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How to read Nick Clegg’s big speech on growth

After those disappointing growth figures, there’s no bigger issue in politics today than growth. Where is it going to come from, what are the limits of the governments responsibility and what should it be doing? These question could dominate the rest of this Parliament. And now Nick Clegg has delivered his big speech on growth.

This page is an annotated version of the speech with my comments in red. For most politicians, its a lot easier to read their speech that way than to wade through the code undigested. And theres a conclusion at the end.


Nick Clegg: Building a New Economy

Fri, 04 Feb 2011

Speech to a Carbon Capture and Storage plant in Rotherham.

I am grateful to be here with a group of businesses who are at the forefront of the UK’s drive to build a new economy.

I will be saying more about the specific issue of carbon capture and storage, and our plans for a green economy, in a moment.

First I want to make some remarks about the Government’s approach to economic growth – and about the kind of economy we want to grow. This is of course a topical question in light of last week’s disappointing figures for GDP growth.

We are under no illusions in the Government about the difficult economic circumstances that we inherited from Labour. The Chancellor and the Governor of the Bank of England have said that recovery from the recession is likely to be ‘choppy’ for some time. The Prime Minister and I have both said that the nation faces a long, hard road back to prosperity.

Here we have two of the Coalitions Holy Trinity of economic arguments. That they inherited a mess from Labour and that recovery will be “choppy”. Both are effectively ways of writing yourself a blank cheque. For if the mess is really horrific, then that explains everything horrid that happens in the coming years. And – in the midst of it all – there is no way of distinguishing choppiness on the way to a strong recovery from, simply, a feeble recovery. So both are ways of deferring criticism.

It is perhaps worth saying that there are also some strongly positive signals in the economy. During the course of this week, we have seen the publication of three sets of important economic indicators on manufacturing, construction and services – all moving in a positive direction. Things are difficult, but it is not all bad news.

But then he blinks! Leaning on these little bits of data, admittedly good in themselves, is a bit like grasping at straws. If choppiness is to be expected, why not leave it at that?

But let me also assure you that we are determined on our course of action to tackle the deficit. The outgoing Labour Chief Secretary to the Treasury said in his now famous parting note that ‘there was no money left’. Of course it was much worse than that. They left us well and truly in the red. This year we’ll be spending over £43bn just on the interest on our debts.

Ah, heres the third of the Trinity, the deficit. Whatever your view on that – the defining debate of the moment – I fear the drama of the cuts is obscuring the need for deeper analysis.

That’s £830m per week. Just under £119m a day. For that money, we could build a new primary school every hour. We could buy a new Chinook helicopter every day. We could take 11 million people out of paying income tax. We could triple the number of doctors in our hospitals.

But the broader point I want to stress today is that the deficit and debt left by Labour are simply the most obvious symptoms of a much deeper economic malaise. When the financial crisis struck, the economy was fragile, founded on personal and state debt rather than investment; lopsided in favour of financial services and the South East; and overly-reliant on carbon consumption rather than green growth.

All coventional wisdom except the last point. But remember – hes speaking at a carbon capture plant…

Labour’s economy was weak, and this weakness was exposed when the financial storms came.

So the Coalition Government is determined to eliminate the deficit. But let me be clear: paying off the deficit is a means to an end, not an end in itself. We are determined to foster a new model of economic growth, and a new economy – one built on enterprise and investment, not unsustainable debt. We seek nothing less than a new model of sustainable growth.

“A new model of economic growth”? Like Cameron, Clegg seems to have a taste for vaulting rhetoric when he dabbles in economics. Its slightly disorienting. If he just says “different from Labour” (which is what I suspect he really means), we can start to analyse the differences. But “a new model of economic growth” suggests sweeping radicalism that defies the plodding of mere assessment. Im dubious this promise will be fulfilled.

Paying off the deficit is a vital part of our plan for growth. Necessary for restoring confidence in Britain; necessary for keeping down the cost of borrowing for families and business; necessary to avoid paying extra interest to the bond markets. Necessary – but not sufficient. If the Coalition Government simply pays off the deficit, but leaves the underlying economy unchanged, we will have failed.

Since the depressing growth figures, the line coming from Conservatives has mostly been narrow almost to the point of Thatcherite – that paying off the deficit is the route to growth. Clegg is going beyond that, but not necessarily against it.

We are not in Government simply to clean up Labour’s mess. We are in Government to lay the foundations for a better, stronger economy. People want their politicians to be leaders, not accountants.

It is important to be crystal clear about the problems we are addressing. Most people know that we inherited a crippling deficit. But perhaps it is not yet clear enough that we also inherited a failed economic model. The model of economic growth based on debt and on financial services is broken for good. So the Coalition is undertaking two very difficult tasks at the same time – dealing with the deficit and building a new model of economic growth.

To disentangle: debt and financial services were indeed two huge features of the economy under Labour. They provided much of the income that enabled the spending of the Labour years. But this is not enough to define Labours approach to the economy. For it still leaves the question of what Labour did with the money and the markets and what they were trying to achieve.

Let me say too that as Government, we are determined to get this right. It is very tempting in a time of economic difficulty for governments to churn out initiative after initiative, in a desperate attempt to stimulate the economy or – all too often – to try and give the appearance of doing so. And politicians can fall prey to the myth that somewhere there is a lever they can pull to generate growth, and that they should simply pull as many as possible in the hope of finding it.

I doubt Clegg intended this to be read as a message telling Richard Lambert to get lost. But thats how it reads. If the CBI wants a department for growth focussing relentlessly on what it can do to help the economy grow, it is misguided.

The last Government introduced, in the name of economic growth, over 3,000 publicly-funded schemes aimed at business support and an almost monthly diet of tax breaks and so-called ‘business solutions’.

And the result of all this activity and spending? In the first decade of this century – all years in which Labour was in power – growth was the slowest since any decade since the 1960s. Over the past decade, business investment has grown by just one per cent a year, a quarter of what it was in the 1990s.

Of course I am not claiming that all of the previous Government’s schemes were ineffective. Many were valued and valuable. My point is that we have to do a very much better job of targeting public money in a way that has a genuine impact on economic growth.

Yes, that is a central, tricky question. Lets hear the ideas.

That is why the Government is currently conducting a growth review, consulting with businesses and economists to ensure that our approach is grounded, evidence-based and properly thought-through. Some have expressed concern that we haven’t published it yet, and that we are waiting for the Budget. I do not think we should apologise for treating this issue with the utmost seriousness.

We need to be clear about the fundamental factors that drive economy growth; clear about the areas in which government can effectively play a role; and clear about the interventions than make the most difference.

That sounds good.

We need, in short, a grown-up approach to growth, based on hard-headed analysis – in place of the ‘pick and mix’ approach that has characterised too much recent government activity, grabbing at instant initiatives rather than taking the big decisions that really count.

There are four important steps we need to take to build a new economy:

  • Weaning ourselves off debt-financed growth, and onto investment-led prosperity;

This is straight out of the Mervyn King playbook. As such, it is less a programme for the future than an acceptance of our predicament: our chances of another credit-fuelled boom are nil.

    • Investing in the ‘hard’ infrastructure that underpins growth, such as transport;

    Is there any UK government since our grandparents grandparents that has not done this on a significant scale?

      • Cultivating the ‘soft‘ infrastructure made up of knowledge, skills and education that businesses need; and

      This again is not new. Labour was interested in similar things. But it could be important. Vince Cable has spoken previously about the OECD consensus that nations should continue to invest more in these areas even while cutting deficits. That would be an abrupt U-turn as the Coalition is currently making cuts here.

        • Balancing regions and sectors, instead of putting all our economic eggs in one basket

        This is new, in the sense that no government Ive known (Thatcher on) has attempted it. And it is big. What could be better than a bigger, stronger manufacturing sector? But doing it would require huge efforts by government (eg as outlined here by Will Hutton). Mind you, politicians of all parties have been talking about it for about two years now. And its not got beyond the rhetorical.

          Investment, not debt

          We have learned – the hard way – that an economy built on debt is built on sand. Right now we are going through the sometimes painful process of unwinding a toxic legacy of personal, business and public debt.

          OK. Well because he keeps going on about it in crude terms, Im obliged to point out that debt itself is not bad. The whole reason were desperate to get banks to lend more is so that firms can take on more debt. Too much debt can of course be bad, and we as a nation have got much more than is comfortable. But some debt is often a good thing.
          We should not fall into the trap of seeing deficit reduction and economic growth as separable. Our deficit reduction plan is a vital element in our growth plan. By keeping the UK out of the danger zone, and holding down the cost of borrowing, our approach is creating a stable macroeconomic platform for growth.
          Yes. The question is, if the government cut less rapidly, could it retain the stability benefits but also generate more growth and save more jobs? Thats what Labour wanted to do. Thats what the fabled “Plan B” for the economy would be. Clegg fails to tackle what is really the central point in the whole economic debate at the moment.

          As the Secretary-General of the OECD said of the UK last week: “dealing with the deficit is the best way to prepare the ground for growth in the future. In fact if you don’t deal with the deficit, you can be assured that there will not be growth, because confidence will not recover”. I agree. And just this week the Institute for Fiscal Studies endorsed the Government’s overall deficit reduction approach.
          Note that endorsements like that from the OECD could apply equally well to Plan B…
          There is a moral dimension to this question too. I have never understood those who say its more ‘progressive’ to delay tackling the deficit, so that we shuffle off responsibility for our debts to the next generation to deal with. This strikes me as little short of intergenerational theft. It is the equivalent of loading up our credit card with debt and then expecting our kids to pay it off.
          The moral authority claimed here is bogus Id say. The point about higher growth is that allows you to pay off your debt more quickly. That is one of the chief points that advocates of Plan B think is is in its favour. The government obviously thinks they are wrong. But I cant see how their position is immoral.
          It frankly beggars belief that the leader of the Labour Party is today talking about social mobility. The Labour Government presided over stagnating social mobility, increasing inequality, and passed on to Britains young people a monumental economic crisis and a deadweight of debt hung around their necks. Labour created the problems we face today. Its about time they came up with some answers too.
          Personally, Id say Labour failed to fix the problems on this front that emerged during Margaret Thatchers time.
          The need to shift from debt-fuelled growth to investment-led growth also frames our approach to banking reform. We will shortly be announcing the outcome of our discussions with the banking sector. But I can say now that we are determined to ensure greater investment in British business; a greater contribution to the Exchequer; and more transparency in top pay in the banking sector.

          The Government is also committed to the creation of a Green Investment Bank, with funds of at least £1 billion, to enhance the necessary investment in low-carbon growth, in a sound economy built to last. We’ll be able to say more about this vital new institution in the coming weeks too.

          Er, why is the Green Investment Bank taking so long? Everything seems to have disappeared into Budget discussions.
          ‘Hard’ infrastructure: transport and communications

          The second element in our drive to build a new economy is to focus on the hard infrastructure that underpins growth. It is clear from the economic evidence that the key function of government, beyond creating the right macroeconomic environment, is to support investment in the infrastructure that makes economic activity possible.

          Mind-bogglingly obvious and conventional. How can this be evidence of “a new economic model”? [You can skip the rest of this section.]
          That is why the Coalition Government took the decision to maintain the capital investment plans of the previous administration, despite our tough deficit reduction plans.

          That is why this government has pressed ahead with plans for High Speed Rail 2, and with investments in Crossrail.

          That is why we are planning to provide the best superfast broadband network in Europe by 2015, with the Government providing £530m of investment over the Spending Review period to support private sector investment – including in some of the most remote areas of the UK

          And that is why, in our National Infrastructure Plan – the first to be produced by a UK government – we have established an expert review into improving the flow of private investment into some of our key infrastructure sectors. The review is ongoing, as part of the Government’s wider growth review, and is drawing on the advice of three well-respected experts in the area: Dieter Helm, from the University of Oxford; Mike Toms, of Oxera; and Tim Stone, chairman and founder of KPMGs Global Infrastructure and Projects Group.

          As he suggests, all the important stuff in the National Infrstructure “Plan” is actually under review.
          ‘Soft’ infrastructure: knowledge and skills

          We also know that the nation’s knowledge base, and the skills of our workers, is a vital component of growth. The importance of investing in this ‘soft infrastructure’ – the third key step towards a new model of economic growth growth – explains a number of decisions taken by the Coalition:

          This is true in that the Coalition does seem to have latched onto this soft stuff in its rhetoric. But Labour was keen on it too. If this is a key to the “new economic model”, then presumably the Coalition has to demonstrate that it is going to be “better” at this somehow.
          Ensuring that the UK remains a world leader in science and research by maintaining a science budget of £4.6bn over the Spending Review period.
          Clunk. There is something called the “science budget” that funds the research councils. This is being cut significantly in even cash terms, but Clegg blurs the point by ignoring the huge cuts in capital spending. And again, even if the Coalition were protecting science spending, it would be nothing new. Not only did Labour increase spending on the science budget – so did the last Conservative government.
          Protecting education spending, and increasing investment in apprenticeships, as well as reviewing the vocational curriculum in the critical years between 16 and 19
          I dunno, has education spending been protected? Capital cuts in schools. Tuition fees. EMA. Cutting undergraduate places in order to pay for new apprenticeship places.
          Investing in technology hubs to link up the best universities and manufacturers. We have announced an investment of more than £200m over the next four years in a network of technology and innovation centres, modelled on the German “Fraunhofer Institutes”.
          And it gets worse. That £50m a year for the shiny glamorous innovation centres has to be weighed against probable cuts in this area of government spending of around £400m a year. “Probable” because with the new financial year just a few weeeks away, we still dont know what the budget is for the Technology Strategy Board.

          Fourth,the new economy will also need to be radically rebalanced. For too long, we have allowed the economy to be dependent on certain regions and certain sectors. A sound economy is built on diverse, strong regions and diverse, strong sectors. I am delighted that even as the economy struggles out of recession, that the recent data on manufacturing is so strong.

          As the Chancellor has said recently, we need an economy where we sell our goods and services to China and the rest of Asia, instead of borrowing from them in order to buy the things they make for us.
          Yes, but how are we going to get it?
          But we also need to ensure that economic growth is not lopsided in terms of geography. The regional inequalities running like scars across our country are not only socially damaging, they are economically destabilising. The old economy was regionally unbalanced: in the decade up to 2008, for every private sector job created in the Midlands and the North, ten were created in London and the South.
          Yes, but how are we going to get it?

          We have created a £1.4 billion Regional Growth Fund, specifically tasked with stimulating sustainable private sector growth, particularly in those regions most dependent on the public sector;

          Oh come on. That is billions less than Labour was spending on the Regional Development Agencies. How can a cut in what is apparently one of the keys to the new economy be claimed as evidence of intent?
          We are working with the Devolved Administrations to promote growth across the UK and, where appropriate, transfer power of economic issues, such as within the Scotland Bill;
          Interesting. Is this going to strengthen Scotlands hand?
          We are establishing local enterprise partnerships that will bring together local business and civic leaders to take forward economic policy in their area; and
          This is what the RDAs used to do. I cant get worked up about this kind of bureaucratic reshuffle, especially when Cable thinks it is “Maoist” in its hastiness.
          We are giving localities and communities greater freedoms to deliver what they want and conducting a Local Government Resource Review to examine how we can incentivise local growth


          These, then, are the four big steps we need to make towards a new economy – moving from debt to investment; building our hard infrastructure; cultivating skills and knowledge; and ensuring regional and sectoral balance.

          Carbon Capture and Storage

          I would now like to say something specific about Carbon Capture and Storage.

          CCS will play an enormously important part in the new, rebalanced economy. It is an industry of the future; taking the best of British talents in manufacturing, engineering and research; using our natural resources; and spreading growth – green, sustainable growth – across all corners of the UK.

          As Rachel explained earlier, the Coalition Government has committed to four commercial-scale projects. In the Spending Review we allocated £1bn in capital expenditure to the first demonstration project – the largest such commitment to a single project anywhere in the world – despite the immense strain on the public purse.

          Because the Coalition Government understands that if we invest in CCS now, if we get this right, we can create export opportunities of up to £6.5bn a year by 2030. We could create and sustain up to 100,000 new, high skilled jobs. And, at the same time, we can massively cut our carbon emissions. And, make no mistake, this isn’t simply well-meaning environmentalism. This is hard-headed economics. We know that, without CCS, halving global emissions by 2050 will be 70% more expensive.

          Is there a more textbook example of picking winners? Im not necessarily agin it. There can be times… But after stuff like this, lets not have any more cant about it not being the job of governments to pick and choose between industries.
          So gone are the days of government that pins the nation’s hopes on risk-taking in our City banks. We are determined to get behind new industries, in new places, to deliver lasting growth. The people in this room are crucial to that and we look forward to working with you to make it happen.


          So: we need an economy that is sustainable – environmentally sustainable, of course, but economically sustainable too. An economy built on investment, not debt; on world-class infrastructure and world-class skills; and on regional balance and diversity.

          Right now, our deficit reduction plans are inevitably taking political centre stage. And nobody should be in any doubt of our determination as a Coalition Government to stick to those plans.

          But as I have argued today, our ambitions go far beyond deficit reduction. We are equally determined to set our economy on a new course; to fuel growth in a new, more balanced way; and to replace the old, debt-ridden economy with a new one, based on investment, export and sustainability.

          The old economy got burned down in the financial crisis. But a new economy might be able to rise, Phoenix-like, from the ashes of the old.

          This is a long speech that I have struggled to understand. When you actually concentrate on what hes saying, its harder to follow than Derrida or an econometrics paper. It has a teflon quality that stops your thoughts coming together and keeps analysis split up in little droplets. Everywhere, reasoning appears to follow, but doesnt. Ive lived with it now for four days and am still frustrated by it.
          Its central theme is newness, which is Cleggs favourite schtick. He promises us he has the keys to a new economy, which is a very attractive promise as were all heartily fed up with the economy weve got. And to many, even the BBCs Rob Peston, it appears genuinely new. But hes not the first Coalition politician to promise a new economy. No, that was George Osborne back in May last year in his first major speech as Chancellor. Heres the bit of that speech that Clegg cites:

          “So Britain does need a whole new model of economic growth, where we save and invest for the future, instead of building our economy on debt.

          An economy where we sell our goods and services to China and the rest of Asia, instead of simply borrowing from them in order to buy the things they make for us.

          But let’s be clear – when you ask the Chancellor of the Exchequer the question ‘where is the growth going to come from?’ – there is not some lever in my office I can pull to get the answer.

          Because actually the answer is that the growth will come from you, the businesses of Britain.”

          Now that is an almost Thatcherite point of view. Osborne as the voice of the state seems to be washing his hands of responsibility for growth. That, he is saying, is down to the businesses of Britain. That is one answer to the question of where growth is going to come from and what the governments responsibility for that is. Its been a recurring refrain from Conservatives since the bad growth figures came out. But but but. It is the reverse of a serious attempt to rebalance the economy. Rebalancing the economy would take a huge effort on the part of government involving everything from tax to regulation to spending, as Will Hutton has outlined (for more, see my Prospect piece from last year). So we have Clegg citing as support for rebalancing a speech from Osborne that leans heavily against rebalancing. This is typical. How did Clegg resolve the distinction between “need” and “will” that I mentioned before the speech – by using both terms interchangeably. No wonder my brain hurts.
          Hence, this speech cannot be understood as a rational argument. Its a bit of politics. The negative growth in the last quarter of 2010 has forced the issue of growth up the political agenda. Both parties in the Coalition are obliged to respond. Now, theres actually no new policy here. (And that by the way is the difference between being PM and Deputy PM. Camerons speech on hi-tech growth was also problematic, but he had a clutch of shiny new initiaitives to announce). What this speech does is to buy time. The real response will come in the Budget on 23 March.
          What we can get from the speech is a sense of how Clegg is positioning his party against Osborne and Labour. Lets look at his four pillars of the new economy.
          • “Weaning ourselves off debt-financed growth, and onto investment-led prosperity” – the bedrock orthodoxy of the Coalition. Ed Balls could happily sign up to the second bit. But the first bit implies everything is Labours fault.
          • “Cultivating the ‘soft‘ infrastructure made up of knowledge, skills and education that businesses need” – Ditto.
          Theres obviously a huge gap there between what Clegg is saying is important and what the Coalition is actually choosing to spend its money on. In the three pillars of the new economy that involve spending, there are substantial cuts under way.
          Ultimately, this is why this speech fails. It is true that the economy under Labour was built on debt and relied hugely on financial services. But that does not mean that Labour neglected soft infrastructure, or key sectors such as manufacturing, or the regions. It made attempts to strengthen all of these, and backed them with public money. These attempts largely failed. But that surely makes clear that in order to succeed the government will need to do and spend more, not less.
          As Cable has pointed out, the OECD consensus is that investments in the “new economy” should be increased even while cuts are being made to reduce budget deficits. They are doing it in other countries. So why isnt our government doing it? Because when you combine sharp deficit reduction with huge protected budgets in other departments, theres no money left over.
          The government has committed to protecting three huge areas of public spending – health, defence and overseas aid. These are all areas of elective consumption that are essential to Camerons programme. Unless the public is content that the NHS is in safe hands, he cant get elected. Defence and the war in Afghanistan are essential to shoring up his right wing. And aid has been crucial to detoxifying the Conservative brand with caring. In other words, the reason Nick cant have his new economy is that Daves already spent all the money. “Junior partner” indeed.