The Prime Minister delivered a speech to G20 Finance Ministers in London on 5 September 2009, ahead of the Pittsburgh Summit.
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Let me first of all welcome you to London and express my gratitude on behalf of all the G20 leaders for the work you have been doing over the last year - including at your earlier meeting in Sussex and now today.
Today I want to propose to you a global compact for durable growth. I also want to propose some clear principles:
- financial systems based on responsibility, transparency and integrity - that serve the needs of families and businesses not of the bankers;
- sound macroeconomic policies which deliver balanced global growth
- open economies without harmful protectionism;
- environmentally sustainable production and consumption that accelerates the transition to a low carbon economy;
- and a fair distribution of the benefits of growth between and within countries.
This, taken with the renewal of our global institutions that I will talk about, amounts to a 21st century approach to governing our international economy.
But I first want to thank you for your leadership and energy over the most difficult year for the global economy since the Second World War.
Twelve months ago as Lehmans collapsed, people all over the world were staring into the abyss of a collapsing banking system, and the domino effect of this across the world’s capitals. It is true to say that people feared for their savings as bank after bank threatened to fall.
Even six months ago, people were still talking about the real possibility of a great depression like the 1930s.
That we are here today, that banks have been stabilised within most countries, no savings lost, and able to talk about the prospects for the return of growth is a tribute to your work and the work of governments everywhere so let no one tell us that when markets fail and banks collapse governments have no power to make a difference. And let no one tell us that governments are incapable of coming together, of acting together, in concert, recognising that each of our national interests can only be served if the common interests of all are served.
We live in a fast changing global world quite different from the past. That world is not going to return and there are always new challenges.
I want to say that today, having stabilised the banks and creating conditions for the return of growth we are at a new and critical juncture for co-operation in the global economy, there is no cause for, and this is not the time for, economic complacency or over confidence.
A year ago we took the bold action to recapitalise our banks; we put in place 5 trillion dollars in a worldwide fiscal expansion; we boosted domestic demand further with quantitative easing and we took action at the G20 to underpin trade finance -
We now have further choices before us, and decisions to make. Do we continue our fiscal and monetary support until we have clearer signs of recovery — or start to remove it now?
Do we agree that, as we all plan exit strategies, coordinated action is now also needed to deliver durable growth free of the old imbalances — or do we return to the old ways and simply let things take their course? I have no doubt what the answer must be. Let me explain.
Last year coordinated action made it possible to bring two advances - stabilising the banking system and co-oridnated action to create the foundations for recovery. But, as we prepare for the G20 meeting in Pittsburgh in the next few weeks, we must achieve two further advances by working together.
- affirming the action we are taking to avoid undermining the tentative signs of recovery we are now seeing;
- and creating the conditions for durable growth.
The Recession
As economists in both Japan and the US have warned, it would, I believe, be an error of historic proportions if we were to repeat the mistakes of the 1930s - when premature tightening prolonged the great depression - or if we failed to learn the lessons from Japan’s experience of stagnation in the 1990s.
The risks still very much remain. All countries have moved swiftly to support domestic demand through fiscal and monetary policy - in total G20 countries will inject 5 trillion dollars into their economies through fiscal expansion –and necessarily deficits have increased sharply in every country.
At a time when monetary policy effectiveness has been reduced by the strains in the banking system, this unprecedented and wholly exceptional global fiscal action has been vital and appropriate. Without it - each country and the global economy as a whole- would now be facing a much more severe recession, with dramatically higher unemployment and potentially much higher fiscal deficits and debt over the medium term. I understand the ILO say that by our actions at least 7m and probably 11 m jobs have been protected or saved.
Now as the summer has gone on, with additional data and information now on the state of the global economy and the composition of demand, the decisions that need to be made have become clearer. The IMF argue that “fiscal policy should continue to support economic activity until economic recovery has taken hold.”
For it is clear that too early a withdrawal of vital government support could undermine the tentative signs of recovery we are now seeing and lead to a further downward lurch in business and consumer confidence, reducing growth and employment, and actually worsening governments’ debt positions over the longer term.
And we must remember too as far as the financial system is concerned, there can be no complacency either. As the IMF have said, global banks have only written down about a quarter of the $4 trillion of forecast losses. We must also complete this to ensure banks are in a position to contribute to growth by restoring lending.
Now at present as private sector consumption and investment remains fragile public investment and spending is continuing to play a key role in supporting demand and protecting jobs.
The positive growth forecasts for 2010 are in many cases are based on the key assumption that the effective global fiscal stimulus of 2010 will be of the same scale as 2009.
So given the risks we face, this is not the time for economic complacency or over-confidence. The stakes are simply too high to get these judgements wrong. So to decide now that it is time to start withdrawing and reversing the exceptional measures we have taken would in my judgement be a serious mistake.
On the contrary, with more than half of the $5 trillion fiscal expansion committed to yet to be spent, I believe the prudent course is for G20 countries to deliver the fiscal plans and stimulus packages they have put in place and make sure they are implemented in full both this year and next.
Durable Growth
The London summit demonstrated how the world could come together and fight back against the global recession. Today and then at Pittsburgh we must show we will act with the same urgency and unity to set a long term path for strong, enduring and balanced economic growth.
To achieve this we will need to agree clear and concrete plans:
- to ensure that there is no return to the unsustainable imbalances of the recession
- to increase trade as a crucial driver of growth
- to implement urgently the structural reforms that will improve the skills of our workforce and the productivity of our economies
- to allow us to continue to invest for growth in but within a framework of sustainable public finances
First - making the recovery sustainable means avoiding unsustainable imbalances between countries. No country can achieve this on its on its own.
World growth has been driven by consumers in the US and other deficit countries. Already in the US and Britain we’re seeing savings increase. In the medium to longer term this adjustment should be complemented both by enhanced demand from emerging markets, as millions of today’s producers of their goods seek to become consumers of theirs and ours goods, and by structural reforms in emerging and advanced economies.
But to help ensure there is a smooth transition path to what one might call the mature phase of globalisation we need the world now to come together with careful and co-ordinated action.
Without such action collectively in face of this new global challenge, we face a continuing shortfall in global demand. So
It makes sense for countries with large current account deficits to boost exports. It makes sense also for countries with large current account surpluses to increase the demand for goods and services from other countries.
The second plank of our strategy for durable global growth must be decisive action to kick start the growth of international trade. A conclusion to the Doha trade round - has the potential to boost the global economy by at least $150 billion a year. So at Pittsburgh we must reaffirm our commitment to fight protectionism - the commitments of the last two G20s have helped restrain protectionism but we must now do more to begin the process of reducing the remaining barriers to trade. At the same time, as we look to the private sector to become a greater source of growth, all countries should commit to becoming more open to direct inward investment.
Third we should all accept the need for urgent structural reforms to increase global growth. We need a renewed focus on reforming labour, product and capital markets to release the potential for rapid economic growth. Specifically, we need to help current and potential workforces acquire the skills they need for the jobs of the future, continuing to invest in the technologies of the future, and reforming our key public services both to improve the quality of services and increase productivity. This will involve increasing levels of overall investment in the key enabling technologies of the future - like low carbon, digital and bioscience - that will bring efficiencies, more investment-led growth and help low carbon development.
Fourth - we have also made clear that over the following years we will invest in the future within a framework of the sustainable public finances we are all committed to achieve.
Because of the loss of tax revenues in all countries and the necessary measures to support the economy gross government debt ratios, as reported by the IMF, which were on average 80% before the crisis began are expected to rise to nearly 120% in advanced countries.
Although in the UK we start from the position that gross and net UK debt levels are relatively lower than many G7 and G2o countries, we have already made clear that we are committed to halving our fiscal deficit over the next 5 years.
To achieve this we have already pre-announced specific tax increases, including raising the top rate of income tax and reducing reliefs for those on highest incomes.
Alistair Darling and I have spoken too of hard choices needed in public spending over the coming years.
We won’t flinch from the difficult decisions that will be necessary; and we will always act in accordance with our core values of fairness and responsibility. To take just one example from this week - by finding new efficiency savings in our education budget we have been able to begin and finance a new guarantee to every school leaver that — instead of thousands being unemployed as in the last recessions — each of them will have the chance to receive training and work opportunities.
So our tough approach will be based on an approach of front line first: to shift resources from areas where we can achieve greater efficiency, reducing costs where we can, selling assets we no longer need, and giving priority to investments that can secure the jobs of the future and deliver improved front line services for the general public.
Governance
Let me come to the future of international economic cooperation. What all countries have learnt in the last year is that it is more important than ever that we work together, co-operate together, and act together.
And it will become ever more true in the next stage of global economy where our interdependence is such that prosperity for each of us will depend more on the actions of all.
That’s why the G20 needs to agree a clear and unambiguous mandate for the G20 to give priority to the resumption of global growth and to help countries achieve sustainable growth going forward. To address the governance gaps - that have been exposed by this first real crisis of the global economic era, we need - as we have agreed in principle - to implement far-reaching reform of both our international financial institutions and of our banks to bring them into the 21st century and make them more accountable, more representative and more effective.
I believe there are three key changes now needed for our international financial institutions.
First, to help ensure the necessary unwinding of imbalances in a way that does not hurt growth as we move to a new pattern of global growth, the IMF should be more independent and effective in monitoring the global economy and identifying risks. It should be at the centre of the G20 compact.
The IMF and World Bank must have the tools and resources they need, including to help countries insure themselves against the risk of future crises.
Both must be genuinely representative of the new global economy: greater weight for emerging and developing economies in votes and representation — greater efficiency, effectiveness and accountability within their operations.
And similarly we must strengthen the governance and regulation of the banking sector.
Although it has been difficult and painful, we are each seeking to ensure that our banks are declaring their losses in a transparent fashion and have the capital buffers needed to deal with the impact of a recession. But given so much remains to be written down, we must complete this process to ensure banks are in a position to contribute to growth by restoring lending.
But in restoring the sector we cannot accept a return to the past ways of governance. Specifically pay and bonuses cannot reward failure or encourage unacceptable risk taking. It is offensive to the public whose taxpayers money in different ways has helped many banks from collapsing and is now underpinning their recovery.
In the UK we have put in place a tough code to ensure that - as agreed at the London summit - pay and bonuses reflect actual long-term performance not short-term speculative gains. Our banks will have to submit their remuneration policy to the financial services authority for approval by 1st October.
As President Sarkozy, Chancellor Merkel and I have said this week, all G20 countries should develop together and implement consistent rules on bankers’ pay - with sanctions at national level for banks that do not play by these rules. We should now seriously consider the proposals in that letter.
We must all also address those who evade tax. As a result of consensus reached at the London summit, there has been more progress on this over the last five months than ever before with agreements with individual jurisdictions and a new global body established to develop and implement the highest standards of international transparency on tax.
But we must go further still in our own jurisdictions and co-operatively to fulfil our pledge to end bank secrecy. We have served information notices on over three hundred banks to help identify those liable for tax and given people a chance to come forward and settle their dues.
But the time must come when it is right that we take action against those tax havens that have not made progress since the London summit. We should therefore agree on the sanctions we will take against jurisdictions which fail to meet global standards and commit to implement these actions from march next year. And we must make it easier for developing countries to gain access to tax information through multilateral agreements. We must act on our pledge to end the era of banking secrecy.
We must also strengthen our cooperation to improve regulatory standards around the world. Identify those jurisdictions with the weakest regulation, give them an opportunity to comply with global standards but explore the measures we should take against those who refuse.
We must reduce damaging volatility in commodity markets. Sharp price rises, just at the time we least need them, could hinder recovery, while volatility undermines investment.
And we need to ensure that as growth picks up, both public and private investment is directed into low carbon infrastructure. At our April summit the G20 acknowledged that low carbon investment - from energy efficiency to renewables, nuclear power to electric vehicles - will make a crucial contribution to economic recovery, with the potential to improve productivity, create jobs and enhance energy security as well as reducing greenhouse gas emissions. So in Pittsburgh we must reaffirm our commitment to achieving a new global climate change agreement at Copenhagen in December which will provide the policy framework to drive investment in these fields.
But we need to do more than this. The agreement at Copenhagen must include financial co-operation between developed and developing countries to assist the developing world tackle climate change. Finance is needed for the development and transfer of green technologies, to reduce emissions from deforestation, and to help the most vulnerable adapt. It will need to come from the private sector, particularly through an expanded and strengthened carbon market, and from public sources. So in Pittsburgh I would like to see us advance towards a Copenhagen deal by developing a framework for climate finance.
When America held the first G20 leaders meeting, it was a step into the unknown - a test of a new international forum. As the G20 returns to America less than a year on - we have together shown through the ground-breaking agreements of the London summit that we have built a forum capable of delivering and in doing so commanding the confidence of the world.
We must now use that confidence and capacity to achieve what it is our responsibility to the citizens of the world: to build sustainable growth for all.
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