Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.
The Harvard economist Ricardo Hausmann has shown that most of the differences in income and wealth creation between nations can be attributed to how complex their economies are. Broadly speaking, poorer countries make simple things that everyone else can make, while richer countries make things that are complex that not everyone makes. According to one study, in the US, the average employee works with 100 other people to do their job, while in India the average employee works with four.
As Hausmann puts it: “for a complex society to exist, people who know about design, marketing, finance, technology, operations and trade law must be able to combine their knowledge to make products. Modern man is useless as an individual: making a computer is a team sport.” Adam Smith, of course, had the same insight two centuries earlier.
This is one of the reasons why, across the world, cities are emerging as the places where economic growth is strongest. The purpose of cities – their raison d’etre – is to bring people together to allow them to specialise in what they do best and to collaborate with each other. One of the reasons why London has been so successful is that you can find just about anything you want there – experts, specialists, products, services, finance and labour.
Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.
Home ownership in Britain fell during the last decade for the first time in nearly 100 years. This is despite the fact most people still aspire to own their own home. It is an understandable aspiration: a well-supplied home rental market is important for choice and mobility, but home ownership brings the guarantee that you won’t be uprooted because the landlord gives notice, a valuable source of confidence and stability for many families. It’s one of the reasons why Conservatives from Harold Macmillan through Margaret Thatcher to David Cameron have tried to do what they can to help people fulfil this aspiration.
Simplifying the planning laws to remove national targets and giving councils the responsibility to plan for the homes their local community needs is improving the supply of homes. The number of new homes given planning permission has risen by 22 per cent since the National Planning Policy Framework was published last year.
But even so, thousands of people who could afford a mortgage don’t get the chance to own their own home because deposits required by lenders have increased since the financial crisis. In some parts of the country it can take a couple on average earnings ten years of saving to be able to afford a deposit for a house or flat, and for single people longer.
Help to Buy, the Government scheme to assist homebuyers with deposits is designed to address this recent obstacle to home ownership. If a homebuyer can provide a 5% equity deposit the Government will act as a guarantor on the next 15% of the property value.
Some people have worried that providing a route to providing a property with only 5% equity is too small a buffer to withstand any future turbulence in the housing market, in the light of the experience of negative equity in the early 1990s, and the rash lending policies of banks before the crisis.
But there is a vital difference between Help to Buy and the riskier mortgages of the recent past. Every Help to Buy mortgage is required to be taken out on a repayment basis, rather than interest-only. At the height of the boom, many banks advanced interest-only mortgages without any record of a repayment vehicle being in place. This makes a huge difference. For a property at the average UK price of £242,000 a Help to Buy mortgage taken out with a 5% deposit will, through repayments, have built up to a 11% equity share – even if house prices are totally flat – after three years, and a 16% equity share after five years. In subsequent years, the increase in equity accelerates as, typically, more capital is repaid in the later years of a repayment mortgage.
This critical requirement for repayment means that Help to Buy embodies, in effect, a savings scheme that builds to a substantial equity stake – and a buffer against future turbulence that is rapidly established.
In fact, Help to Buy, by reducing the deposit required to 5% and requiring a prudent repayment, is very similar to a scheme operated by Harold Macmillan’s Conservative Government, as this extract from the 1961 Which? Guide to Home Ownership shows:
Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.
“Labour’s current muddled message would take several confusing paragraphs, filled with caveats and clarifications, covered in scribbles and crossings-out. Osborne has cut too far and too fast, they say, but we will stick to his plans. The Tory approach to cutting social security is wrong, though many of their underlying principles are right. Many of their cuts are as cruel as they are unnecessary, but we will not reverse them.”
Jones is a hardliner for whom no Labour leader can be left-wing enough, but his complaint actually plays into the Opposition’s hands – by suggesting that they have changed, when clearly they haven’t. The Shadow Cabinet certainly seem incapable of giving a straight answer on just about any policy question, but anyone who thinks they’ve swapped the red flag for white one is deluding themselves. Whether on the economy, welfare reform, education, localism or immigration, it’s just the same old Labour Party with added confusion.
In the face of determined action from reforming ministers like George Osborne, Iain Duncan Smith, Michael Gove, Eric Pickles and Theresa May, their shadows have been left scrabbling for words. But there’s been no change of mind and certainly no change of heart. In fact, what we’ve seen in the last few weeks doesn’t even count as a change of political strategy. As media scrutiny becomes more intense, it is not surprising that certain indefensible positions have been abandoned, but that’s just tactics. The contradictory statements we’ve heard from the Labour frontbench can be interpreted as a sign of panic, but they also provide a smokescreen for their true intentions.
We’ve been here before. When Labour was in Government, they repeatedly signalled their intent to reform the public sector, while quietly strangling any genuine attempts to do so. Take welfare reform, for instance. In 1997 Frank Field was appointed as the Minister for Welfare Reform, with a brief to ‘think the unthinkable.’ Within a year he was forced out by Gordon Brown, then Chancellor. It would be 2005 before reform got underway again under John Hutton, who commissioned the Freud Report. However, when Gordon Brown became Prime Minister in 2007, Hutton was replaced with Peter Hain and the Freud Report was left to gather dust. As the economic situation worsened, a belated attempt was made in 2008 to revive reform under James Purnell, but, frustrated with the Prime Minister, he resigned the following year and was replaced by Yvette Cooper.
The lesson here is that every time the Brownites (who now have uncontested control of Labour Party) have an opportunity to reverse ferret on reform, they will take it. Unwilling to develop new ideas even in opposition, the chances of Miliband, Balls and Cooper pursuing meaningful reform in office are zero. But what about external pressures? Any future Labour government would have to operate under tighter financial constraints than the last Labour government, thus some people might think they’d be forced down the path of reform. This is to forget the essential difference between them and us.
Faced with the need to make massive savings in public spending, our instinct has been to give power away – providing local public service providers the freedom that they need to do more with less. Labour’s instincts, though, run in the opposite direction. If difficult decisions have to be made, they certainly wouldn’t trust others to make them – even if on matters best determined locally. Furthermore, without unlimited funds to buy off their key supporters, a future Labour Government would placate the likes of Len McCluskey by killing-off reforms to order.
Ed Balls, has already said that he would borrow more if he were Chancellor, but without reform, the pressure on the public purse would only intensify, pushing this country even closer to the cliff edge. That is why the current Government is committed both to deficit reduction and to the reform of our public services. Three years in, the deficit has been reduced by a third, the welfare system is being reformed, choice and rigour is returning to our schools, power has been given back to local communities and immigration is being controlled.
This is a record to be proud of. But these achievements are not irreversible. In fact, let us be under no illusion that Labour – if given the chance – would indeed reverse them. So, don’t be taken in by the toing and froing of recent weeks. With the Brownites in charge, Labour’s position is all too clear: the new policy is the old policy.
Three weeks ago I wrote about Labour’s refusal to say whether they would borrow beyond the Government’s plans or not. As I said, this is an extremely basic question about economic policy – and the Official Opposition really ought to have an answer to it.
Sure enough, a few days later, Ed Miliband had a farcical interview with Martha Kearney on the World at One, during which he claimed – when tackled on the issue of Labour’s proposed VAT cut – that cutting government revenue would not require the government to borrow more. The next morning, on ITV’s Daybreak, he had to execute a volte face and admit that Labour planned “a temporary rise in borrowing”. But far from clarifying the issue, this latest twist begs a host of further questions.
The success of Britain’s financial services industry matters to all of us. Together with the associated business services sector, it employs two million people up and down the country. Furthermore, it contributes one pound out of every eight of all the taxes paid in Britain.
That very importance carries risks – which is why this Government has done what the previous one failed to do: legislated to create a stringent supervisory regime so that banks can no longer look to the taxpayer to bail them out, and to charge a permanent annual levy to contribute to the greater risk they are associated with than other companies.
Last weekend, George Osborne and I represented the United Kingdom at the European Finance Ministers summit in Dublin. Before the summit began, the finance ministers of the Eurozone countries met to approve formally their agreement to give financial support to Cyprus.
The chaotic handling of the Cyprus episode should be a wake up call for Europe’s financial regulators. It revealed that five years after the financial crisis no thought-through and predictable response was ready to deal with the difficulties of two banks which, while large for Cyprus, are tiny in European terms. Instead, policy morphed and uncertainty persisted while the banks had to go on an extended holiday. Just imagine the chaos if this had happened for bigger banks in larger eurozone member states.
Homes: we all need them, there aren’t enough of them and building more of them would provide a welcome boost to the economy.
Unfortunately, the last Labour government left us with the lowest peacetime level of house-building since the 1920s. They also left us a completely dysfunctional planning policy.
In attempting to break the planning deadlock, Labour only made things worse – by imposing targets and regional spatial strategies. This top-down approach certainly had an impact: adding both to the bitterness of local planning battles and to the bureaucracy of an already over-complicated planning system.
Yesterday, the Government responded to Michael Heseltines’s report – No Stone Unturned – accepting 81 of the 89 recommendations made. The former Deputy Prime Minister described the Chancellor’s adoption of so much of the report as “one of the most strategic supply-side decisions that I can remember.”
It is no coincidence that this came at the beginning of Budget week. The policies that have been endorsed have the potential to drive growth just as much as the macroeconomic and microeconomic policies contained in the Budget.
Just as a national economy can be one that helps or hinders business success, so too can particular localities be places that assist businesses to locate and grow or which impede the ambitions of businesses to expand production and take on new workers.
Land ready for development; fast and efficient transport communications; a dependable supply of the skills employers need; attractive housing; positive and dynamic leadership – all of these can make a difference to whether a place attracts jobs or sheds them.
In short, when it comes to growth, place matters.
George Osborne has called it the British Dilemma: how can Britain be one of the world’s leading financial centres without exposing ordinary working people in this country to the terrible costs of banks failing?
Let me illustrate both sides of the dilemma:
The financial services sector is one of our most important industries. Together with related services, it employs around two million people in this country – two thirds of whom work outside London. Even in the recession, financial services contributed about one pound in every eight of government revenue to pay for public services. The industry is, by far, our biggest exporter, generating last year a £47 billion surplus from overseas trade, providing us with vital foreign exchange earnings.
And yet that very importance carries huge risks for Britain. At its peak, the combined value of UK bank balance sheets amounted to 500% of British GDP. Compare that to 300% in France and Germany and just 100% in America. That left us in an extremely exposed position when the great debt bubble of the previous decade finally burst.
In 2007, we witnessed the first run on a British bank in more than a century, with depositors queuing in the streets to get their savings out of Northern Rock. Subsequently, HBOS and RBS – at the time the biggest bank in the world – had to be bailed out, with £65 billion of taxpayers’ money. It was the clearest possible proof of failure in the established system of financial regulation and in the culture of the banking sector.
“The truth,” says Peter Oborne in a typically compelling article for the Daily Telegraph last week, “is that Mr Balls isn’t any good as shadow chancellor.” Oborne adds that “this is an open secret in the Labour Party.”
There aren’t many benefits to being out of power, but one of them is the freedom to develop new policy, unfettered by the immediate demands of government. The key policies that the current Government is implementing now – for instance, on reducing the deficit, restoring educational standards, reforming welfare, controlling immigration and localising power – first took shape while we were in opposition.
The policy work that was done before the election is an important reason why, despite the complications of coalition government, we’ve been able to pursue a demanding programme reform right from day one.
If nothing else, a good Opposition should at least be able to engage with the Government on a serious, intellectual level – challenging the ideas that underpin government policy, proposing alternatives and, perhaps, in the process of argument and counter-argument, advancing our common understanding of the great issues of the day.
But there is no such engagement from Labour. Ballsism, if we can speak of such a thing, is all about frustrating thoughtful analysis of any kind. It operates according to its own internal rules, which can be summarised as follows: Admit no mistakes; avoid consistency; propose nothing new. Let’s look at these in more detail:
To admit no mistakes, to avoid consistency, to propose nothing new may give the impression that the shadow chancellor doesn’t know what to do. That, however, isn’t quite right. In fact, this approach is quite deliberate.
Ten years ago I wrote a book entitled Total Politics, which exposed the ruthless politicisation of the state in order to further the power of the Labour Government. Communication, funding, audit, inspection, regulation: the means of administration were all bent to political ends. Now, with the levers of power out of Labour hands, Balls has adapted the practice of total politics to the circumstances of opposition.
The absence of self-criticism, coherence and innovation in Labour’s economic policy making are all calculated. The idea is that minimal policy allows maximum politics. Having nothing to defend provides Labour with the greatest freedom to attack.
That, however, is all it does. It is essentially destructive, rather than constructive, in nature. By the time of the next election, voters will want to know what kind of future a Labour Government would build for them – or, at least, what kind of future a Labour Government would let people build for themselves.
And at that point, if not long before, it will be clear that these years of opposition have been wasted.
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Unemployment continues to fall. The latest figures, published last week, showed that the number of people looking for work and claiming unemployment benefits fell by 12,500 in the last month to stand at 1.54 million.
Nevertheless, the headline figures must seem remote to the anxieties of anyone who does lose their job. Becoming unemployed can be a shocking and terrifying experience – especially for people who have an unbroken record of employment throughout a long career. In this position, it is easy for someone to imagine that they will never get back into work or, at least, face a protracted struggle before they do.
Unemployment, even for a period of weeks, can put household finances – and family relationships – under severe strain, especially given the long-term accumulation of personal debt in our society.
Britain’s long-term prosperity depends upon a rebalancing of its economy towards financially-sustainable, wealth-creating industries. Since the election over a million new jobs have been created – outnumbering by more than two to one jobs lost. But because jobs will be lost in some sectors and gained in others, it is vital that we have a labour market that enables people to move into new jobs with the minimum of delay.
Most Tuesdays he will be writing this 'Letter from a Treasury Minister' for ConservativeHome readers. Previous versions of this Letter appeared here.
Today twenty cities – from Plymouth to Sunderland, from Preston to Brighton – have been invited to negotiate City Deals with the Government. This second wave of City Deals follows an initial round of the eight biggest cities outside London.
The City Deals take powers and budgets that were previously vested in Whitehall and put them under local control if the city can show that by doing so they can get better results and better value for taxpayers’ money.
For years, the Treasury was the last government department you would go to if you wanted to devolve powers. It was renowned as the keeper of the orthodoxy that the man in Whitehall knows best. That is being transformed.
When I was appointed Financial Secretary to the Treasury five months ago, I asked the Prime Minister to continue my responsibility for working with cities, which I had begun a year before, because I was convinced that the cities programme is of direct relevance to the work of the Treasury. The Prime Minister and George Osborne shared my conviction. Yes, we must have the right macroeconomic and microeconomic policies to create the conditions for growth – low interest rates, a determined programme of deficit reduction, a globally competitive tax system and flexible labour markets, to name just a few. But economic policy must also recognise the importance of place. After all, growth happens not in the abstract, but in particular places where employers expand their production or set up for the first time. These places can be attractive and supportive to growth, or they can place impediments in its way: whether it is the state of local infrastructure, the skills available in the local workforce, the availability of land suitable for investment, the presence or absence of other relevant businesses, the responsiveness of local leaders to employers’ needs. It is essential that we do everything we can to make sure that Britain consists of places where growth can take root and flourish.