The text of Mr Major’s speech to the CBI Annual Dinner, held on 17th May 1990.
CHANCELLOR OF THE EXCHEQUER:
I am very pleased indeed to have this opportunity to address your Annual Dinner, in this your silver jubilee year.
Over the years the CBI has become a pre-eminent representative for industry and business. Not only pre-eminent but vocal. No one could accuse you of being shy in expressing your views either publicly or in personal discussion; and the Government invariably considers what you say with great care – even though we cannot always adopt the policy prescription you set out. It has long been a forthright and constructive relationship; and I hope and expect it will continue to be so.
It is particularly important it remains so at present. For the economy is now entering a crucial period, which will test all that has been achieved in the last decade and which will set the base for our prosperity in the ‘90s. I believe that the British economy will pass that test – indeed do better than pass – but it may not be easy, for Government, or for business.
Our objective in managing the economy and industry is simply stated: it is to outperform our competitors. We need to show the successes achieved in the ‘80s – in productivity, in export markets, and in increased investment in new equipment, innovation and training – these successes were not just a flash in the pan; rather that they were an example of just how much attitudes and performance have changed in Britain.
The truth is that while 1990 is proving, as we expected, to be a difficult year, the 1990s will offer British businesses unparalleled opportunities. There is no need for despondency or hand-wringing. There is a need for businessmen and women everywhere to look to the future and plan for it. For the decisions which will spell success or failure for British firms in the years to come are already upon us.
At the moment, we are confronted with an unwelcome resurgence in inflation and a difficult short-term outlook. That has led some commentators to write off the last few years as no more than a brief interlude of success, and to say that now we might be sliding back to where we started at the beginning of the ‘80s. I understand this fear. But I disagree with it. I believe that this thought is wholly wrong, and potentially very damaging. I was pleased to see John Banham making these points with his usual force a few days ago.
Of course there have been setbacks. And I do not belittle the problems we face in the short-term. But however intractable they may seem to some, they are as nothing compared with the deep-seated weaknesses of the British economy at the beginning of the ‘80s. At that time our economic base was weak and uncompetitive, unhealthily reliant on declining industries, and contained some real pockets of economic deprivation.
That was so because for too long, Governments had disguised the symptoms of decline, and neglected the disease itself. As a result, the real cure, when it came, was all the more painful. But it was the essential precondition for a sustained revival in our economic fortunes. With great effort the trend of decades was reversed, and we began to make up ground on our competitors, and even to out-pace them in many respects.
And as many here tonight will testify, underpinning that recovery at national level were countless individual success stories: the thousands of people who began the decade working for someone else, and ended it as owners of businesses, creating still more jobs for others; the millions of individuals and families who in the ‘80s took the first step towards home-ownership, share-ownership or capital ownership. Remember too the re-birth of many of our regions, towns and cities – Glasgow’s nomination as this year’s European City of Culture being a striking example of this. The pessimists who look at where we are and worry should look also at where we have come from and how much has been achieved.
All in all, it has been an astonishing economic transformation, and one whose benefits will continue to work through the economy for years to come. And it has a lesson for us. What was achieved in the ‘80s can be built on in the ‘90s.
For the moment, the immediate priority of economic policy must be to bring down inflation. I am acutely aware that the measures we have to take hurt many of the people who regard themselves as the Government’s natural supporters – in particular, small businesses, and home-owners on modest incomes. I know there are some who are puzzled that we should keep in place policies that bear heavily on these groups. I understand that. But it is not hard to explain, not when one recalls the damage done by the high inflation of the ‘70s throughout society, to business, to investment, to industrial relations, to savers and those on fixed incomes. Anyone who recalls those days will know one thing very clearly: a period of high interest rates is infinitely preferable to the alternative of high inflation for good.
And that is the problem: the only alternative to high interest rates is inflation. I know there are always plenty of people peddling apparently easy options, but that magic potion – a pain-free cure for inflation – simply does not exist. Nor will membership of the exchange rate mechanism of the EMS remove the need for a tight monetary policy. I am sure we will benefit from joining the ERM and join it we most certainly will when our conditions are met. But it is an added discipline, which will reinforce domestic monetary restraint, not replace it.
There can be no doubt that interest rates have to be used to bear down on inflationary pressures. And there can be no doubt that they are working. The effects are clearly there for all to see – in the housing market, and in the high street.
But I am afraid their job is not yet done. Yes, we are seeing an effect, demand is cooling, but as I have said before, it needs to stay cool for a time while we work off the inflationary hangover. In particular, it will be a few months yet before we see an improvement in the RPI, and in the meantime it has reached an extremely unpalatable level. Of course the RPI overstates the real problem: the idiosyncrasies of the headline rate are well enough understood, and I need not rehearse them again here. But the fact remains that inflation, however you measure it, is unacceptably high, and we must force it down closer to the average of our competitors, and when we have done that we must try to get it down even further still.
We must do so because the reduction of inflation is not some abstract totem. It is the absolute precondition of all our hopes for the coming years. Low inflation will deliver them. High inflation will destroy them. From this it will, I hope, be clear that I have no intention whatsoever of relaxing monetary policy prematurely, and if necessary, I shall tighten it. And I should add that when I am able to reduce interest rates, I will do so cautiously and prudently. My aim is a resumption of steady and sustainable growth combined with low inflation.
Because interest rates are so painful we need the best possible information about how they are working. That means we need to monitor what is happening in the economy with great care. And yet in recent years a problem has arisen: in a buoyant, unregulated economy the behaviour of firms and consumers has often been in sharp contrast to many of the established economic wisdoms.
Most notably, we have found that people are prepared to live with far higher levels of borrowing and far lower proportionate saving than in the past. One reason for this is that credit has become far more widely accessible than in the days of the mortgage queue. But it is also the case that years of sustained growth in incomes and wealth here made people and firms more confident that they can service their borrowing in future.
These factors have proved important upward pressures on demand and to an extent they were predicted. But what we failed to predict was how far, if at all, they would be offset by external shocks such as the stock market crash, and how much and how fast they would respond to the progressive tightening of monetary policy over the last two years.
Such unpredictability is, I suspect, inevitable in a free and open economy, and I make no complaint about it. The freedom is worth the uncertainty. However, in addition to our inability to predict future behaviour accurately, it has become increasingly difficult to assess the present state of the economy with certainty – because of the growing gaps and inconsistencies in our official economic statistics.
The development of the latest outbreak of inflation highlights this very clearly. On the basis of the information available, in common with other countries, policy was directed at avoiding a crisis in confidence and a recession in the wake of the stock market crash. Having avoided that recession, as we now know, policy should have been tighter to bear down on strengthening inflationary pressures. With hindsight, we see that policy mistakes were made – but only with hindsight. At the time, we were not exactly overwhelmed by calls for higher interest rates, and the statistics we had to hand did not reflect the buoyancy of the economy. Again, even when tighter policy was put in place, we still underestimated the strength of demand we were trying to counter.
Since coming back to the Treasury I have given considerable thought to how to cure these statistical shortcomings. It is important we do because we need to ensure that we have the best information we can get, and as soon as we can get it, about the level and nature of activity in the economy, since it will inevitably carry on changing with ever growing speed.
The statistics we have at present do not provide that. Too often the first estimates of key indicators have been radically different from the final revised figures. And many of the accounts do not add up. There is for example a huge balancing item (a technical term for errors and omissions) in the balance of payments statistics for 1989 of over 15 billion pounds. And our information on service industries is very patchy – even though they now account for over half our national output.
In Parliament the Treasury and Civil Service Committee has emphasised the costs to economic policy of unreliable statistics. I know too that representatives of business have been pressing for similar improvements.
I have therefore announced today a package of improvements to statistics that should considerably improve our ability to monitor and forecast developments in the economy.
There are a number of elements to the package. It will involve enhancing existing surveys to collect more information on service industries, investment and profits and it will involve a thorough on-going review of the balance of payments statistics.
I expect the first of these improvements to be introduced by the Autumn and Winter. Taken together with the improvements already in hand, the results of this package should be a substantial improvement in the quality of our key economic indicators. I believe that is essential.
There will obviously be compliance costs, but we shall ensure that these proposals do not lead to unnecessary or excessive burdens on business. They will be kept to the absolute minimum necessary.
I have no doubt that the modest price of the new information will be well worth paying, not least because there will be tangible benefits for business as well as government. Better statistics mean better understanding on the part of government and business. And this in turn should lead to better decisions. That must be good for us all.
But more crucial than the decisions Government takes are the collective decisions of all of you in business, commerce and industry. On this front, I have two particular points I want to make.
The first concerns the familiar problem of high wage settlements. In particular cases no doubt high settlements are justified. But often they are not. And at present it is clear that pay increases overall are running ahead much too fast. Too many negotiators simply assume that they have to match or more than match the RPI regardless of their business circumstances. This morning’s figures for unemployment show graphically what happens if you take that approach. Higher pay and higher costs squeeze profits, investment and output and lead inevitably to higher unemployment. Sometimes restraint is necessary – and that applies as much to management’s salaries as to those of their workforce.
Some companies may imagine that if they price their goods out of markets the Government will accommodate this with a lower exchange rate. John Banham and Trevor Holdsworth have repeatedly pointed out the folly of such thinking – and they are right. It would be a great mistake to think the exchange rate can only move in one direction.
My second point concerns investment. There is no more welcome sign of the improved health of British industry than the record rise in investment over the last three years. I welcome this unreservedly – even though it is costing the Exchequer a massive nine billion pounds a year through capital allowances. I recognise that the slowdown in demand and output makes it harder for companies to invest for the future. But wherever they can invest I hope they will. And I believe they would be wise to do so. For investment needs and opportunities do not simply disappear because the short-term position is tight.
Indeed, in many respects the medium-term investment prospects in the world economy are very good indeed – especially in Europe. We are now only two years away from completion of the European Single Market – a huge market with a population approaching that of the US and Japan combined. The dramatic developments in Eastern Europe are creating fresh opportunities for business ventures of all kinds and will continue to do so. To give one example, hitherto East Germany has traded mainly within the Eastern bloc and UK exporters have sold very little there – only one hundred million pounds in 1989. As it becomes integrated in the Western economy we should aim and expect to account for as high a proportion of East Germany’s imports as we currently do of West Germany’s. In the long term that should bring as much as a tenfold increase in our exports, to one billion pounds – a substantial rise by any yardstick. And of course that is only one of the economies being opened up in Eastern Europe.
I have no doubt British exporters can take these opportunities. In the last year exports have increased by 11%, which is the clearest possible illustration that many British companies are ready to profit from these developments. But many are not. I am concerned when I hear of British companies that have not yet developed strategies for getting the most out of the Single Market. Enormous opportunities exist, but only for those ready to compete for them. And that means preparing now. Not tomorrow. That will be too late. Others will be there before you.
No-one should under-estimate the challenges before us, or the rewards available if we meet them. The 25 years since the CBI was formed have brought their share of problems, but looking across the span of years we can see also the enormous improvements they have brought to the general living standards and quality of life in this country.
None of that would have been possible without the growth of British industry and commerce. It is incomparably better managed, better equipped, more profitable, and more productive than it used to be. The climate in which it operates is altogether better. Now is the time for you to build on these strengths; and to carry them forward into the 1990s. I am sure you will do so.