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WAYS AND MEANS

Budget Statement Relevant document:

The unnumbered Explanatory Memoranda submitted by HM Treasury on 22nd September and 14th October, relating to excessive deficit in the United Kingdom.

Mr. Deputy Speaker (Mr. Michael Morris): Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that at the end of the Chancellor's speech copies of the Budget resolutions will be available to hon. Members in the Vote Office.

3.31 pm

The Chancellor of the Exchequer (Mr. Kenneth Clarke): The "Financial Statement and Budget Report", with a number of press releases filling out the details of my proposals, will be available from the Vote Office as soon as I have sat down.

Mr. Dennis Canavan (Falkirk, West): The Chair has already said that.

Mr. Clarke: I was making sure that I had the hon. Gentleman's attention. I congratulate him on his alertness.

INTRODUCTION

I have three priorities in my Budget this year. The first priority is to keep the economy on track to achieve the great prize of sustainable growth. This recovery offers the best prospect that the British people have faced for many years to enjoy the benefits of growth that does not pass through illusory boom to painful bust. My second priority has been to use this recovery wisely to encourage the creation of more jobs, particularly for people who have been out of work for some time. We must combine greater prosperity for the majority of our people with measures to prevent the emergence of a deprived underclass, excluded from the opportunity to work and dependent on welfare.

The third priority is to strengthen the economy in the longer term. We must aim for a modern economy in which the growth of enterprising companies will give people a greater sense of confidence in the flow of new jobs that will always be required to replace the old jobs eroded by technology and competition.

UK Economy

The background to this year's Budget is the healthy growth in output that we are seeing in Britain and overseas. The recovery has been under way at a modest pace for over two and a half years. It is now stronger and output has grown by over 4 per cent. over the past year. That is easily the fastest rate of growth of any of the major European economies. The forecasts I am publishing with this Budget show the economy expected to grow by 3 per cent. next year. As the recovery has got stronger, growth has come increasingly from exports. Over the last year, British exports have grown by over 8 per cent. Investment in plant and machinery has grown by over 5 per cent. Consumer demand has increased by a more modest 2 to 3 per cent. That is a very healthy shape for this stage of the recovery and bodes well for our long-term future as a competitive industrial economy.


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Our exporters have been able to take advantage of the pick-up in growth overseas, by keeping their costs down and raising their productivity. Our producers have succeeded in improving their performance in domestic markets, so that while exports continue to rise, imports are little changed. Overall, I expect our balance of payments on current account to improve by over £6 billion this year. An improving balance of payments is remarkable for this country at a time when the economy is growing stronger. More encouragingly still, inflation has remained low.

Underlying inflation has fallen to levels that we have not seen for a generation. Indeed, only about one third of the adult population of this country have ever experienced such low inflation during their adult life. The other two thirds are still finding it difficult to adjust to the change to a low-inflation economy. [Interruption.] They are not going to adjust back under the Labour party, either. Unemployment is on a clear downward trend, having fallen by over 450,000 since December 1992. The United Kingdom, as I have already said, is the only major economy in Europe where unemployment has fallen over the past year.

The unemployment rate in this country is lower than the average for the European Union. And the number of people in work is rising. The "Labour Force Survey" shows an increase of 226,000 in the number of people in work in the last 12 months. That means real new jobs for people up and down the country.

We are seeing strong output growth, strong export growth, falling unemployment, an improving balance of payments and low inflation. That combination is almost unique in this country since the war. But let us be under no illusions. Those promising conditions have to be sustained if they are to deliver higher living standards and secure jobs for men and women. And these promising conditions have arisen at all only because of the difficult decisions that the Government have been prepared to take in recent years.

We must not now throw away the gains that have been made by turning to some short-term dash for yet faster growth. Growth will be sustained only if we keep the lid on inflation, get public borrowing down further, and push ahead with measures which strengthen the industrial economy. That is the way to convert growth into prosperity and jobs.

That way lies the virtuous circle of improved competitiveness, rising productivity, economic growth, low inflation, and more jobs. We must not change our minds now for the sake of short-term popularity. [Interruption.] Those who bask in their short-term popularity and neglect the need for sound economic measures will live to rue the day hereafter. Only by keeping our nerve and sticking to the determined policies that we have put in place over the past couple of years will we be able to enjoy the full fruits of improved economic performance in rising prosperity and lower unemployment.

Inflation

Let me deal first with inflation. Low inflation creates a climate of stability which encourages savings and investment in the future of this country. Nothing would


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be more damaging than if we let inflation off the leash again only to have to take another dose of bitter anti- inflationary medicine. The British experience is that high inflation has brought economic recovery to a halt three times over the past 20 years. That is three times too often for my liking. And while we have succeeded in bringing inflation down to levels that were last seen when England won the World Cup, we must never take that for granted. Before that game I had lived in a low-inflation economy. After that game came Harold Wilson, in political terms.

I live in a low-inflation economy again now and am glad to say that our inflation rate is now well below the European average. We need to keep up that performance if we are to be a competitive manufacturing nation enjoying the living standards of the best in future. I will therefore continue to set interest rates to meet our objective of keeping underlying inflation in a range of 1 to 4 per cent., and in the lower half of that range by the end of the present Parliament. That is a tough target by Britain's recent standards, but not by those of some of our best competitors.

To make sure that we achieve that target, I have backed good intentions and resolve with a number of important decisions over the past year that have strengthened the framework of policy. The Bank of England's quarterly inflation report is now fully independent of the Treasury. The Governor decides the precise timing of interest rate changes. And, most importantly, I decided in the spring to publish the minutes of my meetings with the Governor. As a result, we in Britain now have one of the most open frameworks for monetary policy-making in the world. This will stand us in good stead in keeping inflation permanently low; but it will most certainly not avoid the need to take tough decisions at times.

In September the Governor and I agreed that, with the recovery strengthening at home and prices rising abroad, there was a sufficient risk of inflation picking up here to justify raising interest rates by half a per cent. By acting before retail price inflation itself picks up, we will aim to nip inflation in the bud. I expect inflation to rise slightly over the next year, reaching a temporary plateau of around 2 per cent., as a result of higher commodity prices and stronger profit margins in our very buoyant manufacturing industries. But continuing competitive pressures will ensure that producers and retailers keep costs under control and pass on the benefit to consumers. I expect that underlying inflation should then resume its downward trend.

Gilt Market Repos

Before I turn to the public finances, I can announce an important further development of the gilts market. The Bank of England is publishing today a consultative document on the establishment of an open sale and repurchase-- a so-called repo--market. This should improve both liquidity and efficiency, reducing yields and hence reducing the Government's debt interest


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costs. Each reduction in yields of just one basis point--one hundredth of 1 per cent. --will eventually save more than £25 million a year of public expenditure.

Public finances

I turn now to the public finances.

Last year, I continued the process started by my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont). I announced measures which cut the public sector borrowing requirement by 1 per cent. of GDP by the end of this Parliament. Combined with the healthy growth in the economy that we are now enjoying, those measures have helped to bring the public sector borrowing requirement from £45 billion in 1993-94 to an expected £34 billion this year. My objective remains the same: to balance the Budget over the medium term. We remain on course to eliminate Government borrowing entirely by the end of the decade. By 1996-97 borrowing will be approximately equal to the Government's net capital expenditure.

About half my own cuts in public borrowing last year were achieved through cutting public spending plans. But, because of the length of the recession, my right hon. Friend and I also had to raise taxes to meet the objective of healthy public finances.Delay and failure to act would have caused, since then, intolerable additional pressures to raise interest rates faster and to raise taxation still further. We would not have had strong and sustainable recovery now if we had failed to cut spending and raise taxes last year.

For that reason, the public spending cuts and the tax increases that I announced last year remain, of course, quite essential to the strategy of achieving economic recovery. We have restored confidence in our ability to achieve sustained recovery by the process of taking firm measures. We would damage that confidence again if we now seemed to falter, or even to go back on any of the measures that we have already put in hand.

VAT on Fuel Compensation Package

I am able to improve the package of help that I announced last year to cushion the effects of VAT on fuel on all pensioners and on vulnerable groups--enormous though that package was when I announced it last year. Last year I doubled public spending on the very effective home energy efficiency scheme so that, for the first time, everyone over the age of 60 became eligible for a grant. This has been a huge success. Soon over a million people will have received grants to improve the insulation of their homes, reducing their excessive heating bills and improving their comfort. That is still not enough. Therefore, on top of last year's doubling, which will of course be carried forward each year, I am now adding another £10 million a year to the resources to fund grants. Soon British homes will at last be a match for the British weather in every part of the United Kingdom, especially for the elderly.

Cold weather payments were set at £6 each week only two years ago. I now intend to increase them to £8.50 each week in order to reassure people that they will get help with their bills when spells of freezing weather occur.


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Furthermore, next year, 1995-96, there will be an additional £52 for single pensioners and £73 for couples built into all retirement pensions as compensation for VAT on fuel.

From April 1996 there will be £68 extra on the single pensioner rate and £96 extra for pensioner couples. That is more than the whole of the VAT on fuel bills for a significant number of them. In addition, electricity prices have been falling for many people. Gas prices are to be raised for the first time since 1991, but this will be coupled with discounts for prompt payment which will reduce many peoples' bills.

The House should appreciate that, so far, including the first stage of VAT- -the 8 per cent. already in payment--both gas and electricity bills have fallen by 1 per cent. in real terms over the last two years. That real- terms fall is for everybody, before taking into account the package of help for pensioners so far in payment. The full burden of the tax is, of course, only borne by people of working age who are not receiving means-tested benefits. I have made it quite clear that people of working age cannot expect tax cuts or a reverse of previously announced tax increases this year.

PUBLIC SPENDING

I would like to turn now to the Government's new plans for public spending.

Last year's Budget set a new milestone in the control of public spending. We managed to reduce the control totals that had been set in the previous spending round, by £8 billion over three years, and we reduced general Government expenditure by £15 billion over the same period.

That was a measure of the success of the new system of public expenditure control that we first introduced in 1992. Last year saw the first fruits of the programme of fundamental reviews of all Departments.

The reaction to that new approach was predictable. A welcome from the Government side of the House, criticism and alarmist nonsense from the Labour party and scepticism from the so-called experts who doubted whether those plans could be delivered in practice. In fact, for the current year, 1994-95, the first year after last year's announcement, we expect to do better than the plans that were set and we expect to underspend by more than £1 billion.

At the start of this year's survey, the Cabinet decided that we should also keep within last year's planned totals for 1995-96 and 1996-97 and allow no more than 1 per cent. real growth for 1997-98. The plans I am about to announce deliver that remit. But it has not been easy. Last year's settlement was extremely tight. I am grateful to my right hon. Friend the Chief Secretary for his skilful handling of what has been a difficult spending round.

We have been guided by four basic principles this year. First, we have taken advantage of the welcome fall in inflation since the last Budget. Thanks to lower inflation, the price levels that we will be facing in 1995- 96 will be 2 per cent. lower than we expected when we decided on spending plans last year.


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We have not let that feed through into a higher level of real resources for Government Departments. We have reduced our cash plans for almost all programmes. Lower inflation needs to be matched in the public sector by lower cash spending.

The second principle is that we have built on the increasingly important role played by private finance. All Government Departments are now looking actively at private finance options for their capital expenditure.

Thirdly, we have focused our search for savings on administrative and running costs, cutting the back office and protecting the front-line delivery of our key public services. Our aim has been to provide a better output of public services, for fewer inputs. Fourthly, we have taken a close look at the Government's own spending priorities. We have looked for savings on some programmes so that resources can be channelled into the services and policies to which the Government attach most importance.

Private Finance

The right hon. Member for Kingston upon Hull, East (Mr. Prescott) reacted to my mention of private finance. Privatisation and private finance for capital investment are rapidly becoming the chosen method for raising the quality of public services in the majority of countries in every continent in the world. They started in this country. Although the political debate here has been transformed since I first became a Minister, an irritating amount of post-socialist resistance still persists. The right hon. Member for Kingston upon Hull, East will welcome the news that, fortunately, the Government's private finance initiative remains alive and well and is growing rapidly.

Last year, I announced that a number of transport schemes would go ahead under the private finance initiative. Significant progress has been made-- £370 million of private capital has been invested in transport projects in the past two years, with a further £760 million already committed. In addition, £3.5 billion of projects are currently out to competition and the value of contracts placed will steadily build up from a stream to a significant flow. The right hon. Gentleman does not look so cheerful.

The private finance initiative, however, runs wider than transport. There are now more than 50 health projects either approved or completed, bringing more than £100 million of new capital into the national health service. Bids have been received for the first two privately financed prisons and more than £1 billion of information technology projects are now following or considering the private finance route.

In higher education, universities now receive approaching a third of their revenue from the private sector and my right hon. Friend the Secretary of State for the Environment announced on 31 October new proposals to make it easier for local authorities to form joint ventures with the private sector.

New projects are constantly emerging as the initiative breaks new ground. Today, I can announce that we are on course to let contracts in 1995 under the private


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finance initiative, leading to around £5 billion of capital investment. We said that we could do it, we introduced it and we are doing it.

Transport

The growing importance of private finance has helped us to find significant savings for the taxpayer in the transport programme. In recent years, there has been a huge increase in public expenditure on the trunk roads and motorway programme which has risen by one half in real terms in the past 10 years. That was essential to tackle traffic bottlenecks and to reduce costs on British industry seeking to get goods to markets at home and abroad.

Now that the main need of the economy is control of public spending and borrowing, we cannot carry on pumping in the same amount of taxpayers' money. We have, therefore, significantly reduced planned public spending on trunk roads and motorways. Even so, public spending on such roads--without taking account of the expected contribution from the private finance initiative--will be considerably higher in real terms than the average level of provision in the 1980s. Rapid progress with private finance of design, build, finance and operate roads will take provision still higher and the first four DBFO schemes will shortly go out to tender.

Private finance will also now play an increasingly major role in London Underground investment. In particular, I am pleased to report that the private finance competition for the provision of a new Northern line train service has proceeded rapidly. My right honourable Friend the Secretary of State for Transport will be able to announce a decision very soon.

That, together with future deals, should improve the quality of London Underground investment as well as its quantity. In addition to the contribution from private finance, the plans in the Budget imply total investment in the underground network next financial year of around £1 billion. The Budget also takes account of the key effects expected to arise from rail privatisation, not least the privatisation of Railtrack within the lifetime of this Parliament, as announced by my right hon Friend the Secretary of State for Transport last week.

As has been the case with other privatisations, rail privatisation will bring benefits to passengers from more efficient management bearing down on costs and being more responsive to passenger needs.

Running Costs

Private finance will play an increasingly important role in financing better infrastructure for public services in coming years. I now turn to the need for firm control of the Government's current, as opposed to their capital, spending.

One of our key objectives this year has been to intensify the search for savings on administrative and running costs. My right hon Friend the Chief Secretary joined the Treasury team from the Ministry of Defence, where he played last year a lead role in preparing the defence costs study. That experience served him well.


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The success of the defence costs study is just one example--a very successful one--of how key programme objectives can be protected by bearing down on the administrative costs of delivering them. The outcome has been a substantial benefit for the taxpayer and for the front line.

The defence plans in the Budget fully cover the costs of the important equipment orders that the Secretary of State for Defence announced in his statement to the House in July. Indeed, taking account of the changes in inflation since last year, these plans actually allow a slightly higher real terms level of spending than implied by the plans last Budget, accommodating the costs of military redundancies associated with the defence costs study.

Improvements in the efficiency of delivering services is a policy that must apply throughout the public sector. The plans in this Budget reflect the results of a rigorous scrutiny of the Government's own administrative costs. It must be right for modern government to modernise their own management structures and to get their own overhead costs down.

As last year, we have maintained the policy that the pressure from pay and price increases should be met by greater efficiency or other economies. This has already allowed public services to achieve very reasonable pay settlements that reflect low levels of inflation and allow modest increases in real earnings. It is ridiculous to describe this long overdue and sensible practice as a pay freeze.

But, in total, the plans in this Budget are for central Government running costs not to rise in cash terms over the four-year period from 1993-94 to 1997-98 taken as a whole. That represents a real-terms reduction in those running costs of more than 10 per cent. in the cost of government. It is consistent with the civil service White Paper expectation that total civil service staff numbers will fall significantly below 500,000 over the next four years to their lowest levels since the war.

Local Authorities

It is only right that local government should follow central Government and take a similarly tough approach to containing its costs. The Government's proposals for local authorities have been set on that basis. The 1995-96 total standard spending in England will be 2.2 per cent. higher than this year, including provision for community care. That is perfectly reasonable after a year in which provision was far better than local authorities had expected or planned for because of the Government's success in reducing inflation.

As in central Government, local authorities will need to pursue opportunities for savings rigorously. Local authorities have substantial scope for improvements in efficiency, and for other economies. By that means, and by concentrating on their priority areas, they will be able to protect key services. The Government will use their powers to cap excessive local authority budgets should that prove necessary.

My right hon Friend the Secretary of State for the Environment will announce the details of the local authority government settlement on Thursday.

Housing

We have managed to find savings in housing capital expenditure, in particular that of the Housing


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Corporation. The Government will comfortably exceed their election manifesto commitment on the provision of new social housing up to 1994-95. The new plans will still allow a substantial social housing programme to continue, assisted by the corporation's success in levering in private finance.

Employment

Against the background of steadily falling unemployment, it has also been possible to make economies in the employment programme while still improving the quality of the programmes that are provided. A major reform of training for unemployed adults, based on payment by results, will seek to ensure that more trainees get jobs when they finish their courses.

Social Security

As a result of the announcements in last year's Budget, we are already down the track of a thoroughgoing reform of the social security benefits system. We intend to ensure that it is better targeted on today's real needs and we intend to make it simpler and less susceptible to abuse.

Legislation to reform statutory sick pay and to introduce a new incapacity benefit was enacted in the previous Session. This Session will see the passage of the Jobseeker's Allowance Bill and a major Pensions Bill to modernise the framework for both state and occupational provision.

Tomorrow, my right hon. Friend the Secretary of State for Social Security will announce the details of the next phase of this programme of reform. I wish to mention now three of the initiatives that he will announce, from which I expect substantial public spending savings to flow.

First, there is housing benefit. My right hon. Friend will announce tomorrow a reform of the arrangements through which the general taxpayer subsidises local authorities' payment of housing benefit to the tenants of private landlords. The effect of this will be that authorities will not be fully reimbursed if they pay housing benefit on rents that are significantly above the average for the area and the type of property. Local authorities will, therefore, scale back the benefit they actually pay in line with the new restriction on central Government subsidy. They will, however, retain discretion and have some funding to pay the full rent in individual circumstances which they consider justify it.

The previous arrangements meant that neither the landlord nor the tenant usually had any incentive to negotiate a lower rent because housing benefit would usually pay the rent in full-- [Interruption.] This has had the inevitable effect, as seems to be acknowledged, of driving up rents and public expenditure-- [Interruption.] I see that that is a welcome reform. At the moment, the social security budget sometimes pays the rent in full in cases where the rent is far above the average rent for property of that type in the neighbourhood. In future, people on housing benefit will have an incentive to make the same judgments about what they can afford as people who have to pay all their own rent. The system will no longer be a prey to the unscrupulous landlord. The reform will take effect from October 1995. Existing claimants remaining in the same property where they live now will not be affected.


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My right hon. Friend the Secretary of State for Social Security will be glad to hear the encouraging response from Opposition Members-- [Interruption.]

Let me see how far I can take the Labour party down the process of social security reform. Secondly, my right hon. Friend the Secretary of State for Social Security will announce tomorrow further measures to limit support for mortgage interest through the income support system to constrain the cost to the taxpayer and to minimise the distortion to work incentives.

Most people are readily able to insure their mortgage interest payments, if they wish, against periods of sickness or unemployment and many people already do so. For new mortgages taken out by people of working age after October 1995, support will not normally be available for the first nine months, although my right hon. Friend will consult on the precise arrangements, including different treatment for circumstances in which insurance might not be available. There will also be some scaling back of support for existing borrowers.

One reason why insurance has not become more widespread is that the taxpayer has picked up the interest bill too readily in too many cases. This change will give more borrowers an incentive to ensure that the mortgage costs of people who are temporarily unable to keep up with their payments will be met by the borrowers themselves and by lenders, rather than by the taxpayer.

Thirdly, my right hon. Friend the Secretary of State for Social Security will also announce a major intensification of the war against fraud in the social security system. We are already saving £700 million a year from existing efforts. The further measures on fraud, which include a major project to pay benefits in post offices by electronic means rather than by paper transactions, will, at a cost of £300 million, save another £2 billion over the next three years.

The Government know that firm control of public spending and reduced public borrowing are essential to sustained recovery, prosperity and jobs. We will also show that strong control of public spending overall can be combined with improvements in key public services selected as Government priorities.

Education

The Department for Education provision will increase in real terms by almost 1 per cent. next year. The Government are intent on extending their significant achievements in education, and we have also managed to find savings in parts of the education programme. Almost one in three young people is going to university, compared with one in eight in 1979. That is a remarkable achievement. A period of consolidation to secure quality and standards is now required after a period of very rapid expansion. However, the overall package of student grants and loans will once again increase in line with inflation. There will be continued growth in student numbers in further education, again to record levels. The new plans also allow for further growth in the number of grant-maintained schools and for additional capital spending in our schools.

Home Office

The Government continue to attach high priority to spending on law and order. The new plans for the Home Office increase provision for the police by 3 per


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cent. in 1995-96. Major efficiency improvements from the Sheehy proposals will enable more police officers to be released for front-line duties. The reforms to be implemented next year will give chief constables much greater freedom to manage their own increased resources and to respond more effectively to the public's priorities.

Single Regeneration Budget

As a former Minister with responsibilities for the inner cities, I am pleased to say that within the single regeneration budget we have found extra resources to support new projects in our rundown urban areas and elsewhere. My right hon. Friend the Secretary of State for the Environment will be providing for more projects under the current bidding round and he will be able to conduct a second round of bidding with funds starting in 1996-97. In all, there will be more than £800 million for new regeneration projects over the next three years.

Health

That brings me--finally, on public spending--to the Government's plans for the health service. With inflation so much lower than expected this year than last, it would have been perfectly possible for us to reduce our previous plans for health and still to meet our manifesto commitment to real growth in resources for the national health service each year. Due to the high priority that we give to the national health service, we have decided not to claw back the unexpected provision in this way. Instead, the health service will keep the unplanned bonus that it has had this year from lower inflation. I shall spell out what that means. Next year, spending on the national health service will grow by £1.3 billion. That is 1 per cent. growth in real terms against the per cent. increase that we originally allowed for in last year's Budget. It will come on top of a real increase of 3 per cent. this year because of the drop of inflation.

So, in addition to the extra money from the taxpayer, the health service continues to benefit from the improvements in performance flowing from the Government's reforms. Further improvements in efficiency are expected to release at least £600 million extra for patient care next year. All those savings, including gains from rationalising management and administration costs throughout the Department and throughout the national health service, are ploughed back into patient care. Those extra funds, on top of the extra provision that I have announced, which are achieved from savings coming from a variety of measures, have only one thing in common. All those savings--therefore all the extra funds--have so far been opposed by the Labour party.

All this--the extra provision and the savings--means that next year we shall all benefit from an even better financed health service, which has seen real increases in spending on it by the taxpayers in every year since the Government took power. It will be delivering even better standards of patient care, with further improvements in patients charter standards, and more progress in reducing waiting times.


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HELPING PEOPLE BACK TO WORK

At the beginning of this speech I said that the combination of healthy growth and low inflation we are now seeing is virtually unprecedented in Britain's recent past. Few doubt the strength of the recovery. But everyone in touch with the real world knows that the benefits of recovery have yet to feed through to many people in this country. Unemployment remains far too high.

Thanks to the labour market and trade union reforms of the 1980s, unemployment did start falling at a much earlier stage of this recovery than it had in recent previous recoveries and, unlike other European countries, we have resisted pressures to add social costs on top of wage costs for our employers.

Unemployment will, of course, fall further as the economy recovers. But I have long believed, as my panel of independent forecasters points out and as is now widely recognised, that demand expansion on its own is not enough to produce a sufficient fall in unemployment. We have to do more to reduce unemployment in ways which are consistent with sustained growth and low inflation.

I have been making speeches on this and giving lectures ever since I became Chancellor on the need to ensure that we do not have recovery without jobs. As well as giving speeches, I have already done something about it. In my last Budget, I did three things. I announced measures to make it harder for people who are quite capable of working to stay on benefit without looking for a job. That is at the heart of the job seeker's allowance. I made it easier for people with children to take jobs, by introducing a child care allowance into family credit. I made it cheaper for employers to give people work, by cutting the lower rates of employers' national insurance contributions by a full percentage point.

In this Budget I want to do more on all three fronts. We must get people back into work and out of dependency on benefit. We must reduce--not increase--the cost to employers of employing people who have been out of work. I aim to ensure that we do not have a class of people in this country who are excluded from economic activity.

Incentives for employers

The first step is to encourage employers to look more favourably on people who have been out of work for some time.I can announce, therefore, a wholly new incentive to encourage employers to take on more people who have been unemployed for two years or more. In future, employers will get a full national insurance rebate for up to a year after taking on such a person. That will provide employers with an important new reason to give a second chance to someone who has been unemployed for some length of time-- [Interruption.] Yes, but the Opposition were very late on the scene on which we have been working for a long time and they have got most of it wrong. I am going to announce a package which will show the Opposition how to do it. This first whole-year national insurance contribution holiday will run from April 1996. More immediately, my right hon. Friend the Secretary of State for Employment intends to develop new pilots under the


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Workstart scheme. This offers employers a grant to recruit people who have been unemployed for over two years. There will be around 5, 000 new job opportunities. Experience with existing pilots that we have been running suggests that the scheme helps to break down the prejudice which can blight the long-term unemployed.

I know that some employers will still worry that people who have been unemployed for a long time may have lost the habit of working. We introduced the work trials scheme to counter that. It allows unemployed people to try out a new job for three weeks, without losing their benefit. They will keep their benefit entitlement. It costs employers nothing for those three weeks and it lets employers see for themselves whether the people they take on can be relied on to hold down a steady job. The record so far is impressive. A large number of people are kept on at the end of the trial period. So I propose to expand the scheme to provide 150,000 job opportunities over the next three years.

In addition, I propose a further cut in the lower rates of employers' national insurance contributions for every employee. From next April, they will come down by another 0.6 per cent. This will reduce the cost to employers of providing lower-paid jobs by another £230 million in 1995 -96, on top of the reduction of £940 million carried through from 1994 -95. It must make sense to keep on cutting the burden on employers who create jobs and in particular on those employers who provide jobs for less skilled people. The Labour party keeps wanting to go in the opposite direction by increasing the costs on employers with a minimum wage and a social chapter.

Incentives to look for work

I need to match these incentives to employers with measures to ensure that people get the rewards to which they are entitled when they move from unemployment into work.

First, we need to ensure that people are kept in touch with the labour market and do not stay on benefit unnecessarily. The job seeker's allowance will reinforce the link between claiming benefit and looking for work. It will be supported by an unprecedented range of measures to help the unemployed.

One of our existing measures, Community Action, was due to finish next year. My right honourable Friend the Secretary of State for Employment has decided to extend the scheme in revised form. It will provide work experience and a route back to jobs for around 40,000 long-term unemployed people each year.

We introduced Restart when I was Minister of Employment in 1986. That required people who had been on benefit for a long time to come in for an interview and advice to help to get back into work. It gave positive help to many people and got many back into work. It also revealed that some could not be bothered to come for the interview. They lost benefit.

For young unemployed people, we have been experimenting with similar schemes called Workwise and 1-2-1. We propose to extend them nationwide.

Helping employees with the transition to work

But it has to be worth people's while to take jobs. I also intend to introduce new measures to ensure that


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people are not deterred by genuine, short- term financial problems when they try to move from unemployment into work.

Anyone moving from benefit into a low-paid job is likely to be better off, but it may not seem like it to the man or woman concerned. The first thing that happens when a person takes a new job is that income support disappears, and with it all help with the cost of housing and their council tax. In due course, the person in the new job may be entitled to family credit and housing benefit. But at the moment it can be hard to find out how much that will be, or when it will come.

In the meantime, the person concerned has all the expenses of getting to work -- buying clothes or tools, travelling to work, and so on. Time and time again, I have had people tell me that this is a major deterrent to taking a job and that they really cannot afford to take a job because of these gaps in the system. I have a number of measures to help.

I propose to speed up the payment of family credit, so that anyone who takes a job can be sure of getting the benefit to which they are entitled, and getting it quickly.

I propose to enable people who take a job to go on getting the same help with their rent and council tax as they had on income support, for their first four weeks in the new job. I propose to speed up the payment thereafter of housing benefit, so they can be quite sure where they stand at the end of the four weeks.

I propose to exempt from tax the back-to-work bonus which my right honourable Friend the Secretary of State for Social Security announced in October. That will give people who have been unemployed, but have managed to do a bit of part-time work while receiving their benefit, a lump sum when they leave benefit and take a job. I also propose to expand the number of grants available to people who take jobs, to cover their start-up costs. These are known as jobfinder's grants. I propose to make available around 25,000 grants of an average of £200 for those who have been unemployed for more than two years.


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