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The New Opportunity Economy

Below is the full text of my John Smith Annual Finance Lecture; The New Opportunity Economy. There’s a bit of a trail in the Guardian today. The argument is simple; is we make the right choices now, we can not only rebalance our economy towards investment and exports, but we can open the new jobs that it is possible to create to people from a wider range of backgrounds, tackling the issue of low pay, and redoubling efforts to get people back to work.


The Smith Institute Annual Finance Lecture – 18.30 (check against delivery)

Tuesday, 22 September 2009

  1. A year on from the crash of Lehmans, we meet here tonight amidst signs that economies around the world are starting to emerge, battered but determined, from the vicious spiral that looked so dangerous a year ago.

  2. As we look ahead to the recovery, we know the job is not yet done and risks still abound:

  3. Much of the global stimulus is still to be delivered

  4. Protectionist instincts must remain checked

  5. Banks around the world must go further in freeing up the flow of credit

  6. But amidst these clouds, there is now hope that the help we put in place is working:

  7. Our factories are busier – manufacturing output grew in June and July

  8. Our shops are busier – retail sales up in the year to August.

  9. Our markets are busier – UK businesses have raised over £8 billion in bonds, and £20 billion in equity

  10. Our most important customers – Japan, Germany, France – appear to be moving out of recession;

  11. Our housing market, here, as well as in the US, seems to be stabilising.

  12. Students of the Chancellor’s language will have heard him say, he’s now confident, while cautious, of growth by the end of the year.

  13. So, will the big question in politics not get larger? From who is best placed to secure the recovery, to whose plan is best for the future? Whose plan will give us economic growth that is fastest and fairest, and will rest on the strongest foundations? And who is going to give us the right balance of public spending to deliver that plan?

  14. Tonight I want to answer those questions and make a simple point: even when times are tough, we still have choices– and if we want healthy growth, we need active government; on a world stage and here at the home ground.

  15. But let me start with a small contrast: the contrast between the aftermath of Lehman Brothers collapse, defined by the leadership of Gordon Brown and Alistair Darling, co-ordinating an international economic recovery plan, and the approach that followed a different anniversary, which was also marked last week.

  16. Last Wednesday was the 17th anniversary of Black Wednesday.

  17. Not the spark for leadership. Unless your ideal of leadership is sitting singing in your bath as Norman Lamont …

10. Nor the trigger for wise choices in public spending. Unless your definition of wisdom includes an indiscriminate blitz on public services – regardless of the consequences:

  1. for child poverty;

  2. for waiting lists;

  3. for crime;

  4. for those who lost their jobs, their homes and their pride.

11. All because the government believed, as Mr Lamont told the House of Commons, that the recession and unemployment were a price worth paying.

12. Our approach to the recovery will be as different to the Conservatives’ as our approach to the recession. Even in tough times, especially in tough times, you have choices – and for economists those choices must start with how you plan to grow.

13. Marty Feldstein once explained economists’ obsession with growth with the tale of the Emperor’s chess board.

* Granted one wish, the hero asks the Emperor for a single grain of rice on the first square of a chess board. On each subsequent square he asks that the grain of rice be doubled. By the 64th square it’s more rice than exists in the world

* Yet, if our hero asked for rice on just the white squares, his reward would have been a mere fraction of that

* In the modern world, these small differences in compound growth can mean big changes. An economy growing at 1.5% a year takes 47 years to double. At 2.5%, doubling takes a little over half the time.

14. This is why the opportunity economy has always been centre stage for New Labour.

15. An opportunity economy that has transformed the health and wealth of our country for ten years.

16. But an opportunity economy that will need to look different in the ten years to come.

17. Let me give you the numbers: between 1997 and 2008, our national income rose by £600 billion[1]. The lion’s share was consumption and the vital rise of government spending to correct historic underinvestment.

18. In the new world economy of the ten years to come neither consumption nor government spending will pack the same punch. So investment – in business and homes – plus our exports will have to pick up the slack.

19. So, two years hence we expect business investment to contribute over three times more to our GDP growth than the average contribution it made from 2000-06.

20. And for 2009-11, we expect net trade to add 0.5 percentage points to GDP growth each year – far from the contribution of the past.

21. So, if this is the plan, the central question for the government is this: in these tough times, what are the right international, macro-economic and domestic policy choices that deliver the right path to rebalanced growth? Tonight I want to touch on each.


22. Let me start with the international picture.

23. Twelve months ago, the world risked sliding not into recession, but into a global depression. The G20 in London confronted a new reality: we are today all in the same boat. We sink and we swim together.

24. So now, as we look to secure the recovery, the Prime Minister and Chancellor travel to Pittsburgh where they will argue that the old ways are now over.

25. The global relationship is no longer a one-night stand; it’s a marriage, for good times and bad, in sickness and in health.

26. There is no better proof-point than the challenge of securing growth in the decade ahead.

27. You know, if America were to raise its savings rate, from 4% to 10%, along with similar adjustments in other deficit countries, then almost 1,000 billion dollars will leave global demand.

28. That is not a problem that can be fixed by an instant consumer boom in China. Nor can it can be fixed by a fall in the European savings rate.

29. It can only be solved by coordinated international action; by unwinding old imbalances; by opening new markets for countries like ours; and by action to secure growth.

30. In other words, it needs a commitment to structural reform; to increased trade; to ambition; to a more representative IMF that has the confidence and trust of emerging markets.

31. And so we look forward to the G20 meeting at Pittsburgh later this week to hear more about a new compact for global growth.

32. Even in tough times we have choices. And our first choice has to be to act globally. Not to go it alone. Not to cut ourselves off from the mainstream. Or plough our own furrow. We have to lead from the front.


33. The second choice is then at home, in our macro-economy.

34. If our plan is to increase investment and exports then prudent public finances, a sound banking system and a stable housing market become the trinity of virtue.

35. Public finances have to be stable to guard against the risk that interest rates rise, and private investment is crowded-out. That is why are determined to halve the deficit over four years and reduce public debt in the medium term.

36. With low interest rates, we need sound banks to broker new investment.

37. Which is why in July Alistair Darling set out changes to the governance, co-ordination, and regulatory framework of the UK’s financial authorities.

38. This isn’t about shifting around some well upholsted institutional arm-chairs – which seems top of some people’s to do list – it’s about getting on with the detail of ensuring effective regulation and delivering a return to good old fashioned banking.

39. And with sound public finance and sound banks, we need a stable housing market. Because markets with bubbles damage confidence and stability.

40. Which is why this year the PM and Cx have announced £2.1 billion to build some 30,000 new homes, and in the months ahead, at the PBR, we address the long-term challenges that stand in the way of smoothing housing supply.

41. So, on the international stage, and in the macro-economy, we need active government. And we need it too in the micro-economy.


42. Economies are different to companies – I know that because I’ve started a company and I work at the Treasury. They are rather different jobs.

43. But, if we want to make our living in the world, we are going to have to compete in it.

44. And, if we want to win, we have to be even more productive than in the past.

45. Over the last economic cycle, we’ve delivered the best productivity growth on record (at 2.4% per annum). It wasn’t an accident; it came from transforming investment, skills, competition, enterprise and innovation.

46. We’ve built over 130 major roads.

47. More people travel further by rail than in any year since 1946.

48. The number of adults without qualifications is down by a third.[2]

49. Our competition regime is in the world’s top three.

50. And by 2010 we will have doubled science investment to £6 billion.

51. It’s a good record – but in three areas we have to go further to deliver our plan for growth, to help drive-up investment, and to help boost exports.

52. First, our infrastructure investment demands certainty – and priorities.

53. So Infrastructure UK, a new body, has been charged with drawing up the big tasks for the 50 years ahead – across energy, waste, water, communications and transport.

54. Second, we need to tackle head-on the market failures in innovation where they threaten new ideas.

55. We all know that businesses tend to under-invest in R&D due to “spillover” effects – as social returns exceed private returns, and we know technology-based businesses can find it difficult to secure the finance they need to grow. I know it all too well. Because that’s the kind of business I started.

56. Everything I learned starting and growing a successful technology business tells me this is why you need active government, to deliver growth. But having doubled the science budget since 1997, having put in place the £750 million Strategic Investment Fund, we will look at what more can be done. So, as announced in the Budget, we are considering evidence for changes to ensure the tax system continues to encourage innovation and the competitiveness of the UK

57. If we make these choices wisely, with an active government leading internationally, prudently, strategically, we can deliver not only recovery, but faster growth ahead.


58. So we grow our economy. So we rebalance. So we pay down the debt. But is that it? I don’t think it is. Our goal in public life is not to deliver a nation of soulless wealth. We want a country with a wealth of soul.

59. So our model for growth isn’t simply about growth for its own sake. We want growth for the change it can make to peoples’ lives. We want fast growth. On firm foundations. But fair growth too. We don’t want a country divided into haves, have nots, and have yachts. We want a country of fair shots. Not fast bucks.

60. And that is why our plan for growth comes with a plan for sharing growth by giving people the power to work, then earn higher wages with better skills. .

61. In the last decade we have transformed our skills base, and the wages that go with them.

  1. The number of people with no qualifications has fallen by 1 million over the last ten years.

  2. And, through the National Minimum Wage, we have given the lowest earners the biggest boost to pay-packets

62. But let’s be honest – there is unfinished business that our growth plan for the future must address – starting with social mobility, which is still too low.

63. For three decades, from when I was born in 1970, social mobility in this country did not move. For all the huge economic, social and political strife we saw, it did not move. Now, finally, there are positive signs.

64. But the UK still has a lower intergenerational income mobility than the US, France, Germany, Australia and Canada.

65. And Alan Milburn’s report showed how access to our top jobs – like the professions – are simply not open enough to those from a low income background.

66. To this challenge I would add one more: the challenge of the ‘low pay’ economy.

67. In the ten years after 1997, real wages for workers in Britain grew by an average of 1.7%. This was the highest wage growth in the G7. It’s a great achievement.

68. But we cannot and will not ignore the fact that over 5 million people are still paid less than £6.67 an hour.

69. And to tackle the problem we have to zero in on the cause.

70. And the cause is that part of the economy where jobs have grown – but wages haven’t: hospitality, retail, distribution – the kind of jobs I did before I went to college.

71. You know seven out of ten employees in the hotel and restaurant sector are low paid, and 44% of the people working in the wholesale and retail sector are low paid. 7 million jobs in our country require no qualifications.

72. These are the jobs often filled by the very young, by those who are over 50, by those in part-time work.

73. But these are not sectors that are internationally traded; it’s not global competition that’s driving down wages.

74. So, we will investigate where Government action can help to tackle these persistent low wages.

75. Government investment is not the whole answer. Government spends £5 billion on training; industry spends £38bn.

76. But government isn’t a bit part; it’s a leading role – and we know the problem can be addressed – by following the examples of Germany and America, where workers’ skills in these sectors has gone up, and where skills are better used.

77. So over the next three months, BIS will launch a Skills Strategy to set out how our £5bn investment in adult skills will support the development of a high-skill, high-productivity economy for the long-term, where opportunities are open to all.

78. Active government in tough times, making the right choices for our future.


79. There is one final piece of the puzzle. If we act internationally, prudently, strengthening our ability to compete, if we share growth by strengthening skills, we still have a final challenge.

80. Re-doubling our action to get people back to work.

81. A bigger labour market isn’t just good for our growth. It’s good for social justice. I speak with feeling because my constituency has the second highest unemployment in the country. Regeneration and helping people back to work is at the core of my team’s work in Hodge Hill.

82. It’s there I see the transformational effect of a job on crime, health, poverty, and poverty of aspiration; you know if we cut the unemployment rate in my poorest ward to the national average, an extra £90m would come through the door in wages.

83. That’s why now, not later, is the time to look beyond the downturn. To go further still to reconnect people to work

84. So this autumn, the Treasury, BIS and DWP will set out a Back to Work White Paper to advance the fight for full employment, to use skills investment to help people get a job, to strengthen the partnership with business in our communities, and the incentives to work within the welfare system.


85. So even in tough times you have choices. And our choices will be different to the Conservative party.

86. The Conservatives claim to have learnt the lessons of the past two years – yet all we hear is a beating of the retreat to the comfort zone of 17 years ago, after that famous anniversary celebrated by Mr Lamont, advised of course, by Mr Cameron.

87. The Conservatives say they worry about the deficit. But to halve the deficit you have to keep the recession’s cost down then grow the economy, raise some taxes and keep public spending under control. They fail every test.

88. First they risk wrecking the recovery and putting up medium term welfare costs.

89. Mr Osborne asserts that it is monetary policy, and monetary policy alone that must be used to fight recession.

90. But everyone knows monetary policy alone is not enough. This is a global credit crunch.

91. When the banking system is in intensive care, you can’t rely on low interest rates alone to get an economy moving.

92. You need fiscal policy too, which is why every country in the G20 and every constituency in this country from the CBI to the TUC have endorsed this advice. It is the view of British business leaders and of leading economists.

93. This leads Mr Osborne to down tools in the fight against the recession

  1. The £5billion in help to create 150,000 jobs

  2. the help for 300,000 people to stay in their homes?

  3. the extra support being provided for those out of work for over 6 months?

  4. the 35,000 new apprenticeships being introduced?

  5. the £2.6 billion offered to support 150,000 businesses by deferring tax?

94. Second, Mr Osborne does not have a growth strategy, but a no-hope strategy for the future.

95. You can’t be for investment while scrapping the Annual Investment Allowance and cutting capital allowance rates.

96. You can’t be for correcting market failures in innovation without investing real money.

97. You can’t be for more infrastructure – and oppose the planning reforms vital for faster and more predictable infrastructure.

98. And you can’t be for higher skills when you want to cut the skills budget, abandon Train to Gain, lower the number of students at university and rejecting compulsory skills and training for kids after 16

99. Third, you’ve got to make difficult decisions on tax and spending. So, will they now abandon, the following measures, which appear at first glance, not aimed at cutting the deficit – but growing it

* Voting against alcohol and fuel duty rises in the Finance Bill; at a cost of £5 billion over the next three years

* Opposing pensions tax relief changes for the highest earners, the 50p rate of income tax and National Insurance changes; a gap by the way of about £16 billion from 2010 – 13

* A spending pledge for single rooms in the NHS that is £8bn short. [Just one of the £54 billion in other pledges released under FoI last week.]

  1. I could go on. But you get the idea. A sound-bite is not a plan. A photo-call is not a policy. This is not a party serious about debt control; it’s a party that would put the deficit in free-fall.

  2. The Conservatives refuse to say a word about how quickly they would halve the deficit. Will they match our determination to see the work done in four years?


  1. Let me finish with a message of confidence.

  2. There are emerging signs that, across the world, we are moving from recession to recovery. The job is not yet done. We must remain vigilant. But we need to start looking towards the future too.

  3. As the G20 will make clear this weekend, we need to plan ahead, to bolster and boost the recovery. Internationally, it means more balanced global demand, with a new global compact for stability and growth.

  4. At home, it means putting in place the reforms that will increase our productivity and get people back into work. Better infrastructure, supporting innovation, highly-skilled better-paid jobs across our economy.

  5. Yes – spending will be tighter – but even then there are choices.

  6. We made the right choices during the recession.

  7. We will make the right choices for the recovery.

Thank you.

[1] £616bn – nominal figures

[2] From17.1% in 1997 to 10.9% in 2008 – a 36% decline


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