LONDON – As the world recovers from the Great Recession, the question facing advanced economies is this: How do we deliver sustainable growth and rising prosperity for our citizens?
In Britain, we have an economic plan that delivers economic stability, deals decisively with our record budget deficit, opens the country to trade and investment, and addresses the structural weaknesses that are holding us back as a place to do business and create jobs. Of course, every country is different – and the policy prescriptions for each need to recognize that. But the lesson from the British experience is that the only way to deliver prosperity – to win the so-called “global race” – is by tackling problems head-on.
When the coalition government came to office three years ago, the United Kingdom’s deficit was forecast to be higher than that of any other country in the G-20, at more than 11% of GDP. Unlike the United States, we did not have the benefit of issuing the world’s major reserve currency. And our proximity to the eurozone, engulfed in a sovereign-debt crisis, meant that restoring fiscal credibility and preventing a spike in market interest rates was our most urgent priority.
So, over the last three years, we have been working through a steady deficit-reduction plan. As a result, we have achieved a larger reduction in the structural deficit than any other major advanced economy.
The eurozone crisis on our doorstep, and the lingering damage inflicted by the crash of our financial system, dragged down economic growth in 2011 and 2012. Even so, our labor market performed far better than in previous recessions, with record numbers of people remaining in work. And our economic plan created the foundation for the strengthening of the recovery that we have seen throughout 2013, with our Funding for Lending Scheme leading to significant improvements in credit conditions. As a result, the International Monetary Fund’s latest forecast has revised upward UK growth – and more so than for any other G-7 economy.
But that does not mean that we can relax. The Office for Budget Responsibility, the body that provides an independent assessment of UK public finances, has shown that while the deficit has been coming down more quickly, stronger economic growth alone cannot be relied upon to address the deficit’s structural component.
Dealing with the deficit has required difficult decisions – from reforming the welfare system and increasing the state pension age to controlling public-sector pay. But I have always believed that a country cannot make itself richer by writing checks to itself. We need to make responsible choices to ensure that we can live within our means – and that is what I am determined to deliver.
A government that lives within its means is a necessary condition to secure the economy for the long term – but it is not sufficient. Success also requires taking bold steps to tear down trade barriers and open the economy to investment from fast-growing countries like China and India. That is precisely what we have done. I would go so far as to say that no country in the West is more open to investment than the UK.
How many Western countries would allow, let alone encourage, Chinese investment in their new nuclear power stations? Indeed, how many Western countries have an ambitious civil nuclear program at all? We do, which is why I was in China in October agreeing a deal between Chinese investors and EDF Energy to build the first reactor in the UK for a generation.
Indeed, in international forums, the UK is the first to argue for free trade. The deal reached at the World Trade Organization’s ministerial conference in Bali this month was a historic step forward – with an estimated benefit to the UK of $1 billion. But the UK will continue to argue that it must be the beginning, not the end, of a wider determination to liberalize trade, in order to benefit from the growth and jobs that doing so brings.
We have also had to address the structural weaknesses that have been holding the UK back. Perhaps the most visible sign of this has been our decision to cut the corporate tax rate to the lowest level in the G-20. My reason is simple: I want competitive taxes that say Britain is open for business to global companies. At a time when other countries are considering financial transaction taxes, we are abolishing some of these taxes. And, with our banking reforms, we are strengthening our reputation as the home of global finance – from insurance to asset management, and from the new offshore renminbi markets to issuance of the first sovereign sukuk, or Islamic bond, in a non-Islamic country.
This is not about a race to the bottom; so, at the same time, Britain has been leading the way in fighting tax avoidance and evasion. Yes, I want competitive taxes, but they must be paid. Tax avoidance and evasion was a central theme of the UK’s presidency of the G-8 this year, resulting in commitments to unprecedented new levels of automatic exchange of tax information between countries. Some 39 jurisdictions – from France and Germany to South Africa and Mexico – have already signed up to become early adopters of the new standard on automatic exchange.
In a global race, one cannot stand still. So, while our education reforms are driving up standards, we need to do more. Britain’s universities are one of our biggest assets, attracting many thousands of international students from around the world every year. That is why, in my financial statement in the first week of December, I announced that we would lift the cap on the number of university students in the UK. Access to higher education is a basic prerequisite for economic success, and we need to ensure that Britain can compete with the likes of the US and South Korea, which send a much higher proportion of their young people to university.
Here is the uncomfortable truth. In a global race, there are winners and losers. Some countries will do what it takes to remain competitive. Some will not. I am determined that Britain will not be left behind. More than almost any other major economy, Britain paid a heavy price in the Great Recession, which followed a decade of misguided economic policy. Now we are fighting back, and the message to the world is clear: the UK is open for business.