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Pre-Budget Statement
3.30 pm
The Chancellor of the Exchequer (Mr. Gordon Brown): In this year's pre-Budget report, we seek to steer a course of stability amid a world economic downturn. We set in place measures to improve productivity and provide support for enterprise, we introduce new measures to make work pay for all our people and we show how we will invest in health, education and our infrastructure to provide the modern services on which people rely--in each case taking long-term decisions that will equip our country for the future.
The background to the report is the global downturn. It started in Asia and has reverberated throughout every continent. Not only has it shifted the balance of risks in the world economy from fears about inflation to fears about growth, but it has forced every country, continent and international financial institution to cut its estimates for growth.
World trade growth is set to fall by two thirds. Forecasts for world growth have now been virtually halved. One quarter of the world is in recession and in this uncertain world, my objective for Britain is that we steer a stable course and, by building our long-term strengths, we are more than equal to any and every challenge that the global economy presents. Because in the past 18 months inflation has been brought down to its target of 2½ per cent. and because Britain has set in place a long-term monetary framework with the independence of the Bank of England, Britain is better placed than in the past to face the global difficulties. Because, too, Britain has tackled its structural deficit in public finances, we are more able to steer that stable course, but as all forecasts around the world have made clear, there is acute uncertainty about the eventual outcome of global financial instability. We are conscious of the balance of risks: on one hand, the risk of a sharper slow-down in the world economy as a result of instability and the effect on confidence and, on the other hand, the risk that inflationary pressures might persist. So the pre-Budget report is set with this firmly in mind: no denial of short-term difficulties and no diversion of policies for long-term strength.
Our challenge in the year ahead is to strengthen the three essential foundations for long-term strength and success. First, Britain now has for the first time a credible long-term framework for both monetary and fiscal policy. It has an inbuilt capacity to respond credibly to short-term pressures and we shall not be deflected from it. Secondly, with business, in order to build on that stability, we are putting in place a strategy to tackle a fundamental long-term economic weakness--the 40 per cent. productivity gap with our most successful competitors. These measures will include investment in education and innovation, and new encouragement for enterprise and for competition.
Thirdly, with our welfare-to-work programme and by ensuring that work pays, we are extending opportunity to all in our country, creating a Britain where no one is excluded, no potential is neglected and everyone has a contribution to make. It is a Britain that is both enterprising and fair.
First, I shall deal with the foundation for long-term economic stability. Official figures show that byspring 1997, with consumer spending growing at an
unsustainable pace, inflation was heading way above the country's 2½ per cent. target to twice the level of our competitors--4 per cent. and above--and that at that time, Britain was set to repeat the boom-bust cycle that led to 15 per cent. interest rates for one whole year in the early 1990s.
Because immediate action was taken, making the Bank of England independent and tackling the inflationary pressures, inflation is today at our target of 2½ per cent. I can announce that for future years our forecast is that inflation will stay on target. As a result, Britain's long-term interest rates have come down from more than 7 per cent. in May 1997 to 5 per cent. The differential between Germany and Britain has narrowed by nearly 1 per cent. Long-term interest rates are now at their lowest for 35 years and the lowest since Britain's boom-bust cycle first became entrenched.
Because Britain has brought inflation under control, it has been possible, as the world has turned downwards, for interest rates to respond more quickly and in a more forward-looking way than in past economic cycles. In the previous economic cycle, interest rates remained in double figures for more than four years. In contrast, the Bank of England has already been able to reduce interest rates to respond to a changed international environment.
Long-term monetary stability is a precondition of our economic success. I reaffirm my support for the Bank of England's independence, for its remit and its membership. I do not believe that any political party, putting the long-term interests of Britain first, will, on reflection, bring party politics and short-termism back into interest rate decisions.
It is also because Britain has a new long-term fiscal framework with clear disciplines set out in the code for fiscal stability that we are laying before Parliament this afternoon that, as world growth slows, fiscal policy is able to make its contribution to stability and future growth in Britain. The official figures published today confirm that in our first year, we cut the budget deficit from the £28 billion that we inherited to £8 billion. That tightening has continued throughout our second year--a total fiscal tightening in two years of 3¾ per cent. of national income. So, fiscal policy has played its full part with interest rate policy in tackling inflationary pressures.
Because we have concentrated on priorities and cut waste, spending this year will be £2 billion below the ceilings that we inherited. As a result, our current budget this year is expected to be £5½ billion in surplus. What in the Budget was prudently projected to be net borrowing of £1 billion this year is now expected to be a debt repayment of £1½ billion.
The golden rule is that over the cycle we balance the current budget. In other words, on current spending, we eliminate the structural deficit that we inherited. Again, I can report to the House that because of the tough action that we have taken since we came into government, that is exactly what we are now achieving.
Now that we have broken with short-termism and created for the long term a stable monetary and fiscal framework with an inbuilt capacity to be more responsive to the economic cycle, fiscal and monetary policy can together contribute to stability and growth in the coming years.
My forecast for 1999 of 1 to 1½ per cent. growth in our economy will see Britain steering a stable course, even when one quarter of the world is in recession. As the
economy returns to its sustainable growth path, we expect growth to be between 2¼ and 2¾ per cent. in 2000, and between 2¾ and 3¼ per cent in 2001.
It is because we are cautious about the balance of risk in the economy that we have based our public finance forecasts on assumptions deliberately more prudent than those made under the previous Government. First, our public finances are planned on an estimate of a 2¼ per cent. trend rate of growth--¼ per cent. lower than the assumption that we inherited. Secondly, our forecasts have revised downwards the ratio of VAT receipts to projected consumer spending, reducing estimated revenue by nearly £4 billion over the next five years.
Thirdly, revenues from tackling fraud have been set at a more cautious level than in the previous Parliament. Fourthly, we have discontinued the highly imprudent practice of assuming revenues from privatisations that have not been agreed. In each case, our assumptions have been audited by the independent National Audit Office, and because of the experience of the early 1990s we have adopted a more prudent approach to forecasting income tax and corporation tax revenues, including a cautious estimate of revenues from self-assessment.
Even after making those prudent assumptions, and taking into account the world downturn, we meet our first rule--that of balancing our current budget over the cycle. We expect the current surplus to be £1 billion next year, £3 billion in 2000-01, £8 billion the year after that, and £10 billion and £11 billion for the two years to follow. For the same years, net borrowing is expected to be £4 billion, then successively £5 billion, £2 billion, £2 billion and £1 billion.
Those figures are better for every year of this Parliament than those for any year of the previous Parliament. They represent an estimated current surplus for the coming five years of £33 billion--a margin that shows that we are equipped to cope with further uncertainties. That £33 billion surplus contrasts with what happened under the previous Government--a deficit of £149 billion over the economic cycle, as national debt doubled.
Our second rule, the sustainable investment rule, requires that as we borrow for investment, debt is set at a prudent and sustainable level. In the last year of the previous Government, the debt ratio was 45 per cent. of national income. In the next three years, to meet the needs of a modern infrastructure, public investment will rightly double. Yet as a result of our overall prudence, debt as a proportion of national income is set to fall below 40 per cent.--to 39 per cent. next year, then to 38 per cent., and then to 36½ per cent.
Hon. Members who take a special interest in the Maastricht criteria will want to know that in each of the next five years Britain will be comfortably within the Maastricht guidelines.
Long-term economic stability, from which we will not be diverted, is the foundation for future success, but we shall achieve our long-term goals for growth and employment only through an even more radical modernisation of our economic policy in favour of opportunity, enterprise and work.
We now need to push ahead with modernisation ineach of the following areas--improving productivity, expanding opportunity and investing in our future. So in
every one of those areas our economic policy will be based on getting the best out of all our people and their potential--in other words, maximising economic opportunity for all. What makes for a good economy also makes for a good society--one that is fair and cohesive.
I turn to the first conclusions from the review that we have conducted with British business into removing the barriers to productivity. As our seminars with business have revealed, the only way for Britain to be at the forefront of the new knowledge-based economies of the future is by modern policies for education, employee participation, small business development and science and innovation.
Our first recommendations concern the quality of education. With our £19 billion investment in educational reform, we have set out demanding targets for literacy, numeracy, teaching standards and higher qualifications. My right hon. Friend the Secretary of State for Education and Employment has announced today a £250 million investment in a new traineeship programme for teenagers. In this way, we have now made it possible for every young person after the age of 16 to stay on in part-time or full-time education, to get the qualifications they need and to have the opportunity of a job.
To meet that productivity challenge for our economy, we must do more to encourage the ambitions of all our children, not least by bringing the world of education and the world of work into closer contact. Over the next year, we plan to enlist business leaders throughout the country to take the world of work and business into our classrooms. To encourage businesses to offer expertise and management help to our schools and colleges, I can say that the Budget will allow businesses to claim tax relief when they second staff to schools and colleges.
Britain can do more to remove the barriers to opportunity and ambition--the ambition to work your way up and use your creative talents, the ambition to start and build a successful business and the ambition to see the firm in which you work succeed, and you succeed with it. Today, only a fraction of British employees--and an even smaller minority of those outside senior management--own shares in the companies that they work in. Yet the evidence is that employee commitment is a vital strength for companies competing, and then succeeding, in the global economy.
I want, through targeted tax reform, to reward long-term commitment by employees. I want to remove, once and for all, the old "them and us" culture in British industry. I want to encourage the new enterprise culture of teamwork in which everyone contributes and everyone benefits from success.
In the next Budget, we will make it easier for all employees--not just a few--to become stakeholders in their company. I want to double the number of firms in which all employees have the opportunity to own shares. Many employees already hold shares through their pension funds, so I will propose to our pension funds and other institutions that they should provide better and more direct public information to their members and investors.
In future, more of our wealth and jobs will come from small and growing businesses. In just 18 months, we have announced cuts in the rate of corporation tax on large companies twice--to 30p in the pound, the lowest level of corporation tax ever. For small companies, we have cut the rate twice, too--to 20p in the pound. In the Budget
we will consider a further tax reduction for small businesses. In particular, we will consider converting the temporary investment allowance we introduced last year into a permanent tax cut.
I have in mind a bigger reform to cut the burdens of tax and red tape. Small businesses getting started and growing lack not only the resources to pay tax, but the back-up to administer national insurance, income tax and VAT payments and their payroll systems. From April 1999, the Inland Revenue and the Contributions Agency will be merged. We propose to roll out on a nationwide basis a new, comprehensive service for all businesses, helping them to replace time-consuming book-keeping by offering a one-stop advice service, administered by local offices and a national helpline. So, from now on, every Government Department will have an obligation to encourage enterprise and entrepreneurs.
I can confirm to businesses that we are also re-examining planning regulations and building control to identify barriers to productivity and job creation, and how the planning system in Britain can be speeded up to help us to emulate the success of high-tech clusters and corridors, such as America's Silicon valley.
Access to bank finance is critical to the success of every small business. Therefore, I have asked the banks to work with Mr. Don Cruickshank, formerly of Oftel, to assess what steps can be taken to serve more effectively the needs of businesses in the economy.
To open up and enhance competition, we will ensure, with a 20 per cent. increase in its funding, that the Office of Fair Trading has the necessary resources to break down barriers that prevent new firms from entering markets and keep prices unacceptably high for consumers. Further announcements on how the new arrangements will work will come from my right hon. Friend the Secretary of State for Trade and Industry, who will soon publish his competitiveness White Paper. Our policy is pro-small business, pro-share ownership, pro-tax simplification and pro-competition.
Our policy is also pro-skills and pro-science. To turn scientific inventions in Britain into jobs for Britain, we need to do more to honour the spirit of invention, facilitate the exploitation of invention and encourage the commercialisation of invention. More than ever, innovation is the key to higher productivity. We must ensure that inventions created in Britain are developed and manufactured here too.
The first step is a higher quantity and quality of research and development. So, the Government will consult small business on supplementing the current tax relief on research and development with a more effective tax credit for small business, based on the volume of research and development investment.
Three months ago, we announced a partnership with the Wellcome Trust that will invest more than £1 billion to re-equip university science in Britain. It is the largest ever public investment in Britain's science base. Having received an overwhelming response from universities to that and to our new university challenge fund, which is a public-private partnership for commercialising scientific inventions, we are now inviting further private sector involvement.
I now want to complete the path that takes inventions from the science lab through high-tech venture capital and then to the national and global marketplace. So I am
announcing that to develop business expertise in science and to transfer technology from the science lab to the marketplace, we will endow up to eight new institutes of enterprise in British universities. That is a further signal of our determination that the genius of British invention will once again become an engine for growth and job creation.
The strong venture capital industry, supporting high-tech, high-risk investments, is also critical to the future of Britain. Today, we have only 6 per cent. of the early stage, high-tech venture capital of the United States, so we will consult on and consider new incentives, including how to encourage our more successful companies to invest in start-ups and how we can provide new sources of venture capital and management expertise for entrepreneurs.
The productivity challenge is one that must be met by the public and not merely the private sector. Next month, for the first time, the Government will publish public service agreements that set clear targets for improved performance for all Departments. To help them meet those and to monitor performance, we are today establishing an advisory panel from business and management.
Absenteeism costs the public sector up to £6 billion a year. Specific targets are being set for each Department to reduce absence rates by 20 per cent. by 2001 and 30 per cent. by 2003.
We are working with business, not merely to promote higher productivity, but to secure policies for a sustainable environment. Today, I am publishing the report by Lord Marshall, formerly president of the Confederation of British Industry, into the role of economic instruments and the business use of energy. I thank him for his work, which moves the debate forward substantially. After public consultation, the Government will fully consider the recommendations as part of their wider strategy on climate change. I am also publishing today a consultation document containing proposals for a £50 reduction in vehicle excise duty for the smallest and most environmentally efficient cars.
Just as the Government are modernising our industrial economy, so too we are modernising employment policies. The House will be pleased to know that by next April, 300,000 people will have benefited from the new deal, which gives a new sense of hope to men and women previously left out and excluded. Already 29,000 companies have signed up to the new deal, and we are now ready to extend it.
From 30 November, 60,000 opportunities will be created for the long-term unemployed in 28 areas of our country. In Northern Ireland, in support of the peace process, we will guarantee new opportunities to all men and women who have been unemployed for 18 months or more. We will also extend nationwide the new deal skills shortage programme and offer up-front support for training to help to fill the vacancies that come on-stream every month. To tackle skill shortages, I can confirm that by March next year, there will be 120 centres for information technology and high-tech training in every part of the country.
Side by side with the new deal, there will be new guarantees that work will pay more than benefits. From April, as a result of abolishing the entry fee to national insurance, all employees will receive a tax cut of£66 a year. Business will be pleased to know that I can
announce that from April, employers will not pay national insurance on earnings below £83 a week, the 1999 level for the personal tax allowance. When it is economically right to do so, and so that work pays more, we will introduce the 10p starting rate of income tax.
From 1 April next year, 1.9 million employees, including 1.3 million women, will benefit from the minimum wage. I can confirm today that the minimum income guarantee for a low-paid family in work, which as a result of the working families tax credit was announced at £180, will be raised to £190 a week from October next year, as a result of the minimum wage and changes that we are making in tax and benefit. Work will pay a guaranteed minimum of £190 a week for a family, with no income tax to pay on incomes below £220 a week. That will guarantee a minimum income of at least £5.50 an hour for a lone parent in work with one child, and £6.37 for an adult with two children.
To enable parents and carers to balance work and family responsibilities, we want to provide extra help for child care. We have provided the resources for up to 1 million new child care places over the next four years. Consistent with our national child care strategy, we will extend our new child care tax credit to cover all children up to the age of 14 and in the case of disabled children, who have greater needs, up to the age of 16.
We will match the working families tax credit with a new disabled person's tax credit that will ensure that work pays for a disabled man or woman who takes a job. A disabled person with one child moving from benefit to full-time employment will be guaranteed a minimum income of £220 a week, with no income tax payable on income below £274. Disabled men and women taking up work will be as much as £78 a week better off.
Under this Government, disabled men and women who want to work will be guaranteed fair treatment at work, and work will pay. Matching the minimum income guarantee for disabled persons in work there will be a new disability income guarantee of £128 a week for severely disabled people out of work.
We are guaranteeing pensioner couples a new minimum income of £117 a week. That will be followed in the Budget with a guarantee that pensioners will have no income tax to pay unless their income rises above a new specified level. As a result of other measures that we have taken--by following our cut in VAT last year with tougher regulation and new winter fuel payments--I can say that pensioners are saving £108 on their fuel bills and the poorest pensioners are saving £140.
Our task for the country for the coming year--steering a course of stability--is to meet the productivity challenge, to extend fairness and our welfare-to-work programme and to make the modern investments we need in our future. I am pleased to announce that, following the modernisation of the private finance initiative, there will be new investment in our infrastructure--in more than 1,000 schools, 25 hospitals and in dozens of public transport projects--over the coming three years amounting to an additional £11 billion. Over the three years from next April, public investment will double--and will do so at the right time. That is the right decision and the right course of action for our country.
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