Thank you for inviting me to speak here at the North East Economic Forum.
We meet here today at a time of anxiety and mounting anger: anxiety as the recession and spreads from the financial markets to the high street and the factory floor; mounting anger as the country asks how, after fifteen years of economic growth, Britain can be so ill-prepared for what is happening.
The North East, of course, is not immune.
Nissan is cutting production at its Sunderland plant.
BAE Systems is reducing its workforce in Newcastle.
And behind the big names lie small and medium sized businesses that are part of supply chains, or innocent victims of the evaporation of credit, or hit by the rising import costs of a devaluing currency.
I grew up with a family manufacturing business; I know the pressure when orders fall off; I know the difficult decisions that have to be made as savings have to be made; I do understand the pressure so many of you are under.
And I am not going to pretend to you that next year will be anything other than very difficult.
We have had enough of Government Ministers telling us Britain is better prepared than most, or that the downturn will be short and shallow.
We should be honest enough to see ourselves as others see us.
The OECD predicts we will have the steepest rise in unemployment in the G7.
The IMF and the European Commission say we will have the deepest recession.
The international markets have delivered their own verdict on the fundamental weakness of the British economy with the precipitous fall in the value of the pound.
This devaluation - bigger than any of the post war devaluations - has led some to conclude that the answer is to abandon the pound altogether.
It didn’t take long for the euro-fanatics in the Labour party to seize on our economic difficulties for their own ideological ends.
As European Commission President Barroso said just this week: “British politicians have already told me, 'If we had the euro, we would have been better off'”.
The new Business Secretary, who spoke to you earlier, says that the government “is right to maintain a long-term policy objective of taking Britain into the euro”.
That is exactly the wrong solution to Britain’s problems.
Sterling’s decline is the result of a damning verdict from international markets on British economic policy.
The right solution is better policy to restore confidence in Britain’s long term prospects.
Indeed the discipline that the markets impose on governments is one of the advantages of not abandoning your currency.
These arguments remind me of the Christmas Tale and the ghosts of past, present and future.
Let me explain why all three would come to haunt us if we were to abandon the pound.
For if Britain was in the euro the past boom would have been bigger, the present bust would now be even deeper, and we would have less control over the future recovery.
There is the past.
The mess that our economy is in is the result of a debt-fuelled boom that Gordon Brown allowed to build up over the last ten years.
It was domestic policy failure that gave us those 125% mortgages and more personal debt than any other economy in the history of the world.
But monetary policy in the euro area has been ever looser than here in Britain so if we had joined the euro, credit conditions would have been even looser and the bubble could have been even bigger.
Then there is the present.
Yesterday the Bank of England delivered the kind of rate cut that Conservatives have been urging and that our economy needs.
The result is that interest rates in the euro area are now 0.5% higher than they are here, and they have fallen far more slowly.
So, if we had joined the euro, rates would be higher now than they need to be to stimulate demand in the British economy.
If the last decade has taught Gordon Brown anything it should be that you have to keep control of interest rates and monetary policy.
And then there’s the future.
The euro has never been primarily an economic project, it’s a political one.
Once you share a currency and a central bank the pressures for closer political union become ever more powerful.
We’ve seen those pressures operating over the last few weeks with the concerted attempt to deliver a euro-area spending splurge.
Given that we are already borrowing more than any major euro area economy, that would be the wrong solution for Britain.
Some euro area politicians have stood up to the pressure – the German finance minister said he wouldn’t join the other “lemmings”.
But monetary union will only increase the pressure for closer political union.
That’s not what the British people want, and under a Conservative Government they can be confident that it’s not what they’ll get.
We fought against joining the euro in the past and we will not join the euro - in the present or the future.
Instead, to take effective action you need first to understand the root causes of the crisis – reckless over-borrowing and systemic regulatory failure.
Over the past ten years, Britain accumulated the highest levels of personal debt of any country in the world.
Our housing boom was greater than America’s.
And because of the failure to get to grips with government spending, we came into this downturn with the biggest budget deficit of any advanced economy.
So the truth is that this Government neither saw the boom coming nor prepared for the bust.
As a result, we now need a long-term plan to fix the financial system, cut debt, and get the public finances back on track.
What does this mean in practice?
First of all, it means recognising that this crisis was triggered by a credit crunch, and so action is needed to get credit and money flowing through the veins of our economy.
It’s time for the Government to face the truth: the bank recapitalisation plan simply isn’t working.
It may have rescued the banks but it isn't rescuing the economy.
Just yesterday, the largest mortgage lender in the country Halifax announced that it would not be passing on the interest rate cuts in full to its customers.
This was precisely what recapitalisation was supposed to prevent.
Recapitalisation was also supposed to ensure that banks would start lending to businesses again, but it’s clearly failing on that front too.
The FSB says one in three businesses is unable to obtain finance.
And the CBI says the situation may be even worse.
According to them, the number of firms reporting reduced and withdrawn lines of credit has risen from one-third to over forty percent in the past month.
So it’s clear that further action is now needed.
Of course, the banks should be doing more to pass on rate cuts.
But Gordon Brown and Alistair Darling also need to swallow their pride and accept that their bank rescue package needs radical surgery.
The cost of government capital is too high.
It’s clear now that the 12% the banks are paying for the preference shares is stopping them lending out money to homeowners and businesses at the low rates our economy needs.
The interbank guarantees are too expensive as well.
The Government tell us their plan is being copied around the world, but that’s not true.
In America and Germany and France, their banks are being charged far less. No one is following the British model.
The Prime Minister has a choice.
He can either stubbornly stick to a plan that isn’t working, stand on his soap box and lecture the banks while they ignore him, and watch the economy slide deeper into recession.
Or he can swallow his pride, admit he got it wrong, change the bank rescue package to make it work, so that instead of more ministerial grandstanding the banks actually start lending again and passing on rate cuts.
But even that won’t be enough.
We need further radical monetary action.
As David Cameron announced last week, the Conservative Party would create a temporary new Government body – the National Loan Guarantee Scheme – to directly underwrite lending from the banks to British businesses.
This should guarantee billions of pounds of new loans to any UK businesses, and it would do so for a commercial insurance fee, passed on by the banks, that would properly protect the taxpayer.
So the government would use its balance sheet to get money flowing from the banks to businesses here in the North East.
Our approach has attracted support from the key business groups.
The CBI, for example, has said our proposal “would be warmly welcomed by business”.
While the FSB have said “we welcome this tranche of measures to improve lines of credit for small business”.
If getting lending flowing again is the first priority, immediate and direct government help for business is the second.
With unemployment levels in the North East already the highest in the country and 280 small companies going out of business every week, we need do be doing everything we can to help businesses survive and help people keep their jobs.
That is why I would allow small businesses to delay their VAT payments by six months.
That’s a £10bn boost to help small firms with cashflow problems.
I would also cut employers’ national insurance by one percent for the smallest firms to encourage them to keep people on.
And I would introduce employment tax breaks for companies that, even in this climate, are looking to hire new staff.
These policies would help businesses right now.
That brings me onto the third thing we need to do.
We need to get government borrowing under control.
I think there was a genuine sense of national shock last week when people discovered that the government wants to double the national debt to one trillion pounds.
Let me try to put that huge number in perspective.
The North East’s share of that debt is a massive £42.5 billion pounds.
That’s equivalent to £40,000 for every family – or two years worth of earnings for the average person living in the North East.
The Conservative Party has been warning for years about the size of the national debt and the scale of government borrowing.
We said that the government should have fixed the roof when the sun was shining.
If we had set aside money in the good years then, of course, we could use it now – as other countries than surpluses are now doing.
But this government didn’t. And the result is Britain has run out of money.
That’s why David Cameron and I took a difficult decision to oppose the temporary VAT reduction.
We believed that any potential benefit is more than outweighed by the huge cost.
When we said this some weeks ago, not everyone agreed with us. But I believe that the tough stance we’ve taken is one now broadly shared by the British people.
They can see that a temporary 2.5% reduction in VAT at time when prices are falling anyway is not very stimulating, particularly when the public knows that it will be paid for by a higher national debt and a permanent increase in taxes.
And look at the tax rises Labour is planning if they are re-elected.
A £2.6 billion rise in national insurance up for businesses.
An increase too in national insurance up for anyone earning over £20,000.
That means over 300,000 people in the North East will be hit with higher taxes.
Increasing the taxes on incomes and jobs at the very moment when we hope to be coming out of recession puts a timebomb under the recovery.
Then there are the plans, leaked by the government themselves, to increase VAT to 18.5% and even 20% - completely cancelling out any stimulating effect of a temporary reduction.
Instead of Labour tax rises, what we need is spending restraint.
We need to impose discipline – and get a grip on public money.
A Conservative government will end the spendaholic culture that has been a feature of this government.
We will need one of the toughest periods of spending restraint for a generation.
And for the long-term, we need a totally different approach that will entrench fiscal responsibility for good.
That is why we are committed to establishing a new, powerful and independent Office of Budget Responsibility to assess independently the sustainability of the public finances – so that you and your businesses are not left footing the bill.
That is the only way to permanently reduce taxes – by introducing spending restraint and getting the public finances back in order.
This then is our plan to help during the downturn.
Taking action to guaranteeing lending to business and get credit flowing again.
Taking action to help businesses today with targeted tax cuts and government support.
And sorting out the public finances and permanently reducing taxes.
These policies sit alongside our plan to get the economy back on track for the long-term.
To do that we have to learn the lesson that you cannot build a stable economy on the pillars of finance, housing and government spending.
Never again should we leave our economy so narrowly based on just a few sectors and a few geographical regions.
We need a new vision for the British economy: an economy that is more productive, more competitive, more stable and more balanced.
We have to broaden our economic base to include more science, more hi-tech services, more green technologies, more engineering and more high-value manufacturing, drawing upon a much wider range of industries, markets, people, towns and cities.
Because in the end, the simple truth is this: we will only find a way out of this recession if we can find confidence in the future.
Confidence in the future that when you buy a house its value will rise.
Confidence in the future that when you start a business, it will make a profit.
Confidence that when you take a job it will still be there in six months time.
Looking forward, we need to create an environment in which new businesses can grow and flourish - in every part of the country.
As I’m sure all of us here are aware, the North East today has a lower number of businesses per person than the national average.
In the economy of the future, this has to change.
That means lower and simpler corporate taxes – and we would cut the main corporation tax rate to 25 pence.
It means an education system that equips children with the skills they need for the modern economy – and our revolution in school policy, based on the Swedish example, would help do that.
It means a reduction in small business red tape and policies to encourage start up capital and innovation.
It means proper restraint in spending so that government lives within its means.
It means a financial system that assists efficient access to credit not blocks it.
It means an economy that is better placed to compete, better able to spread the fruits of prosperity, and better prepared to weather the storms of the global markets.
With your help and advice and input we are determined to build it.
Thank you.