First, building a platform of stability based on openness and transparency in policy-making, and secondly, pursuing structural economic reform to promote productivity and employment.
Take Britain, which we know has been more subject than most economies to the instability of boom-and-bust cycles and changing policies. In the Sixties and Seventies, attempted trade-offs between inflation and unemployment each time ended with higher inflation and higher unemployment; in the Eighties, rigid pursuit of fixed intermediate monetary and exchange rate targets - in the belief that this produced a predictable outcome of low inflation - fell apart in the face of deregulation and capital market liberalisation.
Then, following sterling's departure from the ERM, a half-hearted attempt to meet an ambiguous inflation target, based on inadequate procedures and institutional shortcomings, made the decision-making process personalised and politicised.
We have now come to recognise that long-term, open and transparent decision- making procedures that command credibility provide a better route to stability than fixed monetary or exchange-rate rules.
In Britain's past, expectations of boom and bust led to short-term investment decisions or decisions not to invest. And to a take-it-while-you-can short- termism in wage bargaining. Indeed, the result was a vicious circle of low investment, wage inflation, low growth and repeated cycles of boom and bust. The opportunity exists now in Britain for a new, virtuous cycle of low inflation, high investment and high and stable levels of growth. Our task is to raise our national economic potential, thereby bridging the productivity gap with our international partners.
This year's pre-Budget report will focus on the next stage of reforms to labour, capital and product markets that we need, to exploit the growth potential of Britain. For the key to delivering higher levels of growth and jobs is, of course, not just stability but high investment and wealth creation - and that includes the technologies of the future.
We will not make the mistake of past governments, which relaxed the moment the economy started to grow. The same tough grip will continue. There will be no short-termist dash for growth. Instead, through tough discipline, we will make the most of the opportunity for sustainable growth.
The Monetary Policy Committee has demonstrated that it will remain resolute and pro-active in its determination to keep inflation on target over the coming years. There are some who criticise the Bank of England and say inflation can be controlled only by ignoring growth. And there are those who say we should grow by ignoring inflation. But far from choking off recovery, pre-emptive action is essential in order both to sustain growth and meet our inflation target.
We will not make the mistake of our predecessors, of being incautious about the state of public finances and irresponsible in promises about public spending and taxation. I believe that the British economy can reach the upper end of our growth ranges while meeting our inflation target. But we can do so only if we combine prudence with long-term economic reform and modernisation.
The four conditions for our economy achieving that sustainable growth are: first, a pro-active monetary policy and prudent fiscal policy; second, strengthening the programme to move the unemployed from welfare to work; third, responsibility and an avoidance of short-termism in pay and wage bargaining; fourth, a commitment to what matters for higher productivity, namely high-quality, long-term investment in science and innovation, new technology and skills. All of these conditions must be met.
By taking a long view, Britain can steer a course for steady growth.Reuse content