Britain's Economy Today

Speech by Rt. Hon. Charles Kennedy MP, Leader of the Liberal Democrats delivered to Business on Thu 28th Oct 2004

I am speaking to you at a time when there is growing uncertainty in the business environment - rising interest rates may have 'cooled' the housing market but have meant higher borrowing costs for manufacturers, there is slower domestic and export demand due to high exchange rates and record oil prices, which have recently hit over $55 a barrel.

As we enter a period of three party politics - with the three main parties bunching closer and closer together in the polls - the next few months before a probable May election are going to be extremely important.

Clearly, the party who wins must be economically credible as well as recognise and deal with the imbalances in the economy.

And if we are to ensure that our business are able to compete globally, the task of any Government is to ensure that there is a literate - and mathematically literate - population; transport infrastructure which works; moderate, and simple, taxation; and freedom to trade and invest, not least in the Single Market of Europe.

The challenge for the Liberal Democrats is to meet these tests.

Traditionally, politicians spend their time lambasting their rivals and opposition politicians are expected to attack everything about the Government.

I would like to do something a little different here. I consider yah boo politics lazy and destructive.

I prefer to offer constructive criticism; and would prefer to set out positively how we Liberal Democrats would seek to solve our national problems.

I would also like to give credit to the Government where it's due.

This government - and Gordon Brown in particular- has established a reputation for maintaining economic stability.

His key innovation has been giving independence to the Bank of England to set interest rates.

My party has not only consistently supported this policy; we were the first to advocate it.

This has helped to deliver steady growth, low unemployment and low inflation.

These are positive achievements; but there is a down side to the Chancellor's stewardship of the economy.

The Government's endless self-congratulation too easily feeds hubris and complacency.

Alongside the successes - there is also much damaging economic instability.

The lurch from the severe squeeze in public spending in the first years of the Blair Government to the rapid growth of spending since, has led to considerable, unnecessary cost.

Take one example: we waste £1 billion a year on excess charges for agency nurses because key decisions to train and retain staff were not made earlier.Instability over the currency creates further problems.Manufacturers and farmers have been trading for some years at an exchange rate which on some measures has been 20% or even 30% overvalued against a basket of other currencies.That is one reason why Lib Dems keep returning to the unresolved issue of our economic relationship with the Euro area.

The fluctuations in the housing market are another source of major worry.It affects most British families whose home is the principle repository of their personal wealth. I am particularly concerned that the Government has had so little to say about this particular problem - or the fact that we have recently passed the trillion pound figure for personal debt: which is largely secured against inflated house prices.

My colleague Vincent Cable has set out a ten-point plan for creating greater stability in this key area of our economy and it has been treated with respect.

The Chancellor's main responsibility is for the budget.So far Gordon Brown has managed this successfully.

Government debt is moderate.The fiscal deficit is, just about, within the 'golden rule'. Public sector finances are in reasonable shape.

But there is no room for error and a downturn - a sharp fall in the housing market' or a new oil shock - would create a worrying amount of red ink.

As leader of a party which seeks to establish its economic credentials - I would urge caution in these circumstances.

The Government has promised to find £20bn a year extra from so called 'efficiency savings' and the Conservatives are promising to use such savings for tax cuts.

While there is no doubt that it is possible to find different priorities for government spending - and my party is proposing some - I am wary of some of the more extravagant promises which are being made for savings which can be made by cutting red tape and sacking civil servants.

If such savings actually do materialise, they should be used to reduce the budget deficit.In addition, we need a genuinely independent system for monitoring the government's performance in fiscal policy and a genuinely independent Office of National Statistics.At a time when trust in the politics is a serious issue - and particularly trust in this government - the public must be able to believe the figures.Credibility is fundamental.

PROBLEMS FACING BUSINESS COMMUNITY

Turning to problems which specifically relate to the business community, there is increasing concern, and sometimes anger, being expressed by many firms - especially small businesses - about the cost, complexity and inconsistency of government (and EU) regulation.While it is tempting to create a simple dichotomy between less regulation (good = liberal) and more regulation (bad = illiberal) - the issue is not fundamentally one of principle.Regulation is sought because there is a market failure.

The problem in the UK context stems from the fact that what often seem to be desirable measures in isolation are becoming, cumulatively, very onerous.The traditional calls for 'less red tape' are understandable but do not take us very far unless it is clear which red tape is being cut.

Liberal Democrats have tried to be specific, and wish to work with business to identify unnecessary regulation.But something stronger is required: a wave of regulatory reform both at a national and EU level.

There has to be a satisfactory, independent system for regulatory impact assessment, in order to ensure that action is proportionate to the size of the problem and the costs regulation incurs.The concept of 'sunset clauses' has been widely promoted but infrequently acted upon.

The UK Government is beginning to apply such disciplines, though the assessments vary in quality from department to department and there is no consistent or independent methodology.

A more detailed assessment process - which should in future be both more rigorous and independent - should be used to ensure that civil servants publicly justify costs they are imposing on the economy.

SPECIFIC MEASURES FOR BUSINESS

Under Liberal Democrat proposals no new regulation will be passed until there is a fully published assessment of its costs and necessity. Every new regulation will automatically cease unless Parliament specifically approves its renewal after a period specified in a sunset clause.And endless visits by all sorts of factory inspectors will be replaced in most cases by one all-purpose inspection.

There is a need, too, for much higher levels of accountability.The question 'who regulates the regulators?' was less important when regulating was seen as both temporary and technical.But as it has become more entrenched and political, regulators have to be subject to more demanding levels of accountability.And we would like to see the regulators like the heads of the OFT, the FSA and HSE subject to the same confirmatory hearings as the members of the Monetary Policy Committee.

Liberalism has always been about encouraging enterprise, competition and markets.

The entrepreneur Ghulam Noon recently pleaded with Patricia Hewitt at a business conference: "please stop trying to help us!" At our last party conference our motion on business was entitled: "setting business free"

Our proposal to abolish the DTI is not just about saving money but because we understand the frustration business has with a meddling, centralising, over regulating government. Its abolition is the largest act of deregulation.

The government's task is not to pick winners and prop up losers but it should promote enterprise. Our proposals ensure that business interests are represented by at the 'top table' by giving the Chief Secretary to the Treasury responsibility for business.

Gordon Brown has missed a huge opportunity to restructure the tax system and remove serious anomalies.

Instead The Chancellor has created an extremely complex network of tax credits for individuals and businesses on income and capital and the complexity has often become counterproductive. Tax simplification should be a major objective of policy.

LIBERAL DEMOCRAT TAX AND SPENDING PLANS- TOUGH CHOICES

I put much emphasis on sound public finance.That is why I have insisted that most of the spending commitments my party makes at the next General Election should be fully accounted for and financed by cuts in lower priority spending.

We have just completed an exercise of demonstrating how £25 billion could be switched over a parliament - not in cutting waste, but by making clear policy choices.

We have identified several areas where major savings could be made:

I have already spoken about the abolition of the DTI

Cutting the 'Local Area Initiatives' and cuts in the Treasury, DEFRA and ODPM which duplicate the role of local government

Scrapping the government's 'baby bond' scheme

Scrapping the proposed ID card

Cutting substantially the Eurofighter programme

We would be more radical than the government in relocating the civil service and agencies as part of our commitment to decentralisation.We would privatise bodies best run in the private sector: like Royal Mint, ECGD and British Trade International.

Out of that we can make a really serious commitment to priority areas:

" We would radically improve state pensions, lifting many older pensioners out of means testing. There is now a general consensus that means fails to reach many in poverty and creates a disincentive to save. About half of our allocated £25 billion will be spent on pensions.

" We would demonstrate a commitment to 'law and order' - what I call 'tough liberalism' - through a big increase in police numbers and also in prison education and drug rehabilitation

" We shall fill some important gaps in the government's education programme - specialist maths and science teachers in school

The commitment to tough choices is real.

If you observe some of the Lib Dem councils in action - In Leicester, in particular, we faced a sustained barrage from Labour for making such choices; but the electorate respected us the more.

What I do reject is the idea - being promoted by Tories and Labour alike - that choices don't have to be made because there is so much 'waste' to be saved.

Of course government waste must be cut.

But the idea that billions can be magically saved through new IT systems and centralised procurement, flies in the face of experience.

And let us not forget that waste is not just about bureaucracy.Unemployment is waste (as it was under the Conservatives).

For Britain, the war in Iraq has cost over £3 billion - if the war had been conducted under UN auspices as in the first gulf war, our allies would have contributed, not just the British taxpayer.

Public services require a system of governance that is both democratic and decentralised.

One of the most fundamental differences between the Liberal Democrat approach and that of the Government is the latter's insistence that decision-making should be driven centrally, at ministerial level, through operational targets.

A more satisfactory model is one in which the strategic framework for commissioning services is set by a democratically elected authority, as local as possible. An inevitable consequence of decentralisation is that there is likely to be more variety, including variety of standards and conditions of employment.

Minimum standards could be established, but the hope would be that good practice and good example based on successful experiment would drive up standards.

Democratic elections at a local level, under fair voting arrangements, provide a better source of legitimacy and community involvement than any amount of ministerial direction, or quangos stuffed with government appointees.

FAIR TAXES

Neither our spending commitments nor the condition of the economy require an increase in general taxation.

What is required is fairer taxation.

I don't disguise from a business audience the fact that better off people- and that no doubt includes some of you- would have to pay a little moreIt is inexplicable for a government promoting an agenda of social justice that the poorest 20% of the population pay a higher percentage of their income in tax than the richest 20%.

This, we intend to correct.We propose a new top rate of tax of 50% on every pound earned over £100,000.This would be used to remove unfair charges: student tuition fees and top-up fees, which are a major deterrent to students of modest means entering high education; and the introduction of free personal care for victims of Alzheimer's and Parkinson's.

Those who complain that a 50% tax rate on high income earners is a disincentive to work and save should remember that 4 in 10 poor pensioners already face a 50% marginal rate under Pensioner Credit and many low paid workers caught in the benefit trap can pay marginal rates approaching 100%.

We also propose to scrap council tax, which is very regressive, and replace it with a local income tax.

LIT operates on the principle of the 'ability to pay' and has been used successfully in countries as diverse as Denmark, Switzerland, the US and Japan.

CONCLUSION

I have long said that the problem with the Conservative party is not the leader but the party itself.It is out of touch and increasingly confined to the rural shires of England.At the next General Election, it is unlikely that any Conservatives will be elected in Scotland or Wales; while the local elections and recent by-elections show that they are no longer in contention in the major cities.Their own party Chairman dismissed Brent, Leicester and Hartlepool as 'not their natural territory'.The party which is challenging Labour for power in these areas is the Liberal Democrats.

Today there are no - I repeat no - Conservative councillors in Newcastle, Liverpool, Manchester, and Oxford - I could go on.What all this adds up to is that the Conservatives won't win the next election, because they can't.

But I would go further. It's time to look further ahead - at the possibility that when Labour loses, as eventually it must in a democratic system, the next government may be a Liberal Democrat and not a Conservative government.

Such a Government, I would argue, should be economically Liberal while committed - as we are - to social justice, quality public services and financial discipline.

I would summarise such a programme like this.Economic stability and financial responsibility; tough choices in spending priorities; fairer taxation; and free-enterprise.