Speech to University College London
University College London
Wednesday 11 February, 2015
It’s almost exactly a year since I last spoke here. I’m particularly pleased to return today, 11 February, which is the anniversary of the foundation of this great university.
There’s a strong Scottish connection there, since the key figures in establishing UCL were of course two Scots – Thomas Campbell and Lord Brougham. And I hope you’ll forgive me for gently reminding you that when you were being established as England’s third university, Scotland already had five!
As you’ve probably all noticed, quite a lot has changed since I was here last year. It’s been a truly momentous twelve months in Scottish politics. And as you may also have noticed, not all of it turned out as I would have wanted! I would much much rather be returning here as Deputy First Minister of a country which had just voted for independence. But it is a huge pleasure and privilege to come back as First Minister.
What has happened in Scotland in the last year will obviously influence what I want to talk about this afternoon. But my speech covers issues which are of relevance across the whole of the UK.
I want to speak today about the state of our economy, the state and structure of our society, and the nature of future economic growth.
And I want to make three fundamental arguments. Firstly, I’m going to talk about something that is not talked about nearly enough - the impact of austerity on individuals. I don’t think that any economic policy can be seen as a success, when it causes severe anxiety and misery to so many people– including many of our most vulnerable citizens.
Secondly I’ll argue that – even if you somehow felt able to set aside the human cost of austerity - the current UK Government’s economic policy has failed even on its own terms. It has failed to reduce the deficit as planned, and it has failed even more comprehensively to rebalance the economy.
Finally, I want to talk about what that means for the future; why the Scottish Government rejects the current Westminster proposals for even more austerity, and how we want to approach creating a fairer and more prosperous country.
But I want to begin with the point which underpins all of those arguments. Talking about the deficit in isolation, as the Westminster parties are doing, misses the point. Economic policy is a means not an end; it’s the means for citizens to lead happy, healthy, fulfilling lives.
One of the things I encountered time and time again during last year’s referendum campaign – indeed the sentiment which came to dominate the debate - was an overwhelming desire to create a fairer society, as well as a more prosperous one. That desire came from many no voters, incidentally, as well as from yes voters. And I know it extends well beyond Scotland’s boundaries.
But one of the reasons that the referendum was such an electrifying and exhilarating experience, was that we got to ask fundamental questions about the sort of society we want to live in. And everybody – including 16 year olds who had never voted before, and many older people who hadn’t voted in 30 years – knew that they had a voice that would be heard in a decision that really mattered.
The consequence was a surge in engagement and political confidence which – regardless of the result - will benefit Scotland for years and decades to come.
And when you emerge from a debate as wide-ranging, passionate and fundamental as that, the discussions that dominate Westminster seem bizarrely and depressingly narrow.
The entire focus of the Westminster debate is on the deficit. Now, the deficit is hugely important. But it’s a symptom of economic difficulties, not just a cause of them. And it cannot be seen entirely in isolation.
Scotland, like the UK, and other countries around the world, faces deep, interrelated, complex challenges. The deficit is certainly one; but so too is boosting productivity, ensuring skilled and well paid job opportunities, adapting to an ageing population, combatting inequality and moving to the low-carbon age.
Trying to tackle the deficit while ignoring those other challenges makes no sense. Much UK policy over the last five years has asked the wrong question – how do we cut spending as quickly as possible – and inevitably it has arrived at the wrong answers. The result has been policies which target the vulnerable, hinder growth, and constrain rather than build our economic potential.
In 2010, the Chancellor of the Exchequer famously said that “we are all in this together”. He said that “Too often when countries undertake major consolidations of this kind, it is the poorest - those who had least to do with the cause of the economic misfortunes - who are hit hardest…This Coalition Government will be different.”
Well, it hasn’t been different – far from it. But two weeks ago the Institute for Fiscal Studies published an analysis of the tax and benefit changes made by the coalition. It found that the changes have harmed the poorest 10% of households more than any other section of the population.
And that’s not the only inequity. Research by the House of Commons library last year showed that women are disproportionately affected. They are bearing more than ¾ of the impact of tax and welfare changes. Disabled people are also losing out. In Scotland, it is estimated that more than half of those who claim Disability Living Allowance will see their benefits cut by at least £1,100 a year.
So it’s simply untrue to say that we are “all in this together”. The cuts have had a disproportionate impact on women, disabled people, and those on low incomes. The most vulnerable are bearing the heaviest burden.
In my view, this human cost is in itself too high a price to pay for current policies. I see its consequences every week in my constituency. But what makes it even worse, is that these policies are not actually serving their wider purpose.
That’s the second point I want to make this afternoon - the UK Government’s economic policy has failed: categorically and comprehensively. And not by my reckoning, but on the UK Government’s own terms.
It’s worth remembering that the UK government in 2010 didn’t promise an ideological war to shrink the state. It promised to rebalance the economy. David Cameron promised to address the situation where “our economy has become more and more unbalanced, with our fortunes hitched to a few industries in one corner of the country.” The Chancellor promised a rebirth in manufacturing, with the economy “carried aloft by the march of the makers”.
But none of these structural changes has happened.
It’s maybe worth looking at regional imbalances. Now, it’s important to say – and not just because I’m here! – that London is one of the great world cities. It’s an extraordinary hub of commerce, innovation and achievement. And this city’s success brings benefits to the broader UK economy, including Scotland's.
But it’s also hard to ignore the fact that London exerts an almost overwhelming gravitational pull on talent, investment and business from the rest of Europe and the world. That poses a challenge – for all parts of the UK.
Scotland actually fares better than many places. We’re currently the third most prosperous part of the UK, behind London and the south-east. – partly because we have our own Parliament and can take steps to boost our own economy. But London’s GDP per head is still 80% higher than ours. Over the last five years, London has continued to outperform the rest of the country for job creation and growth.
And so we need to compete. That’s why the Scottish government argues so strongly for more job-creating powers. And although we are disappointed with how few new responsibilities are proposed for devolution, we’ll always use the levers we have –not to engage in a race to the bottom, but to create long-term comparative advantage.
And if our successful example encourages greater decentralisation elsewhere in the UK, we would warmly welcome that. Because at the moment the UK has the deepest regional imbalances in Europe.
But that’s just one of the challenges we need to address. Social inequality is damagingly high. Manufacturing across the UK is still below pre-recession levels. So is GDP per head. The current account deficit – a key measure of trade and income flows with the rest of the world - is worse than at any previous point in the UK’s history.
And perhaps most damagingly of all for the UK Government’s credibility, it’s failed to meet its own deficit reduction targets.
In 2010 the Chancellor of the Exchequer predicted that the UK would be running a budget surplus on its current spending of £6 billion next year. He now expects a deficit of £49 billion. In total, over the six years to March 2016, the Chancellor is likely to miss his borrowing targets by a hundred and fifty thousand million pounds.
That’s a mistake - for every single person in the UK – of almost £2,500.
And now, when the evidence tells us that austerity hasn’t worked, the UK government is now telling us is that we need even more of it.
Under UK government plans, the cuts we have seen to date would be much smaller than what is yet to come. Even under opposition proposals, a further £30 billion of cuts would be required over the first two years of the next parliament.
The Institute of Fiscal Studies put this into perspective in its Green Budget last week. It looked at 32 advanced economies, and found that the UK Government’s fiscal consolidation plans were the largest of all.
Now, there are three things about this. First, I’ve already talked about the human cost of austerity - the consequences for public services, families and individuals. That impact will get worse. According to the IFS, the cuts still to come are likely to be 35% bigger than the cuts we’ve already seen.
The second point is this– why should we believe the UK Government will succeed in reducing the deficit as they plan? The previous austerity package failed. And if you look at the detail of the current projections, there are some very obvious doubts.
A good example here is productivity. We all know that improving productivity – our output per hour worked - is essential to any sustainable increase in living standards. But the UK’s productivity has scarcely improved during the economic recovery. It is still lower now than it was in 2008.
Even the Office of Budgetary Responsibility has said that “it is hard to judge when or if productivity growth will return to its historical average.” Deep spending cuts will hurt investment in skills, innovation and infrastructure. So they are more likely to hit productivity than help it. But the UK Government has given no explanation of how productivity increases will be achieved. Austerity has become an article of faith; but what we need is a strategy for growth.
And the third and final point is this. Even if the Government meets its forecasts for public debt, the consequences for household debt will be severe.
We all know that economic growth in the past has relied too much on debt and credit. But that problem is likely to get even worse in the next few years, as a direct result of government policy.
The reason is quite clear. There are four major components to economic growth – public spending, exports, business investment and household spending. Of these, public spending is being cut and exports are likely to be subdued. Businesses remain cautious, although some investment is expected. So most of the economic growth the UK Government expects will come from household consumption.
But in a time of low wage increases and high inequality, this can only happen if household spending rises more quickly than household incomes. That will lead to an increase in debt. In fact the Office of Budgetary Responsibility predicts that by 2020, UK households will be more heavily indebted than they were just before the financial crisis. Average household debt will be 184% of income in 2020. In 2008 the figure was 169%.
It’s worth thinking about what that means. The Chancellor is making unprecedented cuts to public spending and the public services on which we all rely. He is doing so in the name of fiscal responsibility. Yet his entire economic model depends on individual households taking on more debt than at any time in history. Instead of pooling risk, the government is dispersing it to households across the country. Individuals will be deeper in debt, families will feel less secure, the economy will be less resilient. It’s morally unjustifiable and economically unsustainable.
The Scottish Government proposes a different approach.
It’s worth noting that the Scottish Government has balanced its budget every single year. That’s partly because we have no choice, of course! But it’s something which has required genuinely tough decisions. But by and large and on the whole, we’ve carried people with us. Because the policies we’ve adopted have clearly had a sense of fairness at their heart.
In terms of the UK economy, we believe that debt should be reduced as a percentage of GDP – but more gradually than either of the largest UK parties is proposing. For example if you limited real terms growth in departmental spending to half a per cent each year – it would reduce debt as a share of GDP in every year from 2016-17. But it would also permit – compared to current UK government plans - a further £180 billion of investment across the UK over the next four years.
We could protect the infrastructure, education and innovation which will support stronger and more sustainable growth in the future. And we could take a different approach to the crude cuts that reduce work incentives and impact directly on disabled people and families with children. We could manage the deficit down, but without destroying the social fabric.
And of course, we could also release savings through some very straightforward choices. Deciding not to renew Trident, for example, would save around £100bn, at 2012 prices, over the next 35 years.
The Trident Commission last year estimated that the equivalent annual cost of a new Trident system will be almost £3bn. Cash costs will peak at £4bn in the mid 2020s.
That is money that could be - and should be - invested instead in health and education.
So, by taking a different approach - by offering an alternative to the austerity agenda of both Labour and the Tories - we would ensure that fiscal consolidation is consistent with a wider vision of society. A society which strives to become more equal, as part of becoming more prosperous.
We simply don’t accept that there’s a trade-off between balancing the books and having a balanced society; fairness and prosperity can go hand in hand. Indeed, I’d put it more strongly – they must go hand in hand.
The Scottish Government’s approach is part of a growing international consensus.
IMF research – examining 173 countries over 50 years – has shown that more unequal countries tend to have lower and less durable growth.
It’s an argument that Mark Carney has endorsed; Christine Lagarde at the IMF has made it very strongly; its principles underpin much of President Obama’s economic policy in the USA.
It has profound implications here in the UK - which is currently the 6th most unequal country in the developed world. Scotland on its own fares slightly better – by 9 places – but not well enough.
There is overwhelming evidence that this degree of inequality harms our economy. In fact, the OECD estimated that inequality reduced the UK’s economic growth by 9 percentage points between 1990 and 2010.
It’s basic common sense that as a society, we will do better if we can benefit from the skill, talent and innovation of all of our people.
But there are other reasons too. Higher incomes would increase demand and boost the revenues needed for investment in infrastructure and education. More equal economies are more resilient and less likely to depend on borrowing and credit. That reduces what is called failure demand in public services – meaning the state can spend more effectively on health, welfare and justice.
That’s why the Scottish Government’s Council of Economic Advisers – which includes two Nobel laureates, Joseph Stiglitz and James Mirrlees – is currently looking in detail at how the Scottish Government can create a fairer society, using the powers we have.
But one thing we’re already very clear on, is that we see the private sector as being an essential partner in all of this. They are not only vital to but will also benefit hugely from helping to build a fairer society.
The Scottish Government already works closely with business. We have the most competitive business taxation system in the UK. We continued to support our enterprise agencies, during a period when England abolished its regional development agencies. Businesses played a major role in influencing our new economic strategy, which we’ll launch next month.
And so we’re also encouraging and supporting business to contribute to a fairer society – it’s clearly in their own best interests.
Gender equality is a good example of that. There, the Scottish Government is leading by example – my Cabinet is one of only three in the developed world to have a 50/50 gender split. And we’re also launching a major drive – called 50/50 by 2020 – to encourage gender equality in public, private and third sector boardrooms.
And we are removing some of the key structural problems facing women in the workforce – for example by planning a major expansion of childcare. That meets a key demand from many employers. Last November, the CBI called for a major expansion of childcare from the age of 1 onwards. It was a clear recognition that a shortage of childcare doesn’t just prevent parents – primarily mothers – from returning to work. It also deprives businesses of skilled and experienced workers.
And we have a clear focus on the quality of work – people’s experience in the workplace. The Scottish Government already pays the living wage to all our employees; and we’re using procurement policy, where we can, to encourage its use in all public sector contracts.
Now we are funding the Poverty Alliance to run a scheme for accrediting living wage employers. The scheme already covers more than 100,000 employees across Scotland. 100 companies are already signed up. They are being persuaded that fair pay is good for their employees, good for their reputation, and good for their bottom line.
We are also working with business and trade unions to set up a Fair Work Convention, and to establish a Scottish Business Pledge.
The pledge enshrines an important principle. Just as Government will work with business and trade unions to create a prosperous and strong economy, so business can play a part in delivering a flourishing and fair society.
Essentially, we are appealing to companies’ sense of enlightened self-interest. In doing so, we are encouraging them to commit to good business practices - such as innovation or internationalisation - and to good employment practices; such as the living wage, gender equality or supporting workforce engagement.
There’s good evidence that this consensual, partnership approach to economic development will work.
It mirrors good practice in Germany and other successful European economies. Its emphasis on fairness and equality, is in line with recent research. And it builds on steps we’ve taken in Scotland, which have already had significant success.
I spoke about productivity earlier. It’s been a focus of our economic strategy, and one where we’ve worked closely with business, higher education and others to boost skills and innovation.
8 years ago, Scotland’s productivity was 6% behind the rest of the UK – now it’s almost exactly the same. That’s partly because of low growth in the rest of the UK, of course, and there is still a long way to go – our productivity is 13% below Sweden and 20% below Germany. But we have made progress.
In other areas, our performance is even stronger. Our international exports have increased by 20% in the last three years. We regularly outperform all parts of the UK outside London and the southeast for inward investment. And we are doing better than the other countries in the UK on all major employment measures – we have lower unemployment and economic inactivity, and higher employment.
We have done a pretty good job – in the face of an incredibly difficult economic climate - of protecting growth, improving the long-term potential of the economy and enhancing social justice. In doing so, we’ve consistently set out an optimistic vision of how we can work together in Scotland, for the common weal or the common good. And one reason why there has been such a consensus in Scotland that the Parliament needs more powers, is that people trust us to use those powers responsibly.
I mentioned at the start the influence that Scots and the Scottish university system had on the foundation of this university. It’s one instance of Scotland setting an example which could be followed more widely across these islands. That’s not a one-way street, of course - very often we’ve learned from what has happened elsewhere. Indeed, just this week I announced a new initiative to close the attainment gap in our schools which draws very heavily on experience here in London.
But just at the moment, after a momentous 12 months in Scotland, we will see a hugely significant 12 months across the whole of the UK. And I hope that Scotland can again exert a beneficial and progressive influence on developments here in London.
If we do, we will make the case for a more rational economic policy at Westminster. And we will use the powers we have in the Scottish Parliament to pursue a different approach; one based on partnership, fairness and prosperity.
Because if that approach can take root more widely, it will help to halt the deeply misguided march to further austerity at Westminster. And that’s something which will bring benefits to Scotland, and to all of the UK.