Speech by the Chancellor of the Exchequer, Rt Hon George Osborne MP, the Lloyd’s of London annual city dinner
Speech by the Chancellor of the Exchequer.
[Check against delivery]
Thank you, Peter, for your kind words of introduction.
Let me pay tribute to your time at Lloyd’s and celebrate your achievements at the helm of this great historic institution.
You have helped it regain its place as the world’s leading insurance market.
On behalf of everyone here – Peter – thank you and well done.
I suspect we haven’t heard the last of you…
Talking of banks –tonight is an important reminder that the City of London is so much more than just banking.
It is also a global centre of excellence in insurance, fund management, legal services, shipping and many other dynamic financial industries.
But it is also a global banking centre – and this Government is absolutely committed to keeping it that way.
Your speech also reminded us that as one of the most open economies in the world Britain is not immune from events around the world, whether natural disasters or financial turbulence.
These are very unsettling times for the global economy.
Bad news about economic growth, particularly in the US economy, has been compounded by falling confidence in the ability of political systems on both sides of the Atlantic to respond decisively to the challenges they face.
And I suspect most damaging of all, the impact of a sharp oil and commodity price shock is still working its way through the global economy.
At root, however, this short term instability has been driven by powerful long term fundamentals.
For, as I have said many times now, this is not a normal economic recovery.
We cannot just sit back and wait for numbers that went down to come back up, or for lost ground to be made up, as has happened many times in the past.
Globally we are living through a painful and fundamental re-adjustment of a model of global growth that was badly broken;
a model of growth fuelled by unbalanced global demand and amplified by poorly regulated financial markets.
In short a model of growth built on unsustainable debt.
Here in Britain our model of growth was the most badly broken of any major economy, our debt burden one of the biggest, and the necessary re-adjustment correspondingly difficult.
As the research presented by the Bank for International Settlements at Jackson Hole last month confirmed, of all the world’s major economies the UK saw the biggest expansion in debt over the past decade.
That’s because we had the biggest housing boom, the most indebted families, the most leveraged banks and the biggest structural budget deficit.
All the evidence from economic history suggests that, thanks to this overhang of debt, recoveries from financial crises are slower and choppier than recoveries from other kinds of recession.
That’s why Ken Rogoff and Carmen Reinhart, the economists who have made perhaps the greatest contribution to our understanding of this crisis, have called the period we are living through the “Second Great Contraction”.
So, while we have all had to revise down our short term expectations over recent weeks, the only people who should be fundamentally re-examining their view of the world are those who thought that this time was different.
Those whose plans depended on unrealistic assumptions of a rapid return to business as usual and a continuation of forgiving financial market conditions.
This Government has never thought that this time would be different.
We understood right from the beginning that the world of the boom years had changed beyond recognition.
We identified the problems and the risks – an overleveraged economy, an unsustainable budget deficit and a broken model of growth.
We warned repeatedly that the recovery would be choppy.
And we set in train a plan that was comprehensive and clear in its vision, but also flexible enough to withstand shocks along the way.
A plan for fiscal responsibility to bring unsustainable government borrowing under control, so that monetary activism can allow interest rates to stay lower for longer.
The plan we have set out was designed in tough times for tough times.
It is the rock of stability upon which any sustainable recovery depends and we will hold to it.
We had an Emergency Budget last summer on our own terms – not this summer on the market’s terms – unlike so many other countries.
We have been ahead of the curve.
We have been a safe haven in the sovereign debt storm.
We have delivered record low interest rates for families, businesses and taxpayers.
We are not immune from what happens on our doorstep.
But we can remain masters of our own destiny.
Just this week Italian bond yields have started to creep up again to 5.5%, three times those in Germany, and Greek one-year interest rates are now at a staggering 84%.
Our bond yields are just 2.3%.
Abandoning the plan we have set out would put Britain back into the firing line, lead to soaring interest rates and cripple any hope of a sustainable recovery.
But there is more that we can and must do.
This evening I want to set out an agenda for this autumn that responds to recent events and addresses their underlying causes.
First and foremost an international agenda, because this is a global crisis.
But because Britain was one of the biggest contributors to the global crisis, also a domestic agenda to build a new model of economic growth and play our part in a successful global economy.
There is no shortage of international economic activity over the next few weeks.
I will be going to a G7 meeting later this week, ECOFIN next week, the annual meetings of the IMF the week after, and more G20 meetings of finance ministers and heads of government in October and November.
What the world needs is not more meetings, but meetings that produce results.
As I said in a joint article three weeks ago with the finance ministers of Singapore, South Africa, Australia and Canada,
global co-ordination in the recovery is inevitably harder than co-ordinated reflation at the peak of the crisis because the necessary reforms are more difficult to achieve and sustain.
The Governor of the Bank of England is fond of using sporting analogies to explain economic arguments, but I don’t want to allow him a monopoly.
So let me explain the differences between the first phase of the crisis and the phase we are going through now.
Global coordination in the first phase was like a tug of war – the crucial thing was to get everyone pulling in the same direction.
Coordinated monetary stimulus through cuts in interest rates and quantitative easing, fiscal loosening by those who could afford it, and the use of taxpayer support to stabilise banking systems were all designed to support short term demand and avoid a deeper recession.
Two years on and the challenges are different and more varied.
A debt crisis in the banking sector has evolved into a generalised crisis of sovereign, banking and private sector debt.
If we simply repeat what we did in 2008 and 2009 without addressing the underlying cause of this crisis – excessive levels of indebtedness – we risk making things worse, not better.
So the game has changed and become more complicated.
Global coordination now is like a football team: everyone’s role needs to be suited to their positions and abilities if the team is to be successful.
We won’t win anything if we all just charge ahead in the same direction – indeed we’d just let in goals at the back.
In particular, in many countries we would put at risk the low interest rates and supportive monetary conditions that are so crucial in recovering from a debt crisis.
So we need a differentiated global response, with each country’s role calibrated to its economic situation.
The shape of that response should be clear.
First, the debt crisis needs to be confronted head on – by tackling the debt.
Those countries with large budget deficits that face significant fiscal risks – including the UK with one of the largest deficits of all – must continue to set out and implement credible deficit reduction plans that will get debt as a percentage of GDP onto a declining path.
It’s crucial to remember that simply announcing deficit reduction plans is not enough – talk is cheap.
In order to be credible, plans must be implemented and be seen to be implemented, and they must be rooted within credible fiscal frameworks.
In the Eurozone, member countries must follow the remorseless logic of monetary union and make more progress on institutional reform and fiscal integration.
This is the only way to convince financial markets that the euro has a stable future.
We have seen some progress on this front over the summer, but now what has been agreed needs to be implemented.
And where necessary, credible fiscal consolidation should be accompanied with credible action to strengthen banking systems.
If banking systems are allowed to remain impaired and fragile, then not only will financial instability persist, but the monetary transmission mechanism will remain broken, denying businesses and families the full benefits of low interest rates that are so crucial for recovery.
The greatest threat to sustainable growth is the global overhang of excessive debt.
So without these actions to get public and private sector debt under control anything else that we do will be at best a temporary fix and at worst will just make the problem worse.
At the same time, however, we need to support demand in a sustainable way.
This must be the second part of the international response.
We are all familiar by now with the need for a global rebalancing of demand.
Current account surplus countries should do more to rebalance their economies and encourage domestic sources of demand.
This will inevitably take time.
As I said last year, during this transition countries in different situations should take different actions
some countries are more able to boost global demand, but the best thing that countries with fiscal challenges can do is to show that they can live within their means.
For example, the US with its reserve currency faces different constraints from other countries, and I look forward to hearing President Obama’s proposals later this week.
Christine Lagarde, the new head of the IMF, makes the same point – and she will be in London on Friday to join me in a roundtable discussion ahead of the G7 meeting.
This global rebalancing sounds simple, but turning analysis into action at the G20 has proved painfully slow, with amazing amounts of time spent on tortuous discussions about definitions instead of concrete actions.
The truth is that these imbalances in demand are a product of a globally integrated economy, but ultimately also have their roots in difficult economic problems within individual countries: entrenched patterns of demand and trade and fear of economic disruption.
What is needed is genuine political will on all sides.
And it will also be needed for the final element of the global agenda – a concerted effort to open up markets and reform our economies to make them more productive.
At a global level there could be no greater stimulus than renewed progress on global trade talks.
And crucially we need to improve the functioning and transparency of oil markets, to get oil supply up and oil prices down from their current elevated level.
This is the international agenda that we have been promoting for some time now.
It should form the basis for our international discussions this autumn.
And I will discuss this agenda with my Chinese counterpart, Vice Premier Wang Qishan, when we spend Thursday here in London at the annual Economic and Financial Dialogue, something China has with no other European country.
But our long-standing problems are home-grown as well as international.
In many ways our domestic agenda fits naturally with our international agenda.
First, as I have said, with a budget deficit larger than Italy, Spain or Portugal, we must stick to our deficit reduction plan.
As the IMF and others have pointed out, for an economy with a financial sector as big as ours, the potential for negative feedback loops from sovereign risk to financial risk and back again makes fiscal credibility even more vital.
We have earned credibility in the markets and safeguarded our triple-A credit rating that was on negative outlook when we took office.
This market credibility is not some abstract concept: families benefit from the lowest ever mortgage rates and companies are able to borrow and refinance at historically low rates.
For an economy as indebted as ours that is an absolutely necessary condition for recovery from a debt crisis.
That’s why in the months and years ahead we will do everything we can to keep monetary conditions throughout the economy as growth-friendly as possible – consistent with the inflation target.
As Andy Haldane of the Bank of England reminded us last month, the new Financial Policy Committee we have established has a vitally important mandate to ensure that financial regulation takes account of the economic cycle and does not exacerbate downturns or booms.
The Merlin agreement is already delivering more lending to SMEs.
And if there is more we can sensibly do to ensure that the benefits of low interest rates are felt throughout the economy then we will do it.
Of course, with a banking system whose balance sheet is some 500% of our GDP we have to make sure that our banks are successful but safe.
That is why we face what I have called the “British dilemma” – how to sustain a world beating international financial sector without putting our economy or our taxpayers at unacceptable risk.
That is why we established the Independent Commission on Banking and I look forward to its final report on Monday.
I want the City to be an undisputed global success.
This year, despite what the doomsayers said, London has again topped the global league table of financial centres.
We’re officially the number one place to do business – so let’s not talk ourselves down, instead let’s talk the City up.
Yes, we need to improve London’s infrastructure, but let’s remind people of the multi-billion pound Crossrail link – the largest urban infrastructure investment in the western world today.
But I want the City to be just one of the many success stories of the British economy.
For that to happen we’ve got to work hard to have a private sector that competes, that invests, that exports.
In the modern age that is the only route to high quality jobs and lasting prosperity.
We have proved that we are prepared to take political risks to promote long-term growth.
When we chose to cut tax rates, we cut business taxes.
We changed the taxation of overseas earnings to bring multinationals back to the UK.
We are fundamentally reforming the welfare system to promote work.
We are transforming the education and student finance systems.
These are hugely controversial measures that most governments have shied away from for too long.
These decisions don’t win me any votes – but they are right for our economy and our country.
We are cutting regulation and red-tape.
Investing in broadband.
Putting more money into transport – even in these straitened times.
There is much more that we can do, and the global challenges we face make it even more important that we tackle the issues that might be thought too difficult in normal times.
I need your support against the vested interests who will oppose us almost every step of the way.
Take planning – a fundamental problem that almost anyone who has looked at the UK economy says is crucial to raising UK growth.
Our reforms are meeting predictable opposition.
The business community must continue be a voice for these reforms.
If I can be candid with this particular audience – I don’t just mean during the week here in London – I mean at the weekend too.
And let me put it this way – nobody should campaign for a new underground railway here in London but against a high-speed overground one outside London.
We need to take pro-growth decisions just as difficult as the decisions we have taken to tackle our deficit.
Around the world people are calling out for political leadership and decisive government.
Where leadership is lacking it is undermining confidence.
Where political systems are paralysed it is spreading instability.
Here in Britain we faced potential political paralysis last May with a hung Parliament.
But this Coalition Government came together in the national interest to provide the strong leadership that Britain needs.
That leadership is now as strong as ever despite the global financial storm.
So with your help we will stick to the plan we have set out, take a lead in the global debate, take the difficult decisions required to support growth, and set Britain back on the path to prosperity.
Thank you very much.