CON SP: SMF Speech

[Katherine West]

The Chancellor of the Exchequer today spoke at a Social Market Foundation event, where she laid our her three-phase plan for supporting the British economy through tough times

Thank you for the opportunity to speak today. The Social Market foundation has a long and privileged history of taking a hard pragmatic look at economic and social issues in Britain and offering practical solutions from neither the left nor the right. John Major called this his favourite think tank; fifteen years later Gordon Brown was writing articles for it; and here I am today speaking about our plans for the economy. With my own political history, perhaps this is the perfect place for me as well. 

It has been a turbulent year for me - and Chancellor is not a role I considered a likely calling at all. Nor is it a simple time to have your hand on the tiller of the Exchequer. The economic storms we face are more daunting than any that our country has faced in a generation or more. The old adage goes that when America sneezes the world catches a cold - we seem to be in a world now where an American bank had a sniffle and we have all ended up bedridden with the flu.

It is in these circumstances where the approach and framework that you bring to policy - pragmatic, principled, and sensible - is so valuable. This is no time for us to be fixated on ideology or dogma. What the British people need in this storm is stability, certainty, and practical support. The recent economic news has been hard, and the next year or more will be tough for many people. That the actions we have taken so far have made our financial system more robust is only a beginning, and it does not make the next period easy. Our job is to get people through that and get our economy to the other side with a plan for recovery.

So today I want to set out the three phases of how we are going to respond to this crisis: secure the financial system, cushion the blow of the recession on families and businesses, and reset and rebuild a fairer, greener and higher wage economy.

Phase 1 - secure the financial system

The first emergency phase of our response is the security of the financial system. We have come under attack for this from Opposition MPs - the former Shadow Chancellor included - but it is critically important for anyone with a deposit, a mortgage - frankly, a job - that our financial system continues to function and function effectively. 

That isn’t about bailing out billionaires. In fact, the way we have approached it so far is the opposite. When we nationalised Northern Rock, we cancelled bonuses and dismissed the executives that had run it into the ground. And our capitalisation scheme has shored up the financial system with minimal risk to taxpayer money.

We are not out of the woods, and it is very possible - no, likely - that we will need to take more action to secure the financial system. We will do whatever is necessary. With the current regulatory regime and state of the banking sector we inherited, it would be a gross act of national self-harm to allow a major bank to fail. But let me be abundantly clear. If financial institutions do end up needing taxpayer bailouts, it will not be easy for them. There will be no golden handshakes or farewells, no bonuses. And we will expect significant institutional change at any bank in that situation, just as we have at Northern Rock.

But I also want to give people a clear guarantee now that their savings and their money is safe, so there can be no question in the future. Therefore, I will set out to the House tomorrow reforms to the Financial Services Compensation Scheme that will guarantee substantially more of individual bank deposits.

Phase 2 - cushion the blow

The second phase of our response is to cushion the blow of the financial crisis on families and on businesses. It is, unfortunately, inevitable that we are in for a recession and the hardship that brings. Our job has to be to support people through that - create jobs and arrest rising unemployment, support incomes particularly for those who earn less, and support our small and job creating businesses to survive and invest and grow.

We have already taken emergency action: infrastructure investment to create jobs, a £250 tax cut for all earners, increases to child tax credits, and temporary full expensing for business. It was the biggest discretionary fiscal stimulus in generations. And at the next Budget I think it is likely that we will need to go further.

But outside the Budget, there are things that we need to do.

The first is to work to free up channels of credit. Right now the action we have taken means that the banks are much more stable than they would otherwise have been. Interest rates are falling. But banks are not lending. We can all understand why: many of their assets are much less liquid than they once were, and there is a natural caution in new finance. 

The Bank of England has already taken action on the first issue by launching its Special Liquidity Scheme. So today I am announcing specific action on the second. I am today announcing that we will launch a new Business Finance Guarantee Scheme, with the details to be set out by the Treasury in the next month. The scheme will guarantee up to £50 billion of new lending. The scheme will improve banks confidence to lend, reduce the interest rates that small businesses have to pay to borrow, and require a commercial fee to be paid to the government - sharing risk and return in this unstable environment.

Getting credit moving will prevent a deeper recession and save jobs. But direct action on jobs is also necessary. That will be the focus of the next budget - which I intend to deliver by the end of this year. But I want to provide immediate relief now. So today I introduced legislation to provide a national insurance credit of £2,000 for new hires, available to companies that have not initiated redundancies. It will be available for the next six months, with one payment made at the beginning of employment and another made after six months. This will make the first year of a minimum wage job tax free for employers. This will cost £400 million over the next six months - supporting thousands of jobs - and foreshadows a substantial package of support at the next Budget.

Phase 3 - reset and rebuild a fairer and greener economy

The third phase of our response concerns what comes next. Once we have passed the peak of this recession, and we look to rebuild our economy, what should it look like? How do we have a strong recovery that is fair, balanced, and leaves our economy and our country more resilient to this kind of shock in the future?

The fundamental problem with the British economy going into this crisis was that it was too unbalanced, too reliant on the City of London and on international finance. We are too unequal, with Labour leaving office with child poverty rising. We are still too environmentally damaging and not yet fully grasping the challenge of climate change. And even before the financial crisis, real incomes in the economy were stagnating. And we were too quick to look to big government as a solution to fundamental underlying problems.

My vision is to move away from this unequal; low wage, high emission, big government economy that Labour presided over; and rebuild a more balanced economy that is fairer, higher wage, lower emission and bigger society economy. An economy with modern infrastructure; balanced rather than reliant on the City of London; supported by a banking sector that serves the public and is socially conscious rather than simply chasing international profit margins.

We need to start that work now. Which is why a cross-government piece of work to bring forward the policies to make this happen is starting now, and over the next twelve months:
 

• The Education Secretary, Theresa May, will bring forward plans to raise the education leaving age to 18 alongside a radical expansion of the apprenticeships regime
• The Minister for Business, Innovation and Skills, Nick Boles, will bring forward legislation to establish a new National and Green Investment Bank to turbocharge investment in our infrastructure and our cutting edge small businesses
• The Chief Secretary to the Treasury, Justine Greening, will bring forward plans for more affordable childcare; working alongside the Secretary of State for Health and Social Security to set out how we will meet our country’s child poverty targets
• I will bring forward a Co-operative Economy Bill, which will aim to double the size of the co-operative sector by expanding their access to finance, giving the competition commission new powers to ensure all markets have a strong co-operative sector, and allow workers and communities to buy-out a business on the verge of insolvency.

And what of the elephant in the room - banking? What is the role of the British financial sector once all this is said and done?

What we have seen over the last year has been, I think, a reckoning of our own design. We have a very large, very international financial sector in this country, which was ineffectively regulated by a confusing tripartite regime. Those two factors meant that banks - even ones that grew up on the British high street like Northern Rock - were more focussed on clever deals and swaps in the international markets than they were on their local personal and business customers; and regulators were unable to really realise the true risk of what was happening and prevent those customers from ever being at any risk in the first place.

So I think we need a change of approach in two areas. On the first, I have no doubt at all the importance of maintaining Britain’s world leading role as a financial sector. But our domestic banking sector has a social and economic obligation to this country and its people and its business. They are a part of the big society. And if the big boys of the banking sector want to focus on the international world of high finance, then I think we need to nurture choice and competition at home to ensure that our people and our businesses are well-served. So I will be bringing forward a new Banking Competition Bill this year which will set a pathway for a new, leveller playing field in this country, fostering a new generation of building societies and business mutual banks that serve communities rather than profits. And we will transform National Savings & Investments into a new British Savings Bank through the post office, which will be a real challenger in the market rather than simply a cheap way to sell government debt.

And as for the existing players in the market, and the prospect of future regulation - I accept that the middle of a storm is not the time to rearrange the cabin furniture. But things will change. I intend to launch an independent review of the regulation and structure of the banking sector and future reforms that would improve financial stability - including the possibility of either dividing, or ring-fencing, retail and investment banking services. Further details will be set out shortly.

The three phases I have set out this evening are a framework, and they set the scene for the Budget later this year. But I want to come back to what I said at the beginning. This is not the time for the dogmatic pursuit of any ideology. Now is the time for calmer heads and safer hands to prevail. What Britain’s struggling families need right now is practical support by a Government on their side. That is why we have a pragmatic, clear plan: secure the financial sector and protect their savings; cushion the blow of this global recession on hardworking families; and position ourselves to rebuild a fairer, greener, and higher wage economy. Thank you.