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Clarke: New Labour and the British Economy

Speech to Cass Business School

"A serious critique of the Government's wholly inadequate management of the economy is long overdue. The myth has got about that Gordon Brown is a very good Chancellor. The truth is that Gordon Brown's claimed economic success is an illusion.

Far from building on the strong economy he inherited, growth and investment in our economy have been below what my party achieved before 1997. The Chancellor has failed to restrict public spending to what the nation can afford. His tax policies have not been the "fair" policies that he promised. Gordon Brown's policies are remorselessly eroding our national competitiveness. The UK is no longer the exciting place to do business that it was in the 1980s and 1990s.

I am not surprised that Gordon has spent the last three years desperately trying to get out of No. 11 and into No. 10. A Chancellor should only be judged by one measure - the state of the economy he leaves behind. Gordon is going to leave some grisly economic problems for his successor. His economic legacy will be a growing issue between now and the next election and it will still haunt him if he becomes Prime Minister.

Today I am going to show how the reality of New Labour's economic performance in no way matches the promises they made to get elected. And I want to point the way forward as we begin to articulate the case for the Conservatives to run Britain's economy after the next election.

The New Labour Case

The 1997 Election was not about the economy. Polls showed that we had restored our reputation for economic competence - it is a commentators' myth that we had not. Gordon Brown promised to stick to my figures and did not make a big issue of my economic policies. We tried to claim that Labour's promises made a black hole in his figures but failed to persuade the electorate of that. The economy never really featured in their victory and our defeat.

It is important to remember that Labour came to office having made some very specific promises about their economic policy. We were told that:

• they would raise growth by "strengthening our wealth-creating base";

• they would be "wise spenders and not big spenders";

• taxes would be "fair and be seen to be fair";

• they would increase competitiveness and raise private investment.

These 1997 manifesto pledges were significant because they were meant to mark a new departure for Labour. There was to be no return either to the boom and bust of past Labour governments or their penal tax rates.

A Labour Government would, they claimed, be wise spenders of public money. Ministers would even be required to find savings before they could spend more. Taxation would be fair and would be designed to encourage employment, create incentives to work and promote savings and investment.

You may be wondering why there was no reference to motherhood and apple pie. In fact, the economic section of Labour's manifesto was illustrated by a picture of a mother with her children and another of a delicatessen counter in a supermarket. I suppose apple pie was thought old-fashioned and therefore "uncool". Labour's 1997 manifesto was, if nothing else, a master class in political marketing.

But I believe that politicians should be judged by their promises. Of course it is not always possible to deliver everything you have set out to do. The electorate does not expect perfection. If you are honest and open about your mistakes they will forgive you. But the voters judge harshly those in public life who promise everything but deliver little. So they should. Labour's performance must be judged by what they promised us in 1997.

1 Economic Growth?

Their first promise was clear: "An explicit objective of a Labour government will be to raise the trend rate of growth by strengthening our wealth-creating base". This is an objective for national policy with which wholly I agree. When I was Chancellor of the Exchequer, I used to say that a Chancellor needs to ask himself the question, 'am I making it easier for a businessman in the Midlands to create jobs and wealth?'

Economic growth derives partly from economic stability and we did not enjoy that stability in the 1960s and 1970s. The Conservative economic reforms of the 1980s and 1990s - opposed by Labour at the time - were robust but they were right. They have stood the test of time. Even Gordon Brown's tinkering has not wholly destroyed the economic revival those reforms made possible.

Economic policy has to be governed by a set of rules and the Major Government went for an inflation target and a balanced budget over the economic cycle. Norman Lamont made a key step forward by establishing our inflation target. After 1997, Labour took away from the Chancellor the responsibility for meeting that inflation target as part of giving the Bank of England independence. Contrary to some reports, I was always in favour of an independent Bank and I was moving towards that as Chancellor.

Having given up responsibility for monetary policy, Gordon Brown invented two new rules for his tax and spend policies:

• the first of these, the so-called "golden rule" says that government may only borrow to invest and not to fund current spending over an economic cycle;

• the sustainable investment rule says that debt must be kept under a 'prudent' level of GDP across the cycle.

The truth is that the "golden rule" is made of fool's gold. What, you may ask, does "investment" mean in this context? You may be surprised to learn that repairing potholes in roads counts as "investment" under Gordon Brown's "golden rule". This is patently ludicrous. Investment has become a label for anything the Chancellor wants to shift off the revenue balance sheet.

The most scandalous example of this is the decision to exclude Network Rail's borrowing from the definition of public sector debt. This conceals huge potential liabilities of £21 billion as well as making the Government's public sector borrowing figures look better than they are.

First Gordon Brown fiddled the definition of "investment"; now he has fiddled the definition of the economic cycle. It was done in that classic New Labour way - slipped out just as Parliament was rising for the summer recess. It is entirely typical of Gordon Brown's style that he disguised this with an obscure tome full of economic jargon.

The Treasury document took fifty pages to tell us something very simple: the Government had changed the date at which the present economic cycle is supposed to have begun from 1999 to 1997.

Labour only chose 1999 originally as the start date for the cycle in order to make the phoney argument that the recovery had begun after they had won power. Ironically, they have now had to drop this absurd claim and concede that the recovery was under way by 1997. They have used two years of surpluses gained by sticking to my figures to rescue themselves from their present problems.

With one bound Mr Brown was free. By changing the point at which the current economic cycle started he could borrow another £13 billion and hope to escape further tax rises in 2006.

This is more than just cooking the books. It is a body blow to the reputation of a Chancellor and a Government who prided themselves on their supposed adherence to the golden rule. Mr Brown has not just trashed his own rule; he has done lasting damage to his reputation. A damaged Chancellor is a weakened Chancellor.

Independent experts had long predicted that the Chancellor would break his golden rule next year and have to raise taxes. The Institute of Fiscal Studies said as much in October 2004. The International Monetary Fund issued the same warning. The OECD said that postponing measures to tackle what it saw as a structural deficit could make any downturn worse.

Labour has not strengthened the nation's wealth-creating base; they have weakened it. Britain has dropped from fourth to eleventh in the World Economic Forum's international competitiveness table. Manufacturing, one of Labour's priority areas for growth, has contracted remarkably with a million jobs lost since May 1997. Although the economy has continued to grow, it has grown at a slower rate under Labour than it did under my party.

Worse, such growth as we still have in 2005 is being sustained largely on debt -household and public. Growth is also slowing down and is already below our "trend growth" level which is the level that the UK economy ought to be able to achieve.

The verdict on Labour's performance on economic growth? A generous critic would say that it could have been worse. It certainly was under previous Labour governments. But it was nowhere near as good as it could - and should - have been. In 1997 as a result of what they inherited, Labour had a truly exceptional opportunity to bring about a step-change in the performance of the UK economy. They flunked it and we are all the losers as a result.

2 Wise Spenders?

Labour's second election promise on the economy was that they would spend our money wisely. I thought at the time that I would believe that when I saw it. Labour is congenitally incapable of spending taxpayer's money wisely. It has an unenviable record of mismanagement in both central and local government.

I was surprised by Gordon's first two or three years as an Iron Chancellor embracing prudence. But it was never going to last. In the year 2000 he threw prudence on one side and became an old fashioned tax and spend Chancellor making a reckless dash for growth. Superman threw off his cloak and became Clark Kent. He has been addicted to spending other people's money ever since.

Under this supposedly cautious government, the increase in government spending has been phenomenal: it has risen by half in cash terms since 1997 and by 27 per cent if you allow for the increase in prices. This year alone, public spending is planned to rise by over seven per cent. Too much money has been spent and is being spent. Much of what has been spent has not been spent wisely.

Take public sector jobs. The Government plans to recruit 360,000 extra public sector workers between 2003 and 2006. If past trends are repeated, fewer than 45 per cent of these people will be working in frontline roles. The civil service grew by 64,000 in just five years.

The Government still tries to make extraordinary claims that the cost of running the government machine has fallen. It has not. Central government administration costs rose by 60 per cent to over £21 billion after 1997. The Government's claim is the result of using an accounting trick: they count in the cost of the administrations in Scotland, Wales and Northern Ireland before 1997 but exclude them after Labour were elected. This is Enron-style accounting and it is a disgrace.

The national debt stood at £352 billion when Labour came to power; it is now £415 billion and it is likely to reach £573 billion by 2010. This rate of growth is not sustainable and it already concerns the International Monetary Fund. Some of us remember Labour Governments getting into difficulty with the IMF in the past.

This is the opposite of what New Labour promised us. "We will not build the new Jerusalem on a mountain of debt", Gordon Brown told the Labour Party Conference in 1996. "We will not make the mistakes of previous Labour governments who failed to control spending and then had to cut back" he said on another occasion.

It matters because "prudence" was at the heart of the New Labour 'project'. Philip Gould, Tony Blair's opinion polling guru, had identified a pledge of financial prudence as immensely popular with the public:

"The economic-prudence pledge provided massive reassurance, almost

physical relief. Every respondent selected this as their first pledge".

It was a critical promise for them because of Labour's notorious failure to control spending in the past. By turning the back on that key pledge in 2000, Labour has fundamentally undermined its credibility on public spending.

If you criticise Labour's spending programmes you are met with the silly knee-jerk response that you want to cut spending on schools and hospitals. Well I do not want to cut spending on schools and hospitals; these ought to be priority areas for public spending under any government. The trouble is that Labour has not just put money into these key areas. What they have done is to scatter taxpayer's money across the public sector like a Grand Prix winner spraying champagne over the crowd. That is irresponsible and it does not deliver better public services.

Productivity in key services like the NHS has been falling like a stone. Labour's reaction to that has been to try to get the definition of productivity changed.

Gordon Brown introduced public service agreements so that there would be clarity about what the extra public money was paying for. Incredibly, half of the Treasury PSA targets were apparently not met. Every Department has also produced performance targets of their own. The result has been the creation of an industry which employs large numbers of public servants in desperately trying to create statistics that will match the targets.

Labour has failed to come up with an effective mechanism for ensuring that increased resources for public services reach the frontline where they are needed. I do not argue that is an easy thing to do - I know that it is not. I do say that Labour's approach has completely failed. What is more, the public knows it. They can see that they are not getting value for the increases in taxation.

If we take Labour's commitment in 1997 that they would be wise and not big spenders, the very opposite has happened.

3 Fair Taxes?

In 1997 the Labour Party did attack the Conservatives over higher taxes. They then went on to make the bold promise that they would "establish a new trust on tax with the British people". Theirs would be a government that offered "fair taxes".

Labour's record shows the hollowness of that pledge. The tax burden has risen substantially during Gordon Brown's chancellorship. By 2009, it will be at its highest level for 24 years - on current plans. It could go even higher if Brown responds to rising public debt by increasing taxes. The tax burden has risen from 34.8 per cent of GDP when I left Number 11 to over 37 per cent this year and it is planned to rise to 38.5 per cent. I do not equate such a large rise in the burden of taxation on families and business with Labour's promise to have "fair taxes".

Labour's promise not to increase income tax or VAT was meaningless. All they have done is to shift the burden to other taxes, some of them very regressive. One of the most striking examples of this is the council tax, where the average Band D tax has risen by a breathtaking 70 per cent in eight years. There is nothing fair about imposing higher taxes on pensioners with modest incomes; that is exactly what the hike in council tax has done.

The cumulative effect of Gordon Brown's approach is staggering if you pause to look at it. Income tax would have had to rise by 16.5 per cent at the basic rate to raise as much revenue as he has raised by his 66 stealth tax increases. Four million more people are now paying income tax than when Labour came to power. The failure to up-rate allowances has led to the number of people paying the top rate rising by a third over the same period.

It is not just individuals who have been hit by tax rises. Business has been adversely affected too. The Chancellor once declared that, "I want tax cuts for business, not tax rises" but he has delivered the opposite. Over 30 of Gordon Brown's 66 tax rises have been on business. Some, like the increase in employer's National Insurance contributions in 2003, raised the tax burden on the creation of jobs by employers. That NIC change alone increased taxes on business by £7 billion. The CBI estimates that the cumulative tax burden on business has risen to £54 billion under Labour.

Constant changes to the tax system, such as those we have seen in corporation tax since 1997, make the system more complex, less transparent and more difficult for companies to understand. This is often because Gordon Brown avoids transparent tax rises in order to deceive the public but goes for hidden tax fiddles instead.

This is hardly surprising; if you bump up public spending you have got to get the money from somewhere. The Chancellor had no choice but to put up other taxes. Over a period of time, this puts UK companies at a disadvantage compared to their global competitors.

Fair taxation must be related to ability to pay but it surely also means transparency and simplicity. Tolley's Yellow Tax Handbook now runs to 7,344 pages in four volumes. How on earth can companies and taxpayers be expected to find their way around a tax system that complex?

Whatever they promised, Labour's tax policies have proved to be anything but fair in practice.

4 Increased competitiveness and investment?

"We will build a new partnership with business to improve the competitiveness of British industry for the 21st century, leading to faster growth". Another page of the manifesto; another promise to the electorate. But have Labour's policies made us more competitive?

What Labour has done is easily summed up: they have increased the regulatory burden on business; they have presided over a dramatic fall in manufacturing; they have failed to increase productivity; and they have extended personal dependency on the state. Not a good record if you are promising to improve Britain's competitiveness.

The worsening balance of payments is a worrying sign that our economy is no longer competitive in the global market place. We had a £1 billion surplus in trade in 1997; by 2004, the UK had a mammoth £39.7 billion trade deficit, the biggest since the 17th century.

The regulatory burden on business is excessive and it is still growing. The British Chambers of Commerce estimate that the cost to business of the additional regulations introduced since 1997 now stands at nearly £40 billion. The cost to the economy of implementing new legislation is now running at £6 billion a year.

In 1995 Gordon Brown promised to "implement an industrial policy so that our manufacturing industries can grow again". Since he became Chancellor a million jobs have been lost in manufacturing; the level he had inherited had remained broadly unchanged for five years. This is not just a personal disaster for the families and communities affected. To retain our status as the fourth largest economy in the world we need to be more than a service economy.

The Government's record on productivity is simply appalling. Productivity growth has fallen by a third since 1997. In an excellent recent speech, my colleague David Willetts set out the scale of the productivity challenge that we face. David cited the OECD's latest figures, published this Spring. The output per hour worked in dollars in Britain in 2003 was $37.70, lower than the G7 average and lower not only than France, the United States and Germany but lower even than Italy.

Part of the Conservative approach to stimulating industry and enterprise in the 1980s and 1990s derived from the belief that individuals need incentives to succeed. We set out to reduce individual dependency on the state and strengthen personal self-reliance. We understood that increasing labour market flexibility was critical to raising our overall economic performance.

A government truly committed to making Britain more competitive would have continued with this approach. Instead, Labour has extended personal dependency on the state in a remarkable way. Tax credits, their euphemism for social security, actually provide financial help for people with an income of up to £66,000 a year. If you want to make Britain competitive with India and China you don't start by giving social security to families earning £66,000 a year. Bringing up children is costly but there are better ways for the state to support families than through handing out social security to people who are paying top rate tax. Even some of my fellow MPs are apparently claiming the child tax credit. It makes a mockery of the welfare state and discourages self-reliance.

In their manifesto Labour implied that Britain had a poor record in 1997 on investment when the opposite was the case. British business investment in the UK was growing at 10.5 per cent a year in 1996-97; it had fallen to 3.4 per cent by 2004. The dire performance in 2004 was actually an improvement on an even worse performance over the previous half dozen years. Far from encouraging business to invest, Labour has presided over a collapse in investment.

There are a number of factors at play here but the Government cannot shirk its responsibility. Under its stewardship the savings ratio has fallen by almost half. The pension's tax has taken over £5 billion a year out of investments. Companies have had to increase contributions to pension funds to make up for the shortfall.

First Labour vandalised our pension system and then they ignored the looming crisis over the rising cost of retirement. Their policies have been irresponsible and short-sighted.

If you think I am being harsh, listen to the former Labour Minister Frank Field MP on the subject:

"When Labour came to power we had one of the strongest pension

provisions in Europe and now probably we have some of the weakest".

The scale of the crisis is awesome: FTSE 100 companies now have pension fund deficits of £61 billion. Only 18 per cent of companies now offer a final salary pension scheme, compared to 78 per cent of organisations in the public sector. Less than half of people under thirty are now saving for a pension.

The Government's response has been to set up an inquiry; it is no good setting up an inquiry when your own policies are the problem.

The policy failure on competitiveness and investment is the fourth of Labour's failed economic promises. We were promised that this Government would be a different kind of Labour government, one that would break the mould. They have not done anything of the sort. This is a tax and spend Labour Government and over the next four years the public will begin to feel the consequences of Gordon Brown's failures in policy. As the burden of taxation, public spending and regulation increases, the British economy is steadily becoming more like a continental European economy at the very time the continental governments should be reforming to lift those burdens and move closer to the Conservative "Anglo-Saxon" model.

A Conservative Agenda

The mere fact that the Labour Government has not lived up to its promises on the economy will not win my party an election. The electorate will want to know what an alternative economic policy will mean for them. Now is not the time to write the first Conservative Budget speech but we should be thinking about what the fundamentals of our economic policy should be.

A Framework for Growth

The aim of Conservative economic policy should be clear: to create an enterprise society where we seek the Holy Grail of steady growth and low inflation.

Thanks to Tory policies in the 1990s, we have had twelve years of modest growth and low inflation. But we do not have a good enough enterprise society in Britain today to face the rapidly changing modern world. Indeed, I believe we have lost some of the entrepreneurial cutting edge that marked us out in the early 1990s.

A key part of Conservative policy-making over the next two years must be to come up with ideas to give the UK back that hunger for business success. In order to achieve that we will have to remind people that a well-run economy makes for a better quality of life for all. Whatever happened to "popular capitalism"? The sense that we can all share in rising prosperity seems to have evaporated. We need to revive ideas like wider share ownership and reinvent them for a new time.

Britain needs to be a place where entrepreneurs know they will be supported. Even Labour accepts that the 1970s notion of the Government 'picking winners' is well and truly dead. But that does not mean government has no role in supporting enterprise.

Government can help to create the right conditions for growth in a number of ways. The first of these is competent policy management at the centre. New Labour's economic policy management has been characterised by an obsession with spin and rhetoric, excessive regulation, conflict between the Prime Minister and the Chancellor and a wholesale fiddling of the figures. All this must stop.

The Treasury must be the centre of policymaking. The Department of Trade & Industry should be scrapped. I know that upsets the panjandrums of the business establishment but if we no longer have nationalised industries, we no longer need a department to run them. I do not believe that the DTI has made a substantial contribution to our national prosperity in its 35 years of existence.

We need high quality statistics compiled by a truly independent statistics body. I marvel at the fuss Labour made about our use of statistics in the past. They have manipulated and misused statistics in a way that has shocked the most hardened commentators.

I also believe that we need independent economic forecasting. I began to pursue this line when I was at the Treasury. You will not be surprised that I met some resistance. But I see no justification for the continuance of the present system. This is just the sort of expert advice that can be more effectively delivered by outsourcing.

The Public Spending Crisis

It is a fundamental truism of Treasury life that if the Chancellor is not prepared to say "no" to some of his colleagues' demands for money, the nation will go bust. Just like life, politics is about choices. The Treasury should not be a sweet shop where the goods are given away free.

A Tory government should scrap Labour's experiment with a three-year spending cycle. All it has done is to cause departments to submit inflated bids as a hedge against inflation in two or three year's time. We need to reinstate annual spending rounds with an agreed maximum total at the outset. It has some disadvantages but it is the only way to work. Three-year spending programmes remove all flexibility from the system. Public spending needs to change in response to unforeseeable events in the growth of the economy or the costs of public services. A three-year straitjacket is inefficient and produces inflated budgets padded out for safety.

We must tackle the running costs of departments. I detailed earlier the alarming increase in public sector employment under this Government. Overall public sector employment must fall - but the cuts should fall on the backroom and not on the frontline.

We also need to tackle the scandal of consultancy costs. Too often the use of external consultants is an exercise in covering policymakers' and Departmental backs. The use of consultants should be governed by a strict set of rules and constantly evaluated to ensure value for money.

But let me be clear: controlling public spending cannot just be about waste. Governments have constantly to keep a grip on spending and borrowing. The art is to control public spending to what the nation can afford whilst steadily improving core public services through better use of the resources that can be afforded. That art has remained an impenetrable mystery to New Labour. It is a counsel of despair to say that it can never be done.

My party needs to consider now whether we can devise some basic tests for public expenditure. We must first be prepared to ask the question of every activity, "should the government be doing this at all?" If it is a responsibility that must fall upon the public sector, what is the best way to deliver it? Can the private sector do the job more efficiently and at a lower cost? If we are handing out taxpayers' money, is our scheme proof against fraud? Do we have a foolproof system in place to measure whether we are delivering what we believe we are paying for? These are some of the potential tests that we must apply. No doubt we will devise others but I believe this approach should reduce the percentage of GDP taken by the government. We need smaller but better government in order to be competitive in the twenty first century.

New Labour has talked the talk on public sector reform but they have not delivered. We will not control public spending until all Ministers in all departments are made to understand that more money must mean better services - every time.

Tackling the Over-Regulated Society

There is no doubt that we live in an over-regulated society. There is a trend towards greater and greater regulation and we need to call a halt to it. I am under no illusions about this as a politician. People do not queue up at my constituency surgery to tell me that this or that area of human activity should no longer be regulated by the state. The opposite is true. Powerful single issue lobbies demand more and more regulation for what sound to be very worthwhile reasons. It will be very hard to change this culture but we have to try.

We need to be clear that a Conservative government would stick up for enterprise. The principle has to be that regulation has to be proportional to the problem. The State can never eliminate every risk and should not pile cost and bureaucracy on business and citizens in a desperate and excessive attempt to do so.

The heavy handed enforcement of regulations is also a growing problem in modern Britain. Regulators need to work with business and not see the people they are inspecting as the enemy.

The Tories & Tax

I should say at the outset that I am not about to lay out a tax policy today for my party in 2009. No one can predict economic conditions with certainty or the needs of the public service four or five years ahead.

What I do say is that reducing the tax burden can only follow reducing the growth in public expenditure. Tax cuts that are made before public spending control is achieved can only be financed by borrowing and borrowing is merely tax deferred.

Conservatives are not in favour of tax cuts because they benefit the better off. We know that low tax economies are the successful economies. All of us benefit from the economic growth that low taxation can stimulate.

But we must be honest with people and tell them tax cuts can only come only when they are affordable. And probably the first area for tax relief when we have done the necessary work to make it affordable will need to be pensions and savings rather than cuts in direct personal taxation.

Telling people that they are going to have to work longer and retire later is not an easy message. But it is the plain truth. I propose to set an example myself here. We must support those who do save for their old age with a proper package of tax breaks for savings. These are essential as inducements to get people to save. Part of our difficulty will be that Gordon Brown has cut back these tax breaks. For example, the Government has built into public spending the £5 billion it takes each year as a result of cutting pension tax credits and it will be difficult to afford to reverse that tax increase. But we must strive to do so as soon as we can afford it.

The Tory Challenge

The success of the government formed after the next election as of all Governments will depend on its ability to deliver sound economic conditions. Tough decisions on public spending have to be made because of the need to ensure the stability of the economy and to create greater prosperity to finance everything that governments and individuals wish to achieve.

The economy is always at the centre of our political life. But it is an area of public policy least suited to gimmicks and rash promises to spend more in order to get a good headline. Gordon Brown started off by offering a prudent policy but he gave it up and became just another tax and spend Labour Chancellor. The "Iron Chancellor" has corroded through to the base metal and the rust is beginning to show.

The Conservative Party must always stand for stable economic conditions that enable enterprising people to create the wealth upon which we all depend. If I became Prime Minister after the next general election, I would be looking for a real Iron Chancellor to clear up the mess left by Gordon Brown."

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