‘When in 1997 we made the Bank of England independent, we also froze spending for two years, cut the national debt, and imposed the responsibilities of the New Deal: hard choices made to restore as the central objective of British economic policy the goal of high and stable levels of growth and employment.
Today I can report that:
British inflation has been its lowest for thirty years;
interest rates their lowest since 1955;
this Christmas there are more people in work in Britain than at any time in our history;
and economic growth is now strengthening.
And while America, Japan, and half the euro area have suffered recessions, the British economy has – uniquely – grown uninterrupted, free of recession, for every single quarter and every single year since 1997.
And now is the time for this stable and growing economy to seize the opportunities of the emerging world recovery.
So Mr Speaker, with the same strength to take the right long-term decisions that has guided us through the world downturn, this Pre-Budget Report sets out the further tough choices we must now make:
first, decisions to lock in our hard won economic stability and fund additional obligations to the war against terrorism and to Iraq;
second, long-term choices, stepping up the pace of economic reform, to strengthen Britain’s enterprise culture, British science and the flexibility of the British economy;
and third – even as we come through a world downturn and because we believe enterprise and fairness can advance only if they advance together: an additional one billion pound a year investment in Britain’s children, to advance our goal that not just some but all of Britain’s children have the best possible start in life and that no child in Britain is left behind.
First, the world economy.
While the USA and Japan have been recovering during 2003, growth in our biggest trading area – the euro zone – is expected to be just 0.5 per cent.
In Italy 0.4 per cent.
In France 0.2 per cent.
And in Germany it is zero.
I can report that in Britain growth, this year, is now expected to be 2.1 per cent – meeting our Budget forecast.
Mr Speaker, when I made our forecast the Opposition said that it was not just incautious and wrong but ‘a deliberate misrepresentation’ of Britain’s economic prospects and not to meet it destroyed credibility.
I can report to the House that not only have we met our forecast — but cumulatively since 2000 Britain’s economic growth has been stronger than Japan, the euro area and the USA.
And I can tell the House that Britain has now enjoyed the longest period of peacetime growth since records began in 1870 – over 130 years ago.
And I can also tell the House that, looking forward, we expect British growth next year to increase by between three to three and a half per cent and in 2005 to increase again by three to three and a half per cent.
And in a world downturn, Britain has achieved growth with low inflation and high employment.
I can report that since 1997 inflation has averaged 2.3 per cent and that the number of jobs created now exceeds 1.7 million. Unemployment in America is 6 per cent, in Germany, Italy and the euro area it is 9 per cent, in France 10 per cent, in Britain it is 5 per cent: British unemployment — for the first time in 50 years — lower than every one of our major competitors – the euro area, Japan and America.
Even with long-term unemployment cut by 80 per cent, youth unemployment cut by 75 per cent, I have read Pre-Budget representations that this Government’s New Deal is an expensive failure and should be abolished. Today we are setting out evidence showing that without the New Deal youth unemployment would be twice as high; without the New Deal half the lone parents who have moved into work would not have done so; without the New Deal unemployed men would be 20 per cent less likely to get a job. So the challenge of this Pre-Budget Report is not to abolish the New Deal – now, with 2 million helped, the most successful employment programme in our history – but to strengthen its role in removing forever the scourge of long-term unemployment in our country.
Mr Speaker, we remain vigilant to both inflation and the continuing risks from global imbalances, an uneven world recovery and geo-political uncertainties.
And I understand the continuing concerns of manufacturers and exporters – and it is urgent that world trade talks be resumed.
As we achieve more balanced growth, fixed investment is growing this year by two and a quarter per cent with growth forecast at six to six and a half per cent next year, and business investment – expected at Budget time to fall – is rising by three quarters of a per cent this year, with three to three and a half per cent growth forecast for 2004.
Latest manufacturing and industrial production figures show one per cent growth in just one month and manufacturing output – which has fallen in both North America and Europe – is expected to grow here by one quarter of a per cent this year and by around two per cent in both 2004 and 2005.
With the housing market and consumer spending growth now – as we forecast – moderating, we expect domestic demand and private consumption to grow by two and a half per cent this year and in the following two years — building on six years from 1997 in which British households have averaged real rises in income above 3 per cent a year. And with, since 1997, one million more homeowners in Britain, rising household debt has been matched by rising household wealth and lower interest payments.
Because this Government will never take stability for granted, I have announcements designed to entrench our stability.
First, the credibility that has come from Bank of England independence, and the tough decisions to cut inflation, has made possible a proactive, forward looking approach to interest rates, cutting aggressively at the right time for the economy and – as the economy strengthens – now locking in long-term stability.
The symmetrical inflation target enables the Bank to be both pro-stability and pro-growth and the long term credibility of our symmetrical target will be enhanced – as the independent Office of National Statistics reports in its paper published today – by adopting the internationally recognised measure of inflation – the harmonised Consumer Prices Index:
more reliable because, taking account of spending by all consumers, this Consumer Prices Index gives a better measure than the old RPIX measure of spending patterns;
more precise because, as in America and the euro area, it takes better account of consumers substituting cheaper goods for more expensive.
I have therefore written to the Governor of the Bank of England today confirming my announcement earlier this year and that, from today, the operational measure for inflation will be this Consumer Prices Index and I am setting the new inflation target at 2 per cent.
I can confirm: pensions, benefits and index-linked gilts will continue to be calculated on exactly the same basis as now.
As before, the target will be symmetrical. Should the rate of inflation diverge from the 2 per cent target by more than 1 percentage point on either side our open letter system will be triggered.
And because discipline in pay setting is essential in both private and public sectors, I have also written today to Public Sector Pay Review Bodies informing them that our inflation target is 2 per cent.
Mr Speaker, when in 1997 we broke from the old annual public spending rounds by setting fiscal rules over the cycle and fixed three year spending settlements, and then paid off more debt in one year than all the debt paid off across all the fifty years since 1945, debt interest payments have been reduced to just 2 per cent of national income, lower than at any time since 1915: long-term decisions for stability that have enabled fiscal policy during the world downturn to support monetary policy and maintain economic growth.
And this Government will ensure that for the long-term debt levels will remain low and sustainable, and in each Pre-Budget statement, report not just on the medium term fiscal position but on the long-term. Today’s report shows that while in Germany, France and the euro area state spending on pensions will rise towards 15 per cent of GDP by 2050, Britain’s figure of 5 per cent means – and I quote the report – that, ‘the UK public finances are sustainable in the long term’ the UK is in a strong position relative to other countries to face the challenges ahead’. I have to tell the House that to revert to the pre-1980 position, an earnings link with pensions, would – by the end of the period – raise deficits by 3 per cent a year just to cover this one item with the long-term sustainability of public finances undermined. Instead this Government will proceed on a prudent and sustainable basis.
Essential also for long-term stability is a flexible housing market and I welcome the interim reports of:
the Miles Review on the market for mortgages;
and the Barker Review into barriers to housing supply.
Kate Barker highlights Britain’s weak private rented sector and I will now consult on a new incentive to encourage the creation in Britain of real estate investment trusts.
With flexibility central to meeting the euro’s five economic tests, I am today also publishing our first report on labour, capital and product markets and, as promised in June, the draft euro Referendum Bill is published today.
Since 1997 Britain has created over 100,000 more businesses; there are 170,000 more self-employed. But more enterprising as we are, Britain still lags behind American rates of business creation and success.
And just as we took hard decisions that have led to a British consensus on stability, I want to build in Britain an even deeper lasting British consensus – a shared national economic purpose that building on our historic strengths – Britain’s scientific genius and creativity, Britain’s global reach, Britain’s stability – we become, in the era of globalisation, one of the world’s most enterprising, flexible and successful economies.
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