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George Osborne: There is a dependency culture

"Thank you very much for inviting me here today.

You've heard a lot today about what leadership means in the private sector. I want to talk about the leadership that Britain needs from its Government.

My argument today is a simple one.

The British economy faces its most testing time for a generation.

But we are not prepared for the difficult times that lie ahead.

The past fifteen years of global growth provided the perfect opportunity to prepare our economy for the twenty first century.

Two billion people - a third of the world's population - have joined the global economy in countries like China and India.

The result has been a huge expansion in global supply, and so strong downward pressure across developed economies on prices, inflation and interest rates.

Around the world, countries like Ireland and Australia shrewdly took advantage of these huge opportunities.

They reformed their economies, made themselves more competitive, and strengthened their public finances.

Both of these countries, for example, now have a "future fund" of assets built to provide security against future shocks and liabilities. Their public finances are well placed. Their competitiveness has risen. Their institutions are stronger.

Our competitors used the fat years to prepare for the lean years. Britain did not.

Indeed I would argue that we are the least prepared major economy in the developed world to cope with the current financial turbulence.

Our financial reputation has been badly damaged by the only run on a retail bank in the world - and nationalisation has only reinforced that damage.

Our double deficits - external and fiscal - are worse than any other European economy. Taken together, they are worse than the United States.

And our economy is increasingly inflexible, with falling competitiveness thanks to higher taxes, more regulation and failing public services.

The consequence is that respected economic forecasters are predicting that this year we will experience the sharpest economic slowdown of all the G7 countries.

I believe there are important challenges in the short, medium and long term on which we need leadership if we are to weather the current uncertainty and ensure that we are never again in such a vulnerable position.

The first challenge is the immediate institutional one. Have the different institutions that oversee financial stability in different countries been able to cope with the lack of liquidity and lack of credit.

The answer is 'yes' - except in Britain. Only in Britain has there been a run on a bank.

The second challenge is the medium-term fiscal one. Are governments in the developed world in a sufficiently strong fiscal position to withstand a slowdown and the pressure that puts on government revenues?

The answer is, in most cases, yes. Most countries have used recent economic growth to build up surpluses or at least reduce deficits. But not Britain - we have the largest budget deficit in Europe.

The third challenge is the long-term economic one. Are the developed economies of the world sufficiently flexible to recover quickly if there is a serious down-turn?

The answer is that many countries have used recent years to free up the supply side, reduce corporate taxes and make their economies more flexible and more competitive. Britain has instead become less flexible and less competitive.

And only the British Government is contemplating a major tax increase on business and enterprise as its response to a potential slow-down - which is economic madness.

What's more we have failed to use the last decade to tackle entrenched poverty and reduce the costs of social failure - it is unacceptable that after sixteen years of economic growth Britain has the highest proportion in Europe of children living in workless families.

Today I want to set out how a Conservative Government would provide leadership on these three challenges - institutional, fiscal and economic.

In the short term, the Northern Rock debacle has exposed the flaws in the institutional arrangements introduced ten years ago to govern financial crises.

The key problem was that when things went wrong, no-one was clear who was in charge. The FSA was supposed to be in charge of the liquidity of individual institutions while the Bank was in charge of the liquidity of the system.

So let me set out some of the institutional reforms that we need to introduce to give Britain a twenty first century financial infrastructure.

We clearly need to reform deposit insurance.

Following the run on Northern Rock, the first £35,000 of savings are protected. I think it is sensible to raise that so that we protect at least the first £50,000 of savings - that would cover 98% of all depositors and is equivalent to the $100,000 that is protected in the United States.

We also need to reform the way the Bank and the FSA supervise the liquidity of individual institutions. There was a clear failure to do this with Northern Rock.

And we need to create a new power for the authorities to take control of a bank on the brink of crisis.

This bank rescue power should set out, clearly and in advance, how all parties - shareholders, savers, and other creditors - will be treated.

And the power must allow the authorities to free up the deposits of retail customers, as part of a reform of deposit insurance.

I'm glad that the Government have also adopted the broad outline of this model for dealing with future banking crises.

I believe it also provides the blueprint for how they should have dealt with Northern Rock.

Instead of nationalising a high street bank, with all the negative signals and risk to the taxpayer that entails, we have argued that Northern Rock should have been subject to a Bank of England led reconstruction.

This would have been a form of administration that would have ensured that taxpayers were at the front of the queue to get their money back, not at the back of the queue under nationalisation.

So the short term challenge on which Government must show leadership is the urgent need to reform our financial oversight institutions, increase deposit insurance and give new powers that reinforce the independence of the Bank of England.

In the medium term, we must restore the health of the public finances.

For in a downturn, tax revenues usually fall and the rate of government spending goes up as welfare costs rise.

These so-called automatic stabilisers help to smooth demand in the economy. But the process works in reverse, so revenues automatically rise when the economy is growing above trend.

Economic stability demands that you save in the good times so that government can afford to help recovery in the bad times.

And after fifteen years of global growth, our public finances should be in a healthy state. Most other countries finances are.

But instead both the OECD and the European Commission estimate that we have the largest structural budget deficit in Europe, a deficit that is more the twice the size of the EU average.

Borrowing this year is forecast to be £38 billion, roughly the same as the defence budget.

So with little room for manoeuvre, with no money put aside for a rainy day, what is the solution?

Well as the old adage goes: the time to fix the roof is when the sun's shining.

It's too late to make sure that the public finances are properly prepared for this coming downturn.

In the medium term, we can all now see the benefits of our policy of sharing the proceeds of growth so that government spending will grow more slowly than the economy over an economic cycle.

By spending within our means - after a decade of doing the opposite under Labour - the public finances will in time be returned to a sustainable position as government revenues grow more quickly than government spending.

As we have said many times before, that leaves room for real terms increases in spending on the NHS. We have pledged to match Labour's published health spending figures which imply growth of 4.1% a year for the next three years - NHS spending growing as a percentage of GDP.

Some of that growth must come from efficiency savings and reductions in spending elsewhere - the plans that the Government has already published include absolute cuts in spending in several departments, including the Department for Work and Pensions and the Treasury.

And of course we need to improve public health and health productivity, so that we reduce the long term demands on Government and get real value for money from what we do spend.

We must also ensure that the British economy will never again be in such a vulnerable position. Never again should we be able to recklessly borrow in a boom.

Of course, the situation we find ourselves in is exactly the fiscal rules were meant to prevent. They have clearly failed.

We have already seen that when the golden rule started to bite, the then Chancellor is able to move both the start and end dates of the economic cycle in order to buy more room for manoeuvre. It is like making the defendant the judge and jury in their own trial.

As a result the fiscal rules have failed to ensure prudent fiscal management. No serious economic commentator now uses them as an indicator of the health of the public finances.

That is why I have pledged that we will hand the dating of the economic cycle and the verification of fiscal rules to an independent body - so that credibility is restored.

Chancellors will no longer be judge and jury of the very rules that are meant to constrain them.

It is a key part, along with and independent Bank and independent statistics, of the triple lock on economic stability that David Cameron and I set out more than two years ago.

For by restoring trust in the fiscal framework we will ensure that never again will a Chancellor be able to borrow in a boom and leave our economy so exposed to a downturn.

Not only must we prepare the economy with immediate reform of our banking institutions and restore the health of the public finances over the medium term, but we also need to make the long term changes that will make our economy stronger, more flexible and more competitive.

A competitive economy is far better prepared to weather a storm than an inflexible and uncompetitive one.

As Alan Greenspan puts it: "if we cannot forecast these bubbles or these expansions or even a standard old-fashioned recession, which we can't, it is important that we have a flexible system so that it absorbs the adjustment."

Over the last decade the evidence of our increasing inflexibility has been overwhelming.

New employment legislation, £56 billion of additional regulations, poor skills and failing infrastructure have all made Britain's economy less flexible. And that's before the effects of the proposed tax rise on entrepreneurs.

And the result? Our productivity growth- what Gordon Brown rightly called the "fundamental yardstick" of economic performance - has fallen while in the US it has almost doubled.

Take home pay is down, real living standards have fallen, the tax burden is up, and business investment is down. We have fallen down every league table of competitiveness

While a benign global economy shielded Britain from the damage being done, like rocks under a falling tide, the problems are now emerging all too clearly.

In the 1980s, Margaret Thatcher's programme of deregulation and business tax reductions freed Britain to compete. She liberated the supply side and let demand follow.

We have been living off the benefits of that revolution.

But a supply side revolution is not just a one-off that happened twenty years ago. To compete in the new global economy, we need constant reform to attract business from abroad and help domestic companies to grow.

Recent visits to Eastern Europe, Ireland, India and China have reinforced my belief that we need a second supply side revolution to once again catch up, build the environment for enterprise, and become the best place to do business in the world.

The report of our Economic Policy group last year set out proposals for far-reaching deregulation.

The independent Tax Reform Commission I established showed how we can simplify our business taxes, with lower rates paid for by fewer reliefs and allowances, and we are working with PWC and Grant Thornton on how we achieve that.

Ten years ago we had the 4th lowest corporation tax rate in the EU.

We now have the 19th lowest.

It is a significant drag on our competitiveness and it needs to come down.

We will also reverse the increase in the small companies corporation tax rate, paid for by scrapping the complex new investment allowances.

And we will continue to oppose the badly thought through increase in capital gains tax - no other developed country is responding to a possible economic slowdown by raising taxes on enterprise.

And we have put forward a radical programme of school and welfare reform, because improving skills and ending dependency are crucial for economic success in the modern world.

It is a sad and shocking fact that almost five million people in Britain are claiming out of work benefits.

Despite ten years of rhetoric and billions of pounds spent on centralised welfare programmes such as the New Deal, youth unemployment is now higher than in 1997.

And at the same time as many as 80% of the jobs created since 1997 have gone to foreign workers.

It is absolutely astonishing that the new Work and Pensions Secretary says today there is no dependency culture in Britain. What further evidence do we need that ministers are out touch with reality. Can't he see what is happening in our comuntites? Can't he see that millions of people are languishing on out of work benefits? James Purnell: I've got a message for you - there is a dependency culture and the time to tackle it is now.

By giving people the incentives and the skills they need to find work, I believe we can turn this shameful situation around.

By moving people off benefits and into work we can transform their lives, and those of their children, at the same time as reducing the costs of social failure to the state.

That's why we announced in January the most far-reaching programme for welfare reform for a generation.

The Government have tried their best since then to give the impression that they are copying our lead - you might have noticed that one of the best ways to get a policy implemented is for the Conservative Party to announce it.

In this case there are three crucial reasons why I believe the Government will fail to make a real difference, just as they have failed to make progress over the last eleven years.

First they won't take the tough decisions needed to end the something for nothing culture - we have proposed real sanctions for those who won't participate in back to work schemes or refuse a decent job. They will lose their benefits for up to three years.

Second they won't crack down on the small minority who are persistently playing the system. We have proposed a year of compulsory supervised work for anyone who has been claiming unemployment benefit for more than two out of the last three years.

And third, they won't even try to tackle the really tough cases who have been stuck on benefits for years - many of whom are more likely to die or retire than they are to get a job.

For many of these people caught up in the dependency trap, tougher sanctions won't be enough unless they are combined with more support to gain the skills and confidence they need to get back into the labour market.

The resources needed to do this are staring us in the face - the billions of pounds being paid in benefits every week.

Instead of paying people benefits to fall deeper into dependency, we should be investing in them and giving them the skills they need to contribute to the global economy.

It's a compelling business case - spend the welfare budget to invest up front to get people off benefits and into work, and reap the rewards many times over in lower benefit payments.

But if it's such a win-win solution, I hear you ask, why isn't it happening right now?

The answer is Treasury dogma which Gordon Brown spent 10 years defending as Chancellor of the Exchequer.

This is the dogma that insists there is a distinction between money spent by the Department for Work and Pensions and money distributed by the Department for Work and Pensions.

Both count as spending from a taxpayer's point of view, but the Treasury won't allow savings in one to pay for new investment in the other.

It's as if your finance department won't allow you to justify investment in a new automated production line based on the resulting savings in production costs.

Gordon Brown has fought tooth and nail against any changes to this dogma. He battled in Whitehall against the recommendations from David Freud's report on welfare reform that it should be scrapped.

The result is that the Government's ambition on welfare reform are totally undermined.

For all the announcements that we've seen from the Government in the last week, the Department for Work and Pensions can only afford to provide support to new claimants of incapacity benefit, plus the tiny proportion - less than 10% - of the existing 2.6 million claimants who are under 25.

That's only scratching the surface of the problem.

I hope that Alistair Darling will be able to persuade his predecessor that we can't afford to wait any longer - he should announce in the Budget that an obscure Treasury accounting rule will no longer be able to hold back the aspirations and life chances of millions of families.

If he doesn't, a Conservative Government will re-write this accounting rule and free up the investment that we need to truly transform our welfare system.

David Freud has said that "the most important aspect" of our proposals is "a clear commitment to overturn and modernise the artificial accounting distinction between programme costs and welfare payments".

As he says, "that means we can open the way to put billions of investment in to get people back off the stock of Incapacity Benefit and back into the world of work".

To protect the taxpayer still further our plan makes sure the up front investment, and the risk, would be taken on by the private and voluntary sectors, who would get paid for placing people in work from the benefit savings to the Government.

If international experience in countries such as Australia and the USA are anything to go by, the "payment by results" system that we have proposed will unleash billions of pounds of private investment in skills, support and mentoring.

And the results will be lower benefit spending - money that we will use to end the perverse "couple penalty" in the tax credit system that gives couples more money if they split up.

Most importantly it will move hundreds of thousands of people into work, equip them with the right skills, and provide business with the workforce that it needs to compete in the global economy.

Conclusion

So these are the long term reforms to our economy that we will make and I want to be judged on.

My ambition is nothing less than to make Britain the most competitive major economy in the world so that the benefits of globalisation are felt by every citizen, and we see living standards in our country rise not fall.

That, in the end, is the best defence against adversity and instability.

It means a financial oversight regime that works. It means a strong and independent Bank of England. It means not borrowing in a boom. It means long term reforms to make our economy competitive. It means biting the bullet and getting to grips with a welfare system that traps people in dependency.

That is the leadership that you have the right to expect from your Government.

And it is the leadership that a Conservative Government will provide.

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