| Previous Section | Index | Home Page |
Economic policy
Mr. Deputy Speaker, I want to ask the British people this question: in the years ahead do we seriously want to be prosperous in this country? I think that we do. That is why I am setting out an economic policy aimed at the next five years, not just the next five months. I am setting out an economic policy that will go on delivering our enviable combination of rising prosperity, low inflation and more jobs. That is my purpose in this Budget. This Budget secures a prosperous future for all sections of our people and their families.
The last thing that the British economy needs now is a change of direction. We need at least another five years of this Government's continuous vigilance on inflation. We need more of this Government's determination to get government borrowing down. We need another five years of this Government's commitment to raise the wealth-creating potential of the British economy, by improving incentives, reducing the role of the state and creating a climate for enterprise.
26 Nov 1996 : Column 155
Let me begin by turning to my forecast for growth. I expect the British economy to grow by 2½ per cent. this year and 3½ per cent. next year--and there are few serious commentators who would disagree with me. I hear mutterings from the shadow Chancellor; there are few serious commentators who would disagree with me.
By keeping a close eye on the prospects for inflation up to two years out, and by taking sensible early action if and when necessary, I intend to ensure that healthy growth continues without inflationary pressures emerging. That is what I have always promised--no return to boom and bust.
I expect consumers' expenditure to continue to be the main engine of growth next year. The real value of take-home pay is growing strongly.
The housing market recovery is now firmly established. I hope that negative equity can soon be consigned to the economic history books.
People are feeling the improvement in their family finances. Consumer confidence is at its highest levels for more than eight years.
I expect consumer spending to grow by 3 per cent. in 1996 as a whole. But it has been strengthening through the year. So I expect stronger growth to continue, with consumers' expenditure rising by more than 4 per cent. next year.
But this recovery is not just about a more confident consumer. Businesses are optimistic too. The climate for business is excellent. Strong demand at home and a recovery in our key export markets present British industry and commerce with tremendous opportunities.
Interest rates and tax rates remain low, and profitability is high. The result has been business investment growth of 6 per cent. so far this year. I expect business investment to continue to grow strongly--by almost 10 per cent. next year.
These excellent conditions for business are not lost on overseas companies looking to invest for the future inside the European market. Let us never forget the most valuable practical endorsement that we get for our sound economic policies.
The United Kingdom remains the No. 1 destination for inward investment into the European Union. Keeping our enterprise economy on course at the heart of Europe will keep us in pole position.
Exports have grown by almost 20 per cent. over the past two years--an impressive performance in the face of weak demand in our key European markets. The achievement is down to our strong cost-conscious British exporters. They will benefit further next year as the tentative recovery on the continent becomes more established. I expect export volumes to rise by more than 7 per cent. this year and by 6 per cent. next year.
The current account has been close to balance during the last two and a half years, thanks to strong growth in exports and income from our investments overseas. I expect the current account to remain broadly in balance this year and next.
26 Nov 1996 : Column 156
As I said earlier, I am glad to say that our thriving economy is creating jobs. Employment in the United Kingdom has risen by more than ¾ million real jobs since the recovery began. Unemployment has fallen by almost a million from its peak. It will soon drop through the 2 million mark. But that is still too high. I want it to go on falling and I expect it to go on falling.
I hope that during the debate the shadow Chancellor will say that he forecasts that unemployment will now rise, month after month. That seemed to help our performance in the labour market the last time he said it.
We are on course to get underlying inflation down to our target of 2½ per cent. or less, and to keep it there. In October underlying inflation rose to just over 3 per cent. This should not have surprised anybody who looked at last year's statistics. It is a temporary and inevitable reflection of the exceptional falls in the price level 12 months before.
Let me give the House my concrete reasons for being so confident about low inflation. Apart from oil prices, which have risen sharply, commodity prices are steady and are not putting upward pressure on inflation. Earnings growth remains sensible and modest. Producer price inflation--a good indicator of what is in the pipeline for retail price inflation--is at it lowest levels in this country since the 1960s. Producer input prices are actually lower than they were a year ago.
Any risk to this recovery from inflationary pressures re-emerging remains a good way off. But as I have demonstrated again and again, when I see any risks, I will act. I will continue to stay ahead of the game on monetary policy. Eddie will keep me steady and I intend to continue to be canny.
I expect underlying inflation to meet our target of 2½ per cent. or less. I will ensure that we go on meeting that target for the foreseeable future.
We have made good progress in reducing public sector borrowing, but it has not been as fast as I expected. The Budget therefore targets public sector borrowing again. The general public may ask why I concentrate on public sector borrowing in the way that I do. [Interruption.] It is suggested that I do so because I am a Tory. That is a good reason for concentrating on public sector borrowing as I do.
One reason why I continue to concentrate so heavily on public borrowing in setting policy is that money spent paying the interest on our debt is, in my opinion, money that I would prefer to spend on public services and the reduction of taxation.
We are making good progress on bringing down borrowing, but lower than expected tax revenues mean that it has not fallen as fast as I expected in the last Budget. This is not bad news for everyone. People are no doubt quite glad not to be paying as much tax as I expected. But as I am the Chancellor, I strongly prefer to keep any tax cuts under my own control.
The causes of these shortfalls in our forecasts of tax revenue--primarily on VAT, but also on direct taxes--cannot wholly be explained by any experts inside or
26 Nov 1996 : Column 157
In this Budget I will propose a number of measures to stem tax leakage, to protect the ordinary tax payer and to make sure we get the right tax from the right people. When I reduce tax, I want to do so in a way that is fair for all businesses and fair for all hard-working British men and women.
Government borrowing has been steadily coming down for three years. This Budget will ensure that Government borrowing keeps coming down. I expect the public sector borrowing requirement to be £26½ billion this year. That will mean it has halved as a share of GDP over the past three years. I expect it to come down to £19 billion next year and to be broadly in balance by 1999-2000.
That pattern of declining borrowing is very much better than the one I had to put in my summer economic forecast last July. Since I produced the summer forecast, which was debated in the House last summer, I have reduced my expectations for next year by £4 billion.
A large part of that improvement is the result of the measures that I am taking in this Budget. This Budget tightens fiscal policy. The reason why I am tightening fiscal policy now is to reduce the risk of having to tighten monetary policy excessively as I set policy to hit my inflation target.
My decisions are always taken solely in British interests to benefit the British economy. But my decisions in this Budget also mean that, by happy coincidence, we will meet the Maastricht debt and deficit criteria in 1997, and we will do even better than that in the medium term. [Interruption.] I do not need any assistance from nationalists. It is a happy coincidence for everyone because those criteria make sound economic sense, as we all agree, with or without a single currency.
Our option whether to join or stay out of a single currency, based on British national interest, remains a genuine choice. We will qualify, but we will choose in the next Parliament when the time comes.
This Government is the champion of sound public finances, of limited government and of low taxation. Our combination of low taxation, low public spending and low debt is the best in Europe. We intend to stay in that enviable position. We can do that only if we continue to bear down on public spending.
In the 1980s, across the rest of Europe, the modern state remorselessly took an ever greater share of almost every nation's wealth. We in Britain held the line. The proportion of GDP going into Government spending in the United Kingdom is now 8 per cent. lower than the average in the rest of the European Union. If our spending had risen to continental levels we would now have to raise nearly £2,300 a year more in tax from every British household.
I have set a target of 40 per cent. or below for the share of national income that goes on public spending. Making progress towards that desirable target means tough
26 Nov 1996 : Column 158
Against that background, we had to keep the rest of public spending within the tightest possible limits, in order for us to spend more on the public services that people really care about: education, combating crime and our national health service. This country has been well served by my right hon. Friend the Chief Secretary who has successfully tackled that problem. Despite all the difficulties, we have been able to reduce public spending plans over the next three years by a further £7 billion in this Budget. Public spending next year will be more than £24 billion lower than was projected when I became Chancellor--a reduction of 7 per cent.
| Next Section
| Index | Home Page |