CHECK AGAINST DELIVERY
Speech by the Chancellor of the Exchequer at the Mansion House
on 15 June 2000
My Lord Mayor, Mr Governor, my Lords, Aldermen, Mr Recorder, Sheriffs,
ladies and gentlemen.
In thanking you for your invitation to speak at this evening's Lord
Mayor's dinner to the bankers and merchants of the City of London,
the first in a new century, let me at the outset pay tribute to the
work the City of London does, the contribution you as representatives
of the financial and business sector make to the British economy and
the difference you make - a financial services sector that accounts
for one pound in every 16 of our national income, employs over 1 million
people, and is second to none in the world.
Just as the City of London achieved its pre-eminence over the centuries by meeting again and again the challenges posed by economic change at home and abroad, you can take pride in the fact that by putting to work enduring British qualities - our creativity, our enterprise, our belief in duty and fair play, and our openness to the world - we are a leader in Europe and the world:
- the London Stock Exchange, the largest trading centre for foreign equities in the world;
- the Foreign Exchange Market - with a daily turnover of over 600
billion dollars - the largest and most important in the world.
And amidst the new developments this year - the introduction of new
technologies, the proposed merger between the London Stock Exchange
and Deutsche Borse, the Royal Assent this week for the Financial Services
and Markets Act and the new Authority under Howard Davies' leadership
- we see in practice the City's continued ability to respond to and
And this is my theme tonight: that having as a country found a new
strength to take the tough decisions to create economic stability,
we in Britain must find the same strength to make the reforms in our
labour, capital and product markets that are essential to higher productivity
and thus greater prosperity for our country.
When I first spoke to you three years ago in June 1997, I spoke of
our resolution to achieve monetary and fiscal stability, as the only
sound platform for prosperity.
In today's global economy, no nation can secure the sustainable investment
it needs unless its economy is built on the rock of stability.
In Britain I saw - as you saw - the past instability caused by inconsistent
rules, ever changing targets, ad hoc haphazard and often over-politicised
decision-making procedures and lack of transparency.
Our new economic approach sought to learn from past mistakes, is
founded on stability, is designed to make sense of the new world of
liberalised financial markets and, while often characterised as simply
Bank of England independence, it is in fact built upon four propositions.
Because there is no long-term trade-off between inflation and unemployment,
the first lesson we have learned is the management of demand alone
will not deliver high and stable levels of employment.
In global capital markets there is little scope for the national
fine-tuning of the past which tried to exploit that supposed long-term
trade-off between inflation and unemployment. It leads us to reject
short-termist dashes for growth.
But equally in today's de-regulated, liberalised financial markets,
national governments cannot deliver stability by using flawed intermediate
policy rules relating money demand and inflation.
So the second lesson we have learned is that monetary rules that
assume a fixed relationship between money and inflation do not produce
reliable targets for policy and do not deliver the stability we seek.
But the alternative should not be a return to discretion without
The answer is not 'no rules', but the right rules. So the third lesson
to learn is that in an open economy, the discretion necessary for
effective economic policy is possible only within a monetary and fiscal
framework that commands market credibility and public trust.
The fourth lesson follows from this: that credibility depends upon
clearly defined long-term policy objectives, clear and accountable
divisions of responsibility, and maximum openness and transparency
So in Britain we have set clear policy objectives:
- in our case, price stability through a symmetrical inflation target
and sustainable public finances through applying the golden rule that
over the economic cycle revenues should cover consumption - in other
words a balanced current budget - combined with a prudent approach
to public debt.
Second, well-understood and consistent rules of procedure for monetary
and fiscal policy-making:
- in our case, a new system of monetary policy-making, at the heart
of which is the independence of the Bank of England, and the open
letter system between Governor and Chancellor. And an equivalent and
equally important set of fiscal procedures legally enshrined in the
Code for Fiscal Stability.
Third, openness, accountability and transparency to keep markets
and the public properly informed and to ensure that objectives and
institutions are not only credible but seen to be credible:
- in our case, an open system of decision-making in monetary policy
through the publication of minutes, a well understood system of voting
and full reporting to parliament; and in fiscal policy an open and
transparent system under which Government allows its actions to be
subject to full scrutiny, and ensures that key fiscal assumptions
are independently audited.
Similar lessons have been learned in Europe where a similar approach
with the same objective, to achieve monetary and fiscal stability,
is being pursued.
In the euro area, there is a similar recognition that the old fine-tuning
cannot work, a similar understanding that in liberalised markets rigid
monetary targets cannot, on their own, deliver stability, a similar
insight that the discretion necessary for effective economic policy
is possible only within a framework that commands market credibility
and public trust; and growing agreement that credibility depends upon
clearly defined long-term policy objectives.
Hence in the euro area the pre-commitment to low inflation and fiscal
discipline where inflation has been effectively brought down in the
1990's from 4.4 per cent to 1.3 per cent and borrowing successfully
cut from 5.5 per cent of national income to 1.2 per cent.
Hence also central bank independence and the terms of the stability
and growth pact; and hence too the growth of an open process of multilateral
surveillance within Europe involving peer review.
As I said to the House of Lords Select Committee in January last
year "the issues of transparency in decision making, which we dealt
with in our reform of the Bank of England, and the symmetry of the
inflation target, which have proved to be central to the success of
the United Kingdom's new monetary framework, will also be issues for
future debate in Europe."
I said in October 1997 that in principle "the potential benefits
of a successful single currency are obvious- in terms of trade, transparency
of costs and currency stability" . As the Secretary for Trade has
said, 50 per cent of trade is now with the euro area, and the UK and
euro areas are each others largest trade and investment partners.
In 1997 I also said that the Government had resolved the question
of principle. While we recognise the constitutional issue as a factor
in the decision, we do not consider it a bar to entry if there is
clear and unambiguous evidence of the economic benefits of joining,
and if the people had the final say in a referendum.
The 1997 Statement also set five economic tests which are the necessary
economic pre-requisites for membership of a successful currency union.
The tests, for which this Government and this Treasury is the guardian,
- first, sustainable convergence between Britain and the economies
of a single currency;
- second, whether there is sufficient flexibility to cope with economic
- third, the effect on investment;
- fourth, the impact on our financial services industry; and
- fifth, whether it is good for employment.
We are committed early in the next Parliament to making an economic
assessment of the case for British membership, based on these tests.
In pursuit of this strategy , to prepare and then decide, we published
earlier this year our second National Changeover Plan, having introduced
new legislation to ensure departmental preparations. It is a measure
of our commitment to an open process of preparations that we have
a euro standing committee with business and the City and are in regular
contact with business in every region, to discuss preparations and
how these can be made in the most stable way. The policy of 'prepare
and decide' will continue to be implemented in full consultation with
business and the City.
There are those who would refuse to join the euro on principle. They
would refuse to join even if the economic tests showed it to be in
the national economic interest to do so. That is not our position.
As the Government statement said in October 1997, a successful single
currency "would help us create the conditions for higher and more
productive investment in Britain and far greater trade and business
Some opponents allege that we intend to fudge the tests, that our
intention is to join as quickly as we can get away with, irrespective
of whether there is the sustainable convergence we need , and thus
the tests are merely a political and tactical device to disguise what
is a hidden agenda.
I reject this view. As the Prime Minister has said, the tests must
be met. We cannot pre-judge the five economic tests. To do so before
we have secured sustainable convergence would risk repeating past
failures, mistaking exchange rate stability for stability across the
economy and prejudicing our commitment to move Britain from the instabilities
of a stop-go economy to greater long-term stability.
The Government will not agree to a short-termist approach that would
put at risk economic stability or the discipline that has created
sustained growth, rising investment and over 900,000 jobs since 1997.
So the policy that the five economic tests must be met, and that
the people would have the final say, the policy set out in October
1997, repeated by the Prime Minister in February 1999, has not changed
and will not change.
I understand the recent difficulties that the sterling-euro exchange
rate has caused and I welcome the positive response of manufacturing
which has increased productivity by 5 per cent over the past year.
But the policies which I am sometimes asked to follow to bring the
exchange rate down or even to set an exchange rate target alongside
the inflation rate target would today risk the very outcome all of
you want to avoid - a return to stop-go.
We are determined to avoid repeating past economic instability caused
by the succession of ever-changing targets - not just the money targets
we saw in the early 1980's but the dual exchange rate and inflation
targets of the late 1980's and early 1990's. In these years, the then
Government chose in succession £m3, m1, then m0 , then when these
failed shadowing the Deutschmark, then the exchange rate mechanism,
as the economy moved from one stop-go cycle to another.
Under the Bank of England legislation, I write a formal letter every
year to the Governor to set a target for the Bank of England.
This I did last month. The objective of British monetary policy today
is - and remains - clear and unambiguous - to meet a symmetric inflation
target at 2.5 per cent with inflation outcomes below target viewed
just as seriously as outcomes above target.
For an economy that has been laid low too often by violent stop-go
cycles, that long-term stability must come first and must be entrenched
across the whole economy.
Pre-emptive action by the Bank of England - under the wise leadership
of Eddie George and I thank also the two retiring members William
Buiter and Charles Goodhart for their work on the committee- has allowed
us both to meet our inflation target and sustain growth. And because
this is what I want us to continue to do, we will support our monetary
authorities in the difficult decisions they have to take to ensure
that we meet the inflation target and sustain high and stable levels
of growth and employment.
And already we are seeing here in Britain the rewards of creating
Bank of England independence and tough fiscal rules.
This week's latest figures confirm this.
For the third year running inflation is this year in line with our
target and is at historically low levels. We will continue to achieve
low inflation. And our forecast is that the economy will grow steadily
- by between 2.75 and 3.25 per cent this year, with growth forecast
to be 2.25 - 2.75 per cent next year and the year after.
Long-term interest rates - once 2 per cent or more above Germany's
- are now at the level of Germany, showing that people have confidence
in a low inflation future for Britain, enabling businesses to plan
for the longer term with greater confidence.
And having imposed new fiscal disciplines, we have cut borrowing
by over £40 billion in our first three years and we are on course
to meet our two strict fiscal rules.
And it is because we sought to learn from the political mistakes
of the last forty years that this Government will maintain its prudent
and tough approach. The figures I announced in the Budget mean that
we will meet our fiscal rules over the cycle. Indeed that we will
meet our fiscal rules even in the most cautious case, on the most
cautious assumptions, including the most cautious view of trend growth
at 2.25 per cent.
And as I announced in the Budget, I have decided to lock in a greater
fiscal tightening this year and next year than we promised in last
year's Budget and Pre-Budget report.
We are therefore able to repay debt - last year 18 billion pounds,
this year 6 billion pounds, and next year 5 billion pounds.
And in deploying the proceeds of our auction of the spectrum which
raised £22 billion we will - as I have announced this week -
reduce debt and debt interest payments and in doing so proceed with
proper prudence and utmost caution.
The same toughness and discipline we have shown in the last three
years will continue in the coming years.
Indeed it is only by building from a platform of stability and meeting
our tough fiscal rules, that we will be able to deliver both stable
growth and investment in public services.
And it is from this platform of monetary and fiscal discipline that
you have been able to create 100,000 more small businesses employing
people, from 1.2 million to 1.3 million, with last year 7 billion
pounds more in business investment and 12 billion pounds more inward
investment into the United Kingdom.
And as a Government, we are determined to continue to back your efforts
as businesses by maintaining our disciplined approach.
Stability is of course even more important because Britain, like
almost every major industrialised country, is in the midst of a period
of restructuring of our economy.
We know that increasingly every product and almost every service
will be exposed to global competition, and we know also that continuous
and rapid innovation in our technologies will compel unprecedented
flexibility and adaptability in skills and knowledge.
The innovation-rich economy will require an opportunity-rich society.
So this is not a time for complacency, not a time to pause, not a
time to relax our efforts.
To those urging us to slow the pace of change, or simply stick to
the old ways, whether it be old labour market policies, old attitudes
to enterprise or old approaches to competition, I reply that if we
slow the pace of change we will fall behind our competitors.
Britain cannot assume either that the new information technologies
will automatically bring the higher productivity growth now seen in
the United States.
To equip ourselves best to meet and master these challenges, we need
as a country to raise our game.
We have some of the greatest companies, some world class sectors,
some global champions, many represented here this evening, in whom
we do and should take pride, and once again we have record levels
of inward investment in our country.
But over the last 50 years, productivity growth in Britain has been
just over two and a half per cent a year, compared to between three
and a half per cent and four per cent among our main European competitors.
In recent times productivity has been increasing - especially in
manufacturing, where we have seen a 5 per cent growth in the last
year - but the increase is not fast enough.
Meeting the productivity challenge - closing the gap with our competitors
- must be the priority over the next few years.
Only with rising productivity can we meet people's long-term expectations
for rising standards of living without causing inflation or unemployment.
It makes it all the more important that stage by stage, continuing
with the Pre-Budget report and the next Budget, we remove the barriers
to enterprise, investment and productivity growth.
Let me give one illustration for this more general point.
When we came into Government and cut the long-term rate of capital
gains tax for business assets held for ten years or more, capital
gains tax had been fixed at 40 per cent for almost ten years.
Amidst all the other priorities, we decided that long-term investment
and enterprise would benefit from radical change, so this April we
cut capital gains rates for business assets from 40 per cent to 20 per
cent after three years; and to 10 per cent after four years.
Having made these decisions, I also looked at what I could do to
recognize the importance of investors in small and medium sized companies,
and business angels - and to the growing numbers of Britain's unquoted
companies. Now they will benefit for the first time from a cut from
40p to 10p after four years.
But just as we have reformed and cut capital gains tax we have reformed
and cut the main rate of corporation tax from 33p to 30p, making ours
the lowest rate in the history of UK corporation tax, the lowest of
all major industrialised countries.
And we are determined to build on our lower corporate tax rates and the interest relief we give on investment overseas and make Britain an increasingly attractive environment for multinational companies.
Our new enterprise management incentive scheme is also designed for
the future, for emerging hi-tech companies. To motivate, recruit and
reward Britain's real risk takers, growing hi-tech firms recruiting
essential personnel are now able able to offer share option incentives
of 100,000 pounds for up to 15 employees. And we have made a
change in work permit rules to enable key information technology employees
and businessmen and women to be attracted to Britain.
It is now well understood also that two thirds of growth is the result of innovation. Not only therefore does our new research and development tax credit support nearly a quarter of new investment in small and medium-sized business research and development, but with our 1.4 billion investment in science, our new University Challenge funds, and our eight Centres of Enterprise around the UK, we are honouring the spirit of British invention, and encouraging the commercialisation of invention.
And to make Britain the best environment for e-commerce and catch
up with America as swiftly as possible, we are introducing 100 per
cent allowances for the next three years for any small business
buying computers, or investing in e-commerce and new information technology.
We know that the extent of competition at home is the key to competitiveness
abroad. We know that open not closed economies are the driving force
in productivity growth. And we know that it is the global reach of
business, not protectionism, that is the key to dynamism and growth.
So having made the competition authority independent and having accepted
the main Cruickshank recommendations on small business banking, we
will go further to encourage new entrants and to promote a more competitive
environment in utilities, energy, e-commerce and telecoms and the
And in the labour market, greater adaptability to change is needed
if there is to be employment and economic opportunity for all. Because
we recognise that people will have to change jobs more often, that
skills are at a premium, that reform has been needed from the 1980's
onwards to create more flexibility and upgrade our skills, we will
invest in education and equip not just the few but everyone to cope
with and master change.
While we are rightly proud that our capital markets are world leaders,
I want us to ensure that investors have every opportunity and encouragement
to back dynamic small and growing companies. So we will want to do
more, as the Myners Review intends, to encourage the venture capital
industry for start-up and early stage ventures.
And I want Britain to play its part in leading the development of
the pan European capital markets - pushing for rapid implementation
of the capital markets action plan - so that Europe too can develop
venture and risk capital markets that bring jobs and growth.
So I conclude my speech where I started.
We should see the billions of trade and the 3 million jobs that
come from the European single market as only a beginning. Instead
of seeing Britain posed against Europe, we should see Britain working
constructively in Europe to complete the single market in energy,
telecommunications, the utilities and financial services. In this
lies more business and more jobs for Britain and Europe together.
And we will continue to build support for further economic reform
in Europe and demonstrate that, instead of Britain having to choose
between Europe and America , the way ahead is closer cooperation between
the continents of Europe and America in the interests of the greater
prosperity of both.
And it is for the best economic reasons therefore that in Europe
we will continue to support fair tax competition, and not tax harmonisation.
And we will continue to argue the case for exchange of information
and continue to refuse to allow a withholding tax to be imposed on
the City of London.
My vision is of a Britain which puts to good use enduring British
values, our enterprise, our adaptability, our commitment to fair play
and internationalism; a Britain where there is economic stability
rather than the old stop-go ; a Britain which plays its full part
in Europe and the world and is not detached or isolated from it; a
Britain that is more business-friendly than ever and rewards the innovator
and risk-taker; a Britain which encourages new companies to start,
to invest, to grow, and to expand, and where the opportunities and
benefits of enterprise, employment and prosperity are shared by all
regions and open to all people.
Working together to achieve this offers the best future for our country.