“It does not have to be this way” – extracts of speech to CBI Wales Annual Dinner

We need real political leadership to resolve the eurozone crisis. The pre-emptive and coordinated action by central banks yesterday is welcome. But the only way to properly ensure market confidence in the eurozone is for the European Central Bank, alongside the bail-out fund, to finally be given the political support it needs to act as lender of last resort when liquidity problems arise. That is the logic of the monetary union these 17 countries signed up to.

Here in Britain, our economic recovery was choked off over a year ago – well before this recent eurozone crisis. Consumer and business confidence has been falling for the last year.

The OBR’s report this week actually upgraded its forecast for eurozone growth this year, while it slashed its forecast for the UK. And it made clear that the main factor driving growth in the UK this year was net trade, while the contraction of domestic demand has driven the slowdown.

But going forward, if eurozone leaders continue to fail to take the necessary action and the eurozone crisis deepens, it will of course have an impact here in Britain.
Last summer I argued that when a global hurricane was brewing it was not the right time to rip up the foundations of the house. The government thought it knew better and that going further and faster than Labour’s more balanced plan would boost confidence and private sector job creation.

But instead of making things better, I believe that gamble has ended up making things worse. With our recovery choked off last autumn and unemployment already rising to a 17 year high, we are now in a much weaker position to face the storm as it gets closer.

And the OBR’s very gloomy forecasts this week are based on “the assumption that the euro area struggles through its current difficulties” not on a worsening situation.

So what can be done here in Wales and across the UK?

The Chancellor’s answer this week was to effectively accept that things would continue to get worse and that the government must carry on and stick to its plan – despite slower growth and higher unemployment which is leading to £158 billion more borrowing than planned. Extra borrowing not to support the economy through difficult times, but the bill for the economic failure, higher unemployment and bigger benefits bill that has been created.

The small measures announced by the government this week will not – according to the OBR itself – make much, if any, impact. The OBR’s report explicitly says: “we have not made any material adjustments to our economy forecast on the basis of these policy announcements”.

But it does not have to be this way.

I believe it is now even more vital that we take action here in Britain to support business, get our economy moving again and create the jobs we need.

The eurozone crisis should not be an excuse for inaction or a reason to stick stubbornly to a plan that isn’t working. It makes the case for changing course now even stronger. Because if we cannot rely on exports to fuel economic growth then where will growth and jobs come from in the coming years?

The IMF was clear earlier this year that if the economy undershoots expectations and risks a period of stagnation – which is what the OBR this week said would happen – then the UK should slow down the pace of spending cuts and tax rises. I believe the Chancellor got it wrong 18 months ago, but by rejecting the IMF’s advice I believe he is compounding the original error and getting it wrong again this week.

Action now is vital for businesses and families, but it is also vital if we’re to successfully get the deficit down in the medium term. That is what Labour’s five point plan for jobs clearly sets out, including a national insurance holiday for small businesses taking on extra workers, a temporary VAT cut to boost spending power and genuinely bringing forward infrastructure projects that help strengthen our economy for the future.

Here in Wales, I fear that businesses and the wider Welsh economy will be disproportionately hard hit by slower growth, rising unemployment and the loss of over 700,000 jobs in the public sector across the UK.

First Minister Carwyn Jones and his team have worked hard in recent weeks, in partnership with business here in Wales, to use every lever available to them to get young people into work and promote apprenticeships, skills and investment. Jobs Growth Wales is exactly the kind of programme we have been calling for the UK government to follow. But without progress in the eurozone and a change of course from our Chancellor these will be tough times ahead.

Not acting now to support the economy – and sticking to a plan of spending cuts and tax rises that I believe goes too far and too fast and has seen our economic recovery weaken rather than strengthen – will not only condemn hundreds of thousands of people to unemployment and risk thousands more businesses going under, it risks long term damage too.

The trend growth rate of the economy is not fixed – so this isn’t just about growth postponed versus pain deferred. Months – or years – of slow growth aren’t something that will be quickly repaired.

As I said in my lecture at the LSE earlier this year, it risks leaving a permanent dent in our nation’s prosperity – relative to how prosperous we might have been and how prosperous we are relative to other countries.

Because economic history also teaches us that economies don’t simply bounce back to where they would have been.

Who now doubts that the depth of the recession of the early 1980s had long-term and permanent effects? Manufacturing jobs and companies lost – never to return. Small businesses gone bankrupt – losing skills, ideas, networks and potential.

Capital investment plans first postponed eventually dropped and never resurrected. And most importantly of all, adults and young people out of work for months, which turned into years, and left a permanent scarring effect on their skills, their health, and their ability and willingness to ever work again.

So the claim that the current debate about the pace of cuts is simply deferring pain misses the point.

The risk is that George Osborne will wreak long-term, as well as short-term, damage on the British economy by creating a vicious circle of permanently lower business investment, lower income and lower employment, which in turn requires bigger tax increases and deeper spending cuts to get the deficit down.

All at a time too when people are already suffering up and down our country – here in Wales and across the UK. Life is already tough enough if you’re unemployed – and we need to help those people into work.

It’s also tough for all those who have worked all their lives but for whom flat wages, the fear of unemployment, higher fuel and food prices and growing debt means they’re seriously worrying about their futures – and those of their children – for the first time. As Ed Miliband has said, this is a threat to the Promise of Britain – the promise that the next generation will be better off than the last. And it’s difficult too for pensioners dependent on fixed incomes, as well as for young people wondering what prospects they will have.

But there is a further reason why this matters. We all know that the financial crisis exposed the vulnerability of banks and the over-reliance of the British economy and tax receipts on financial services. But it also accelerated the rise of India and China as our competitors – not just in low-cost manufacturing; but in top-class design, education and attracting international investment. And we can’t afford to be left behind.

We need to rebuild our banking and financial sectors – and do so by rewarding investment and sustainable growth, not short-term risk-taking. We need a modern industrial policy that provides incentives for technological and scientific innovation. And we must ensure every company takes their responsibilities seriously and every employee gets the chance to up skill.

While the Conservative Liberal notion is that support for market-led growth means that the ideal state is one in which government does as little as possible, in truth, markets are inevitably and unavoidably shaped by what governments do, and by what government doesn’t do.

And the longer we spend with no or slow growth, the longer the road to recovery becomes, the greater the pain that will have to be endured and the further we fall behind.

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Posted December 1st, 2011 by Ed