Tag: Speeches

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

INTRODUCTION

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

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

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

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

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

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

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

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

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

THE 1944 WHITE PAPER

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

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

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

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

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

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

First the post war years.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

THE NEW ECONOMIC FRAMEWORK

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

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

A PLATFORM OF STABILITY

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

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

Let me review each proposition one by one.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What conclusion can be drawn from all this?

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

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

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

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

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

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

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

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

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

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

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

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

Credibility, once lost, is hard to regain.

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

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

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

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

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

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

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

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

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

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

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

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

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

That openness needs to be underpinned by accountability and responsibility.

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

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

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

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

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

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

First, clear long term policy objectives:

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

Second, well understood procedural rules:

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

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

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

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

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

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

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

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

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

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

WELFARE TO WORK

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

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

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

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

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

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

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

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

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

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

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

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

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

PRODUCTIVITY

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

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

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

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

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

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

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

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

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

RESPONSIBILITY IN PAY-SETTING

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

To succeed we must all be long termists now.

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

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

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

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

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

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

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

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

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

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

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.