It's great to be back in Birmingham. You had George Osborne last Friday...me this Friday. Andrew Mitchell nearly every Friday. Looks like the Shadow Cabinet should all move here and then we'd save ourselves the train fare.
This is the first speech I've made since I took some time off after the death of my son. It's right to focus on the most urgent issue facing our country - the economy.
I want to talk about what we need to do right now - in the recession. And then I want to talk about what we need to do for our recovery - in the future.
I understand just how hard it is right now for businesses and families in the West Midlands and across the country. Large or small, the businesses that you run are having a desperately difficult time. Orders are down. Sales have slumped. Import costs are rising. Credit has dried up. You're asking yourself difficult questions about the future of your businesses: investment plans and staff numbers. And rightly, you're asking questions of politicians too: what are you going to do right now, to help people in this recession?
WHAT WE WOULD DO NOW
I believe that if politicians are genuinely going to help, that help has to be based on the right analysis of the problem. It's clear that the recession is entering a new phase where the immediate problem is a collapse in demand. Those of you whose businesses are dependent on exports know this all too well. The numbers on the collapse of exports and trade around the world are truly shocking. Those countries that can afford it can go some way to plugging the demand gap with a fiscal stimulus. Unfortunately, and scandalously, because we didn't fix the roof when the sun was shining, Britain can't afford to do very much.
On some measures we are forecast to have the largest budget deficit of any G20 country this year - it could be more than ten percent of our GDP. That's more than Hungary and Pakistan - countries already in the hands of the IMF. Concerns over the sustainability of our public finances are already undermining international confidence in Britain - it would be irresponsible to risk making that worse. It looks like the Chancellor is fighting a rearguard action to stop Gordon Brown doing exactly that in the Budget. I hope he succeeds.
Yes, we should allow the automatic stabilisers to operate. And yes there are things that the Government can and should be doing to support demand. We should be making sure that the investments that are already planned and budgeted for actually take place. Around the country, too many projects are being cancelled or delayed due to lack of finance. We should be doing everything we can to kick start private sector investment in the modern infrastructure and new technologies that will underpin a competitive economy in the future.
That could include removing the regulatory barriers, providing government guarantees to reduce financing costs, and even direct support for equity investment in the start-ups and growing companies of the future. And we should be trying to help people at risk of repossession who are struggling to pay their mortgages. But most of all we need action to address the very heart of the problem - credit.
We have been arguing for many months now that at the heart of the recession is a monetary crisis that requires monetary solutions. You are on the front line of this crisis. If you can't get credit, you can't keep going. If you can't keep going, you have to lay people off just to survive. So unemployment goes up, people have less money to spend, and the whole vicious cycle gets worse. That's why, to help with your cashflow, we'll allow small and medium sized businesses to delay their VAT payments by six months.
That's why, to help you keep on staff, we'll cut employers' national insurance by one percent for the smallest firms. And that's why, to let you keep more of your own money to reinvest, we'll cut corporation tax for small companies by two pence. But more important than anything else, we need big, simple and bold action to get credit flowing again. That's why we have supported efforts to recapitalise the banks and deal with their toxic assets.
The Government's first bail out clearly failed and the details of the second one were too slow in coming - but I hope it will be enough to turn so-called zombie banks into healthy banks that are focused on lending not survival. The Government's had their second chance, let's hope they don't need a third one.
Alongside dealing with toxic assets, the policy that would make the biggest difference right now is something that we proposed many months ago and have been campaigning for ever since. A massive, government-backed, National Loan Guarantee Scheme that can be up and running within days. The Government attacked this - and then announced something similar over a month ago. But unbelievably, it is still stuck on the drawing board. No wonder people feel frustrated - it's as if ministers think it's good enough just to announce things. It's a scandal of inaction - but sadly, it's just one example.
In the past few months, in a blaze of publicity, the Government have announced six key schemes. They range from a Working Capital Scheme to a Guarantee Scheme for Asset-Backed Securities; a Homeowner Mortgage Support Scheme to recruitment subsidies.
Here in the West Midlands you're still waiting for the real help for the car industry that you were promised weeks ago. Today, not a single one of these schemes is properly active - and the Government is rowing about who is to blame.
The hallmarks of this government are hyperactivity and ineffectiveness. When it comes to the vital task of restoring confidence that's about the worst combination there is. They've got to realise that 'Real Help Now' isn't just a good slogan - it should be what they're about.
HOW DEEP THE PROBLEMS GO
That's the emergency action we must take. And while we face a difficult time, we should never forget that this recession will end and we can pull our country through. But through to what? Because in many ways, this is the more difficult problem: what to do with the battered economy that survives?
By the time this recession is over, our national debt will stand at over a trillion pounds. One million more people may have been added to the welfare register. And the drivers of our recent economic growth - the financial services and housing sector - will be shadows of their former selves. What then for our country - for our future growth, prosperity and quality of life? And what then for my party's plans?
I know the scale and nature of this economic crisis means change in our policies and our hopes for what we can achieve in government. And because I've recognised that, I hope I'll be able to answer the three big questions people are asking of me and my party. Do the Conservatives really get how deep the problems go? Are they really prepared to take the difficult decisions - including about tax and spending - given the appalling state of the public finances? And can they really deal with this crisis in a way that is more than just firefighting... can they deal with it while at the same time making this country a better place to live?
In a series of speeches over the next few weeks, I will be answering these questions. But tonight, I want to focus on answering the first of these: do we really understand how deep the problems go? The Prime Minister doesn't - he believes none of Britain's problems are home grown. He thinks that a fundamentally sound economy has been hit by an external financial juggernaut... that Britain is just the innocent victim of a banking crisis that "came from America"... and that all we need to do is apply a few sticking plasters to an otherwise healthy body.
I take a different view - our banking system is not separate from our economy, it is a reflection of it. The unsustainable debts in our banks are a reflection of unsustainable debts in our households, our companies and our government. But if I'm honest, I have to admit that we - the Conservative Party - didn't see this as early as we could have. I believe we were - and still are - right to focus on fixing our broken society... because unless we get to grips with educational failure, welfare dependency and family breakdown, then not just our quality of life but our standard of living will always be poorer than it could be... as we pay, through higher taxes and bigger government, the costs of social failure.
I believe we were right, as we did back in 2006, to warn about rising levels of personal debt. And I believe we were right, as we did at the last election and through to today, to consistently warn about the scale of the Government debt crisis. But do I believe we did enough to warn about the rising levels of corporate debt, banking debt and borrowing from abroad? No. And there are other areas of economic policy where I look back now and think we would have done it differently if we had the time again. For example, while we warned that it was wrong and complacent to claim that boom and bust had been abolished... we based our plans on the hope that economic growth would continue.
All parties signed up to this cosy economic consensus, including the Liberal Democrats, whose spending plans have tended to be the largest of them all. It is only by being honest about the past that we can get things right for the future. So we need to recognise that our economy, as well as our society, is broken - and we should have said so sooner. But if we're honest, we must also recognise that some of our economic difficulties today relate not only to what has happened in the last ten years, but also to certain fundamental weaknesses that have been there for decades.
In recent years these fundamental British economic weaknesses have actually been getting worse rather than better, but they have been masked by easy money and economic growth. It's only when the tide of debt-fuelled growth recedes that the rocks underneath are revealed. Well the tide is out now, and the rocks all too visible. We as a country can't get away with it any more.
So here is the truth: whoever wins the general election, the next government of this country will need to make a clean break with the past and set about fixing these fundamental economic weaknesses. And there are four of them. First, we've got an economy built on debt - government debt, corporate debt and private debt are all at unsustainable levels. Second, we've got an economy that's completely unbalanced - precariously dependent on too few industries and too few people.
Third, we've got an economy that labours under a massive welfare burden - with millions of people who could be creating wealth not doing so. And fourth, we've got an economy that isn't regulated properly - where small businesses are strangled and our banks enjoyed a free rein.
Britain is not somehow entitled to economic growth and prosperity.
It has to be earned - by having the honesty to face up to our fundamental weaknesses and having the courage to turn them around. So let me take each of these weaknesses in turn and tell you what we've got to do.
DEBT
We've got to start with our biggest weakness - debt. Over the past decade, Britain's economy has been built on a foundation of debt: personal debt, corporate debt, banking debt, and government debt. Our personal indebtedness is the highest of all advanced economies, ever. Our banking system entered the crisis twice as indebted as America's. And I know if we win the next election, we will inherit the worst public finances of any incoming government in modern British history.
We must rebuild our economy based not on debt but on saving and investment. Too often, companies, like banks, just increased leverage to increase returns on equity, without increasing returns on assets - the sound returns that drive sustainable growth. We have set out plans to abolish tax on savings income for all basic rate taxpayers. And we must, as George said last week, change our corporate tax system, which subsidises debt and penalises equity finance. Of course, far from trying to rein in this unsustainable household and corporate borrowing, the Government was leading by example. We must change that too.
Labour are planning to double our national debt in five years - taking us to the point where we will owe more money than all the post-war British governments put together. That means every child in Britain is born owing at least £17,000. And servicing just the interest on that debt will cost more than educating those children. It can't go on.
Government must live within its means - just like your businesses, just like everyone else. That's why we need an Office of Budget Responsibility that will expose any Chancellor who tries to spend beyond his means, and create a rod for the back not just of my Chancellor, but for all future Chancellors. But I also know, in the years to come, we will have to make more extremely difficult decisions on spending, borrowing, and taxation.
So people need to know two things: that we are prepared to make those decisions, but also that we will make them in a fair and thoughtful way. This is hard to prove in opposition. But let me say this. Last November, we opposed the VAT cut - that's a centre-right party opposing a tax cut. We did so in the teeth of fierce opposition - the public were for it, some businesses thought it was necessary. But we still did so, because we knew it was wrong. Wrong for the recession - as a 2.5 percent VAT cut when shops are already cutting prices was never going to make much difference. And wrong for the recovery - because all that extra borrowing would damage the public finances and place an unexploded tax bombshell under our economy.
We will need more of that discipline in the months and years ahead, and I will soon be setting our approach to public spending in more detail.
UNBALANCED ECONOMY
The second weakness we've got to address is our unbalanced economy. There's this idea that as long as the overall economy is growing, the balance of that growth between different regions, industries and people doesn't really matter. This idea hasn't been the preserve of any one party at any one time.
Successive governments have failed to address the disparities in wealth between North and South and the richest and poorest in our society. And in the last decade, the Labour government abandoned manufacturing - letting it lose over a million jobs - in favour of financial services and housing, both of which are now in crisis. These imbalances - geographical, social and industrial ...
...are part of the reason why we're so badly placed to deal with this crisis.
We've been over dependent for our growth on finance, housing and government spending - and we just don't have the regional economies, the skilled workforce or the different industries and markets to fall back on and drive us through this recession. That too has to change, and that's why our plans for fixing our broken economy will include new proposals for creating a more balanced economy...
...focusing in particular on a renaissance in British manufacturing.
WELFARE DEPENDENCY
The third fundamental weakness at the heart of our economy is perhaps the most difficult to confront. It's the burden of massive welfare dependency successive governments have accepted as an unfortunate fact of our national life. We entered this recession with five million people on out of work benefits. Over one million of those are aged between sixteen and twenty-four. Let me repeat: those are the figures when we entered this recession. It's only going to get worse. But how on earth did this happen in the first place? We could debate it all day.
It's about education, it's about training, it's about home life... Yes, it's about all these things. But the continuing existence of the welfare culture is down to one other important thing: the reluctance of all political parties to stick their neck out and confront it.
When the economy was growing and tax coffers were filling up, it was tempting for successive governments to avoid the dilemmas about what to do with people who don't work some of whom have no aspiration to work. On the one hand, generosity to those in need is the hallmark of a civilised society.
On the other, generosity in welfare can create a self-reinforcing cycle of dependency that stretches right across generations. That's not compassionate - condemning people to the dead-end of dependence on the state. And we have got to recognise that Britain will never compete successfully in the world while carrying the burden of massive welfare rolls. We cannot avoid this subject any longer.
That's why we have made radical welfare reform a central part of our plans and why David Freud has joined us to help drive it through. David has brought a key insight to the welfare debate - that the huge and complex task of getting millions of people into work must start in each case with human contact, personal understanding and tailored support. So we will bring in private providers and voluntary groups who can deliver the human touch that jobseekers need.
REGULATION
The fourth weakness at the heart of our economy concerns regulation. I believe that cutting red tape helps create wealth and raises living standards by boosting businesses and creating jobs. So I do want to cut that red tape which makes the lives of small businesses so difficult... because it will help them compete in the global economy, grow, develop, take on more people and create more wealth.
And just as I have taken on this Government for overburdening our businesses with all their regulations in the past decade...I will take on anyone who tries to use this financial crisis to argue for more regulation of our small businesses. But the idea that we should apply these principles to every part of the economy with the same passion and verve - including our banks - is wrong.
In a free market, businesses succeed and businesses fail - but the market in which they operate would not even exist if the whole banking system fails. The purpose banks serve and the function they have - to collect savings and direct them into profitable investments - means that they underpin our whole economy. So unless we want our economic lights to go out, it's right and it's proper that our banks are properly regulated by an organisation with the wherewithal, discretion, common sense, power and influence to keep them in check.
This, of course, was the case up until 1997 - when Gordon Brown took the disastrous decision to remove from the Bank of England its historic ability to ensure that banking credit was kept within responsible limits... and created a whole institution - the FSA - to regulate banks' products, processes and procedures.
It wasn't light touch regulation - it was wrong touch regulation. It failed to understand this central insight in financial markets: That while much of the time market discipline ensures that banks act responsibly and control their risks, it is precisely when that market discipline breaks down - as it did over the past decade - that we need regulatory discipline strong enough to keep banks responsible.
The height of the boom is precisely when financial regulation is most important. That is why a year ago we put forward proposals to make sure our regulators call time on debt. I'm delighted this is on the G20 agenda, to try to get a global agreement. But even without international action, here we will introduce a new Debt Responsibility Mechanism, instructing the Bank of England to write regularly to the regulator, setting out its concerns about the sustainability of the level of debt in the economy. We are considering whether this job is best done by folding the regulator back into the Bank of England. And we will ensure that wherever it is situated, the regulator has the teeth to do its job by giving it the people it needs - paid for by an increased levy on the City.
CONCLUSION
Tackling debt. Rebalancing our economy. Getting people back into work. Regulating our economy properly. If we do all these things, we can confront - and will overcome - the fundamental weaknesses of our economy. This will not happen overnight. The old habits, the old philosophies, the old failed ideas are deeply entrenched. And this will not happen through government alone.
The new jobs, the new products, the new ideas that will lift us up will be born in the factories and offices in places like the West Midlands - not in the corridors of Whitehall. It will be hard, it will be difficult - but we can not put this off any longer.
Now is the time to make the changes Britain needs.
That way, we won't just survive this recession... limping through to the other side, one notch down on a graph of decline. We'll get through it: stronger, better, richer and fairer.