial tariffs of developed countries have fallen from nearly 40% to less than 5% through eight rounds of multilateral trade liberalisation.  The most recent of these – the Uruguay Round promises to increase world incomes by some $500bn per year by the year 2005.  The Uruguay Round marked a major reduction in (non-tariff) trade barriers: agriculture and services were included in the GATT for the first time.  Since then we have seen Agreements to liberalise markets in Financial Services and Information Technology.  At Birmingham, the G8 pledged to resist protectionist pressures.  At the fiftieth anniversary  celebrations of the GATT in May, world leaders renewed their commitment to open markets in trade and investment.

At the same time, we witnessed global capital flows on an unprecedented scale as investors perceived new investment opportunities in markets which were previously not open to them or too risky to contemplate.  The Asian financial crisis was preceded by a period characterised by record private capital inflows into emerging markets and a substantial compression of spreads across a wide range of emerging market credit instruments.  Net capital flows to developing countries  roughly tripled over the last decade to more than $150 billion a year.

The terms of new bond issues by developing countries improved significantly in the early 1990s – the average spread at launch for US dollar denominated issues declined, in retrospect excessively, from over 400 basis points in 1991 to a low of less than 200 basis points by 1994 .

This irreversible global economic integration in capital and now also product markets has been accompanied by impressive growth in the world economy. During the 1990s, global output has expanded by on average of over 3 per cent each year, with developing countries growing at an average of 6% and countries in Asia by an average of 8%.

But in the last year, the trends which accompanied strong growth rates in emerging markets have been reversed.  The end of last year saw a collapse in private capital inflows to emerging markets, leading to dramatic falls in Asian exchange rates and  stock markets – of as much as 80 per cent in some cases.The Asian crisis countries themselves witnessed a turnaround of $70 billion in bank lending with net inflows of $40 billion in 1996 turning to net outflows of over $30 billion in 1997.  And unlike in the case of the Mexico crisis, the reduction in capital flows to the crisis countries was not offset by a reallocation of flows to emerging markets in other regions.

The growth performance of these countries has also gone sharply into reverse – on a scale unprecedented in contemporary economic history. After strong growth in previous years in Asian economies, the economic crisis has been a particularly jarring experience for the citizens of these countries as well as international policy-makers and investors. And with the growing realisation that recovery is taking longer to occur than had been hoped, there has been a significant reassessment of risks to international lending in emerging markets.

It is right for policy makers to admit that the causes of these complex events are not yet fully understood and will require continued  analysis.  Moreover, the factors explaining the onset of economic difficulties and loss of investor confidence in each of the countries affected are different, and it would be wrong to engage in misleading generalisations.

In Thailand, for example, the first country to be affected, the immediate cause of  the economic downturn was an unsustainable asset price boom, compounded by macroeconomic policy errors, which exacerbated the situation, rather than helping to solve it.

In Indonesia and South Korea by contrast, macroeconomic policy errors were not to blame for the loss of investor confidence, while recent events in Russia represent a particular combination of economic and political instability, leading to a loss of  investor confidence and, in turn, macroeconomic breakdown.

However, some common themes do emerge in all affected countries in Asia. Excessive short–term foreign currency borrowing occurred because of the perception of an absence of currency risk due to exchange rate pegs, implicit and explicit government guarantees and directed lending practices which compounded the inefficient allocation of capital, as well as weak supervision and prudential standards.

Borrowing was in many cases used to finance investment in economically unsound projects and governance in the corporate and financial sectors was often weak. In some cases, currencies became uncompetitive, resulting in large current account deficits. Moreover, when the financial crisis hit, fiscal policy was, in retrospect, kept too tight. However underlying all these factors and at their root, was a lack of transparency in economic statistics and policy making which led to confusion and dented market confidence.

In Asia, a period of adjustment was inevitable. What is striking is, first, that the scale of this adjustment should be so severe – as evidenced by the falls in equity and currency markets and in output in many Asian economies. Secondly, these  financial pressures have spread across emerging markets from Asia – to Eastern Europe and recently Latin America.

In hindsight it is clear that investors were not making fully prudent assessments of the risk associated with their lending decisions. Last year we witnessed the first decline in private capital flows to emerging markets this decade, and a general reassessment of risk. The widening of spreads in emerging markets has continued following the Russia crisis, rising from around 600 basis points to 1600 basis points.   Recently we have seen a general flight to quality and safe-haven buying by increasingly risk-averse global investors.

While some sharpening of risk management may bring benefits  in the medium term, it is concerning that even some of the best performers amongst emerging markets are now being been caught up in the fray.  Even those with sound macro-economic fundamentals, such as Hong Kong, have not been immune from short-term speculative attacks.

These developments illustrate why it is so important that we take extremely seriously the sort of correction we are currently witnessing. Industrialised economies have felt the impact of falling demand in emerging markets. The general increase in investor risk-aversion has also led to volatility in the major world markets.  In the US and Europe, stock markets have fallen significantly, while bond prices have been pushed higher. With inflation low or falling in many parts of the world and with the slowdown in demand in a number of economies, especially emerging markets, the balance of risk in the world economy has shifted, as the statement by G7 countries and central bank governors earlier this week made clear .

3. Stability in the world economy

My primary concern today is how international co-operation can help to deliver sustainable growth, open trade and the proper functioning of banking systems.

Economic stability

The first priority for Asia is to restore a platform of economic stability on which growth depends.  The economic situation in much of Asia remains difficult, as the slowdown is turning out  to be greater than expected. But progress has been made in restoring economic stability in some of the countries directly affected by the crisis, through full and timely implementation of the necessary reforms, in conjunction with the IMF.  In both Thailand and Korea, we have seen significant currency appreciation this year, and this has allowed interest rates to be reduced to below pre-crisis levels.  Moreover, the latest trade data show that export volumes grew rapidly in the first quarter. I also want to mention the vital contribution which  China is making to global financial stability.  Its policy of  maintaining a stable exchange rate is an important and  responsible one in difficult times.

With the continued pursuit of  transparent and credible  policies, we can see further signs of recovery.  Macroeconomic  policy should now be focussed, on creating the right conditions  to support domestic demand and export-led growth.   Structural  reforms, particularly in the financial sector, must also continue alongside action to put in place adequate social safety nets.  Since the beginning of the crisis, I have argued strongly that more emphasis needs to be placed on social spending to limit the impact on the most vulnerable in society.

As our recent statement made clear, G7 countries, as well as the IMF and the World Bank, stand ready to support countries in all emerging markets, which are prepared to embark on a course of strong and sound policy action. Of course, for the IMF to do this and be ready to help in times of crisis, it needs adequate resources now. I am glad to say that the British Government has taken action to play its part in doing this, and I urge others to do the same as a matter of urgency.

In Russia, economic progress can only be secured if there is political stability and a genuine commitment to both stabilisation and structural reform. As the G7 officials discussed at their meeting in London earlier this week, the international community remains ready to cooperate further with Russia in support of sustained efforts towards stabilisation and reform.

Inevitably, trade flows will change as the world adjusts to the recent swings in capital flows. In the Asian crisis countries, we have seen significant improvements in trade balances, with a combined annualised surplus of $80 billion in the first five months of 1998, compared with a deficit of around $40 billion  annualised in the same period last year.

But the necessary shift from trade deficit to surplus in emerging markets can either be achieved by domestic stagnation or export-led growth. It is in our shared interests to achieve the latter, but this is only possible if the industrialised world provides the engine for that growth by sustaining demand in the world economy. All industrialised countries – in Europe and Japan as well as North America- must bear their fair share of the adjustment. No one country can either escape its responsibility to play its part in sustaining global demand or be required to bear the whole burden and thereby encourage protectionist sentiment.

We must demonstrate both that we have learned the lessons of history, and that we have adapted our approach to the modern global economy of the late 1990s.  We are not going to bury our heads in the sand in the face of instability as policy-makers have done before.  Equally, we must guard against repeating the precipitate policy mistakes which, for example, the UK made following the 1987 stock market episode when policy was kept too loose despite domestic inflationary pressures.

This is a crucially important task, in particular for monetary policy makers.  I know from my conversations with Eddie George, the Governor of the Bank of England that central bank Governors in the industrialised world are fully focussed, as Monday’s statement by G7 Finance Ministers and Central Bank Governors demonstrated, on the need to maintain demand growth in the current global environment.

In the UK, as result of the decisive action the Government has taken over the past year in monetary and fiscal policy, the UK macroeconomic fundamentals are now sound and Britain is now back on track to achieve a return to stability as the platform for sustained growth. Recent evidence of reductions in inflation and earnings growth is encouraging.  But further progress is essential, if we are to maintain an economy which combines sustainable growth and low inflation.

Prospects for sustainable growth with low inflation continue to depend on responsible wage behaviour in both the private and public sectors, where pay must be related to what the economy can afford.  It would be the worst of short-termism to pay ourselves more today at the cost of higher interest rates tomorrow and the missed growth and job opportunities that would inevitably follow.

It is vital also that measures are taken to put the Japanese economy back on the path of sustainable growth.  Japan has a particularly important role to play as the second largest economy in the world,  by far the largest economy in the Asia region, and a key export market for the crisis economies.  Japan is clearly not responsible for the Asia crisis.  But Japan can be part of the solution.   That means using macroeconomic policy tools to boost domestic demand and restore business and consumer confidence.  The G7 has welcomed the efforts you have been making and the fiscal package you announced in August. The world economy needs an early return to growth in Japan and decisive  action to that end.

Trade policy

Vigilance is required not just in domestic macroeconomic policy but also in trade policy. We must guard against the risk that worries over cheap imports from Asia will encourage misguided calls for a retreat into protectionism.

The world that made this protectionist mistake earlier in the twentieth century, in the decades before the Bretton Woods institutions were created, must not make it again, on the eve of the twenty first century.

It is therefore critical that we resist these pressures and stand by the pledges we have made at Birmingham, ASEM2 and the OECD and WTO Ministerial meetings to maintain the liberalisation of international trade and investment.

The successful completion of the WTO financial services negotiations in December of last year was a tribute to all the participants. We must not allow current market difficulties to stand in the way of further trade liberalisation and opportunities for growth.

I want to give you three further examples of how the G7 and the UK can signal its commitment to promoting free trade and  resisting protection.

First, we need to move quickly to a new round of trade talks that will take multilateral liberalisation forward, not backwards. We are therefore fully committed to European Commission proposals for an early start to the Millennium Round of trade negotiations with a fully comprehensive liberalising agenda covering Agriculture, Services, Competition and Investment.  It is in the interests of everyone to work hard to make sure these talks deliver. These talks should start in the year 2000.  I propose that we work with the WTO to ensure that preparations for negotiations start now to ensure a prompt start to the Round. We should also consider whether there is any case for bringing that date forward.

Second, anti-dumping.  Arguably the misuse of anti-dumping measures as a way of protecting domestic markets is the biggest current threat to international competition. We need to be more watchful than ever in current circumstances. Recently, the UK has strongly opposed the imposition of measures against amongst others China and Indonesia in the case of unbleached cotton. And we will continue to do so in similar cases.

Third, we shall be looking critically at our own rules and measures. For example, The Voluntary Restraint Agreement on Japanese cars exports to the UK expire at the latest at the end of 1999. The UK is and will remain firmly committed to the liberalisation of the UK and  EU car markets.

Financial stability

The third area where vigilance is essential is in banking and other financial supervision and regulation.  The G7 can take the lead in maintaining the momentum of global domestic demand, and safeguarding the openness of the global trading system. But if we are rapidly to restore investor confidence, and emerge from the current turbulent period stronger than we entered, it is essential that countries facing financial pressures take the urgent and necessary  steps to strengthen their own national financial systems, in co-operation with the private sector and the international community. This will involve difficult decisions to tackle corporate and financial sector weaknesses,  and to develop better systems of supervision and regulation.

Of course it is not just emerging market economies that need to be vigilant when it comes to financial stability.  An equal responsibility lies with the G7 countries.  In London, the home of the world’s largest international financial centre, we take our responsibility to ensure open, transparent, orderly markets very seriously.  I know the governments and regulators of other major international financial centres do so too.

In London, market participants have absorbed the impact of recent instability without serious difficulty.  Of course we are not complacent.  The Financial Services Authority – the new universal regulator of banks, securities and insurance – is monitoring the situation closely.

Here in Japan, the restoration of financial stability is a top priority in order to ensure that efforts to stimulate the economy can be effective. I hope financial reform legislation can be passed quickly and look forward to the implementation of these measures in a speedy and decisive manner.

It is vital that a solution is found and that confidence is restored.  This is essential to put the economy on a sound footing.  Continuing financial sector instability will make  Japan’s economic recovery much more difficult by hampering efforts to stimulate domestic demand. A transparent, well-regulated and reinvigorated financial sector will play a large  role in putting the Japanese economy back on its upwards trajectory. The same applies throughout Asia.

The UK fully supports the efforts which you are making, and  recognises the importance of co-operation amongst supervisory authorities. For many years there were close links between banking supervisors in the Bank of England and their colleagues in the Japanese Ministry of Finance and the Bank of Japan. Both in Japan and in the UK, this year has seen the establishment of new universal financial regulators: the Japanese Financial Supervisory Agency and the UK Financial Services Authority. In the months since our two FSAs were created they have already built up strong links, reflected in day to day contact on individual issues.

But I believe we can and should do more to enhance mutual understanding and co-operation. One of the best ways of doing this is for supervisors from one organisation to spend time at the other. As a first step, I can announce that next month
supervisors from the Japanese FSA will go to the UK FSA for an intensive exposure to the way that UK undertakes supervision. And we are planning a similar visit to Japan by UK supervisors as well as longer secondments in both directions.

We also need enhanced and targeted surveillance of financial sector stability by the IMF and the World Bank working in close co-operation.   And greater co-operation between the IFIs and the international regulatory organisations (Basle, IOSCO, IAIS)  is also important.  The Basle liaison committee, which combines representatives of developed and emerging markets and of the IMF and World Bank, is a good example of this sort of co-operation.

The G7 is also considering with the IMF and World Bank how to improve co-operation between the two institutions in the areas of financial stability and surveillance including transparency in both public and private sectors, and will come forward with proposals.

4. Strengthening the financial architecture

I have set out the action which the G7 together must take to counter the threat to prosperity and jobs posed by this short- term instability. But this instability should not prevent consideration of the long-term implications of the recent crisis for both domestic policy-making and the institutions of the global economic system – sometimes referred to as the financial architecture.

We start by recognising that the global economy has changed the environment for domestic policy making. In the global market place national governments, dependent for investment funds on the day to day confidence of international investors, must pursue consistent and credible policies that guarantee stability. Rewards for doing well have been substantial. But punishment for those countries who perform badly is now more instantaneous and more severe than in the past, with the risk of contagion as investors become more risk averse.

This can be seen from the way in which the Asian crisis, and now the Russian crisis, came unexpectedly – the speed with which the capital markets have moved, with sentiment swinging from excessive optimism about prospects to a deep pessimism, the accompanying volatility of exchange rates and the way in which deep-seated flaws in financial systems in emerging markets have been exposed.

Despite these changes, we are still operating with essentially the same institutional structure that was set up over 50 years ago when the world was facing a very different set of problems. The Bretton Woods twins, the IMF and the World Bank, were designed to help the world recover from a devastating World War.

The World Bank was given the task of reconstruction and development, the IMF was to look after payments imbalances, and particularly prevent the beggar-my-neighbour devaluations.  Later the Bank for International Settlements  was formed and developed a limited role in bringing together the Central Banks of different parts of the world.

We need to examine how we can reform this architecture to improve the workings of the global economy and facilitate both trade and capital flows. We must learn from what we have done right over the last 50 years but also from the problems that have emerged most recently in the current crisis.  So let me start by setting out the key issues that need to be on the agenda of the meetings in Washington early in October.

There are those who argue that instability is the inevitable result of free capital movements across national boundaries, while others blame speculators who exploit  capital mobility for short-term profit. What is clear is that short-term capital flows can be destabilising and can disrupt markets when investors are insufficiently informed and educated and institutions lack credibility.

So one part of the  answer to the uncertainty and unpredictability of ever more rapid financial flows is to introduce new disciplines in economic policymaking: clear long- term policy objectives, the certainty and predictability of well-understood procedural rules for monetary and fiscal policy, and an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

Greater openness in procedures as well as in the dissemination of information will provide markets with a better understanding of fiscal and monetary policy, reduce the likelihood of market corrections by revealing potential weaknesses at an early stage, and encourage governments to develop more open policy making processes and internationally recognized yardsticks for assessing fiscal policy.

I welcome the progress made in agreeing the Code of Good Practice on fiscal transparency that the UK originally proposed a year ago in Hong Kong. The Fiscal code has now been agreed. The IMF already plans to issue a manual to provide more guidance on how to construct and present fiscal policies.

The issue now is how the Code should be used in practice.  I believe that it should be disseminated widely to extend good fiscal practice throughout the world, and that countries should be required to report on how they are applying it. The IMF should report on its implementation as part of Article IV consultations and that it should become a key component of programme conditionality.

But the fact that, in some Asian countries the difficulties began not in macroeconomic policy but in inadequate financial regulation shows why it is right for us to extend the principle of transparency and new discipline in policy making from fiscal policy into monetary and financial information and procedures and corporate governance. That is why I have proposed that we supplement the code on fiscal transparency by asking the IMF to prepare a code of good practice on financial and monetary policy, in consultation with the world bank and the BIS and asking the OECD to draw up a Code of Good practice in corporate governance.

The monetary and financial code will need to ensure that countries provide a complete picture of usable central bank reserves, including any forward liabilities, foreign currency liabilities of the commercial banks and indicators of the health of the financial sectors. We must also find ways of improving and speeding up publication of data on international banking flows.

These Codes of Conduct, policed by the IMF, can help private sector lenders and investors when they make country risk assessments, enable them to make sound lending decisions country by country and so reduce the tendency to brand all emerging economies  in the same way. We also need to do more to encourage – or even require – prompt publication of IMF Press information notices and the conclusions of Article IV missions.

Sound macroeconomic policy, open and credible institutions and procedures and a healthy financial sector are essential pre- conditions for orderly capital account liberalisation.  The recent turbulence in global financial markets has demonstrated the importance of ensuring that all the necessary pre-conditions have been met, sequenced in the appropriate way.

I continue to favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation.  Bold in concept because open capital markets allow efficient use of capital and the transfer of technology and expertise, and have brought substantial benefits to industrial and developing economies alike in recent decades.

But the need for caution in implementation is now clearer, and more important, than ever.  Orderly liberalisation will require sound banking and financial systems and appropriate macroeconomic policies.  Without these important pre-conditions being in place, countries will remain vulnerable to capital market volatility. I believe that this work must also be extended, working with the IMF, to deepen our understanding of  the pre-conditions for a successful capital market liberalisation by emerging market economies. We need to make clear the risks of moving too fast if these pre-conditions are not in place. Equally, countries that seize upon unilateral actions as a substitute for necessary reform and co-operation damage the prospects for their own economies and the world system.

Finally, given the key role that IMF plays and continues to play, we must now find ways to improve the IMF’s own accountability to ensure that it performs its responsibilities in an open and transparent way that enhances public confidence. We need a systematic approach to internal and external evaluation of the Fund’s own activities, including a new full- time evaluation unit, inside the IMF but reporting directly to the IMF’s shareholders, and in public, on its performance.

We will return to these and other long-term issues of crisis prevention and alleviation in Washington in three weeks time.

5. Conclusion

Let me say in conclusion that in the new global economy, neither the United Kingdom, Japan nor any other country can afford the easy illusion of isolationism.  We are all part and ultimately product of events happening in our global economy.  Never in all of economic history have so many depended so much on genuine economic co-operation among the leading industrialized nations.

We must never forget that the path of open trade and open capital markets that we have travelled in the last 30 or 40 years has brought unprecedented growth, greater opportunity and a better life for people across the world.  No sensible policy- maker wants to turn the clock back to protectionism and insularity.  But to move forward, we need active governments, acting together through reformed international institutions.

The questions are sophisticated and technical.  But we must never forget that they are also human questions.  They involve the living standards of people as well as the level of finanacial transactions.  They involve not only the value of capital or trade or investment, but the deepest values of our societies.

We must make markets work – – in tough times as well as easy ones.  That is the burden and honour of all of us who lead in the era of globalization.  I believe we can meet the authentic problems of our times with a vision, an intelligence, and an energy which will make the world economy stronger, more stable, and more prosperous – – ultimately more open not just to the free flow of goods, but to the rising tide of people’s aspirations everywhere.