The Prime Minister's speech on The Economy, March 2013
Rt Hon David Cameron, Thursday, March 7 2013
Today, I want to talk very clearly and plainly about our economic situation.
I know things are tough right now. Families are struggling with the bills at the end of the month. Some are just a paycheque away from going into the red.
Parents are worried about what the future holds for their children.
Whole towns are wondering where their economic future lies.
And I know that is especially true for people here in Yorkshire and in many parts of the north of our country…
…who didn’t benefit properly from the so-called boom years…
…and worry they won’t do so again.
But I’m here to say that’s not going to happen.
Because we have a plan to get through these difficulties – and to get through them together.
It’s a plan to fix the fundamental problems in our economy…
…to get the jobs and growth that will make our country a success in the Global Race…
…and to back the aspiration of hard working families who want to get on in life.
And my argument today is simple: if we stick to the plan and reject the false choices…
…we can come through this together with a stronger, more resilient and more balanced economy.
But first, let’s start with what went wrong.
Because if we don’t understand what went wrong in our economy…
…we’ll never understand what is needed to put things right.
Our economy has been beset by three fundamental problems.
The biggest budget deficit in post-war history.
A build-up of private debt accompanied by a global banking crash.
And an erosion of our competitiveness in an era when the global race for our economic future has rapidly accelerated.
Let me take each in turn.
First, the deficit.
This deficit didn’t suddenly appear purely as a result of the global financial crisis.
It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years.
By 2008, we already had a structural deficit of more than 7 per cent – the biggest in the G7.
In the cold reality of the bust that followed, we saw the true scale of the myth of the boom that had preceded it…
…the broken model of growth that was propelling our economy into an increasingly unsustainable position.
We will not be able to build a sustainable recovery with long term growth…
…unless we fix this fundamental problem of excessive government spending and borrowing that undermines our whole economy.
Second, we had over-indebted households borrowing from over-indebted banks.
Banks lent more than they could afford to – spurred on by an irresponsible banking culture that rewarded short-termism and unmanageable risk-taking.
And households borrowed more than they could afford to – spurred on by an assertion that we had ended boom and bust.
So when the crash came we didn’t just have over-indebted banks, over indebted households and a big budget deficit…
…we had the most over-indebted banks and the most over-indebted households…
…as well as the biggest budget deficit of virtually any country, anywhere in the world.
Third, there was a fundamental erosion of our competitiveness.
Let me put this simply.
Britain is in a global race...
…a fierce battle for our economic future with great shifts in wealth from West to East.
And yet while this race was speeding up…
…the last government fatally undermined our competitiveness with layers of red tape and bureaucracy.
£77 billion of new red tape – with over 36,000 new regulations…
…more than twelve for every working day of the last government.
Our corporate tax regime went from being the 11th most competitive in the world to 23rd.
The UK fell out of the top ten places for ease of starting a business – meaning it took twice as long to start a new business as in America…
…almost twice as long as in France…
…and the same length of time as Mongolia.
Innovation was stifled and the ability of British business to compete internationally was seriously damaged…
…falling from 9th in the global competitiveness league to 13th.
The growth achieved in these years of the so-called boom was far too dependent on unsustainable factors.
Excessive government spending.
A housing boom.
And uncontrolled immigration.
None of these is a sustainable way to deliver long term economic growth.
And when you look now at the reality of what happened in these years, you can see the true picture.
Even at the end of the so-called boom there were 5 million people of working age on out of work benefits.
One fact tells the story of just how unbalanced growth was.
The stunning fact that in the West Midlands…
…traditionally one of the engine rooms of our private sector economy…
…between 1999 and 2008, the number of people in private sector jobs actually fell.
The competitiveness problems went deep.
The welfare system failed to incentivise people to work.
And our schools badly let down many of our children.
Approaching half of all 16 year olds in 2010 failed to get GCSE Grade C or better in both English and Maths…
…and we were left with over 5 million functionally illiterate adults.
Our plan to fix our broken economy takes each of these three problems head on.
First, we have a clear plan to deal with the deficit.
It is fair.
The richest 20 per cent are making the greatest contribution to the deficit reduction and paying the most.
And in every single year of this Parliament the richest - the top 1% - will pay a greater share of our nation's tax revenues than in any one of the thirteen years of the last government.
As important as being fair, it is also pro-growth.
In spite of making difficult cuts, we are protecting the science budget and the money flowing to schools.
We are avoiding big increases in the taxes people pay on the money they earn.
And we’ve added to the plans we inherited for infrastructure.
For example, in spite of all that we are having to do to deal with the deficit, we have invested more in major road schemes in each of the last two years than in any year of the last Parliament.
We are making big cuts in bureaucracy, including by reducing the size of government.
We now have the smallest civil service since the war.
And some government departments are being cut in half.
Already we have reduced the deficit by a quarter.
We’ve cut the structural deficit – the bit of the deficit that won’t go away when growth returns - by 3 percentage points.
That’s more than any other G7 country.
And in contrast to some other major economies that are battling against big deficits, we’ve been able to pass the necessary legislation through Parliament.
So markets can be confident that we are implementing our plan – and that we will stick to it.
Dealing with the deficit gives us the credibility in world markets to maintain low interest rates.
It is hard to overstate the fundamental importance of low interest rates for an economy as indebted as ours…
…and the unthinkable damage that a sharp rise in interest rates would do.
When you’ve got a mountain of private sector debt, built up during the boom…
…low interest rates mean indebted businesses and families don’t have to spend every spare pound just paying their interest bills.
In this way, low interest rates mean more money to spare to invest for the future.
A sharp rise in interest rates – as has happened in other countries which lost the world’s confidence – would put all this at risk…
…with more businesses going bust and more families losing their homes.
By sticking to our deficit reduction plans we can keep interest rates low.
Second, with the banking system badly damaged it is vital to recognise that you need more than just fiscal responsibility to turn low interest rates into the affordable loans essential for businesses…
…and the low mortgage rates which keep the cost of living down and enable young people to be able to get on the property ladder for the first time.
When you have had such a catastrophic collapse in the banking system as we experienced here in the UK…
…the mechanisms which provide this transition are badly damaged.
So we are sorting out the financial system…
…reforming our banks so they serve the economy…
…and supporting this damaged transition mechanism.
We have already made huge strides in reforming our banking system…
…and 2013 is the year when we will deliver this vital work.
For the first time, it is clear where responsibility lies.
The Bank of England must support the recovery without putting financial stability at risk.
We are creating a new law to separate the branch on the high street from the dealing floor in the city to protect taxpayers when mistakes are made.
Let me be clear about what that means.
In future you can sort out failing banks without asking taxpayers to put in money.
We are also introducing more competition and choice into banking…
…so people have more choice about who they bank with – and more choice to change their bank if they want a better deal.
And we are supporting these reforms with, what I call, monetary activism…
…supporting a damaged banking system that would otherwise struggle to pass on low interest rates.
This is inextricably linked to our fiscal credibility…
…because the low interest rates on our debt give us the capacity to use our balance sheet to pass those low rates through to families and businesses.
We have been incredibly active in doing this.
The Bank of England introduced a Funding for Lending scheme which is now being copied around the world.
We have introduced a NewBuy scheme that helps people with smaller deposits to buy a newly built home.
And the Treasury has for the first time offered guarantees for housing and infrastructure…
…using the strength of its balance sheet to kick start investment throughout the economy.
These initiatives really matter.
Take mortgages, for example.
We don’t want to go back to the days of 110 per cent mortgages and encouraging people to take on borrowing that they can’t afford.
But it is important that people who work hard and do the right thing are able to buy a home.
As I said in my Party Conference speech – it is a rebuke to those of us who believe in property owning democracy…
…that the average age for someone buying their first home today, without any help from their parents…
…is 33 years old.
And we are determined to tackle that.
With the help of Funding for Lending…
…the cost of a two-year fixed rate £100,000 mortgage with a 10 per cent deposit…
…is now £1,000 cheaper than when the scheme was launched.
And it is now possible to buy a new home anywhere in the country with only a 5% deposit, and at very low interest rates.
As a result the Council of Mortgage Lenders forecast that mortgage lending will rise this year by £10 billion…
…for the first time since the financial crisis.
And as we look ahead to the Budget we will consider whether there is more we can do to build on this success.
Third, we are restoring our competitiveness.
At the forefront of this is our bold plan to cut corporation tax to 21 per cent – the lowest in the G7.
As the recent KPMG survey shows, in just over two years we have transformed business perceptions of our corporate tax system…
…from one of the least competitive to the most competitive in the world.
We are introducing some of the most generous tax breaks for early investment start-ups of any developed economy on the planet.
And by stripping back the red tape that was smothering our businesses…
…we have put Britain back in the World Economic Forum’s top ten for competitiveness.
We are getting behind British business helping to win contracts in tough overseas markets by breaking down barriers to trade…
…including with today’s new export action plan for the retail sector…
…assisting up to 1000 companies – including up to 600 SMEs – to deliver half a billion pounds of new business for Britain over the next two years.
And we are getting behind the industries of the future.
This government is not laissez-faire.
But neither is it about picking winners or keeping dead companies on life support like the industrial policy of the 1970s.
It’s about backing the industrial sectors where Britain has a global comparative advantage.
Sectors like aerospace where we have the number one manufacturing sector in Europe…
…and our automotive industry which had a trade surplus in 2011 for the first time in nearly 40 years.
Just this morning in Downing Street, I met with leading managers of global investment funds worth many billions of pounds who are looking at investing in our energy sector.
In lifesciences our patent box – effectively a 10 per cent tax rate on profits for firms who turn UK innovation into UK manufacturing…
…is driving millions of pounds of new private sector investment into our world-leading pharmaceutical sector.
And our support for start-ups is making it easier for insurgent companies from across Europe to float on the London Stock Exchange…
…and helping technology clusters like Tech City in London to rapidly become one of the fastest growing technology clusters in the world.
We are reforming welfare and education so it pays to work and people have the skills to do so…
…including with new changes being announced today to improve the quality and rigour of vocational qualifications for 16-19 year olds.
And in the weeks ahead, I'll be talking more about the wider changes we will be making to vocational education as well as apprenticeships…
…so we back all those who want to get on and succeed in life.
Some people think that talking about making our economy more competitive is motherhood and apple pie.
Some of the changes we need will have to be fought for.
Housing and planning reform.
The building of new roads, bypasses and High Speed Rail.
These are fundamental changes that are essential for the future of our economy…
…but they are not – and will not – be universally supported.
Well, my message is simple.
Make no mistake…
…in this battle for the future of Britain…
I am prepared to roll up my sleeves and fight.
So that’s our plan: fiscal responsibility, monetary activism and restoring our competitiveness to succeed in the global race.
Now of course there are plenty of people out there with different advice about how to fix our broken economy.
Some say cut more and borrow less…
…others cut less and borrow more.
Go faster. Go slower.
Cut taxes. Put them up.
We need to cut through all this and tell people some plain truths.
So let me speak frankly and do just that.
There are some people who think we don’t have to take all these tough decisions to deal with our debts.
They say that our focus on deficit reduction is damaging growth.
And what we need to do is to spend more and borrow more.
It’s as if they think there’s some magic money tree.
Well let me tell you a plain truth: there isn’t.
Last month’s downgrade was the starkest possible reminder of the debt problem we face.
If we don’t deal with it…
…interest rates will rise, homes will be repossessed and businesses will go bust…
…and more and more taxpayer’s money will be spent just paying off the interest on our debts.
Even just a 1 per cent rise in mortgage interest rates would cost the average family £1,000 in extra debt service payments.
So there’s not some choice between dealing with our debts and planning for growth.
As the independent Office for Budget Responsibility has made clear…
…growth has been depressed by the financial crisis…
…the problems in the Eurozone…
…and a 60 per cent rise in oil prices between August 2010 and April 2011.
They are absolutely clear that the deficit reduction plan is not responsible.
In fact, quite the opposite.
Tackling the deficit is the first essential step for growth.
And if we don’t do it, we’ll end up facing even greater austerity.
Moody’s rating agency says “the UK's creditworthiness remains extremely high”…
…thanks in part to a “strong track record” of dealing with our debts and our “political will”.
But they also make it absolutely clear that they could downgrade the UK’s credit rating further in the event of “reduced political commitment to fiscal consolidation”.
So those who think we can afford to slow down the rate of fiscal consolidation by borrowing and spending more are jeopardising the nation’s finances…
…and they are putting at risk the livelihoods of families up and down the country.
Labour’s central argument is exactly that.
They say that by borrowing more they would miraculously end up borrowing less.
Let me just say that again: they think borrowing more money would mean borrowing less.
Yes, it really is as incredible as that.
The Institute of Fiscal Studies has completely demolished this argument.
They say that if we had stuck to Labour’s plans we would be borrowing an extra £200 billion.
That extra borrowing alone is more than the entire national debt of Portugal.
There’s no magic money tree to fund this ever more wishful borrowing and spending.
Labour’s plan is completely incredible.
And we won’t be following it.
We’ll be sticking with ours.
And at the same time as dealing with our debts…
…we also want to help hard-working families cope with the cost of living.
That is why we are legislating to insist that families are automatically put onto the lowest variable tariff for their electricity and gas bills.
We are cutting the cost of motor insurance…
….by clamping down on completely unacceptable practices that have been pursued by some in the legal industry.
And, of course, one of the best ways to help hard working families is to cut their taxes.
As a low tax conservative I absolutely believe in doing this.
That is why we’re already cutting fuel duty and freezing council tax.
And from this April, we are delivering the biggest ever increase in the income tax threshold…
…lifting over 2 million people out of tax altogether since 2010…
…and halving the amount paid by someone working full time on the minimum wage.
Now, of course, there is a case for going even further – and making even more tax cuts.
But the key point is this: you have to be able to fund them.
Of course, there are times when you can cut a tax and find it almost pays for itself.
That was the view of the independent Office for Budget Responsibility when it came to the 50 pence income tax rate…
…which is why we are getting rid of it.
But most of the time tax cuts don’t completely pay for themselves.
Margaret Thatcher understood that a tax cut paid for by borrowed money is no tax cut at all…
…when she said: ‘I’ve not been prepared, ever, to go on with tax reductions if it meant unsound finance’
So yes, we are doing a great deal to help hard working families.
But all of these changes have to be paid for – and they have been paid for.
Getting taxes down to help hard working people can only be done by taking tough decisions on spending.
That is what we are doing in our plan.
And this month’s Budget will be about sticking to the course.
Because there is no alternative that will secure our country’s future.
Of course the challenges are huge.
And there is a long way to go.
But already there are signs that our plan is beginning to work.
The biggest deficit in peacetime history – is already down by a quarter.
Interest rates - are at near record lows.
Exports are starting to turn around too.
Over the last three years our exports of goods to the fastest growing parts of the world have been soaring…
…Brazil – up by half; India by more than half…
…China – almost doubled; and Russia up by 133 per cent.
These are not just statistics.
These increases in British exports means British businesses getting new orders…
…and that means new jobs back at home.
The number of people on out of work benefits has fallen and there are a million extra private sector jobs…
…and more people in work than ever before in our history.
And today we welcome the news from BT that they are creating 1,000 new jobs, including 400 apprenticeships…
…as part of their £2.5 billion investment in broadband.
Most importantly of all, our economy which was previously so badly unbalanced…
…now has private sector employment levels rising in every part of the country…
…and rising fastest right here in the north of England.
Within one year of this government we had a faster rate of new business creation than at any time in our history.
Today we have more than a quarter of a million new private sector businesses – the biggest increase in private enterprises on record…
…with more than three quarters of these new businesses created outside London.
Of course, these signs of progress are just the beginning of a long hard road to a better Britain.
But the very moment when we’re just getting some signs that we can turn our economy round and make our country a success…
…is the very moment to hold firm to the path we have set.
And yes the path ahead is tough.
But be in no doubt.
The decisions we make now will set the course of our economic future for years to come.
And while some would falter and plunge us back into the abyss.
We will stick to the course.
I know some people think it is being stubborn to stick to a plan.
That somehow this is just about making the numbers add up…
…with no care whatsoever for what it means for people affected by the changes we make.
But nothing could be further from the truth.
My motives for sticking to the plan are exactly about doing the right thing to help families and business up and down the country.
Because we want good jobs for our children…
…and we won’t have them if we are burdened with debt and outcompeted by China and India.
Because we want good public services…
…and we won’t be able to afford them if our economy is weak and we’re spending half the budget on debt interest.
Because we want to look after people in their old age…
…and we won’t be able to do that if we’re squandering billions on welfare for people who could work.
Because we want to help people into work and break the cycle of poverty…
…and we’ve seen that ever increasing working-age welfare is not the answer.
Because we want to help with the cost of living…
…and that means cutting spending to keep taxes down.
So yes, we are making tough choices about our future.
But we are making the right choices.
If there was another way I would take it.
But there is no alternative.
The only way we will fix our broken economy and compete successfully in the global race is by fixing ourselves to a clear plan - and sticking to it.
And that is what we are doing.
When I stood on the steps of Downing Street for the first time I said I believed the best days for Britain lie ahead of us, not behind us.
I still believe that.
And by sticking to the plan we can prove it to be true.
By sticking to the plan, we can - together - make Britain a great success story in the global race.