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These have been a turbulent few months, both in the battle against terrorism and for the world economy. In Britain, we have been at the sharp end of terror alerts and we must remain vigilant against all security threats. Around the world, stubbornly high oil and commodity prices and continued tension in the Middle East have contributed to fears of further inflationary pressure and have threatened growth. In Britain we have faced the second-round effects of those high oil prices on gas, electricity and utility bills. But even during these turbulent months the British economy has been showing a capacity to withstand its share of these global shocks.
In every other decade, an oil shock by itself would have threatened a return of the traditional British “stop-go”. But once again our economy is demonstrating the resilience that has given us the longest period of unbroken growth and stability in our history.
While good figures will never be an excuse for complacency, industrial production is moving upwards, business investment trends are promising, productivity growth is actually stronger than previously thought, employment has risen again to a record high and growth so far this year has defied the pessimists once more.
The Bank of England has once more shown itself to be forward-looking and pre-emptive, raising rates by a quarter point, anticipating the effects of strengthening growth and at all times remaining vigilant on inflation. We will need this strengthened British resilience to face tough times ahead. Global risks remain and the world economy faces an uncertain autumn.
Across the world, we are seeing not only the impact of terrorism and geopolitical uncertainty on our economies. We are also seeing a surge of protectionism. Whether it is called “populism” in Latin America, the promotion of “national champions” in Europe or “nativism” in the US, the same sentiments are sadly fuelling isolationism in parts of the world, anti-Americanism in others and anti-globalisation forces almost everywhere.
These are now magnified by one of the most ominous summer setbacks – the damaging collapse of the world trade talks. We must all wake up to the reality that, without the forward momentum a new trade agreement would give, we risk rolling backwards to the age of beggar-thy-neighbour protectionism and the further threats to stability that would flow from it.
This places a special responsibility on the world’s economic leaders when the International Monetary Fund and World Bank meet next month in Singapore. I have decided with Rodrigo Rato, the IMF’s managing director, that we must put trade and globalisation at the top of our agenda.
We must argue that freedom to trade is part of a progressive approach, that the world’s best hope is not less globalisation but more and that the escape route from poverty lies not in isolationism but in greater global economic integration. But Britain can address global risks and lead the argument for global reform only if we show the right example at home – by locking in stability, sticking to our internationalist principles and resisting any return to short-termist gesture politics.
For too long, British politicians of every stripe were willing to sacrifice long-term stability to satisfy the short-term demands of sectional interests, putting off necessary interest rate increases, accepting inflationary wage demands, bowing to protectionist forces, ditching essential reforms or promising unfunded tax cuts.
When governments failed to take tough long-term decisions, it was businesses, homeowners and workers who paid the price every time with a stop-go economy, high rates of repossession and higher levels of unemployment.
This year, to fight inflationary pressures, we have ensured that public
sector pay awards have averaged 2.5 per cent, the lowest for a decade. For the coming year, I have told every department to go further and found all pay settlements on achieving our 2 per cent inflation target. Toughness on pay is just part of a public sector reform programme, to release resources for national priorities, that also includes an 80,000 reduction in the civil service, £30bn ($15.8bn) of asset sales by 2010 and more stretching efficiency targets.
The same strength to make the right long-term choices for Britain requires us to resist easy options and at all times, Budget by Budget, strike the right balance between keeping tax low and meeting the needs of public investment and stability.
Our reforms have allowed us to cut corporation tax from 33p to 30p in the pound and long-term capital gains tax from 40p to 10p, changes that we could afford and sustain. No political party will be trusted if it promises stability in one breath and unfunded tax cuts in the next. To make unfunded promises, to play fast and loose with stability (indeed to play politics with stability) is a return to the bad old days – something I will never do and the British people will not accept.
Our economic leadership abroad and our stability at home depend on us continuing to have the strength to take the right long-term decisions and to put stability first. That is the test by which I want to be judged.
The writer is the UK chancellor of the exchequer