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  JOHN DENHAM SPEECH TO THE SMITH INSTITUTE

John Denham, Shadow Business Secretary
The party of growth, the party of business - speech to the Smith Institute
 
Compared to the worst fears of two years ago, the world economy is in a better shape than many expected.
 
The combination of government interventions to stabilise the international banking system, and a period of globally coordinated fiscal stimulus has helped the global economy emerge from the worst global recession in two generations.
 
The momentum from the measures Labour took in Britain has continued to be felt in the first months of the Tory-led government.
 
But, as a result of a series of wrong choices by this Government, the signs are that 2011 will feel like a tough year for families and business up and down the country.
 
It will become increasingly obvious that, far from us all being in it together, the Government is embedding unfairness; not as a by-product of its policies but as a central part of its strategy for the economy.

On the same day that David Cameron officially abandoned attempts to restrain bankers’ bonuses, and accepted that he would do little but exhort the banks to lend more to small business, the Tory-led Government said that its big idea for growth was to reduce employment protection for millions of largely lower paid employees.

The year started with a tax rise, compounding already significant price rises. On the OBR’s numbers unemployment is forecast to remain high as a result of the Government’s decision to go too far and too fast on the deficit. Earnings will be muted. The result? Living standards will feel squeezed.

The challenge of jobs and growth will be a defining political issue in the coming year.

People will ask whether the pain that is being inflicted on them is justified and they will ask where the new jobs and future prosperity that can bring a fairer society will come from. 

Those in the private sector, who must create the jobs and wealth Britain needs, will be asking whether everything which could be done is being to done to support their efforts.

 
And they will be right to ask those questions.

Although David Cameron has talked about jobs and growth the much promised plan for growth was never published.

And the Government is making the wrong choices on jobs and growth – the wrong choices for the future of Britain.

At the same time as squeezing living standards and forcing businesses to raise prices again by breaking promises on VAT, this Government is giving an effective tax cut to the banks which caused the financial crisis in the first place.

This is not only unfair but the wrong economic choice for the future of our country.  Labour believes the bankers’ bonus tax should be extended for one more year so that the Government can invest the money in the new jobs and growth that British business needs.

And they are wrong on the causes of the deficit.

It was the global banking crisis, the massive fall in tax receipts, the costs of rising unemployment and the need to stimulate the economy which created the deficit, not Labour’s spending.
 
Their political imperative to blame the deficit on Labour is leading the Government to make the wrong choice now of cutting too far and too fast - a reckless choice which risks the recovery. It is not only unfair but the wrong long term economic choice for the future of our country.
 
Growth should be higher than it is today. Unemployment should be coming down.

As Ed Miliband said last week forecasters are predicting that Britain is on course for the slowest recovery in 40 years.
 
Their reckless cuts are making the challenge facing Britain all the harder.
 
When we say it is ‘reckless’; and when we say ‘too far and too fast’ we are not saying soften the inevitable pain by simply spreading it over a longer period of time. The issue is much more profound than that. The Government is risking producing higher than necessary unemployment, lower than necessary growth, slower than necessary recovery, and higher than necessary costs of unemployment and debt payments.  Slower growth will increase pressure for deeper cuts.
 
 
The Chartered Institute of Personnel and Development puts the impact of Government’s plans at a 200,000 drop in employment this year. Under those headlines are larger numbers of job losses.  PWC calculates the public sector cuts will lead directly to around 500,000 private sector jobs loses over the spending review period. The CIPD has previously said that 1.6m jobs could be lost with the increase in VAT estimated to cost 250,000 jobs, three times as many as the increase would of the NIC proposed in Labour’s last budget.

Jobs will be created in the recovery, but the challenge to replace all the jobs lost though public spending cuts, the unemployment still remaining after the global banking crisis, and the impact of VAT, is huge.

The Government has pointed to exports as being a major source of its anticipated growth. And on the back of a major depreciation, trade should be a boost to growth. But the Chancellor’s employment forecasts rest on seeing a £100bn boost to trade in the coming years– a feat not achieved since 1950.
 
This is challenge is the background to my remarks today.
 
It is private sector growth we need

Had Labour been in power today, albeit with a more responsible approach to deficit reduction and making different choices on spending and taxation, we too would have looked to the private sector to create wealth, growth and jobs.
 
The jobs Britain needs can only be created by successful and growing private companies. They need the confidence and certainty that will justify investing in Britain. And public policy must be focussed relentlessly on creating the conditions for growth.
 
Today the danger is the Government is making a series of wrong choices which will hamper the ability of private companies to grow.

The risks it is taking with the economy will make it harder for private companies to grow.

Labour’s more measured approach to deficit reduction would have created more favourable conditions for growth and job creation. And the central challenge for a Labour government would also have been to accelerate private sector growth.

As the party of growth, Labour is today, as we sought to be in Government, the party of business and of private sector success.

And one of the best ways to shrink the deficit is to return to the strong growth business needs.
 
The strength of the private sector is not just critical to the next year but to Labour’s long term view of how we must come out of the global banking crisis with a stronger, more competitive, and fairer economy. The private sector values of entrepreneurship, innovation; the opportunities of social mobility and aspiration provided by small business, the transformative power of enterprenuers are values we share.
 
The creation of the right conditions for a strong and competitive private sector is not, for us, a means to an end, but central to the society we are trying to build. We support people in business, starting up businesses and leading businesses.
 
We need growth and job creation over the next year. But we also need to lay the foundations for a stronger, better balanced economy in the future. There are many areas in which we can compete and succeed.

And let me be clear, we want to see more companies, growing companies, creating more profits and creating more jobs.

We supported what was good in business and supported getting the essential mechanisms right - like education, transport, infrastructure and broadband.  We don’t say often enough that Labour left office with 1.1 million more small businesses than when we started.

We are on a journey, working together to confront the challenges the world presents as we look to the future.
 
The central challenge today and in coming years is to create the conditions in which private sector business - new, growing or established - are most likely to want to invest, to be able to find affordable finance, develop innovative new products and services and create jobs. Public policy must shape an environment which increases the confidence and certainty about future policy, making investment, growth and job creation more likely.

Government cannot take the role of private enterprise, or fill the shoes of the business leader or entrepreneur. But in a modern economy, there is a close and inescapable relationship, and mutual dependency between what Government does and the possibility of private sector success, growth and job creation.

Government policies do shape – for better or worse – the opportunities, the markets and the conditions for investment.

I cannot accuse this Government of having a coherent approach to the relationship between the private and the public sector.

It is, in some ways, all over the place.

But it is clear that many members of the Government subscribe to the simplistic nostrum that the less the public sector does, the more the private sector will do. I fear this crude paradigm will be tested to destruction in the coming years, not least in those regions which are seeing the greatest impact of the cuts in public spending, investment and support for private business growth. And I look forward to seeing what the Smith Institute is doing on assessing the challenges in the north.
 
Just as the Government has taken a series of the wrong decisions on the pace of deficit reductions and on VAT, so its lack of understanding of the crucial role of public policy has lead them to take the wrong choices for growth and a failure to deliver on some key policies.

Finance for business
 
We have seen eight wasted months with no progress on increased bank lending. If tough talk about taxing the banks and nothing being off the table were credit notes, small businesses would be awash with money. The Government have decided to cut taxes on the banks at the same time as banks are keeping credit tight.

We are all waiting, of course, for the outcome of the Banking Commission. But, as yet, the Government has shown little enthusiasm for the development of the sort of institutions which would address the long-term and long standing problems of adequate finance for growing companies and for regional economies.

The promised Green Investment Bank has yet to take any substantive form.

The so-called department for growth suffered bigger budget cuts than the average.

Business Development Grants have been ended.  

In the past, such funding has secured inward investment. Labour’s Strategic Investment Fund, provided investment in advanced industrial projects, where specific market failures are preventing otherwise viable developments.  Nissan said recently that our investment help safeguard over 1,000 and create 600 jobs in the North East of England. 

But, as Nissan warned the select committee before Christmas

‘Foreign governments are competing to maintain their manufacturing bases that have a capacity to export their way out of challenging economic times. The UK has a clear choice of whether it chooses to fight for new business, new jobs and rebalance the economy or allow the opportunity of this business to go elsewhere.’

A coherent active industrial policy involves a great deal more than public finance. Without a coherent strategy for each key growth sector, public investment is unlikely to bring the fullest returns. But the case for additional strategic investment is and will remain powerful.
 
Alan Johnson has set out Labour’s case for investing £7.5bn by the end of the Parliament in supporting growth and jobs, funded by a fairer contribution from the banks. The danger of a sluggish, jobless, recovery makes this investment more urgent daily.
 
Ed Miliband recently urged the Government to repeat last year’s bonus tax, introduced by the Labour Government.  They can use this solution to start to fill the gap where their growth strategy should be.
 
Although Nick Clegg described Labour’s strategic investment fund as Lord Mandelson “writing out cheques … which he knew would bounce” the Government were forced to admit that the projects met tough Treasury criteria, were good for growth, and let them go ahead.

Indeed, the Government has claimed the credit for investments planned by Labour, like the National Renewable Energy Centre established with Mitsubishi to develop the next generation of off-shore wind blades
 
This week, the first bidding round for the Regional Growth Fund will close. The funding for regional development is heavily squeezed, two-thirds less than was available under the last government, and now has to cover other spending like on housing and transport programmes. Most observers expect the fund to be heavily oversubscribed.
 
Bids will have been carefully considered by private business and local economic partnerships. While not all should go ahead there will be good and worthwhile projects of strategic importance that simply won’t get the money.

Because the Government has chosen not to raise fair additional taxation from the banks it has spurned the chance to invest in viable projects which would attract private investment, boost growth and create jobs.

I think the case for a carefully targeted investment in key sectors of the economy will grow month by month. Construction, for example, generates a good return for the Exchequer and retains spending within the UK.

The Government’s wrong choices have not just affected finance for growth.

Creating uncertainty

The Government has taken a series of decisions which I think will have undermined business confidence and the likelihood of investment.

On critical infrastructure, the development of universal broadband has been delayed and it’s financing and implementation left unclear.

RDAs are being scrapped and replaced by local economic partnerships – with no statutory powers or finance – in a process which even Vince Cable described as ‘chaotic and Maoist.’ Promises to let business communities to keep respected RDAs have been broken. The future of their strategic assets is in doubt.

Changes to the planning system have caused a huge fall in planning permissions for housing.

Investment in adult skills has been cut back and, equally important, beyond a modest expansion of apprenticeships, the government has no strategy to encourage more investment in training by employers.

The controversy over a trebling of tuition fees has overshadowed the missed opportunity to build on Labour’s efforts to bring higher education and business closer together.

The current health reforms threaten the regional innovation centres developed to bring research, the NHS and innovation medical companies closer together.

The Government is taking forward Labour’s plans to develop Technology Innovation Centres, but other established centres of innovation are facing uncertainty and redundancy.

The refusal of the Forgemasters’ loan sent a strong signal that the Government has no plan to ensure that British companies gain from the expansion of nuclear power.

There is as yet no coherent approach to the use of tax policy to support business growth. At one moment, the Government decides to back Labour’s proposal for a ‘patent box’ to encourage bio-science investment in the UK. The next moment analogous support for the video games industry is dropped. Huge uncertainty hangs over the future of R and D tax credits.

In each of these areas, on regional development, planning, broadband, research and development, support for innovative companies, skills and higher education, the Government has taken the wrong choices for growth.

No long term growth plan

And finally our concern, of course, should not be just for the coming year.

The growth and job creation we need next year should also lay the foundations for a stronger, better balanced economy in the future. Financial services will always play a central role in our economy. But we were too dependent on financial services, and while we have created great strength in manufacturing, business services and the creative industries, these have been too small a part of our economy.

In recent months, manufacturing growth has been the strongest part of the UK economy, responding well to a competitive exchange rate and opportunities in economies like China and India. I think their success is testimony to the Labour’s long support for manufacturing. In the recession measures like the car scrappage scheme, skills investment, Time to Pay, and flexible tax credits enabled manufacturers to hold on to more of their skilled workforce than in previous recessions, ensuring that are able to take advantage of new opportunities as they become available.

But we need more than a period of manufacturing growth based on our existing strengths and a competitive pound.

This is the time to ensure that Britain grasps the current opportunity to develop the next generation of innovative technologies, competitive products and to recognising the fast growing markets but also competition from the BRIC countries.
 
In advanced manufacturing and  in other key sectors of the knowledge economy like creative and cultural sectors, high tech services and the broad swathe of the low carbon economy, the challenge for Government is not to walk away, but create the most favourable conditions for investment, growth and job creation.

It has failed to build on Labour’s plans to ensure British business is successful in the key industries and services of the future, making sure our economy is better balanced between financial services, manufacturing, low carbon businesses, the creative industries and other services.

The challenge is to make sure all elements of government policy are properly aligned. This may and usually does include investment in fundamental and applied research, support for the translational of new technologies into marketable products, the right IP regime for innovation, ensuring the financing mechanism from bank lending, public support, government contracts, and venture capital are in place and appropriate, and addressing strategic skills. It means recognising that government policy itself shapes markets and the opportunities for business by the approach government takes to procurement, regulation, planning; and strategic decisions on infrastructure, transport and energy policy. Competition policy can drive productivity and export promotion policies need to be tailored to support those same key growth sectors.

It means ensuring that within the internationally agreed rules of fair competition, as much growth as possible is enjoyed in Britain, by British owned or based companies and that jobs and wealth are retained here; working to ensure that the institutional arrangements for finance, for regional development, for innovation policy, are fit for purpose and working together effectively so that those firms with the greatest capacity to grow are able to do so. It means creating UK supply chains in industries like automotive and aerospace where the UK leads and making the UK the investment choice for manufacturers and others.

While there are many elements to an effective active industrial policy, the overall aim is simple:  to create the confidence about future policy on which the private sector can make sound investment decisions.

The confusion, incoherence, and lack of certainty which characterise this Government all undermine confidence. It may deter investment or simply allow it to go elsewhere.
 

We need to have an honest and balanced assessment of our own record.

Many of Labour’s policies did enable business to flourish. For the last two years the UK has been ranked fourth in the world and first in Europe by the World Bank for “ease of doing business”.  And the OECD has also found that the UK has the lowest barriers to entrepreneurship of all OECD countries. 

But we have also acknowledged that we did too little to develop a better balanced economy. Many of the British or British based companies in advanced manufacturing or the creative economy or business services are genuinely world class - but that as a whole these sectors form too small a part of the economy that we need.

In the last few years we developed and began to implement a more active approach to supporting the sectors of the economy with the greatest capacity to compete and to grow. In my time at DIUS, for example, we focussed new attention on the role public sector procurement and regulation played in creating the market for new and innovative products, services and businesses. The gap between the UK and USA in translating university IP into start ups and licences was closing fast. We encouraged industrial leadership in key sectors and made it easier I hope for the private sector to work with government in areas like the nuclear industry and life sciences.

A fair assessment would have to be that this work was far from complete. Labour’s policy review must look at how, going forward, we build on that work, but reflecting fully the views of business and the demands of a rapidly changing world.

Instead of building on Labour’s approach, this Government has gone into low gear, if not into reverse.

The growth strategy which was originally scheduled for the CBI conference in October was dropped because, at least according to one government official, there was nothing to put in it.

The consultation on a growth policy set out before Christmas looks, at best, a wasteful exercise in repeating discussions business has had many times before and, at worse, a smokescreen to retreat on many of the measures that are needed.

The Business Department is greatly diminished. In the last few years BIS became a major player in Government.  It took the lead in developing a new industrial strategy. Under the current incumbent, it is a department apparently without influence or clout. Indeed, whilst the record of failure in regional policy, higher education, bank lending and bankers bonuses is lengthy, it is hard to identify a single pro-business, pro-growth policy which BIS has successfully championed against the opposition of the Treasury or other departments like CLG.

And now, for no other reason than Vince Cable’s personal unsuitability to make a competition judgement, responsibility for an entire critical industry – the digital economy – is to be transferred to a non-economic department.

There is no public policy reason for placing the responsibility for digital economy in DCMS.  Yes, the media and creative industries have a great interest in the digital economy, but so does the service sector, retail, advanced manufacturing and IT itself. Years of work, bringing industrial sponsorship together within Whitehall so that business can find it easier to work with government was swept aside in a crude act of media management.

We should all be deeply worried about the way this decision was taken.

The pattern I think is already established. What we can expect from the Government is a pattern of disconnected and inadequate announcements which are chosen more for their impact on the headlines than on the economy.

We believe Britain needs to learn the right lessons from the financial crisis that caused the deficit. That means curbing the excesses of the financial sector that led to the problems, restructuring our economy and making responsible spending cuts to halve the deficit by the end of this Parliament. We need to offer hope that the next generation will do better than this one as the same time as this Government is kicking away the ladders of opportunity.

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