CBI West Midlands Regional Dinner
Baroness Shriti Vadera, Minister for Economic Competitiveness and Small Business (jointly with Cabinet Office)
Birmingham, 25 June 2008
Thank you Geoff for that introduction. First, let me say how sorry John Hutton is that he can’t be here tonight because of an important vote.
I want to talk this evening about the long-term competitiveness of our economy.
Pictures of fuel and food driven demonstrations and conflicts around the world are salutory reminders of events in the international economy. The UK along with almost every other major economy is facing its biggest test in decades.
I know that many of you will be facing an uncomfortable time with rises in global commodity and oil prices putting pressure on margins, with weakening consumer confidence and for some tighter credit.
I understand certain sectors are particularly under pressure such as construction and energy intensive companies.
But like Richard Lambert, i think it is important we do “not talk ourselves into unneccessary trouble.” We are well placed to weather the storm compared to previous times and to most of our competitors.
Employment levels are high. In the corporate sector you have recorded a surplus in excess of 2% of GDP. Corporate profitability is high. Corporate debt is relatively low – with the overwhelming majority of investment funded from retained profits.
Retail sales’ volumes grew by 3.5% in may - the largest monthly increase since records began although we should not be extrapolating from that.
Indeed, according to the last global projections the IMF published, the UK is set to be the fastest-growing economy in the G7 in 2008 - albeit at a much slower rate.
Please do not mistake this for complacency. It is going to be tough. The prime minister and every member of government has committed as our highest priority in the coming year, action on the economy. We will bring forward measures to help businesses and households for the short and medium term.
The recapitalisation of banks we all hope bodes well for stability in financial services. But of course we remain vigilant. We will continue to act when we need to, for example with provision of the bank of england’s special liquidity facility. And we will provide assistance where we can. For example with first time buyers or small firms that have problems accessing credit.
Turning to oil, one of the primary drivers of inflation. While there may be an element in the oil price of investment fund activity and the decline of the dollar, prices reflect an underlying long term shift in the global economy that we need to understand and be prepared for. We have already seen many gains from globalisation by way of cheaper goods and dis inflation exported by china in the main. And we will continue to benefit from the productivity gains of global competition and technological diffusion.
But we are now also beginning to see some of the flip side – international inflationary pressures and increased demand for commodities, especially oil and food from both an increase in population and in prosperity. An American population of 300 million owns 240 million cars. 1.3 billion Chinese are not going to be satisfied for long with their 37 million cars. We can do the math for oil demand.
The bottom line is global oil demand is growing faster than supply. It is not just the spot price of oil but also the forward price and the volatility from reduced spare capacity that creates a problem for business investment. And of course the price of most commodities are linked to oil in some way.
This is a global problem and the only real solution has to be global. We obviously do not control others’ actions. But we punch above our weight on the international stage. The Prime Minister has committed himself to personal leadership on this issue.
Both he and John Hutton attended the high level meeting last week in Jeddah between oil producing and consuming states and we have proposed a follow up summit in london later this year. The Jeddah summit discussed measures to deliver a more sustainable global oil price. We have already seen commitments from Saudi Arabia to increased production immediately and a commitment to invest in new capacity for longer term supplies.
The Prime Minister is proposing we explore finding a way to develop a common rather than conflicting set of interests between oil producers and consumers. Consumer states should be prepared to open their markets to investment from oil producers in alternative sources of energy such as nuclear and renewables, giving them a hedge or a stake in a long term less oil intensive future.
For the oil producing states on the other hand, over 70% of oil production and 90% of proven oil reserves are controlled by nationally owned state companies. Supply constraints abound as they have technological and capital limitations in exploiting reserves. So in return oil producers should be open to the resources and technology of international oil companies to improve their capability to increase medium term supply of oil necessary while growing economies adjust to using less oil in the long term.
In the immediate term at home, we remain resolute in our commitment to keep inflation low and reduce our dependence on oil.
We appreciate that fuel and food bills are creating pressures for families. But it would be reckless to allow these recent price movements to feed through into pay settlements. A temporary rise in inflation only becomes a sustained increase in inflation if it feeds into a damaging spiral of inflationary wage settlements.
As the Chancellor said in his speech to Mansion House last week, “continued restraint on pay is required from both the public and private sector.”
We have agreed a number of multi-year pay deals to cover 1.5 million public sector employees. Whatever the pressure we face, we will not deviate from the focus that has delivered a fall in UK inflation – with inflation in the past decade being around half what it was in the previous.
We are resolute not just to overcome these immediate challenges, but to make the right decisions for the long term that allow you to compete effectively in a fiercely competitive global economy. We know you have to make tough decisions every day in your business and so we also accept we have to make decisions with an iron focus on whether it is in Britain’s long term interests or not.
We will continue to work with business and consumers to reduce oil dependency and also meet our environmental targets through energy efficiency, substitution and new technologies.
This transition demands nothing short of an energy revolution. And tomorrow, John Hutton will host a summit with UK businesses to discuss how we can best help companies to compete for this new generation of green-collar jobs.
We have made a clear decision about investing in a new generation of nuclear power to replace existing capacity. The government would like to go further and see nuclear supply a greater proportion of the country’s energy mix.
The reason John Hutton cannot be with you tonight is because he has to stay in London to ensure we win the vote for the Planning Bill. If we are serious about nuclear and renewables as a timely part of our energy mix, we need this bill. As Richard Lambert has said those who oppose it are putting at risk both our energy supply and environmental targets.
We also need to deliver on infrastructure requirements for your long term competitiveness. I am delighted that we have agreed the joint business government investment of £398 million in the Birmingham New Street redevelopment. As part of sustainable aviation growth, extending the runway at Birmingham Airport and a 3rd runway at Heathrow are important to maintaining the connectivity of the West Midlands and all parts of the country to the rest of the world. A 3rd runway has a potential net gain to the economy, after environmental costs and ensuring we meet strict local environmental conditions, of £5 billon. And we’re working for aviation to be included in the EU emissions trading scheme.
It is easy to espouse alternative sources of energy but the tough decision is to ensure we have the planning reforms needed to actually deliver on nuclear and renewable generation. It is easy to dismiss coal in the immediate term but the difficult decisions are about bridging the gaps that would create in power generation and secure supply. It is easy to dismiss airport expansion, but the resolute decision needed is to maintain our cities as leading global centres and for the country to be connected to global markets.
To come on to the thorny issue of tax I am certainly not going to tell you it is easy to get business tax right in a globalising world, with rapidly increasing cross border activity and production chains fragmented across the world.
I know that for you stability, certainty and predictability as well as the overall burden of tax are key. We are commited to consult, listen, take advice and respond to ensure that you can plan effectively for the future.
That is why the Chancellor has set up the multi-national tax forum, which Richard Lambert sits on. And why we aim to reduce corporation tax when we can afford it.
We will also work with the CBI and others to ensure the UK’s framework of employment rights continues to support the competitive flexibility of our labour market, and advances the most important employment right of all – that is the right to work.
And we will stand up for the high skilled immigration fundamental to your ability to access the expertise you need to recruit for the long-term success of our country.
We are committed to selective migration and the introduction of the points based system that will help fill skills gaps and brings lasting economic benefits.
We know we need to go further in simplifying the skills system, ensuring we better anticipate and respond to strategic skills shortages. And put employers’ needs at the heart of skills, education and training. We have already made a start by allowing employers - including Mcdonalds, Flybe and Network Rail - to award their own qualifications.
Because more than any other issue i believe the globalisation challenge is about people – the creation and utilisation of skills. The countries that rise to the challenge will succeed and those that do not will fail.
Britain was made for globalisation. It plays to our strengths – we are arguably the most open and flexible major economy in the world. Our businesses are global leaders. We have a history of free trade, creativity and innovation and we own the international language of business.
That is apparent in our history. Just round the corner on Broad Street, there stands the statue of Boulton, Watt and Murdoch.
Three men whose ideas and entrepreneurial spirit helped start a revolution that saw UK innovation and skills change the world.
That ambition and creativity still runs throughout our economy. And here in the west midlands, it has helped achieve a 16% increase in entrepreneurial activity since 2002 and enterprise rates above the UK average.
You face the challenges of global competition everyday. But you continue to adapt and succeed, attracting investment from across the world.
2007 was a record year for foreign investment in the West Midlands - with projects including the new Ericsson R&D facility in Coventry and Shanghai Automotive Industry Centre in Warwickshire.
Manufacturing is still the single largest sector in the West Midlands economy; employing 360,000 people and generating £45 billion turnover. It makes 250,000 cars a year – 25% of Britain’s value added in the sector.
So with apologies to Mark Twain – the reports of UK manufacturing’s decline have been grossly exaggerated. It is in fact the unsung success of our whole economy.
I think part of the problem is that manufacturing is so transformed often people simply don’t recognise it as manufacturing at all. As Keynes said “the difficulty lies not as much in developing new ideas as escaping from old ones”.
For example, manufacturing investment in intangibles such as design, brand and training is outstripping traditional capital investment in the UK sector. Infact proportionately manufacturing invests more in intangibles than the service sector.
And if we think we are going to be the innovation nation that lives off its value adding brain power let us be clear where the future is. 75% of business R&D in the UK is from manufacturing.
We will be setting out our new manufacturing strategy later this year to both celebrate and promote that global success. And part of the strategy will be action to ensure that just as Murdoch, Watt and Boulton could drive a revolution – UK manufacturers can lead the world’s transition to a low carbon economy. For example Jaguar Land Rover is leading four of the low carbon vehicle platforms that the government is collaboratively investing in.
I have said none of these things are easy. But this government will make the right choices however difficult. As we have time and time again over the last 11 years.
I commit to you I will do everything I can to ensure that as a government, front and centre of our mind will be the immediate pressures you face today. And we will make the right long term decisions – whether in energy, tax, regulation, planning, infrastucture, - for your and therefore the country’s competitiveness. We will not ever forget that you are the source of the prosperity and success we have enjoyed.
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