HISTORIC PRESS RELEASE : Extracts From A Speech By The Chancellor Of The Exchequer Gordon Brown To The Engineering Employers’ Federation [February 2004]

The press release issued by HM Treasury on 10 February 2004.

“Of all the responsibilities of government – to ensure a competitive environment, to invest in science, skills and infrastructure – the greatest and pre-eminent challenge is the creation and entrenchment of economic stability and taking the hard decisions to lock in stability even in difficult times in the world economy – like the last three years when we have lived through the first slowdown to hit all continents simultaneously for 30 years.

But instead of being – as in the old days – first in, worst hit and last out of any world downturn, Britain has not only avoided recession but has continued to grow in quarter after quarter, year after year, in all seven years of our government since 1997.

And we are not just one of the only major industrialised countries to have avoided recession but have been more stable than any of our neighbours over the last few years.

While I recognise that manufacturers and exporters in all regions have faced difficult times, employment overall has continued to rise, unemployment continued to fall and we have had the lowest interest rates and lowest inflation for a generation.

And I believe that now the world economy is strengthening, with, in the fourth quarter of last year, GDP in Britain growing by 0.9 per cent – the fastest rate seen since the first quarter of 2000.

And for the year as a whole, UK GDP expanded by 2.1 per cent – in line with the Treasury’s Budget and Pre Budget Report forecasts.

Growth is also becoming more balanced. While consumption has moderated over the last few months, official data shows that manufacturing output has been rising – up 1.1 per cent in the 3 months to December compared to a year ago. And business surveys show a marked strengthening in corporate conditions in every region of Britain, with export prospects for manufactured exports at their highest level in eight years.

As we discussed this weekend in the USA, the lessons all advanced economies have learned are that in a global economy, monetary and fiscal policy has now to adjust quickly to fast moving changes and to heightened risks of instability – and to do so it has to be proactive and forward looking.

While there is a link between money supply and inflation, in open economies with liberalised capital markets rigid monetary targets just cannot work. But the experience of the 1970s and 80s also taught us that, correct as Keynes was to point to the need for proactive and forward looking monetary and fiscal policy – ever more essential in fast moving capital markets, the old way of doing so – crude annual fine tuning – could not work either.

Instead the flexibility and proactive approach a modern economy needs demands a framework – both monetary and fiscal – based not on short term targets but on clear long term objectives that are met and seen to be met: instead of politicians making interest rate decisions on short term considerations, the Bank of England independently operating a symmetrical inflation target — a target that because it is as concerned about deflation as it is about inflation is not just pro stability but pro growth.

And in Britain today, in contrast with the experience of many other economies where growth has been lower, the credibility that has come from independence for the Bank of England and the symmetric target, the British model we have created, has enabled the monetary policy committee to respond early and decisively – raising interest rates in 1997, cutting them sharply in 1998 – and again with nine interest rate cuts since the latest global downturn began with the result that, even when more exposed than any European economy to the IT shock, growth continued and unemployment continued to fall.

I want to reassure you today that we will never take stability for granted and I can say categorically to investors everywhere that while no-one can ignore the reality of the economic cycle and the potential of global events to impact on the economy, we have shown it possible to make the hard choices and to steer a course of stability. And we will continue to make whatever decisions are necessary to steer that course and support our monetary authorities in the difficult choices they have to take.

And we will entrench not relax our fiscal discipline. Let us recall that at this stage in the economic and political cycle governments have resorted to short termism in fiscal policy and gone on to raise the rate of spending.

But I can tell you this evening that I am determined not to go down the short term road, and we are resolved to avoid the short termism and mistaken monetary and fiscal policies of the past.

So, as I have announced, we will, while meeting all our commitments and our fiscal rules, lower the rate of spending growth in the next spending round.

And let me add: as we welcome the opportunities of Enlargement, we will continue to demand the same discipline from the European Union as we demand of ourselves. We are agreed to resist plans for any excessive increase in the European Union budget. And, so as we are determined to lock in monetary and fiscal discipline in Britain at this stage of the economic cycle, we are resolved to tackle profligacy and waste where it exists in the European budget.

As I found at the G7 this weekend, each country and continent is having to face up not just to the immediate question of fiscal sustainability but to the longer term question of sustainability. Some countries face bills for pensions and health care rising over the next decade to 20 to 25 per cent of national income. Our bills are much lower – around 5 per cent for state pensions for example – and we are determined to ensure that our fiscal position is sustainable over not just a year or two but over the next decades. And in the Budget we will publish our best forecasts not just for the next few years but the next decades examining the costs of health care and pensions in the years ahead, showing how we can meet our fiscal rules.

So let me conclude: it was decisive action by the Bank of England, and supportive fiscal policy, that ensured Britain – unlike other countries – avoided recession. And let me be clear: Britain would have run the same recessionary risks as other countries – indeed, suffered the same British recession of the past – but for the new British model that has been created.

As the monetary policy committee demonstrated rightly and decisively last week, it will be the same forward looking monetary action – backed by our sound fiscal policy – that can, if we continue to make the right decisions and stick to our resolve, lock in greater stability not just for a year, or for an economic cycle, but in this generation – a prize of greater stability that has eluded successive governments of all parties in the post war era; a prize that – with resolve and prudence – is now within our grasp.

So it was right not wrong to make hard difficult choices to ensure that inflation and debt are low, and our fiscal rules are met.

You asked the government to make stability our first priority, above all else, after years of boom and bust.

And I repeat: our priority will remain stability first: stability yesterday, today and tomorrow.”