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Pre-Budget Statement
3.30 pm
The Chancellor of the Exchequer (Mr. Gordon Brown): In 1997, Britain had a £28 billion deficit, a national debt that had doubled and rising inflation, and was at risk of repeating the old familiar cycle of stop-go. So in this pre-Budget report, which will address specific and immediate concerns, we will do nothing to put at risk the economic stability that has given this country the lowest unemployment for 20 years, the lowest inflation for 30 years, mortgages 4 per cent.--£1,000--below the average of the previous 20 years, and a Budget discipline that has enabled us to cut borrowing and to invest more every year in hospitals, schools and public services.
This hard won and newly won stability now gives Britain an opportunity that we can either seize or squander. It is the opportunity to achieve high levels of productivity growth, and so to ensure long-term prosperity not just for some, but for all. Yet every time the British economy has started to grow--as in the 1980s--Governments have made short-term decisions on tax and spending which have put inflation, interest rates and economic stability at risk. So Britain has a choice: the choice that underlies the pre-Budget report.
The risk for Britain is to repeat the 1980s mistake of taking economic strength for granted when we still have a large productivity gap with our competitors, and trying to run the economy at a capacity not yet achieved. Our choice--the choice of this pre-Budget report--is that we build economic strength by investing and, through tax incentives, encourage a new generation of entrepreneurs.
The risk for Britain is to repeat the late 1980s mistake of claiming that a surplus in one year could fund tax cuts for every year, and, by committing in tax what had yet to be earned, stoking up an unsustainable consumer boom and forcing interest and mortgage rates to rise. We will take no risks with stability. Our choice--the choice of the pre-Budget report--is to lock in stability by, as I shall announce today, prudently cutting debt and debt interest payments to keep inflation and interest rates low.
The risk for Britain would be to cut investment in education and infrastructure and to perpetuate decades of neglect and undermine our economy. This pre-Budget report makes a different choice: to move forward with our three-year spending plans, which will double public investment--from investment in education and health to investment in transport, policing and the environment; and, while continuing to cut unemployment and debt interest, to combine public spending with targeted tax cuts to do more for pensioners and, as I will show, to give families the lowest direct tax burden for 30 years. This pre-Budget statement sets out a balanced approach: first stability and prudence to keep interest rates low, secondly tackling under-investment, and then, when it is affordable to do so, making targeted tax cuts for the nation's priorities.
Let me deal first with the forecasts for the economy. Since 1997, our first and most fundamental choice has been--through Bank of England independence, tough controls on public spending and difficult decisions on tax--to build economic stability. There were those in the House who predicted that our policies would bring recession. I can report that this year inflation is meeting its 2.5 per cent. target, and that long-term interest rates
are now the lowest for 30 years--the same as those in Germany, and lower than those in America. The economy is forecast to grow by 3 per cent. this year, and manufacturing--despite its difficulties--by 1½ per cent. Exports are growing by 8 per cent. and consumer demand by 3½ per cent., with living standards rising. Business investment has grown by 1 per cent. this year as we lock in a higher level of investment as a share of our economy--14½ per cent.--than at any time in 40 years. Investment is now a bigger share of our economy than it is of the American economy.In total, fixed investment this year has grown by 2.5 per cent. With 1.1 million men and women in work, Britain now has the lowest unemployment since 1979, the lowest long-term unemployment since 1978, the lowest youth unemployment since 1975, and the highest employment ever among women. Unemployment is now lower in every region: today, there are 1 million vacancies spread across the country. This month, we plan to reach our promised target: 250 young people moved from welfare into work--[Interruption.]--250,000 young people.
It is precisely because we have taken the trouble to build the long-term foundations for success, and precisely because we have resisted short-termism that would threaten stability in interest rates, that I can report that, even in times of uncertainty for the world economy over oil prices and exchange rates, the Treasury forecast for next year is as follows: inflation will again meet its target of 2½ per cent; manufacturing next year will grow by between 2 and 2¼ per cent.; exports will grow by 7 to 7½ per cent.; growth will range from 2¼ to 2¾ per cent.; consumer demand will grow by 2¼ to 2½ per cent.; business investment will grow by 1½ to 2 per cent., and total investment will grow by 4¼ to 4½ per cent.
There were those who predicted our public spending plans would lead to higher inflation and that the economy would run out of control. Between 1979 and 1997, inflation averaged 6.2 per cent. Since 1997, it has been less than half as much--2.4 per cent. Interest rates averaged 10 per cent.; since 1997 they have averaged 6 per cent. Mortgage rates from 1979 averaged 11 per cent.; since 1997 they have averaged 7 per cent. Growth from 1979 averaged 2 per cent.; since 1997 it has been 2.7 per cent.
We have steered a course of stability, but we are not satisfied. Long-term prosperity for all is our objective. We want to achieve, in this decade, full employment, higher education for the majority of young people and sustained improvements in our public services. With an end to child and pensioner poverty, we want not just some but all of our citizens to share in rising prosperity.
That long-term prosperity depends on us reaching American levels of productivity growth. By removing the barriers, tackling under-investment and skill deficiencies, overcoming resistance to new technology and removing restrictive practices wherever they arise, we will build a stronger enterprise culture open to all. Today, as part of the Government's contribution to a new and necessary drive for higher productivity, I am proposing measures, to consult on, to encourage entrepreneurship and expand investment.
To make Britain the best place in the world for multinational companies to locate, we will build on our cut in corporation tax from 33p to 30p--the lowest of all
major countries and the lowest in our history-- by consulting on three major, additional changes. We propose to abolish from April 2001 the withholding tax, not only on international bonds, but normally on payments of interest and royalties between companies in the UK, and to relieve tax on sales of substantial shareholdings by companies. Finally, in line with the needs of the new economy, tax relief will be given for intellectual property and goodwill as we try to create the best environment for modern business in the world.I can tell the House that this year corporation tax revenues are £2½ billion lower than we forecast. It has been put to me that North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make short-term decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that will guide Budget decisions in future.
My second set of proposals help small businesses, whose numbers have grown already by 150,000 since 1997. Last year we cut small company corporation tax--once 23p--to 20p and we introduced a new 10p rate, an overall cut in small company tax bills of nearly 25 per cent. Today I am publishing for consultation with small businesses a set of proposals that simplify small business VAT; they will be of direct help to up to half a million small businesses. Capital allowances and tax credits to encourage investment have already saved over £800 million for business since 1997, a third of a billion pounds of that in manufacturing.
Because I understand and recognise the importance of manufacturing, I will now examine, for the Budget, further incentives to help the manufacturing sector: in particular the proposals from the Confederation of British Industry and the Engineering Employers Federation to extend the research and development tax credit.
To help smaller high risk and e-commerce companies recruit and retain the staff they need, we propose to expand tax relief for share options and to make Britain the most attractive environment for e-commerce. In future, all employees can benefit from our enterprise incentive scheme--up to a company limit of £2½ million worth of share options. For the period to May 2000, I propose to make provision for companies to limit and settle their liability for national insurance contributions on share options.
Having cut capital gains tax from 40p to 10p for long-term investment, I now propose an even further widening of the scope of the 10p rate--to non-trading companies and to venture capital companies so that employees of all types of companies can now benefit from the 10p capital gains rate.
To enhance the contribution of institutional investors to the economy, we will consult on the Myners report proposals to reform the minimum funding requirement and to remove regulatory barriers to investing in venture capital.
To expand savings generally, and especially to double the number of low-income families who save, we will review all the capital limits that deter saving. Already, 9 million individual savings accounts have been opened, and £3 billion more is being saved in them by low-income savers. The tax-free limit for ISA savers has been set for next year at £5,000. I propose once more to set it at £7,000, a figure I shall set now for the next five years.
To build enterprise and balanced economic development across all the regions and public investment, including public-private partnerships, we are proposing today that regional development agencies have greater freedom and flexibility to decide locally how money is invested for them to meet local needs.
The rate of small business creation in high unemployment communities is still one sixth of that in more prosperous areas, and unemployment is still twice as high. Future jobs and long-term prosperity will not come from benefit cheques or the old subsidies, but by a radically different approach--encouraging economic activity and business development along the lines proposed by the Cohen and Rogers reports.
I now propose a radical reform of tax incentives that is designed to raise business investment and economic activity in the high unemployment areas of the country by £1 billion. I propose to introduce stamp duty exemption for all properties in our most disadvantaged communities; accelerated tax relief for cleaning up contaminated land; VAT cuts to reduce the costs of residential property conversions; and tax relief to bring empty flats over shops back into use.
I propose to consult on further business rate relief for small businesses in the assisted areas, and a new and generous tax credit for community investment, including support for the creation of the first community development venture fund.
To assist the upgrading of listed buildings that are central to community life in all parts of the country, I can also announce that we are today asking the European Commission to reduce VAT from 17½ per cent. to 5 per cent. for repairs to churches.
I have one other proposal for a special tax relief. We will not only continue to work for the cut in third-world debt that this and other countries are fighting for, but we now plan to do more to meet the international targets of cutting world poverty by half and cutting by two thirds infant mortality, which, through preventable diseases, carries off one in seven of the world's children before they reach the age of five.
As one of a number of proposals that the Secretary of State for International Development and I are working on to tackle child poverty, the Government will investigate a new tax incentive and a spending measure to develop, cut the costs for and ensure the supply of anti-TB, anti-malaria and anti-AIDS drugs--drugs that could save lives and that are tragically still unavailable in the poorest countries, but drugs which have the potential, which must now be realised, to reduce avoidable suffering and unacceptable deaths.
I turn to the pre-Budget measures to meet our goal of full employment. In addition to making work pay through the 10p income tax rate, our working families tax credit and the new deal--which some would abolish, but which, as independent research shows, has cut youth unemployment by 40 per cent. more than would have happened without it--the Secretary of State for Education and Employment and I will work to intensify coaching help for the 50,000 young people who are still out of work. We will consult on introducing a new service that will help redundant workers to move quickly into new jobs. We will investigate how, with tax-free and, in some cases, free adult learning, we can help to upgrade fast-changing workplace skills.
We will extend the new deal for lone parents with our nationwide programme of choices starting next April, and extend to a further 150,000 lone parents not on income support the opportunity, in the programme of choices, to get back to work. We will agree a new partnership with the voluntary sector to help those with disabilities who want work to get it, while with a £200 million a year additional package that the Secretary of State for Social Security will announce tomorrow, we will take action to improve the living standards of those unable to work who are disabled, and of those who care for them. For each area, we will proceed to draw up local full employment plans addressing all barriers to full employment in their local areas.
High productivity and rising employment depend not just on ending decades of under-investment and targeting tax incentives on our priorities, but on entrenching a low-inflation culture that prudently keeps interest rates and mortgage rates as low as possible. It is because we have learned from the mistakes of the 1980s and before, that I can tell the House that, in spite of the demands that are being made to me, I have decided, in the interests of keeping interest rates and mortgage rates as low as possible, to lock in over the coming years a fiscal stance that is the same or tighter than we set at the time of the Budget.
Let me give the House the background and the full financial figures. Our first rule--the golden rule, which is necessary to keep interest rates and mortgage rates as low as possible--is that over the cycle there must be a current surplus. So, however tempting it may be for some to identify large temporary surpluses as an excuse for permanent injections of resources into the economy, our golden rule demands that there is constant prudence.
In the Budget, I forecast this year's current surplus at £14 billion. I now forecast it to be £16.6 billion. In the years from 2001-02 onwards, the current surpluses are forecast to be £16 billion, £14 billion, £8 billion and £8 billion--figures that will ensure that we remain on course to balance the current Budget over the economic cycle, even on the most cautious of cases.
Our second fiscal rule--the sustainable investment rule, which is a bulwark against short-termism that again helps to keep interest and mortgage rates as low as possible--is that while, over the cycle, we will borrow for investment, we do not borrow for consumption and we keep debt at a prudent and sustainable level below 40 per cent of national income.
After a doubling of national debt in the early 1990s, the ratio of debt to national income had by 1997 risen to 44 per cent. Having made the necessary and difficult tax and spending decisions, in the three years since 1997 we have reduced the ratio of debt to national income from 44 per cent., to 41.9 per cent., to 39.6 per cent., and now to 36.8 per cent. this April. I can report to the House that two decisions--first, the decision to use the proceeds from the spectrum auction to reduce our debt and, secondly, to use this year's surplus for repayment of debt--now make possible a further and even more substantial reduction in debt that will keep interest rates low.
Because we are, in total, cutting the debt by as much as one third, I can report to the House that the public sector net debt as a share of gross domestic product will
now fall from 36.8 per cent. last year to 32.3 per cent. this year to 30.9 per cent. in 2001-02. In addition, from what was a debt to GDP ratio as high as 44 per cent. in 1997, I can report that this ratio is forecast to fall to 30 per cent. and remain there in future years. With long-term interest rates lower and debt well within that 40 per cent. ceiling, we are not only well placed to deal with the inevitable ups and downs of the economic cycle, but we have the best platform possible for years for sustained long-term growth.Our budget forecast for net borrowing was a surplus of £6½ billion this year. Now, we forecast the surplus to be £10 billion, and £6 billion next year. In future, the deficits will be £1 billion, £10 billion, £12 billion and £13 billion as we borrow to invest. In every one of the next five years, adjusting for the economic cycle, there will be a fiscal stance that is the same or tighter than at the time of the Budget--and this year, with the spectrum proceeds, the net cash debt repayment will be £28 billion.
Our approach is to reject the old vicious circle of the '80s--rising debt, higher long-term interest rates, higher debt repayment costs, lower growth, higher unemployment, then enforced cuts in public spending. That was the old boom and bust. Instead, as we have promised, we have by our decisions created a virtuous circle of falling debt, lower long-term interest rates, lower unemployment, lower debt repayments and a stronger economy releasing more resources for public services.
I can report to Members that because of this virtuous circle, lower unemployment has brought savings in social security which, compared with the Budget, provide an additional £1.5 billion next year, and £2 billion and £2½ billion in the next two years after that. In addition to higher Government revenues this year from higher employment, higher earnings growth and from steady growth, debt interest payments are now lower than we forecast at the time of the Budget--by £2½ billion next year and £2 billion in each of the next two years after that.
When we came into Government, we were paying out more in debt interest payments than we were spending on all our schools in the country. Soon, as a result of cutting these debt payments, we will be able to spend 50 per cent. more on our schools than we do on debt interest. Over the past 20 years, 42p of every additional pound spent went to debt interest and social security. In the early '90s, it rose to 50 per cent. of every additional pound spent. Debt and social security will now require only 17p of every pound, and that leaves more than 80p in every pound of additional spending to go to hospitals, schools and vital services, and it enables us to tackle the long-term under-investment in Britain.
Because we have cut the costs of debt and unemployment--now costing £5 billion less than in 1997--and because we have secured sustainable growth, we are able to lock in the fiscal tightening and meet all our fiscal rules, and, within this prudent framework, we are in an even stronger position than in July to tackle under-investment and to target tax cuts on our nation's priorities.
Since July, I have received representations from many people in this House about public spending, including representations from the Conservatives, who propose spending growth only in line with 2 per cent. GDP growth a year. I have studied that proposal in detail. It would
mean, by year three, cuts in spending of £16 billion--and after taking into account the measures I will announce on pensions today, more than £16 billion.I have rejected those representations, and because the economy both needs and can afford to--and cannot afford not to--tackle the under-investment in our country, the Education Secretary will tomorrow, as part of allocating his annual 5 per cent. real-terms increase in education next year, announce new resources for the Learning and Skills Council.
Because investment is needed in our infrastructure not just for social but for economic reasons, the Minister for Transport will announce how every region, city and town will benefit from new investment in roads. With new funds from the spending review allocated to each region for economic regeneration, the Deputy Prime Minister will shortly publish his rural and urban White Papers.
As part of the 5.6 per cent. real-terms rise in NHS spending for the next three years, the Secretary of State for Health will announce for each of those years his allocation to health authorities up to 2004, giving them the stability and certainty that they want for their spending.
In addition to the statement on pensions from my right hon. Friend the Secretary of State for Social Security tomorrow, and the extra allocation that we have made to improve flood defences, my right hon. Friend the Secretary of State for Education and Employment will announce today additional allocations to our schools.
The windfall tax is money raised from the utilities specifically for the purpose of extending employment opportunity through the new deal and educational opportunity through renovating, so far, 17,000 schools. Such has been the success of the new deal in getting people back to work that the windfall levy account is underspent by £200 million. So my right hon. Friend and I have decided that, in addition to this year's rise in education spending, lower unemployment means that we can allocate new money to every school in every constituency of the country--money to be available this year for repairs and improvements; money to be paid direct to the school.
The head teacher of every primary school will receive a cheque for between £4,000 and £7,000. The head teacher of each secondary school will receive, for the smaller schools, £10,000, and for the larger schools, £30,000: prudence once again for a purpose, enabling us to target resources to our priorities and in a sustainable way. That prudence now allows us to match public spending increases by tax cuts targeted on the country's priorities, including making reforms in the tax treatment of transport and the environment, to which I now turn.
Between 1997 and 1999, retaining the fuel escalator introduced in 1993 helped cut borrowing by £30 billion, helping deliver lower interest rates. It enabled us to begin the long-overdue investment in transport, the NHS and schools, and it will have brought about a cut in carbon dioxide pollution by an estimated 1 million to 2½ million tonnes of pollution by the year 2010.
Today, like all countries, we are having to deal with the rise in world oil prices from $11 to $31. Because the Organisation of Petroleum Exporting Countries itself accepts that the world price is unacceptably high, our international efforts are geared to ensuring that production is raised and prices fall. Therefore, I recognise and
understand the very genuine concerns that motorists and hauliers have. It is because we have already managed to cut our deficit, already set aside £180 billion for our 10-year transport plan, and already shown how we are meeting the Kyoto targets, that in the last Budget we removed the fuel escalator and made environmentally based cuts in car and lorry licence fees, and gave new incentives for environmentally efficient fuels. In line with the principles that we set down then, I am now able to show how we can complete those reforms and do more to meet people's concerns, without putting at risk economic stability, necessary investment in public services or the environmental gains. Indeed, the reforms that I propose today are tailor-made to meet our environmental obligations.The annual rise in the price of fuel that would be automatically introduced on Budget day would raise £560 million, putting petrol and diesel up by about 1½p a litre. I propose, at that cost of £560 million, a freeze in excise duties--an across-the-board duty freeze on all fuels that would initially last until April 2002, and, if the oil price remains high between now and then, I can tell the House that there would be a duty freeze for a further year.
I intend to go further, however, in three vital respects. On top of the duty freeze that we had budgeted for in our fiscal arithmetic, the first of the proposals I will consult upon would itself involve additional expenditure of as much as £1,000 million and help to promote substantial benefit to the environment. Yesterday, we published a report showing the environmental benefits from the introduction of ultra-low sulphur diesel in reducing local air pollution. As a result of cuts we made in excise duty on ultra-low sulphur diesel, usage of that fuel has risen in Britain from 20 per cent. in 1997 to 40 per cent. in 1998 to 100 per cent. in 2000. It requires no change to be made in lorry and van engines. It now accounts for virtually 100 per cent. of the market for diesel in Britain today, and Britain is now leading in this cleaner diesel fuel.
We now need to build on that environmental achievement. The widespread use of ultra-low sulphur petrol would further and significantly improve local air quality. Crucially, it would require no change to existing car engines. It is now time to make this cleaner fuel available in every petrol station in the United Kingdom and to make the use of this fuel, which requires no change in any car, cheaper for everyone. To do so I propose to cut the excise duty for ultra-low sulphur petrol so that it replaces unleaded petrol in every petrol station and at a lower excise duty.
On 1 October, we reduced the duty on ultra-low sulphur petrol by 1p a litre. I propose from Budget 2001 a further reduction of 2p a litre--making a cut of 3p in total on all ultra-low sulphur petrol. Because it is right to maintain the proper balance between petrol and diesel, I propose also from Budget day to match the cut in ultra-low sulphur petrol with a 3p cut in excise duties on ultra-low sulphur diesel, which will go to all diesel users. I expect ultra-low sulphur petrol and diesel to account for 100 per cent. of the market next year. When the excise duty cut is introduced at Budget time, motorists using any petrol station in Britain should be able to benefit from this duty cut.
It is by giving this incentive for cleaner fuels that we can both advance our environmental principles and ensure--with the 3p cut per litre in all ultra-low sulphur duty--a cheaper cleaner fuel available in every garage, a better deal for drivers and cleaner air across Britain.
I can also announce that for all cars that still use lead replacement petrol--where there is no longer an environmental case for a higher duty rate--I propose from Budget day to end the differential and cut the excise duty by 2p a litre.
I now intend to go further to help the haulage industry, which is undergoing restructuring. I propose support for scrapping or converting older lorries, with a £100 million investment fund that will include help for buying the new lorries that meet the technological and environmental standards of the future and support for the introduction of logistics and computerisation in the industry. The Deputy Prime Minister will also announce help for an industrywide training and retraining scheme.
We can do more. So that foreign lorries pay their share of the costs of using our roads, we intend to introduce in Britain a vignette system, a British disc under which non-British companies and lorries pay their share to Britain for using British roads.
The Government have considered an essential-user rebate or blue diesel scheme for lorry diesel. However, such a scheme would be administratively cumbersome; it could be levied only on future purchases of diesel; it would have to be open to foreign lorries using British roads; it would not help hauliers where their fuel prices are directly passed on to customers; and it would have no environmental benefits in itself.
The scheme I am proposing is far better. Subject to consultation and legal clearance, I now propose to bring forward a much needed reform, begun last year, in vehicle excise duty for lorries. It will radically cut rates for larger lorries that have traditionally high licence fees. The scheme will be implemented in Budget 2001. It will sweep aside the 100 separate rates; it will consolidate them into only seven rate bands, which will be linked to environmental standards; and we shall cut the rates to match the lowest in Europe.
Lorries in the most competitive sector will save over £2,000. Over 250,000 lorries will each pay lower licence fees as a result of a £300 million total cut in licence fee costs. One hundred thousand lorries will save over £1,000. The average saving per lorry will be £715 a year. The cuts are equivalent in value to a cut of 3p in the price of diesel for the haulage industry--again, with environmental incentives built in to the new licence system. Our proposals for the detailed new scheme and licence rates are published today, and the Government are able to start the transitional arrangements to the new licence system immediately.
I have allocated £265 million for this financial year--half of the annual revenue raised from lorry VED--to be spent before March for a refund scheme that can repay lorry owners up to half of this year's licence fee. Two hundred and fifty thousand lorries and all large lorries will benefit from the refunds--they will be worth, for some of the largest lorries paying the highest fees, £1,000, and up to £4,000 this year. Refunds will be paid from next month,
with payments to be completed by the end of January. The detailed arrangements will be announced by the Minister for Transport.To help restructuring and investment in farming, the Minister of Agriculture, Fisheries and Food announced last week an addition to this year's £220 million packages of measures: agrimoney compensation for arable producers. In addition to freezing red diesel duty at its current rate, I intend in Budget 2001 to abolish vehicle excise duty on tractors and agricultural vehicles.
I now have a similar proposal for car licence fees. It is consistent with our environmental principle that we tax vehicle ownership less, and I now want to complete the environmentally based reform of vehicle excise duties for cars. The new licence fee that we are introducing for new cars registered from March 2001 is linked to environmental efficiency. For all cars under 1200 cc, there is now a lower rate licence fee with a £55 deduction on the standard fee.
While that change has been welcomed, many--especially those in rural areas--have put it to me that greater choice would be available to rural motorists and motorists generally if the £55 deduction could be accessible not only for cars under 1200 cc, but for cars up to 1500 cc, including the Focus, Golf, Astra, Escort and Rover 214. Therefore, I propose to extend the lower rate licence fee and the £55 discount to cars up to 1500 cc, to be paid out from July but to be backdated to today. All those who have a car from 1200 cc to 1500 cc--that is, an extra 5 million cars--will be entitled to £55 off their annual licence fee from today. In total, 8½ million existing cars--one in three--will now pay £55 below the standard fee.
So for motorists as a whole, with the duty freeze, the new reduced licence fee and the cut for ultra-low sulphur petrol, the proposed Budget package will make changes worth the equivalent of a 4p a litre cut while meeting our environmental objectives. By next year, for the haulage industry, there will be changes worth the equivalent of a cut of 8p a litre. In each case, we shall be meeting our environmental obligations and not putting at risk public investment in our vital services or the stability of the economy. Ministers are now inviting discussion of those measures in the pre-Budget consultation, which will take place as Ministers visit every region of the country.
I come now to specific measures of benefit to families and to pensioners. Our aim is that not just some, but every child has the best start in life and that we halve child poverty in the coming decade. Families need help most at the time when parents are bringing up their children. As we extend our new integrated system of child support--from £15 a week for every child to a maximum of £50 a week--our priority in the coming Budget is the new children's tax credit, which is a tax cut for families. This family tax cut, which replaces the married couple's allowance, will be paid on top of child benefit to around 5 million families at £8.50 a week, worth £442 a year.
On current figures, the proposals on which we are consulting would, if implemented, mean that overall the tax burden would not rise next year, and I will achieve my aim of next year cutting the direct tax burden on the typical family to below 20 per cent. It will fall to 18.6 per cent., the lowest level since 1972. However, I believe that in the coming Budget we can offer a larger tax cut for
families. My aim is to increase the family tax cut to £10 a week, in total a £520 a year tax cut that will increase families' incomes.Just as we are introducing a new system of child support based on the foundation of child benefit--at the heart of which is the working families tax credit and the children's tax credit--so too it is now time, based on exactly the same principles, to raise pensioner incomes by a tax and benefit reform that will have as its foundation the basic state pension, and will have as its building block--like the working families tax credit--a new and generous pension credit.
Our aim for pensions reform is both to end pensioner poverty and to ensure that all pensioners share in the rising prosperity of the nation. In a new world of rapidly diverging pensioner incomes--already, 17 per cent. of couples are retiring on more than £20,000 a year, a percentage which grows year by year--and where, as a result, inequalities between pensioner incomes are as great as inequalities within the population as a whole, we will best meet our obligations to pensioners by a new approach.
To plan for the future based on a flat rate earnings-linked rise paid to all, which would give exactly the same to those with incomes above £20,000 as to those on middle incomes--and because the income support system would do absolutely nothing for the poorest--would mean that by the time today's 45-year-olds were retiring, for every £6 billion extra spent on the earnings link, £2 billion would go to pensioners with incomes above £20,000 at today's prices. That would mean that less would be available for the middle and lower income pensioners in greatest need, who are our first priority.
We need a policy that does most for those who need most and at the same time ensures that all pensioners--the very poor, those on modest incomes and the relatively comfortable--share in the rising prosperity of the nation. Let me tell the House what the new system, which will integrate tax and benefits and build upon the basic pension a new pension credit, will look like in 2003, and then I will set out the transitional arrangements.
First, for those in and at risk of poverty, we will radically improve the minimum income guarantee. I can tell the House that the minimum income guarantee, which was £68.80 in 1997, is £78.45 today, and will be raised in April by £14 a week to £92.15. For thousands of our poorest pensioners, that will mean £700 extra a year. I can also tell the House that when the new system is introduced in April 2003, the minimum income guarantee will be set not at £92, but at £100 a week, £22 a week more than today. For the first time, a single pensioner will be guaranteed at least £100 a week. For couples, there will be a rise from £106.60 in 1997 to £154. Every year after that, I can tell the House that the minimum income guarantee will be raised in line with earnings.
With the winter allowance, there will be a 32 per cent. increase in pensioner income for this group even after inflation. That demonstrates our determination that no pensioner is left behind as the Government work to ensure that pensioner poverty in this country becomes a thing of the past. More than 2 million pensioners will benefit. People will be able to claim by phone. They will do so at the point of retirement, and adjustments thereafter would need to be made only when circumstances changed.
We have a second obligation--to millions of pensioners who, after a lifetime of hard work, have modest occupational pensions and modest savings, but receive nothing, and have received nothing over the years, from the system on top of their basic pension and have until now been penalised, not rewarded, for their savings.
These are people whom we meet every week in our constituencies, and this Government are determined that people who have worked hard and saved hard all their lives should now receive more.
Tomorrow the Secretary of State for Social Security's statement will outline the new integrated tax and benefit system--both the pension credit and the new pensioner tax arrangements. I said in the Budget that we wanted the beneficiaries of the new credit to be single pensioners with incomes of up to £100 and pensioner couples with incomes up to £150. I can now say to the House that pensioner couples with incomes below £200, and single pensioners with incomes below £135--many millions of pensioners--will now receive this new pension credit when it is introduced. I can also tell the House that, while the pension will rise in line with inflation, the new pension credit will also rise in line with earnings every year.
In this way, we will give recipients of the pension credit more than even the earnings link in the basic state pension would give them. The pensioners tax allowance will be set at April 2003 at an even higher level--£6,560 for the single pensioner before tax is paid--and for the next Parliament we propose the pensioners tax allowance will also rise in line with earnings.
For the vast majority of pensioners, therefore--middle and low-income pensioners--in Britain, the new system will provide extra cash on top of the basic pension: sums of between £1 and £23 a week extra. And we will achieve all our aims: for millions of the neediest pensioners, relief from poverty; for those on modest incomes, a reward for their savings and occupational pensions higher than an earnings link would give them; and ensuring that all pensioners can enjoy a share in the rising standards of living of our country.
As we move to this new and better system, the Secretary of State for Social Security and I have decided that the transitional arrangements should ensure that over the next two years, pensioner incomes should rise faster than inflation--indeed, faster than earnings--so from April next year we propose that, for the single pensioner, there should be a cash increase of £5 a week; and for a married couple, a rise of £8 a week. I can tell the House that in the following year we can also guarantee the pension will rise above prices--a cash increase of £3 for single pensioners and £4.80 for married couples. Over two years, therefore, there will be a cash rise of £8 for single pensioners and £12.80 for couples--for pensions, £2.6 billion more: more than the link with earnings would give; more each year, on top of more for health, education, transport, policing and the public services.
Those who would spend this money on tax cutting should now tell us which hospitals, which schools, which public services they would cut. The Government have made our choice: investment; targeted tax cuts; keeping mortgage rates low; more for pensions and families--a stronger, fairer Britain.
I have one final announcement. I have had representations to abolish the winter fuel allowance, and, indeed, to abolish the free TV licence for over-75s. I have
even received representations to abolish the Christmas bonus. I have rejected such options, which would give with one hand and take with another.I can confirm that, now and in future years, the free TV licence will remain for the over-75s as we have promised; the Christmas bonus will continue; and the winter allowance will be paid at £150. But the transitional arrangements to our new pension reform will start not next year but this year; indeed they will start this week. I can confirm that cheques are being sent out from Monday that will be paid to every pensioner household in Britain. The winter allowance will not be paid at £150 this year. Nor will it be abolished. For this year specially--the first year of the transitional arrangements--it will be paid not at £150, but at £200 for every pensioner household, free of tax.
I commend the statement to the House.
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