Bank chief warns of growing inequality

Growing inequality is the most serious problem facing Britain, Howard Davies, the new deputy governor of the Bank of England, says today in a BBC programme.

Mr Davies's remarks, in the second of the Radio 4 series Letters from the Boardroom, are seen by Labour as evidence that business leaders are adopting Tony Blair's agenda.

Mr Davies, the past director- general of the CBI and an adviser to John Major, also appears to lend qualified support to a minimum wage "as a last resort" to tackle inequality.

He says: "Part of the nervousness about going further is a fear that employers, cowboy employers, would pay less and less, and allow social security to make up the difference. That hasn't happened so far, because in-work benefits have been confined to just a few people, with children.

"If it did happen, then the Government would need to consider a minimum wage, set at a low level to prevent exploitation (of the Government, rather than the individual). But that would be very much a last resort."

Mr Davies says most politicians were aware that a pounds 5 bn switch from social security to the education and training budget would have a major impact on growth and inequality. One way of finding the cash was to take it from the better off, the people who had been benefiting from trends towards higher rewards for skilled workers.

Mr Davies's remarks coincide with an effort by John Major to beat Mr Blair in winning the support of small businesses.

Twenty four hours after the Labour leader opened a rival campaign to woo business leaders, Mr Major hosted a seminar at Downing Street for small businesses. The Prime Minister said he would "wrestle with the greasy pig" of bureaucracy to remove the burdens of red tape on businessmen. He would also tackle "tax rates that kill incentives" and simplify Paye, National Insurance contributions and VAT, he said.

"Deregulation is a central part of this. Trying to cut red tape is like wrestling with a greasy pig, but it is a pig worth wrestling with,"he told the meeting attended by the Chancellor Kenneth Clarke, the Deputy Prime Minister Michael Heseltine, and top industrialists.