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CHANCELLOR'S CITY OF LONDON SPEECH

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Speech by the chancellor of the exchequer at the Lord Mayor's Banquet, Mansion House, last night: ...
Speech by the chancellor of the exchequer at the Lord Mayor's Banquet, Mansion House, last night:

'My Lord Mayor, Mr Governor, My Lords, Aldermen, Mr Recorder,

Sheriffs, Ladies and Gentlemen.

In thanking you for your invitation let me start My Lord Mayor by

thanking you for the work you and your staff do not just here in the

City of London but round the world in promoting the City and Britain.

And let me at the outset pay tribute to all the companies and

institutions represented here today.

Let me thank you first for the scale of the contribution you make to

the British economy - the£50 billion of income, 4 per cent of

national output, and the 1 million jobs that arise. And let me thank

you also for the resilience, the innovative flair and the courage to

change with which you have responded to not just the world economic

downturn but to the greatest economic challenge of our times - the

challenge of global competition.

When last year, as we made our euro assessment, we conducted a

detailed and in depth review of the British economy, we were able to

conclude that because you, here in the City, had been prepared to

change and adapt, to innovate and invest in the future, to embrace

technological change like automated trading not as a threat but as an

opportunity, and to acquire - from all over the world - the skills

financial services need, London's already considerable and historic

advantages and assets - our stability, our global reach, our

reputation for integrity, our willingness to be flexible - had been

so enhanced for the new global era that, even in the face of a

pre-eminent American economy and an integrated euro area, London has

today

* a greater number of foreign bank branches and subsidiaries than any

other city in the world;

* the largest share of global cross border bank lending;

* with the London Stock Exchange, the largest trading centre for

foreign equities in the world;

* and the foreign exchange market, the largest and most important in

the world.

And it is a visible demonstration of London's global reach and

position - and now, in recent years, the modern links being forged

not just with the USA, Japan and the euro area but with China, India,

South Africa and other countries round the world - that I am told

that there are more countries represented this evening than at any

time in the 120 year history of the Lord Mayor's Banquet. And I

welcome all of you here from every continent and every corner of the

globe.

Your presence tonight demonstrates that the City of London - and our

financial services industry - has learnt faster, more intensively and

more successfully than others the significance of globalisation :

* that you succeed best not by sheltering your share of a small

protected national market but by striving for a greater and greater

share of the growing global market;

* and that stability, adaptability, innovation and openness to new

ideas and to global trading opportunities - great British assets and

advantages - matter even more today than ever.

And what you have achieved for the financial services sector, we as a

country now aspire to achieve for the whole of the British economy.

And this is my theme this evening. That the nations that will

succeed in this fast changing, fiercely competitive global economy

will be those that:

* first of all, lock in long term stability;

* second, encourage a competitive environment and the deepest and

widest entrepreneurial culture;

* third, make the commitment to invest in what offers comparative

advantage as global economic and technological change restructures

where and what we produce - world class levels of innovation,

technology, education, skills and, as you My Lord Mayor have

mentioned, infrastructure;

* and fourth, have the strength to take the hard long term decisions

in favour of free trade and outward looking internationalism.

And I believe that if we have the strength to take the right

decisions for the long term Great Britain stands better placed than

almost any comparable industrial country to be one of the great

success stories of this new global age.

Why? Because I believe that if we build on qualities and values that

have made us great in the past - our British enterprise, British

creativity, the British openness to the world, the British

adaptability to new ideas and our strong British sense of fair play

and civic duty - and if around these great enduring qualities we can

develop a shared British economic purpose about our future destiny as

a country, then I foresee a new era of economic success for a global

Britain.

Now Sir Winston Churchill - who we remember particularly in this

month, the sixtieth anniversary of D-Day - spoke pointedly on the

qualifications needed for a politician: 'The ability to foretell what

is going to happen tomorrow, next week, next month and next year. And

to have the ability afterwards to explain why it didn't happen.'

But in another remarkable phrase he warned his contemporaries that

they must never be, as he put it: 'Resolved to be irresolute, adamant

for drift, solid for fluidity and all powerful for impotence'.

And it is indeed the need for resolution, solidity, an unwavering

commitment to British values facing the challenges of the global

economy, and the strength to take the long-term decisions, that is

central to my message this evening.

Stability

First, Britain will succeed amidst this ever more intensive global

competition only by locking in the monetary and fiscal stability that

we have been enjoying.

And I can tell you that we have not taken the tough decisions on

stability from 1997 onwards to lower our guard or relax our

discipline now.

Let us remind each other of Britain's chronic history of stop-go -

under-investment, short-termism, insecurity and higher unemployment:

* an instability that meant businesses would not invest;

* people would not start up businesses;

* both families and businesses could not and did not plan for the

long term;

* everyone expected inflation to recur; and

* short-termism was dominant.

Indeed, stop go had entered our psychology.

And when we came into government in 1997 it would have been easier

not to have taken the decisions to raise interest rates. I would have

avoided difficulties in my own Party if I had ignored the case for

independence of the Bank of England. It would have been far more

comfortable politically not to have frozen public expenditure or

introduced tough new fiscal rules. But I believe that the test of our

capacity to govern is whether we have the strength to take the right

long term decisions for our country.

And it was our resolve that facing more intense global competition

than ever - where investments will move to the countries that can

demonstrate a long standing commitment to and record of monetary and

fiscal stability - Britain had to have a new monetary and fiscal

regime. And so the changes we made were not just making the Bank of

England independent but

* cutting the national debt dramatically;

* imposing tough new fiscal rules over the economic cycle which

allowed us to invest through a world recession;

* and introducing a symmetrical inflation target that targeted

deflation as much as inflation.

And so let me thank the new Governor - Mervyn King - first for the

work he did establishing the new regime as Deputy Governor and now

for the contribution he has already made as Governor, showing why he

is a worthy successor to Sir Edward George.

I know the Governor will agree that it is because we have developed a

British model for monetary and fiscal stability - which allowed the

Bank to cut interest rates aggressively during the world downturn and

allows the Bank to act proactively and pre-emptively in the upturn

too - that while the USA, Germany, Italy and Japan suffered

recessions, Britain for the first time in 50 years did not suffer a

recession during the world downturn and instead has grown in quarter

after quarter, year after year.

And I can report to you that now the world economy is strengthening,

growth in Britain is also becoming more balanced with business

investment, manufacturing output and exports rising now - and

expected to continue to rise this year and next.

Such is our determination to lock in our hard won stability that

looking forward we can, and will, take nothing for granted.

With financial markets expecting interest rates to rise around the

world as the world economy turns upwards and looks forward to rising

growth and trade, we will continue to support our monetary

authorities in the difficult choices they have to make and entrench

not relax our fiscal discipline.

And we will be vigilant to global risks: geopolitical uncertainties,

current account imbalances, the long term fiscal pressures of ageing,

and specifically three challenges - oil prices, house prices and the

need for continued fiscal discipline.

First oil: while the OPEC decision to raise production targets in

July and August is welcome, I can tell you tonight that I and other

Finance Ministers will continue to press OPEC both on meeting these

quotas and on the case for raising the targets higher. And because a

secure production environment is crucial for stable oil prices in the

long term, we will support Mr Rato - the new Managing Director of the

IMF - in his proposal for a modern and up to date approach to global

energy policy.

Let us recall that most stop go problems that Britain has suffered in

the last fifty years have been led or influenced by the housing

market. 40 years ago we built 400,000 homes a year, by the mid 1990s

it had fallen to just 200,000 so we will press ahead with resolution

- following the Miles and Barker reports and building on the success

of the Deputy Prime Minister's Sustainable Communities Plan - to

tackle the large and unacceptable imbalance between supply and demand

in the British housing market. Reforms that, as we said last year,

are right in themselves but are also necessary for sustainable and

durable convergence with the euro area. And on the euro, the

Treasury will again review progress at Budget time next year.

And while debt servicing costs are on average substantially lower

than ten years ago, the housing market has remained strong. And with

Britain's forward looking and pre-emptive approach to monetary policy

we are showing our determination to maintain both a sustained

economic recovery and stability, remaining vigilant at all times.

Let us recall also that at times like this in the political and

economic cycle - as the economy starts to grow faster - governments

have relaxed their fiscal disciplines and resorted to quick fixes and

short cuts in fiscal policy and gone on to raise the rate of spending

in a pre election spree. But the spending review I will announce in

the next few weeks will both meet all our commitments and all our

fiscal rules. And because our duty is to achieve fiscal

sustainability over the longer term we will not make the mistake of

other countries whose pension and health care costs could rise to 20

to 25 per cent of national income in future decades. And I can tell

you that I am determined to ensure that we can lock in greater

stability not just for a year, or for an economic cycle, but in this

generation ----- a prize of greater stability that has eluded

successive governments of all parties in the post war era; a prize

that - with resolve and prudence - is now within our grasp.

Enterprise

British success in the global era depends on us not just building a

consensus around the importance of long term stability but building a

similar shared purpose about the importance of flexibility and

enterprise - historic British qualities, now more relevant than ever

for success in the global age.

We all know about the rise of China:

* over recent years contributing more to the growth of the world

economy than all the G7 countries put together;

* consuming, for example, half the worlds cement, over a quarter of

the world's steel and a third of the world's iron ore;

* the largest market for mobile phones in the world, and one of the

fastest growing car markets too, with more Volkswagens sold in China

than Germany.

We all know about the rise of Asia: whose economy, without Japan, has

been growing at twice the rate of America and seven times the rate of

the euro area; and to whom 5 million European and US jobs could be

outsourced in the next fifteen years.

And we all know about the rise of developing countries: the vast

majority of whose exports twenty years ago were primary products but

which are now two thirds manufacturing goods with, in twenty years

time, developing countries perhaps accounting for 50 per cent of all

manufacturing exports worldwide.

And I think we can now say with some certainty that the advanced

industrial countries that will do well will be those that are able to

combine the skills of their people in design, science, technology,

finance and management - and modern manufacturing strength - with the

production advantages available in emerging economies.

Think back again to the 1960s and 70s when the old corporatism

stifled enterprise and creativity --- what we called:

* 'the productivity problem';

* 'the management problem';

* 'the union problem';

* 'the short termism problem';

* 'the 'what's wrong with Britain problem'.

So deep rooted was the British problem - sometimes called the British

disease - that as they said at the time:

* first in the fifties we had managed decline;

* then in the sixties we mismanaged decline;

* then in the seventies we declined to manage.

Corporatism led not just to inflationary pay settlements but to

mistakes made by governments trying to pick winners and to subsidise

loss making industries and to sterile confrontations between union

and management as between private sector and public sector, between

market and state, with little shared economic purpose on the way

forward.

And it is only recently that we are seeing a new Britain rising in

its place. Our task - and here I acknowledge the work of my

predecessors - is to complete that break with the sterile self

defeating corporatism that belongs in the past - hence the last

Budget's decision to end permanent on going industrial subsidies in

steel, coal and shipbuilding - and develop a far a wider deeper

entrepreneurial culture where enterprise opportunities are genuinely

open to all.

So same way that we made the Bank of England independent of

government we made our competition authorities independent of

government and created one of the most open competition regimes in

the world. And although not quite as public a symbol as the Bank of

England independence - but unique in terms of labour's history none

the less - we have cut capital gains tax substantially. Even with

other priorities to finance - not least the NHS - we have cut

capital gains tax from 40 pence down to 10 pence for long term

business assets and in budget after budget I want us to do even more

to encourage the risk takers, those with ambition, to turn their

ideas into reality and make the most of their talents.

And just as public services reform in health, education, transport

and the criminal justice system will be stepped up, so too I can tell

you that we will propose further economic reform and in particular

greater flexibility to make us globally competitive.

Take the planning system where I can tell you that we will make our

planning laws quicker, more flexible and more responsive to the needs

of industry and people.

On pay: we will do more to encourage local and regional pay

flexibility

On tax: having cut corporation tax from 33 pence to 30 pence and

small business tax from 23 pence to 19 pence, I promise we will

continue to look with you at the business tax regime so that we make

and keep the UK as the most competitive place for international

business.

On transport not least here in London: we must work with you -

private and public sectors together - to tackle the massive backlog

in infrastructure investment. And with£180 billion of investment

over ten years we will.

And on regulation: I have announced measures - both for the City and

beyond - to tackle unnecessary and wasteful bureaucracy and red tape:

* all new FSA rules subject to scrutiny by our competition

authorities;

* the Office of Fair Trading now specifically examining the impact of

the financial sector regulatory framework on competition;

* and because 40 per cent of new regulation - and as much as three

quarters of new financial sector regulation - comes from Europe I can

tell this gathering that having won the battle for a Savings

Directive against tax harmonisation, Britain has, having consulted

widely with you, already insisted on improvements to the Prospectus

Directive, the Transparency Directive, the Market Abuse Directive,

the Occupational Pensions Directive and the Investment Services

Directive - and we will continue to resist inflexible barriers being

added into the Working Time Directive and the Agency Workers

Directive.

And now that the UK Government has agreed with Ireland, the

Netherlands and Luxembourg to put regulatory reform at the heart of

our four EU Presidencies through to 2005, putting every costly and

wasteful regulation to a competitiveness test, we must ensure that if

other countries fail to implement EU Directives we will not be

discriminated against and there will be a level playing field.

Science

British inventiveness is not just a feature of our industrial

revolution past. I am proud to say that today we lead the world not

only in so many areas of financial services but in technologically

advanced spheres from aerospace and pharmaceuticals to

telecommunications, broadcast technologies and digital electronics.

And while it would always be easier to take the short term route -

and fail to continue to make the necessary investments for the future

- we propose to take the longer term view and to choose- even amidst

other spending priorities - innovation, science and technology,

education and infrastructure. And I can tell you today that in the

spending review we have not only financed higher standards in schools

and the development of world class universities but we will move

forward our ten year transport plan and set out a long term ten year

framework for innovation, seeking a partnership with the private

sector to do more as we set ourselves an ambitious target of

increasing UK R and D investment.

So instead of stop go, Britain is now a stable economy. Instead of

instability and corporatism, Britain is embarking on an enterprise

renaissance and demonstrating a commitment to science and a new

determination to raise standards in education and training.

But just as we have forged a consensus on stability and on

enterprise, science and skills, so too I believe we can forge a

consensus on the issue of Britain's place in the world - and

particularly on our relationship with Europe.

Global Britain

As I said at the outset a commitment to stability and world class

levels of skill, innovation, enterprise and investment must be

matched in the global economy by the same commitment the City has

shown - to being outward looking and global in our reach.

That is why I can assure you of our determination to achieve a

successful outcome of the Doha Round in the world trade talks and we

will also make the case for our membership of the European Union for

the advantages it brings to Britain - and for being a leader in the

enlarged Europe, the biggest single market in the world.

Let us not forget the significance of enlargement.

It brings to an end half a century of division between east and west

-- once it was said that Europe was divided into two halves - those

in the west who had Europe and those in the east who believed in it.

The idea of the European Union was that with economic cooperation a

new prosperity would reinforce that peace.

It was not just an attempt - to use the words of the Bible - to 'turn

swords into ploughshares' but to ensure there would be no need for

swords ever again: although, with the Common Agricultural Policy, we

ended up with rather more ploughshares than we might have wanted.

So European economic cooperation is vital to our prosperity and let

us not forget that 750,000 companies trade with Europe accounting for

3 million British jobs. 53 per cent of our total imports of goods

and services are from Europe. 50 per cent of our total exports of

goods and services go to Europe. And 65 per cent of our investment

overseas now goes to Europe.

We are linked to Europe by geography, history and economics

A Europe of self-governing states working together for common

purposes is in Britain's interests.

And at a time when a significant section of political opinion appears

to be making the case against Britain's very membership of the EU, I

say that we must, and will, make the positive case for Britain in

Europe.

And I believe that the best contribution pro-Europeans committed to

Britain leading in Europe can make to the cause of Europe is by

ensuring that in Europe - indeed in every debate including the

constitutional debate - we face up to rather than duck the difficult

decisions about economic reform.

For just as Britain has to reform to meet the challenges of the new

global economy, so must Europe.

Thirty, twenty, ten years ago it was commonplace to think of Europe

as a trade bloc and of the growth of European companies, European

brands and European flows of capital - and then to debate the

internal rules, disciplines and institutions necessary to make the

trade bloc work. Hence the assumptions of many that a single market

and single currency would lead to tax harmonisation and a federal

fiscal policy and then a quasi-federal state.

But globalisation has meant that it is not simply European but global

companies that have mushroomed, not mainly European brands but global

brands, not European flows of capital alone but global flows of

capital - and because it is globalisation that is driving our

economies, the new enlarged Europe of 25 must look outwards not

inwards, must think globally, reform, be flexible and rise to meet

the competitive challenge of globalisation. And it is global Europe

not trade bloc Europe that is the way forward and a flexible,

reforming Europe that thinks globally must now reject the old,

fatally flawed assumptions of tax harmonisation and federalism.

First, facing worldwide competition, this new global Europe has no

alternative but to embrace flexibility and liberalisation in product

and capital markets: the opening up of electricity, utilities,

telecommunications and financial services markets must proceed with

speed; we need a new competition policy that ensures the single

market delivers the lower prices and greater productivity of the US

single market; and we should abolish wasteful state aids and promote

both a European wide venture-capital industry and Private Finance

Initiatives across the continent.

Second, with more than 18 million Europeans out of work, a globally

orientated Europe must combine a new labour market flexibility with

policies that equip people with the skills they need for work. And

third, Europe must think globally and because half of the world's

output arises in Europe and America, forge a new relationship with

the USA - seeing America as a partner not rival. It is not just in

Britain's but in Europe's interest that the EU and USA make a greater

effort to tackle the barriers to a fully open trading and investment

relationship, strengthen joint arrangements to tackle competition

issues, engage in dialogue about the approach to financial services

regulation and together make multilateralism work for developing

countries.

And Europe must also think globally and ensure that its monetary

regime - the ECB and fiscal regime - the Stability and Growth Pact -

enables it to deliver strong and sustainable growth. That is why

the Stability and Growth Pact must place greater emphasis on the

importance of low and stable debt levels, and take into account both

the ups and downs of the economic cycle and the quality of public

finances including the importance of public investment. And as we

evolve the Stability and Growth Pact to meet changing European needs,

it is through intergovernmental co-operation that fiscal policy

delivers its most effective results. And the British government will

continue to stress that when member states are themselves answerable

to their citizens for tax and spending decisions, it is right that

the conduct of fiscal policy remains the responsibility of Member

States.

That is why Europe must avoid endorsing a federal-style fiscal policy

which would make the Commission and not Member States responsible for

fiscal discipline. That is why while tackling unfair tax competition

Europe must avoid the tax harmonisation that would damage our

competitive position. And that is why also in the coming financial

negotiations also Europe must show the resolution to keep its budget

prudent and continue to tackle the waste of the CAP.

So the new constitutional treaty which is being debated in Brussels

tomorrow must recognise these new economic realities.

What are called our red lines - that include economic red lines

requiring unanimity on tax decisions and no federal fiscal policy -

are not founded on dogma as some allege but on a concrete assessment

of Britain's national interest and Britain and Europe's economic

needs as we meet the challenges of the global economy.

So Mr Lord Mayor here in 2004 we can speak of a Britain that is no

longer the country of stop go but a Britain of stability.

A Britain that has set aside the old corporatism and is a Britain of

flexibility and enterprise.

A Britain no longer looking backwards, its mindset one of managed

decline, but a Britain rising in confidence as it equips itself

technologically and educationally for the future.

And as a Britain no longer looking inwards but a Britain true to its

tradition of global engagement, we can find a new confidence as a

nation --- our outward looking internationalism making us uniquely

placed to be a part of - and lead - in a Europe that is itself

engaged with the rest of the world

A strong Britain in a strong Europe - strong to succeed.

Our shared aim: a confident Great Britain that is a great success

story of global economy.'

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