UK: the economic plan is working

The UK government is dedicated to increasing the nation’s competitiveness and maintaining London’s position as a world leader in the financial field. But we face serious challenges. The economy is recovering from the most damaging financial crisis in generations. UK output fell by 7.2% from peak to trough. That is almost twice as deep as that experienced by the US and three times as deep as Britain’s recession in the early 1990s. 

Debt was at unsustainable levels. In 2010, total private sector debt had reached 470%. The government ran rising deficits even at the peak of the boom. The UK entered the crisis with a structural deficit of more than 5% of GDP, the highest amongst the G7. Subsequently the deficit soared and in 2010 the UK deficit was forecast to be the highest of any major economy. The historically high level of borrowing undermines fairness, growth, and economic stability.

The UK government has implemented the economic strategy necessary to rectify Britain’s perilous macroeconomic imbalances. The combination of fiscal responsibility and monetary activism assists the rebalancing of the economy from debt-sustained activity towards investment and exports. Our fiscal credibility has helped keep interest rates low and allowed the UK authorities to pursue a strategy of monetary activism. This includes measures such as the Funding for Lending Scheme that has supported a dramatic improvement in financial conditions.

Our unwavering commitment to deliver a sustainable recovery is yielding results. The UK economy is turning a corner. Recent evidence suggests tentative signs of balanced, broad-based growth. The deficit has been cut by a third as a percent of GDP and the structural deficit has been cut more than any major advanced economy. Private sector debt has fallen by almost 40% of GDP since early 2010. For every public sector job lost, 3.2 have been created in the private sector. Employment is at an all-time high. Finally, the average of independent forecasts for 2013 GDP growth are now more than double the 0.6% official forecast from March. Britain is on the mend.

But the recovery is in its early stages, and we must remain vigilant. While the extreme risks in the euro area have been reduced, they do remain, and emerging market economies have slowed as capital flows back to recovering advanced economies. We will not become complacent about implementing our plan to repair and strengthen the UK economy. 

The financial services sector in the UK accounts for 10% of our GDP, 12% of our tax revenue, half of our trade surplus, and employs over 1 million people — two thirds of whom are outside of London. Financial services have a critical role in the recovery as a provider of credit and financial intermediary services to businesses and consumers. We are taking ambitious actions along three strands to ensure that we have a financial sector which can make significant contribution to sustainable growth: (i) reforming financial regulation to ensure we have a safe and resilient financial sector that can compete sustainably in the global market; (ii) creating the right environment for financial services firms to trade and attract inward investments and supporting firms to pursue high value opportunities; and, (iii) incentivising banks to lend to the real economy, supporting SMEs and employment.

We are delivering necessary reforms to strengthen the City and make it more resilient. We are implementing the recommendations of the Vickers review through the Banking Reform Bill and we have reformed the financial regulatory architecture in the UK through the Financial Services Act. We are also working hard in Brussels to secure the best possible outcomes on a range of financial services dossiers, enhancing financial stability whilst protecting the competitiveness of the financial services industry.

In the Budget this year, the Government announced the creation of the Financial Services Trade and Investment Board, which has been tasked to support the sector in gaining market share abroad and creating the right environment to attract inward investments. The Board is now up and running and will identify trade and investment priorities within the financial services sector and provide senior level steers and directions for joined up government and industry actions.

A key element of our economic plan is an ambitious programme of growth-enhancing reforms to support a sustainable recovery. Our plan focuses on tax competitiveness, business growth, workforce skills, and rebalancing towards investment and exports. 

Consistent with these aims, we are emphasising long-term investment in infrastructure by committing to publicly fund a pipeline of specific projects worth over £100 billion by 2020. 

We have brought forward the delivery of our commitment that the first £10,000 of income is free from income tax. Increases already in place have saved a basic rate taxpayer £600 a year, rising to £700 next year. By April 2014, 2.7 million low income individuals under 65 will have been lifted out of income tax altogether.

In addition, we are boosting investment and competitiveness through a major programme of corporate tax reform, including by reducing the main rate of corporation tax from 28% to 20% between 2010 and 2015. Companies that had left the UK are now bringing investment back home.

So whether it’s helping keep interest rates low; repairing our banks; dealing with the deficit, or lasting structural reforms to make Britain more competitive — the government is backing British business and creating lasting improvements in the living standards of families. The economic plan is working and we are committed to seeing it through.   

This article was published as a foreword to our UK Capital Markets report in September 2013.

Sajid Javid was made Chancellor of the Exchequer by Prime Minister Boris Johnson on July 24 2019, having served as Home Secretary under previous leader Theresa May.