Pre-Budget Report

My pre-Budget statement today is made against a background of economic uncertainty not seen for generations. These are extraordinary, challenging times for the global economy, and they are having an impact on businesses and families right across the world. In these exceptional economic circumstances, I want to take fair and responsible steps to protect and support businesses and people now, while putting the public finances on the right path for the future That is what I will do today. My central objective is to respond to the consequences of this global recession on our country, both now and in the future, so that we are ready to take full advantage of the recovery of the world economy. My aim is to provide support and protection for families and businesses when they need it most; to maintain our commitment to investing in schools, hospitals and the nation's key infrastructure; and to put in place the measures necessary to ensure sound public finances in the medium term, so that as a country we live within our means. This is not one single initiative, but a comprehensive plan to support families, business and the economy. Because of the wide-ranging measures that I am announcing today and the many strengths of the British economy, I am confident that the slowdown will be shallower and shorter than would have been the case. I am also confident that the UK, as an adaptable and open economy, will be well positioned to benefit from a return to growth in the world economy. First, let me turn to my assessment of the international economy. Because of better macro-economic policy decisions and continuing, deeper globalisation over the past 10 years, global growth has increased from 3 to 4 per cent.; inflation has fallen from 22 to 4 per cent.; and living standards have risen sharply, with 300 million people across the world lifted out of poverty. But a crisis that began, as America itself has said, in the US housing market has seen these benign conditions undermined. The problems in that sub-prime housing market rapidly spread to the entire global financial system, causing a disastrous tightening in credit and undermining confidence. The Bank of England estimates that global bank losses could eventually reach $3 trillion—that is as big as the economies of Italy and Spain put together. Global shares have fallen by 50 per cent. since May. All this happened, too, at a time when the global economy was already suffering from unprecedented increases in energy, food and commodity prices. Those increases pushed up inflation everywhere, and added to the pressure on businesses and households. In the UK, inflation, although now falling, is still at 4½ per cent. In the euro area, inflation has been above the Central Bank target since mid 2007. In Spain, inflation peaked at 5.3 per cent., and in the US at 5.5 per cent. The result has been a sharp reduction in growth across the world: the euro area has been in recession since April; in Japan and Germany, gross domestic product has already shrunk by about 1 per cent. in the past six months; economic output is falling in the United States; and growth in China and India, too, has slowed sharply. This is an unprecedented global crisis, but the World Bank and other institutions are confident that the global economy will recover strongly, predicting that it will double in size over the next two decades, helping to spread prosperity across the world. The root of today's problems are failings in the global financial system. The banking system is at the heart of all economies. Financial markets affect everyone's daily life: if they fail to function properly, the impact is felt right across our economy and by every one of us, so restoring and maintaining financial stability is absolutely crucial. The causes of instability are global, so the Government's response must mean working closely together with other countries. Earlier this month, the Prime Minister and I attended the G20 summit in Washington. A wide range of measures was agreed to increase transparency of financial activities, ensure better international supervision and prevent excessive risk taking. It is crucial that this plan is implemented. So with the UK holding the presidency of the G20 next year, we will take the lead in doing all we can to prevent a reoccurrence of these problems. We will build on the work of the Financial Stability Forum, which, for some time, has been looking at international agreement on capital requirements that reflect the economic cycle and risk. Domestically, too, we need to make supervision and regulation more effective. The Financial Services Authority is now considering changes across the regulatory system—including banks' capital requirements, liquidity conditions, accounting rules and pay structures. The new chairman of the FSA will also examine whether the right processes are in place to ensure that the FSA can supervise the system. The current financial crisis has also illustrated two further issues. First, the recent financial turbulence has highlighted the potential problems with overseas territories and Crown dependencies, such as the Isle of Man and the Channel Islands—[Interruption.]