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SPEECH BY THE CHANCELLOR OF THE EXCHEQUER TO THE CBI CONFERENCE ON MONDAY 1 NOVEMBER.

 

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 Portugese 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.