Karen Bradley was invited by Macclesfield Conservative Association to speak at their annual dinner. Karen talked about how the credit crisis came about and Gordon Brown's role in it and set out some suggested principles for better financial regulation. You can read a transcript of her speech below.
Hello and thank you for inviting me to share your evening and dinner and for being prepared to listen to me for a few minutes.
It's a great honour to be asked to speak in front of such an esteemed audience as the Macclesfield association. Not only is Sir Nicholas [Winterton] himself here but - similarly nerve wracking for a humble candidate is the fact that the President of my own association is here too. Thank you for your support Ian.
It seems me that - as the Chinese curse has it - we are living in interesting times. Economically that may be true and I'll come on to that in a minute. Politically it is certainly fascinating - this week in particular has seen some truly momentous events. Clearly the most momentous was the sweeping victory of Barack Obama in the US - if you can sweep over a 21 month campaign that is!
There will be many in this room who would have been more comfortable with a Republican victory, the Republicans being the party traditionally more naturally aligned to our party. But I think the last eight years have demonstrated that a Republican president can be more aligned to Labour than the Conservatives and history shows that our two countries work wonderfully together when you have a great Democratic President and Conservative Prime Minister - JFK & Macmillan and Roosevelt & Churchill spring to mind.
And so I think that anyone who, like me, loves and cares for the USA and believes that we are all better off when the US is at its strongest should welcome the events of this week and the hope that President Elect Obama brings to his own country and the world.
However, anyone suggesting that this is a sign that the world is becoming more leftwing or as Mr Alexander our current international development secretary said that this is an indication of the world moving politically to rely on the state more is I think wrong. What it really shows is that people are ready to vote for a young(ish) party leader whose charisma and character have encouraged his electorate to trust him.
As if the US elections weren't enough, yesterday, in case you missed the news, interest rates were cut by 1.5%, the largest single cut in a quarter of a century, bringing them down to a level last seen in 1955. More of that later, but I think we can all agree that we really are living through interesting times.
And then this morning we woke up to the news that of the Glenrothes by election and the result is an interesting fillip to Mr Brown's hopes of keeping his party from ditching him before the next general election. But whenever that is I believe we'll see people voting for an inspiring charismatic young leader in David Cameron. I'm looking forward to that campaign but I'm sure we are all grateful for the British intensive month of campaigning and not nearly two years worth.
But economically some things do appear cursed. .
Business and economic policy, particularly tax issues are my professional background as a Chartered Accountant and Chartered Tax Advisor. This experience is also what got me into politics.
I was born in the Moorlands, in Leek. My family moved to Buxton when I was young where my parents ran a pub and I attended the local state comprehensive school. After a maths degree, I worked in the City of London as an accountant specialising in corporate tax. Over many years I have advised some of the biggest household names and many much smaller owner-managed businesses - as well as the odd sheep farm - about how they could reduce their tax burden in the UK and globally. I was never politically active during school, university or my early working life - I think it comes from the unwritten rule of pub management that if you want to avoid conflict, never discuss religion, football or politics. But several years ago now, I had the chance to spend some time working away from my employer - KPMG - as an independent technical adviser to the Shadow Treasury Team, which was led at that time by Michael Howard. I spent seven months in the Shadow Treasury Team and to say that I caught the political bug would be an understatement.
So from having been no more than a couch-Conservative I was hooked. I enjoyed this short experience of politics so much that I joined the party, was persuaded by Michael Howard's personal charm to apply to the candidates list. I worked in the Policy Unit at Campaign Headquarters in the run up to the 2005 election, where I cut my teeth as the candidate for Manchester Withington. Two years ago I was selected as the candidate in my home seat of Staffordshire Moorlands.
So what was it that I found so exciting? What was it that persuaded me to change my career plans, move the family lock stock and barrel to Staffordshire and chance my arm at the uncertain world of politics? It was partly the chance to apply 15 years of technical expertise to new problems. But it was mainly that I could see that politicians have a real opportunity to make Britain a better place, to allow businesses to breathe and thrive so that they can provide jobs and livelihoods, to change fiscal policy and influence government spending in the right areas.
So that's how I got here, but what should we do now and what should the Conservatives should do in the light of the current economic climate?
The first step to addressing the problems we face I think is to understand how we got here - and there are two contributory factors in my mind - global economic events and the actions and steps that Gordon Brown took as Chancellor
So, the global economy first. In a nutshell- the West borrowed and spent and the East lent us the money to spend on their goods. Credit was cheap, inflation low - except in certain assets like houses - and Western economies have enjoyed the good times. Mortgage assets were securitised - that is bundled up and sold on to others as a new product complicating matters but supposedly helping lenders to manage risks. Money was effectively created from nowhere as traders sold shares they didn't even own, money flowed in secondary markets as bets were made on whether other stocks or commodity prices went up or down and ever more complicated financing instruments were dreamt up to supposedly hedge risk - which they were capable of doing if the people using them understood them but as we have now seen, so few did.
So there's no denying that this is a global problem and that all economies around the world are affected. Even Eastern economies are not immune, because they provided at least some of the cheap debt and they are reliant on the West to buy their goods.
Now I would not want you to leave here tonight thinking that I was a critic of capitalism. Quite the opposite. I believe that markets are the best way to manage economies. Supply and demand is after all at the heart of just about every business decision. The successful retailer will only sell what people want to buy. The successful manufacturer will produce what people need. The successful employer will employ the right number of people at the right level of skills to do their work. And prices will and should be affected by supply and demand. So from university students studying for degrees that will get them the best jobs to the best schools having the toughest admissions policies to the, demand will govern the amount of supply and vice versa.
But totally unfettered capitalism is not a good thing because many of the laws of capitalist economics - perfect market information available to all people at the same time or rational decision making always being the case - do not hold true in the real world. People do not always sell their shares when they should based on the analysts comments, some people involved in the market get their information sooner than others, some people make irrational decisions. Who would have thought that the value of VW could soar to €1,000 a share? Who would have thought that we would have a run on Northern Rock? And who would have thought that we would ever see our banks nationalised?
So that's a whistle stop tour of the global economy and it's true that much of the problem is a global problem. But as we explore Mr Brown's role in all of this let's not forget that he was happy to take the credit for the global upturn.
But what about here in the UK? Are we "best placed" to whether the storm as the prime minister has said?
Well, as you may have guessed - I think not. There are many things that Prudence or Mr Bean/Brown has done which have exacerbated the situation in the UK.
The first is that Brown built the UK economy on an asset bubble. He really believed that the bubble would get bigger, that house prices would keep going up, that cheap credit would always be available and that every time we - the home owning public - racked up some more debt, another 0% credit card or mortgage extension would be round the corner to bail us out. So he encouraged us to keep on borrowing.
I remember campaigning in Bolton West at the last election - Ruth Kelly's seat - and leafleting a housing estate of executive homes - all of which were worth according the local estate agents around £400,000. In Bolton! And outside every house a people carrier or estate car, and at least one sports car - BMW, Mercedes, MX5 - and a white van. These were the homes of plumbers, carpenters, builders. All with young families. Bought when the estate was built ten years before and now worth 3 or 4 times what the occupants had originally paid and they have probably borrowed against the mortgage to buy the new BMW or another foreign holiday. These were the people packing out the out of town shopping centres, spending on credit cards and giving the economy yet another boost. Another £25,000 on the mortgage only costs a few extra pounds a week and everyone should keep on spending. That's why UK consumer debt is estimated to now be higher than UK GDP at over £1.4 trillion. Almost all of which was used to keep the economy afloat over the last 11 years. But this must all be paid back.
But not only did Mr Brown encourage all of us to spend, he copied us. He spent and spent - our taxes - racking up enormous amounts of debt which will take a generation if not more to repay. Last year, interest on Government debt cost us nearly £30 billion. That's an awful lot of schools and hospitals. And that's before all the extra debt that has been taken on to cover the recapitalisation of the banks. Every one of us now owes somewhere in the region of £26,000 each in Government borrowing. That's an extra mortgage for many people in Leek and Biddulph. And that's before we include those off balance sheet debts that Mr Brown is so fond of such as underwriting Network Rail.
He thought he could borrow in much the same way as the rest of the country. The difference is it's not his money he will use to pay it back.
Back in 2005, I did some research for George Osborne where I established that there was just over £600 billion of Government debt on balance sheet but an amazing £700 billion off balance sheet. That is debt that the government has not accounted for in the public finances and therefore didn't admit that we would have to pay back. But these are real liabilities - on things like PFI and public sector pensions which any company would have to put on balance sheet. Mr Brown has spent and spent and borrowed whenever he needed to - he didn't mend the roof while the sun shone.
In my time working with the Shadow Treasury team and observing the world of tax and finance professionally, it appears that there were a number of decisions that Brown took. Whether based on incomplete advice or short term gain or simply bad judgement the unintended consequences have been devastating. For example, the removal of the dividend tax credit for pension funds in 2008 has done as much to decimate the UK pensions as any stock market crash could ever do. Likewise his sale of gold reserves between 1999 and 2002 at a 20 year low prices - not to mention disclosing the sale before it happened - cost the country more than Black Wednesday ever did.
Another mistake was in devising a tripartite regulatory system with the BoE, HMT and FSA. This resulted in weakening the BoE's ability to regulate banks' lending rations. This I believe was one of the main reasons that Northern Rock went down. If the old BoE had been able to step in when they saw trouble.
To add to these woes there's one other crucial mistake. When he gave the BoE independence to set interest rates Mr Brown chose the wrong inflation target. It is essential to include the key factor of house prices. If these had been included, I doubt that two up two down houses in Leek would now be so far beyond the means of young couples.
But the availability of cheap credit - coupled with peopling taking on mortgages at 5 or 6 times income with no BoE restraint on the lenders means the economy is now unbalanced.
Finally, and most infamously, Gordon Brown has taxed and taxed and taxed so that the pips are starting to squeak again. And not only has he taxed - sometimes by stealth sometimes openly - but he's done so indecisively. So he introduces a 0% tax rate for the smallest companies. Encouraged to do so, many small traders set themselves up as companies. The next minute he backtracks and soon those same companies will be paying tax at 22% - higher than if they'd stayed as sole traders. Then he introduces a 10p starting band of tax but simply removes when he realises that the books don't balance.
And where has all the extra tax gone? Not into a better health service where wards are threatened with closure. Not into education where too many children leave school unable to read or write. Not into equipment for our troops so they can protect themselves in Iraq and Afghanistan.
So what now? Well, as the old Irish joke has it I wouldn't have started from here. But as we are where we are and it's mess the Conservatives are going to have to sort out. Again.
Much tighter fiscal rules are needed. We need some good old fashioned borrowing criteria - 10% deposit minimum, 3 times earnings, etc. We want business to make decisions, but if we are going to bail out the failures, we must give BoE back its power to regulate and manage. And support banks that have been recapitalised without interfering - after all if they can't pay dividends then the private sector will not want to invest.
Capitalism is by no means dead, but government must now take responsibility in a way that they have not seemed to want to do in an era of purely presentation politics. Whether the prime minister has preferred to spend time with rock stars or with plotting his predecessor's downfall, they have failed to provide responsible oversight. The Labour administration has undermined our businesses and failed our children who will have to pay back the government's debt.
It will be tough but with sensible planning and imaginative policies, based on common sense that put the interests of society and not the state at heart, a Conservative government can begin to put right the mistakes of the last decade. I hope to be part of that task and I look forward to joining Sir Nicholas - but on the government benches.
Thank you for listening.
Karen Bradley 7th November 2008
