Monday 22 March 2004
[check against delivery]
I wish to thank Goldman Sachs not only for the opportunity to address you today but also for their contributions to the wider community. I understand that last year over 15,000 of your employees each contributed at least a day of their time to charitable and community activities - something that you mandate as a company. I am also delighted that in the context of your wider giving your company has recently agreed to fund one of our City Academies.
What is being done here at Goldman Sachs, indeed the emphasis placed by more and more companies on corporate social responsibility symbolises the recognition that prosperity is best achieved in an inclusive society.
The essence of the Government’s economic policy has been to put economic and social policy in harmony; or enterprise and fairness together, as the Chancellor puts it. The simple premise is that stability in economic management is right but only a foundation; entrenching that stability for the long term requires a paradigm shift in how we develop the creative potential of our workforce.
To achieve that, it is necessary to enlarge opportunity beyond a small winners circle; to give what used to be the prerogative of the top 25% of the population - access to excellence in education, to all. Every unemployed person, every long-term benefit claimant who could work, every unskilled or under-skilled worker is part of the nation’s human capital squandered.
However, we recognise something else. The investment in education and science needs to be used effectively for today’s world, personalised to each individual, not mass education delivered uniformly. So investment must be accompanied by reform. And the economy in which those talents are then to be put to work needs to be open, flexible and conducive to enterprise and wealth creation.
Last week’s Budget demonstrated the clear unity of purpose across Government. This is the British path to prosperity: to keep our hard-won economic stability, but then to add to it, the investment allied to reform in education, science and technology, not just in our schools but across our workforce, that is the best guarantor of opportunity and security in a changing world.
Take this path and in the future Britain can be the most competitive and successful economy of its size in the world.
We should never forget the purpose of economic policy is to make people better off. I am proud we have lifted so many families out of poverty. But I am delighted too we have more successful entrepreneurs in Britain than ever before; and to have seen living standards for the average family rise by £26 per week since we came to office; of pensioners by £25 per week.
According to the OECD, in Purchasing Power Parity terms the UK was the poorest country in the G7 15 years ago. Even in 1997 we were second from bottom. Today we are the third richest, behind only the US and Canada.
But to continue and deepen this improvement, we need to keep up with the economic challenge posed by a changing world. Hence what I call the six economic fundamentals for our economic policy, now and in the future.
This is an economy with:
- stability in macroeconomic management
- a competitive tax regime
- flexibility in labour, capital and product markets
- one open to globalisation, rejecting protectionism
- long-term investment and reform in the education, science and technology base of the nation
- a strong commitment to social justice, to removing the causes of poverty and underachievement.
My argument to you today is this: that these are the rules by which globalisation is played; they do not conform neatly to traditional left/right political labels; but they are the only way for a nation like Britain to succeed.
The point is these 6 fundamentals are linked. Without stability, we would not have had the finance for investment. Without flexibility, those benefiting form the increased access to knowledge, would not be able to use it creatively. Without an open economy, the trade and transfers of people, capital and technology we rely on, would not materialise. Without opportunity for all, we waste talent and fund idleness.
I am sometimes asked what I think has most changed about myself in seven years of being Prime Minister. There are obvious alterations which you can tell by looking at me. But in terms of politics, the answer is a growing sense of the speed of change. I feel it when I analyse the threat of global terrorism and chaotic, unstable states that develop or proliferate nuclear, chemical and biological weapons. I feel it in a different context when I analyse global economic trends.
In the last two years, I have made reasonably extensive visits to India and China. Both made a profound impression on me. I remember sitting in a brand new state-of-the-art university complex in Bangalore in southern India, talking to leading biotech entrepreneurs, many of them women academics that had branched out into business, confidently predicting they would beat Europe hands-down in the biotech business within a few years. And they weren’t alone. India, as a whole now turns out 220,000 science and IT graduates every single year. When I returned home, people asked me about the poverty of the country, how shocking it was and so on. There is indeed still much poverty in a nation of 1 billion. But what had shocked me was how fast it was changing.
Then last summer I visited China. I had the same experience. But I noticed something else. Whereas ten years before on a visit, I had also seen new buildings in Shanghai, the same determination to get into the western way of business, but had found it a little like people wanting to learn a new language but not quite sure how to do it; this time, there was an assertiveness, again, as in India, a confidence that showed they were now not just speaking the language but doing so with a fluency and comfort equal to any first world nation. More than that, a readiness to push it further, expand its possibilities, that stood in sharp contrast with what we see in parts of Europe.
Above all, in both countries I was acutely aware that if I returned this year, I would be surprised at the change from last year. What is happening is very clear. Globalisation is transforming the world economy; not just because of changes in methods of production and technology but because mass popular culture, communication, customer preferences mean a perpetual revolution in new business opportunities and challenges. It is not the scale of change alone that is remarkable; but its pace.
Through this change comes greater possibilities for people - new consumer goods, travel, tastes, experiences - but also a deep and abiding insecurity. Over a period of thirty years in County Durham, where my constituency of Sedgefield is situated, the mines gradually closed, having been there for well over a hundred years. Communities had grown up around them, places where people lived and worked and raised their families for generations. Now, just within a few years, Fujitsu, one of the great Japanese hopes of inward investment, has set up its factory in my constituency and closed it, when the microchip market collapsed. In London, as thriving a capital city as any in the world, it is estimated that one in nine workers come from overseas. In Goldman Sachs, 66 different nationalities make up your workforce.
The financial sector, accounting as it does for 5.1% of UK GDP and providing over 1 million jobs, is a vital part of this new economy. While the UK is only 7% of the world economy, you account for over 20% of the world’s cross-border lending. Finance alone is now responsible for a fifth of the nation’s annual IT spend.
In this whirl of different businesses, cultures and changes, people look for some security, for some fixed points. They know they can’t alter the way the world is but they want help to get through it.
During this time the role of Government has itself undergone a subtle but definable change. In the 1980s, those on the right correctly identified the obstacle of Big Government as holding people back: too much bureaucracy, too high taxes, too much trade union power, insufficient room for individual initiative and enterprise. Those on the left struggled to come to terms with that emerging reality. But as the pace of change quickens and a new reality in turn emerges, people look to Government to be more than minimalist; not to revert to planning, picking winners, or job protection through industrial action; but Government there to enable and empower people to survive and thrive in the era of globalisation. To compete effectively, we need to be more productive; more able to adapt to change; better able to move into higher value-added goods and services as low labour cost countries themselves develop up the production ladder. The recent McKinsey’s report on outsourcing showed, contrary to every instinctive reaction, that such methods are not merely necessary for business to survive but can increase the provision of jobs, if the extra competitive advantage is properly used. Yes, China competes with us and can take jobs away. But our exports to China have also trebled since 1996, creating more jobs here.
However, to learn these lessons and apply them, people need to know Government itself understands the challenge they are facing and is acting to help them meet it.
There are three very obvious fundamentals in the era of globalisation. First, you need macroeconomic stability. Bank of England independence and the fiscal rules we introduced in 1997 were long overdue. They have helped us weather the economic downturn better than any other leading industrialised nation. They have provided low mortgage rates, low inflation and sustained levels of growth that would have been the envy of earlier Governments. We also remain committed to British entry into the European single currency provided the economic conditions are met and it enhances our stability. The increased public spending is also, apart from being necessary in itself, at the right time in the economic cycle. But we have kept it within certain prescribed boundaries and maintained overall borrowing at well under the 40% and more of GDP we inherited.
I know, too, business worries about whether money invested by Government delivers the results it should. There are some bizarre measurements of public sector productivity which is why the measurement of it is being reviewed by the O.N.S. For example, if you halved the number of teachers, you would, according to present measurements, double productivity in education. Technically true but nonsense in terms of outcomes. Just take one example in health care of how extra money is achieving results.
Coronary heart disease is responsible for the loss of 35 million working days at a cost to the UK economy of £3.7 billion.
Our extra investment in health means that while not so long ago it was not uncommon for patients to wait up to two years for a heart operation. Now no one waits over nine months, and we aim to get this down to three months next year.
Shorter waiting times means shorter absences from work.
And we are doing more to prevent heart disease. 1.5 million people are now getting cholesterol-lowering drugs from their GPs. For people with diabetes that means a reduction in heart attacks and strokes by a third, preventing 10,000 heart attacks, strokes and major heart operations each year in the UK.
The result? A 23% fall in premature deaths from heart disease. Saving business and the taxpayer money.
This investment within proper limits is necessary and efficient in the long-term, and can help stability.
Secondly, we must maintain a tax competitive economy. Again it is worth pointing out that taxes as a proportion of GDP under this Government, have been lower than in most of the years Mrs Thatcher was Prime Minister and one still way below the EU average. Just as we have already made our choice and cut long term capital gains tax from 40 pence to 10 pence, small business tax from 23 pence to 19 pence and corporation tax from 33 pence to 30 pence, I promise we will continue to look with you at the business tax regime so that we provide incentives for investment in wealth creation and rewards for success - and make and keep the UK as the best place for international business.
The third obvious rule is to have a flexible economy where labour markets can respond to changes in the world economy and where business is able to prosper without excessive constraint by bureaucracy or regulation.
Appropriate regulation should stimulate competition, create a level playing field, establish minimum standards and ensure the proper rule of law. That is good for both business and social welfare. Bad regulation - and in this regard excessive regulation is bad regulation - impairs wealth creation as well as corroding welfare.
It is for this reason that, in the budget, we announced that working tax credits were to be paid directly to recipients and not via businesses. In addition we have recently increased the audit threshold from £1 million to £5.6 million of annual turnover, releasing an additional 69,000 businesses from this requirement.
All new proposals affecting businesses are now required to have a regulatory impact assessment (RIA) evaluating their economic, social and environmental effects. RIAs that do not meet the required standards can be referred to the National Audit Office. We have also introduced a standard twelve-week consultation period for any new regulations.
The World Bank recently published a study entitled "Doing business in 2004" in which it demonstrated that the UK was one of the most lightly regulated countries in the world, coming in the top 10 countries out of 130 countries examined. So we are not doing badly. However we are committed to doing better. During the course of our consultation with the country in preparation for the next Manifesto, we are looking at further measures to stimulate a better regulatory climate, including the policy now adopted in Holland of setting a specific benchmark for the reduction in regulation year by year.
The flexibility we need is not just in Britain but in Europe too. The best contribution pro-Europeans can make to the cause of Europe is by ensuring that in Europe we face up to, rather than duck, the difficult decisions about economic reform - resisting the kind of inflexibility being added into directives like the working time directive, the agency workers directive, the investment services directive and the transparency directive, as well as insisting on tax competition not tax harmonisation.
In addition, we can learn from Europe the necessity of reducing the chronic legacy of neglect of transport infrastructure, a critical element in producing a more flexible and productive economy. We have a £180 billion public/private investment underway, including the biggest overhaul of the Tube for 100 years. But if we are to do all of this and new projects like CrossRail we will have to find new and imaginative ways of spreading the cost of long-term finance.
Thirdly, we have to take on and defeat the resurgent voices of protectionism. Globalisation presents us with a choice: embrace it and make it work for us; or try to thwart it. This is the choice hanging over the WTO round. Without hesitation, we believe in embracing globalisation and making it work.
According to the UN, the past decade has seen 30 countries accounting for nearly half the world’s population grow real income per head at over 3% a year. Never before in human history have so many people advanced so rapidly.
Of course for the most vulnerable nations, engagement with the world economy has to be nuanced and staged - an approach to development that DFID has championed. However this does not take away from the case that the engine driving the world’s development has been the willingness of more and more people to embrace the market economy and its international dimension - globalisation.
This is a truth that should especially not be lost on Britain. This island nation built its fortunes on trade; on our willingness to open up to the world. As a result we have benefited immeasurably from the attendant flow of goods, people and ideas.
Protecting industry and commerce from the inevitable is impossible, expensive and damaging. On the other hand if we set out to build an ever more open, flexible economy endowed with a well-educated and skilled work force we will end up benefiting from the exchange.
When Germany and the rest of the continent industrialised, there were those on these shores who feared the worst. When the United States began its long ascent, there were protectionists here aplenty. When Japan rose, we were also plagued by worries. In each case protectionism was damaging and the very process of dismantling barriers made us all richer. Properly conducted trade is an activity in which both sides can and do win.
These basic rules - macro stability, competitive tax rates, flexibility and free trade - are clear. Break them and your economy suffers. They used to be more naturally associated with right-wing politics. Today, they are part of the agenda of a modern progressive centre-left. As Gordon Brown showed last week, it is now axiomatic for the Government to be pro-stability, pro-business, and pro-enterprise.
However, he showed how they are necessary but insufficient for survival.
Fifth, we need radically to re-shape our scientific, technological and learning base.
The social purpose of this is obvious. But the reasons for the decision are as much economic as social. Indeed increasingly there is no difference between the two. If we want to compete, we have to become better and better educated and skilled; and not a few of us, but the broad mass of people. The fact that it also produces greater social justice and cohesion is a strong political motivator, of course; but the practical justification is economic.
Over the past few years, we have closed the productivity gap with Germany and narrowed it with France, Japan and Canada; but we still languish significantly behind the USA.
I have described the impact of globalisation. But what are the transforming forces driving it?
One is the creation and use of new knowledge. This has always been part of the story of economic progress, from the days of the spinning jenny to the invention of electricity. But today it explains anything from 50-80% of economic growth, and how well any nation creates, manages and uses knowledge has become the most decisive factor shaping its wealth and prospects.
Within every industry - manufacturing as much as services - value now comes less from raw materials and the physical processes of production and more from the knowledge embedded in products and services, the smartness with which business is organised. In a modern car for example, a third of the value now comes from the computing, software and electronics. Older industries like steel have been refashioned by the development of premium products with: again knowledge creating value. New industries like e-shopping, after bumpy starts, are now transforming how markets operate.
The other transforming force is the rise of new connections - the globalisation of trade, money, knowledge and ideas which has transformed every aspect of daily life, from the food we eat to the news we hear, from currency markets to religions.
For all nations these twin forces pose an inescapable challenge: how to create knowledge, how to use it, how to tap it, and how to transform it into wealth and jobs in a fiercely competitive global environment.
Past British governments have at best a mixed record. Governments in the 80s and 90s allowed R&D to fall as a share of GDP - alone of the major OECD economies. They let our science infrastructures fall into disrepair, while other countries stormed ahead.
The Budget has successfully both kept to the fiscal rules and secured long-term funding for education. That will now rise over the coming years from the 4.7% of the GDP we inherited in 1997 to 5.7% by the end of 2008, from one of the lowest in the EU to one of the highest. The science budget will also be given a significant boost which, in time, will take it to almost 3 times the level we inherited.
But we know it is not enough simply to spend the money. The system in which it is spent has to be fundamentally reformed.
We are now investing in pre-school education - we have doubled spending on childcare and invested heavily in nursery education. All 4 year olds and 3 year olds have access to free nursery places. Sure Start is helping roughly 400,000 kids in poorer areas. We want to see it expanded across the country because we know that good quality early years education has a crucial impact on children’s future opportunities and development.
Standards of literacy and numeracy in primary schools have improved significantly - overall 75% of pupils reach a good standard in English now - up 10 percentage points since 1998; in maths, the improvement is even more striking - up 14 percentage points to 73%.
The traditional comprehensive is being remodelled so that we create individual schools, with greater independence and freedom, and a distinct ethos that allows them to tailor education round the needs of the individual pupil. Over 50% of secondary schools now specialise in a particular subject, including 77 which have a business and enterprise specialism. Our new Academies are showing how the specialist model can be developed further. The results in these schools bear testimony to the importance of the shift from comprehensive to specialist schooling. The capital budget for schools - 7 times that of 1997 - is going to be used to lever in a change so that all schools in time become specialist or Academy schools.
University finance is being reformed so that we can educate more students better and so that no student or family has to find money for up-front fees, but rather makes a contribution as a graduate to university finance linked to their ability to pay.
However, we are also now planning to change the way we treat vocational education.
Poor schooling in the past has left us with a legacy of many millions without adequate basic skills - 7 million without the level 2 qualifications needed as the foundation for many jobs. Since 1997 more has been done than ever before in our history - courses available, marketed; basic skills made a condition of welfare benefits; a clear entitlement for everyone to reach level 2 skills. Half a million people have gained basic skills in the last three years alone. But we still have more to do.
We still see a larger drop out rates at 16 and 17 than our competitors - a quarter of 15-19 year olds are not in formal education. To put that right we are putting in place a system of personalised pathways with the right balance of academic and vocational training from 14 through to 19: changing the curriculum to mix practical experience and learning; a sharp increase in the number of 14-16 year olds studying vocational subjects; and a continuing growth of, and improvement of 230,000 modern apprenticeships from 16 onwards in thousands of businesses; all combined with financial support to reduce the appeal of a job at 16 over the hard graft of learning that will pay far more in the long run, so that effectively we raise the educational leaving age from 16 to 18.
We need a fundamental change of culture throughout industry and society, so that learning takes place in every workplace, and every household, and so that every small business and every employee understands that in the new economy, skills are a surer way to wealth. Learndirect has started to achieve this - making thousands of courses easily available online, face to face, in every community across the country. The qualification system is being made simpler. Sector Skills Councils are being created involving employers in deciding on the critical priorities for productivity in each sector to drive how the LSC plans funding and provision.
But the core of the new knowledge economy continues to lie in science and technology. Vast new industries are taking shape around the convergence of information technology, biotechnology and nano-technology, in fields like proteomics, biosensors or the next generations of interactive entertainment - and it is essential that we can compete.
We start with many strengths. We have some outstanding high-intensity knowledge industries - pharmaceuticals, computer games, high performance cars, advertising, design and film, a strong science base, powerful industry clusters, and a potential lead in new industries like grid computing. Our biotechnology sector leads Europe in terms of capitalisation, revenues and products in the pipeline.
But I am in no doubt that we will need to accelerate our efforts if we are to remain at the forefront in the ferocious competition to dominate these new industries.
This is where some of the most intensive competition is taking place - high technology manufacturing rose from around 10% of world trade in 1980 to over 25% by 2000, driven in particular by the dynamic Asian economies. And it is where some of the greatest productivity advances are being realised.
But we are not doing as well as we should be. Governments cannot invent and they cannot command the creation of competitive industries. But active government can make a decisive difference, if public investment in basic science, strategic research and technology transfer is allied to vigorously competitive markets. This, surely, is the lesson of US dominance in successive waves of information technology, and it is the lesson of the smaller countries which have done so well over the last two decades.
So alongside the progress in schools and universities we will provide steady real increases in public spending on science, with particular emphasis on the infrastructures for science in universities and elsewhere; new incentives for business investment through the R&D tax credit - which I’m glad to say is being taken up by thousands of SMEs as well as big companies; new encouragement for science in universities, which is already paying off in the form of record numbers of spinoffs.
This summer we will set out a 10 year commitment to Science and Innovation, including a rising share of GDP to be invested in science by government. We will also set out a clear technology strategy for making the most of the roughly £7 billion which government already invests in R&D each year, as Government procurement.
Science and technology are no longer optional extras to be cut back in hard times. They are the wellsprings of future prosperity.
Finally, it may seem odd to state that social justice is an economic fundamental but today it is. Full employment, the development of career opportunities not for a few at the top but throughout the workforce; the reduction of the economically inactive - still 3 million in the UK today; all of these contribute not just to a more just society but a more productive economy. The changes we are making through the merger of benefit and employment services and additional welfare reform, especially in the area of incapacity and housing benefit, will form a key part of any third term programme. The New Deal will be maintained and expanded. The obligation to work if people can, alongside help to do so, will be deepened. 7 years ago we spent 42p in every £ of public spending on the costs of economic and social failure in interest payments on debt and unemployment benefit. Today the figure is 25p, a remarkable reduction. But we can do better.
In the 1980s there were changes made to the British economy that were important in improving the efficiency and flexibility of British industry. Much of that was done by dismantling barriers to free enterprise. Today, however, we need, whilst preserving that legacy of a previous Government, to invest in our human capital for economic and social reasons, in order to stay ahead and prosper. This is the new economic model, at least for progressive politics. The greater the opportunity we provide for our citizens, the greater their security will be in a rapidly changing and so insecure world. Globalisation is not our enemy but our friend, if and only if we are prepared for the journey it will take us on. That is the challenge of the future, which we are determined to overcome.
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