Rachel Reeves MP speech to the Social Market Foundation (London, Monday 7 March 2016) entitled ‘Budget 2016: Opportunities and risks for the UK economy‘. Check against delivery.
Listen to a podcast of the speech here:
Let me start by thanking Emran and the Social Market Foundation for hosting today’s event.
And I want to thank you all for coming.
As we approach next week’s Budget, much of the coverage and commentary is being conducted through the prism of George Osborne’s positioning and prospects in the Conservative Party.
My fear is that this will be the Chancellor’s focus too.
And my argument today is that the tactics of the Tory leadership contest is a dangerous distraction from the issues we ought to be confronting.
For as the Chancellor prepares to set out his eighth budget statement next Wednesday, we – and he – should be taking a long hard look at his record, and at the challenges the British economy faces over the coming years.
For the reality is the Chancellor has failed on the key tests that he set himself.
Not only has he broken his promises on the deficit, time and time again.
He has also failed to deliver the stronger, better balanced economy that is essential to securing good jobs and rising living standards for the long term, as well as keeping our public finances on a sustainable footing.
The results of that failure increase our vulnerability to current risks in the global economy,
and pose a serious threat to our long-term prosperity.
And it is on these underlying weaknesses in our economy, and the need for a Budget and a plan to address them, that he should now be concentrating his mind.
OPPORTUNITIES AND CHALLENGES FOR BRITAIN
My starting point is the immense pride we can take in Britain’s economic history,
and the enormous potential we see all around us today.
British businesses, workers and entrepreneurs lead the world in so many areas – from fashion and film production to aerospace and pharmaceuticals.
Surveys show that consumers in key export markets – from North America and Europe to the emerging economies of Latin America and East Asia – are more likely to buy, and pay more, for goods and services that they know have been “Made in Britain.”
And our leading position in the new digital economy – from cutting-edge tech firms to small start-ups and self-employed workers using online platforms to turn their talents and ideas into growing businesses and rewarding careers – gives us a real chance to prosper in what some are calling the “fourth industrial revolution” driven by huge technological advances.
But we also need to be realistic about the threats we face.
The question mark hanging over Britain’s membership of the European Union – and all the jobs, exports and investment that depend on it – poses the most immediate risk to our stability and future prosperity.
But beyond this there are deeper and longer term challenges.
For the truth is Britain is not all it could be.
The vibrancy I have pointed to is often the exception and not the norm.
Of course we welcome the fact that the economy is growing and unemployment has fallen.
But too many people are not getting the chances they deserve to make the most of their potential.
Too many workers are stuck in jobs that fail to fully utilise their talents and skills and offer little prospect of development or progression.
Too many people are not working and earning as much as they would like, or locked out of the labour market by childcare costs or other barriers.
Too many employers face obstacles to their expansion, such as inadequate infrastructure or difficulty finding staff with the right skills.
Too many exporters can’t access the finance necessary to sustain the continuous innovation needed to seize the opportunities that new technologies and markets can bring.
These are the stories of untapped promise and unfulfilled potential that lie behind our growing productivity gap with other advanced economies, and the weak wage growth that has dragged down living standards.
And the result is the alarming weaknesses and frightening imbalances building up in our economy that threaten our future prosperity, and increase our vulnerability to future shocks and risks.
THE CHANCELLOR’S RECORD
George Osborne knows all this.
In his words, “the recovery will only be sustainable if it is accompanied by an internal and external rebalancing”, toward “a new model of economic growth that is rooted in more investment, more savings and higher exports”.
The trouble is, he said this in 2010.
What does he now have to show for seven budgets, five autumn statements, and three spending reviews?
Since George Osborne promised to “increase saving … as a share of GDP”, the savings ratio has fallen from nearly 12 per cent to less than 5 per cent.
Meanwhile, the recovery he now boasts of is built on rising household debt – with growth forecasts relying on an annual household sector net deficit set to rise from £40b to almost £50bn by the end of this parliament.
Since George Osborne promised to “increase exports … as a share of GDP”, exports have actually fallen.
The OBR’s latest forecast is that Osborne will miss his target of exporting £1 trillion worth of goods and services by 2020 by more than a third.
This is partly because, despite promising a “march of the makers”, our manufacturing sector, which Osborne himself said was “crucial to the rebalancing of our economy”, has been in recession for the past year.
And let us turn to investment, a key driver of our export performance as well as productivity, employment and pay.
The latest comparative data on business investment as a share of GDP places the UK second last among G7 economies, and 27th out of 29 OECD economies.
On public investment we rank 21st out of 30.
Perhaps most worryingly of all, taking both private and public investment into account, the IMF expects the UK to fall further behind over the years ahead.
Of course, the Chancellor would protest at this point that he has reduced the deficit and is now starting to bring down the debt as a share of GDP.
And let me be clear that I regard this as just as important an objective as any other.
But despite the painful, unfair and often damaging spending cuts and tax rises inflicted, he has been forced to tear up his timetables and targets again and again.
And the lesson of the last five years is that we will never be able to get our public finances fully under control unless we are also building an economy that can deliver the sustainable and broad-based growth in productivity, exports, wages and profits that our tax revenues depend on.
For just look at what the future holds if we don’t improve on the Chancellor’s performance.
The Office for Budget Responsibility currently expects the savings ratio to remain below 5 per cent for the rest of the current parliament.
In 2020 exports will still count for a smaller share of GDP than they did in 2010.
And the shortfall of British business investment relative to the OECD average, which since 2010 has grown from £54 billion a year to £66 billion a year, will continue to widen.
Now one would hope that, if there was ever any serious intent behind his early rhetoric, the Chancellor would be grappling with these issues.
But it looks to me like he has just given up.
And the truth is, indulging a tired and dangerous Tory agenda of state-shrinking, laissez-faire, trickle-down ideology was always more important to George Osborne than either deficit reduction or economic rebalancing.
And on March 16 I fear his mind will be more focused on outmanoeuvring the outgoing Mayor of London, and playing to the backbenchers behind him, than getting to grips with the challenges our country faces in the years ahead.
By putting Britain’s membership of the European Union in question, this Government has not only exacerbated the fragility in current financial markets and increasing uncertainty that, according to a worrying set of figures released last month, showed business investment switching into reverse again in the last quarter.
They have also placed our economic policymaking at the mercy of internal Tory politics, reducing critical decisions concerning our country’s future prosperity into moves in an inward-looking and essentially short-sighted game being played between the Chancellor and his rivals.
So I want to do what I can to refocus debate on what matters most: whether we are taking the right decisions to protect ourselves against risks and prepare for the future by building an economy in which we make the most of everyone’s talents, ideas and hard work to generate a broad-based prosperity in which everyone can share.
I believe we should be raising our sights and aiming higher.
And I want to offer just a few proposals as examples of what I mean on incentivising saving, supporting working families, and boosting investment in growing businesses and essential infrastructure.
First, the Chancellor should do more to support saving by people on ordinary incomes by replacing our unfair system of pension tax relief with a flat rate of 33 per cent.
This would be simple and transparent, allowing us to rebrand tax relief as a two-for-one offer – for every £2 you put towards your pension, the government contributes another £1.
It would be fairer to those on lower incomes, strengthening incentives to save for a broader range of people.
And it would maintain the total level of fiscal support for saving.
It is now being reported that the Chancellor has caved to pressure from his own backbenchers to leave the current unfair system unreformed.
But to do so would be putting his own short-term political ambitions before the long-term needs of this country for the fundamental reform needed to get more people saving.
Second, to raise productivity and employment rates across our economy, we need to do more to support parents of young children who want to work and make their contribution.
Far too many feel forced to drop out of the workforce, or limit themselves to less fulfilling roles that make little use of their skills and experience.
But having just returned from my second period of maternity leave, I know how parents want childcare to be of the highest quality – and for too many the costs are just prohibitive.
So I believe we must move towards a system of universal free childcare for all working parents of pre-school children.
At a time of tight public finances, this will be a challenge.
But it is the right priority.
And the Chancellor could make a start by cancelling the cut to inheritance tax that is due to be phased in from next year.
This is set to cost almost a billion pounds a year, with no benefits going beyond the wealthiest ten per cent of families, and will do nothing to address the inequalities of wealth and opportunity that divide and hold back our country.
I believe this money could be much better used to take a big step towards the universal free childcare we need – for example, by creating a universal entitlement to all working parents of children aged two.
It would help many more families than the inheritance tax cut, as well as expanding our workforce and making it easier for businesses to recruit the talent they need.
Third, we need to reduce the deficit and the debt.
But we also need to be able to respond to events.
We know that economic uncertainty – some of it global, some of it, as I have said, of this government’s own making – are weighing on investment and exports.
But if slowing growth projections mean that further spending cuts or tax rises would be needed to meet the Chancellor’s surplus target, then he should rethink his target, not add to the squeeze on families, businesses, and public services.
This, after all, is what the Chancellor did repeatedly in the last Parliament, when his attempt to cut too far and too fast choked off the recovery that had started in 2010.
To wait, as his current target requires, for growth to fall below a threshold of 1 per cent is arbitrary, potentially counterproductive and, in the views of most economists, simply not credible.
Fourth, with interest rates at unprecedented lows, investment that we know is needed can be done more cheaply now than at any point in the past or, quite possibly, at any time in the future.
Gilt rates have fallen even further since the Autumn Statement – a drop in borrowing costs that, according to Capital Economics, could gift the Chancellor a fiscal windfall amounting to as much as £21 billion over the forecast period.
I propose, as a starting point, that any such windfall should be recycled into initiatives and investments that will raise the productivity and growth potential of the British economy for the long term.
This would certainly be in line with the latest recommendations of the OECD, whose Chief Economist said last month that:
“With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability.”
The focus, according to the OECD, should be “policies with strong short-run benefits and that also contribute to long-term growth.”
Let me say a bit more about what that might mean in the UK.
One key area for action, as I have already indicated, is aiming to raise levels of business investment by addressing problems with access to finance.
Part of the answer to this is addressing distortions in the tax system which favour bank borrowing over equity capital – which makes life harder for innovative firms with high growth potential, and arguable encourages dangerous levels of leverage for the corporate sector as a whole.
But I believe there is also a role for active government stepping in to stimulate and open up capital markets.
The British Business Bank, established by Vince Cable when he was Business Secretary, partly in response to proposals from Labour for such an initiative, has already shown it can make a difference.
But it remains a small scale initiative, and now risks falling into neglect as I fear may happen now the Business Department has fallen into more unreconstructedly Thatcherite hands.
I believe it should be scaled up and empowered to do more, learning from the example of the US Small Business Administration, and, in combination with a more radical agenda for devolving power to cities and regions, Germany’s network of Sparkassen banks.
It is also not hard to find areas where additional infrastructure investment would quickly bring benefits to British businesses and their employees.
Reversing recent cuts to investment in flood defences is obviously a matter close to my heart, having seen the devastating impact on small businesses in my own constituency of the flooding we saw in Leeds on Boxing Day.
So too is the plight of carbon capture and storage projects, one of them sited in Yorkshire, from which the government pulled £1bn of critical capital funding in November – which the chair of the cross-party energy and climate change committee described last week as “the latest in a series of snap decisions that have damaged confidence in the Government’s energy policy.”
And the government must get behind the plan published today by Transport for the North for the increased capacity and connectivity we need to make a reality of the Northern Powerhouse – such as electrifying and adding carriages to the Leeds-to-Manchester rail line.
But as well as environmental, energy and transport infrastructure we should be doing more to get behind our digital economy.
Our digital infrastructure is critical not only to cutting edge tech firms, but countless rural and home-based entrepreneurs and employees needing to collaborate and market across the country and beyond.
According to the Institute of Directors, faster internet connections would raise productivity in 78 per cent of firms, encourage 34% to invest more in their business, and prompt 13 per cent to take on more staff.
But we have some of the slowest and patchiest broadband in the developed world, and don’t even make the top fifty when it comes to the latest “fibre-to-the-building” broadband which some see as the key game changer when it comes to using digital technology to unlock the creative potential of all our citizens.
All of this should, of course, be looked at by the National Infrastructure Commission now led by Andrew Adonis – another Labour policy I am pleased to see being implemented.
But the worry must be that the priorities identified by the Commission will remain just a wish list if they are not backed up by resources and action.
The latest infrastructure pipeline, published in July, showed just 114 out of 565 projects “in construction”.
November’s Autumn Statement brought more of the rhetoric and reannouncements we have come to expect, but as Deloitte said at the time, we are not seeing the “significant shift in infrastructure in this parliament” that “we had been led to believe we were going to see”.
This is another area where I believe George Osborne’s fiscal rules are too crude.
George Osborne’s only commitment on capital investment is to keep it constant as a share of GDP.
But this simply locks in the cuts of the last five years – during which investment has fallen from 3.3% of GDP to 1.4%.
And it takes no account of the potential for well-targeted investments to make a positive contribution to fiscal sustainability through the net returns they can generate.
One way of reflecting this, recently suggested by the Institute for Fiscal Studies and the ICAEW, would be to empower the Office for Budget Responsibility or National Infrastructure Commission to identify infrastructure projects that could be expected to “generate positive financial returns (either directly or through higher tax receipts”.
This, as they say, would be “consistent with the principle …. of eliminating the deficit in order to reduce public sector debt” because it would distinguish, in an independent and transparent way, investment in projects “that are reasonably expected to pay for themselves”.
Such an approach could make it possible to empower the British Business Bank and the Green Investment Bank to raise private capital for commercial investments without putting their purpose at risk by privatising them, as the Chancellor is now bent on doing to the Green Investment Bank.
It would also create the possibility of establishing a broader National Infrastructure Bank, built from or alongside the Green Investment Bank, with the power to raise capital on private markets for priority projects identified by the Adonis Commission that would otherwise struggle to raise sufficient finance.
So my fifth and final proposal for today is that we should adopt a better set of fiscal rules that – subject to independent validation and monitoring by appropriate independent bodies such as the Office for Budget Responsibility or the National Infrastructure Commission – allow separate treatment of economic investments that can pay for themselves at the same time as raising our economy’s productivity and growth potential.
There are obviously other issues and areas of policy that I have not had time to address today.
But I hope I have succeeded in showing that there is much more we could and should be doing to strengthen our economy against present threats and to meet future challenges.
And I believe the proposals I have suggested would put our economy on a better path:
a flat rate of pension tax relief to support saving by people on ordinary incomes
- better childcare provision for parents who want to work, instead of planned cuts to inheritance tax
- the proceeds of recent falls in borrowing costs to be reinvested in initiatives to improve business’s access to finance and priority infrastructure projects identified by the Adonis Commission
- a fiscal framework that ensures we bear down on government borrowing and debt at the same time as enabling the British Business Bank, Green Investment Bank and a new National Infrastructure Bank to raise private capital for self-financing investments that can strengthen our economy and boost future tax revenues.
So let’s set a new course for our country.
Let’s make this a country where a young person leaving school needn’t feel worried about being stuck on a minimum wage job, but can feel excited about joining a thriving, world-class business.
Let’s make this a country where entrepreneurs and employers have access to the capital and connections they need to grow their markets and create more high quality jobs.
Let’s make it this a country where parents who want to work and keep up a fulfilling career can feel confident that their kids will be properly looked after.
Let’s make this a country where more people can look forward to a comfortable retirement because when they work hard the government is ensuring their savings are working for them.
Running through all the measures I have proposed is my belief that a stronger and better balanced economy means a fairer and more inclusive economy, and in the power and responsibility of active government to advance this:
- supporting everyone to save and prepare for their future, not just a few
- prioritising help for every family that wants to work and earn more, over tax breaks for only the wealthiest
- a government that steps up to the challenge of raising investment in innovation and infrastructure, so we can secure the improvements in productivity and competitiveness that future jobs and living standards depend on
My fear is that those are not George Osborne’s priorities because they are not the values of the Tory party on which his ambitions are focused.
Time and time again he has put his popularity with his own backbenchers ahead of the long-term interests of this country by ducking and delaying urgent decisions over airport capacity; by undermining investment in environmental industries and renewable energy; and now, it seems, by rowing back on the reforms needed to help more people save for their retirement.
If so, it makes it all the more important for all of us in the Labour Party to show that these are Labour values, and that our ambitions for the country are so much greater.