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Pre-Budget Statement
3.30 pm
The Chancellor of the Exchequer (Mr. Gordon Brown): The purpose of this, the first annual pre-Budget statement, is to report the Government's assessment of the economy, to outline our Budget aims and to encourage an informed debate of the detailed choices before us. To achieve our national economic objectives, high growth and high levels of employment, the next Budget must address three challenges.
The first challenge is to increase our productivity. Britain today is some 20 per cent. less productive than our main competitors and has been for years. The second challenge is that of employment. Some 3.5 million working-age households--almost 20 per cent.--include no one earning a wage. The third is the challenge of stability. For 40 years, our economy has had an unenviable history under Governments of both parties of boom and bust. Stop-go has meant higher interest rates, less investment, fewer successful companies, and lost jobs. It has been the inevitable result of a failure to take a long-term view.
So the real choice facing Britain in the coming Budget and beyond is between muddling through as we have done for decades from one stop-go cycle to another, or breaking with our past, burying short-termism and securing long-term strength through stability, sustained increases in productivity and employment opportunity for all. This is not a challenge for Government alone. It is a challenge that must also engage both the understanding and the commitment, indeed the energies, of all of us--Government, investors, managers, work forces--together.
So at the heart of this pre-Budget report is the recognition that only by greater openness and informed debate can Britain achieve that shared understanding of the tasks ahead and that shared sense of national economic purpose that has eluded us for too long.
First is stability. The major industrialised countries are expected to grow by 2¾ per cent. this year and 2½ per cent. next year, despite the recent turbulence that we have seen in Asian economies and financial markets. It is imperative that Governments and central banks around the world remain vigilant, but at all times it is the task of Government to ensure a long-term stable framework--exactly the approach that the Government are pursuing.
When we came to power, the economy was already facing yet again the very pressures that have produced the boom-bust instability of the past. Consumer demand was accelerating. It was growing three times as fast as industrial production, as more than £30 billion was released in building society windfall payments. Inflation was predicted to go far beyond its 2½ per cent. target, and was expected to rise towards 4 per cent. next year.
All that was happening because the necessary decisions on monetary and fiscal policy had not been taken. It is because the Labour Government have learnt the lessons from past instability, when interest rates rose into double figures to 15 per cent. in the last economic cycle that, starting in May, we put in place a new monetary and fiscal framework.
Following our reforms at the Bank of England, long-term interest rates have come down, and no one doubts the Bank of England's determination to achieve
the Government's inflation target. With our five-year deficit reduction plan, public borrowing, which was £23 billion last year, is now forecast--excluding the windfall tax revenue--to be £12 billion this year and £6 billion next year.
We said in our manifesto that we would work within existing spending limits, and this we are also achieving as we promised. The deficit has fallen from 4½ per cent. of national income just two years ago to just 1½ per cent. this year, and it will be ¾ per cent. next year, well within the Maastricht criteria.
There is a risk that the structural deficit, which takes account of the economic cycle, may turn out to be larger, so we shall be both cautious and prudent. I can tell the House that we will not make the mistakes of 1988, when it was wrongly assumed that the structural deficit had disappeared, and the penalty was the return to boom and bust.
Although I recognise the concern of exporters about the exchange rate, I understand that what companies fear most of all is a return to that boom-bust instability of the past. So this summer and autumn, hard decisions have had to be taken on both interest rates and deficit reduction, and I am now more optimistic that we are on course to put the economy on track for stable and sustainable growth.
It is to reinforce our commitment to the long term that we shall publish proposals for a code of fiscal stability. We shall legislate so that there is a duty on Government to report to Parliament on how they are meeting their fiscal rules; in that way, everyone can plan for the future on a much clearer and better informed basis.
Let me explain why meeting our fiscal rules matters so much--why they are essential preconditions for long-term social and economic progress. It is because the borrowing levels that we inherited are costing the country £25 billion a year in interest payments alone, which is more than our country's total budget for schools, that we had to act. Our aim is to reduce the huge sums spent simply servicing debts, so that more of our money can be spent on meeting the people's priorities.
The prize for this country, valued especially by a Government who are committed to good public services, is sustainable public finances that allow consistent and long-term investment in our priorities.
By reallocating resources, we shall be investing an additional £2.3 billion in education over and above that planned by the previous Government; and this year we shall be investing an extra £300 million in patient care in the national health service and next year an extra £1.2 billion over and above what the previous Government planned. I can tell the House that, as our comprehensive spending review reallocates resources towards higher-priority areas, there will be real year-on-year increases in spending on front-line patient care.
The key to strong public services is long-term prosperity through higher productivity. Government, industry and people must work together to systematically remove all barriers to high productivity--in product markets by encouraging competition and innovation, in capital markets by measures to enhance investment and growth, not least for innovative small businesses, and in the workplace by encouraging the creativity and flexibility of inventors, of managers and of the work force.
After our successful Budget initiative in July to encourage one of the most neglected of our creative industries--film--it is time to do more to encourage other creative industries where, from science, computer software and communications to design, fashion and music, our British genius for creativity has made Britain a world leader. This year, entrepreneurs in small and medium-sized companies can draw on £200 million, as we have doubled capital allowances to invest in new technology. From next year, the National Endowment for Science, Technology and the Arts will make grants available to encourage creative talents and industries.
I can also say today that, in advance of the Budget, the President of the Board of Trade and I are examining how to improve productivity, how we can help leading- edge businesses to gain funds to develop new technologies, how we can improve Britain's poor historical record of investment in research and development, and how we can make it easier for small businesses to draw on venture capital to create jobs in a more entrepreneurial culture. It is to encourage and reward long-term investment that we are completing a review of capital gains tax, the conclusions of which will be announced in the Budget.
Our poor record of investment in Britain also reflects a low level of national savings. Half the national population have hardly any savings. To encourage more people to save, we will be introducing from April 1999 new, individual savings accounts, the details of which will be put out to consultation next Tuesday in advance of the Budget.
However, there is one decision on investment that should not be delayed. In July we implemented the first stage of corporate tax reform. We cut the main rate of corporation tax by 2 per cent. to 31 per cent.--its lowest level ever. Following the abolition of payable tax credits we began to consult, as promised, on the second stage. Advance corporation tax, it has become abundantly clear, is now a hindrance to sensible business planning and investment decisions. Britain needs a reformed system that matches the needs of modern companies and favours the long term.
To allow companies to plan ahead I can confirm today that, in April 1999, advance corporation tax will be abolished. At that point we shall begin the move to paying corporation tax by quarterly instalments. Small companies will be exempt from this change; special arrangements will be made for medium-sized companies; we shall phase in the change over four years; and we shall substantially preserve companies' expectations for using their existing surplus ACT.
This afternoon the Inland Revenue is publishing full details of the proposed changes and we shall now start consultation on their implementation. In order to help ease the transitional costs and to take one stage further our pro-business and pro-investment agenda, in the Budget the main rate of corporation tax will be cut again by 1 per cent. to 30 per cent. from April 1999--that will be the lowest tax rate of any major industrialised country.
The July Budget started from the understanding that the greatest waste of our economic potential and the most serious cause of poverty is unemployment. It denies opportunity to 3.5 million working-age households where
nobody works. In July, we said that, instead of simply compensating people for unemployment, our priority is to tackle the root causes of unemployment and poverty by providing new opportunities for work.
In the past few months, with the help of Martin Taylor, the Government have been systematically addressing all the obstacles that prevent people taking up and benefiting from work: the absence of workplace skills, the failure of the tax and benefit system to make work worth while, the poverty and unemployment traps that for too many people mean that work does not pay, the lack of employment opportunities and the scarcity of affordable child care.
We have concluded that, to help people move from benefits to wages, nothing less than a comprehensive tax and benefit reform and the modernisation of the welfare state are now required. This strategy involves three basic elements: providing skills for work, making work pay and creating new job opportunities.
First, in order to offer skill for work, my right hon. Friend the Secretary of State for Education and Employment will shortly publish his proposals for individual learning accounts and for the university for industry.
Secondly, I want everyone who can work to be better off in work than on benefit, so the Government now propose an integrated tax and benefits plan involving action at every level. In order to maximise the rewards from work, a 10p starting rate of tax and a reform of benefit tapers will be introduced when it is prudent to do so. To ensure that work pays for families with children, we propose a working families tax credit, backed up by affordable child care. To ensure that the rewards of these reforms flow directly to the employee, we are committed to a statutory national minimum wage.
We shall now consider in detail the working families tax credit--cash paid through the wage packet directly to families on low incomes, side by side with the national minimum wage. The proposal would build on the successful elements of family credit, and would involve better help through the tax system for child care costs.
We will now also consider the future structure of national insurance for the low-paid. Under the current system, some low-paid employees face marginal tax rates of more than 100 per cent. To improve the rewards from work, to simplify administrative burdens on employers, as we want to do, and to encourage them to take on more people, it is now right to consider the scope for bringing the national insurance structure for the low-paid more closely into line with income tax.
Finally, there are men and women who have been excluded for too long, and who need extra help to get back into work. In the Budget, we made our start by announcing a new deal worth £4 billion that provides jobs for young unemployed, the long-term unemployed, lone parents and the disabled. The new deal for the young unemployed will start in January in pilot, and extend nationwide in April, with the support of some of our best known companies.
I can announce today that some of Britain's leading rail and bus companies have agreed to play their part, by introducing a new travel pass for young people on our new deal, cutting by at least 50 per cent. their travel fares to work.
Disabled men and women who want to work should also have the right to work. As the first step in implementing the £195 million programme for people with disabilities, my right hon. Friends the Secretaries of State for Education and Employment and for Social Security will now be inviting bids for the first wave of new projects to start in spring 1998.
Helping lone parents into work is the most effective long-term way to tackle their family poverty. The new deal for lone parents began in eight areas in July. Already it is yielding results where it counts--in higher living standards for lone-parent families. From next year, our welfare-to-work programme will be extended to help every lone parent who wants advice and help, and from April every lone parent coming on to benefit will be offered help to find work, if that is what he or she wants.
Lone parents need, and have a right to expect, affordable child care. Since May, my right hon. Friends the Secretaries of State for Education and Employment and for Social Security have been working with the Treasury on plans to make a reality of a national child care strategy. Paramount in this family policy are the interests of the child. Tomorrow, my right hon. Friends will announce a five-year plan to extend out-of-school child care clubs to every community in Britain.
Funds will be available to set up as many as 30,000 new out-of-school clubs, which will provide places for almost 1 million children. The total cost over five years is £300 million, which is now budgeted for in our plans and represents the biggest ever investment in child care. The cost will be shared between the Exchequer and the new opportunities fund.
To staff these new clubs, 50,000 young people across Britain will be offered training as child carers through our welfare-to-work programme. Under our plan, every lone parent who needs it will be able to find an out-of-school club in his or her community. A national child care strategy is no longer the ambition of workless parents; it is now the policy of this country's Government.
While one in five working-age households have no one working, we also, unfortunately, have extensive skill shortages throughout our economy. The proportion of manufacturing firms reporting skill shortages is up 70 per cent. on a year ago.
We will now introduce pilot projects nationwide, under which any employer who takes on and trains a young or long-term unemployed person and keeps that person on can receive up to three quarters of the new deal allocation up front, thus giving immediate help with training costs. In the case of young people, that will be about £1,700, and for the long-term unemployed, £1,500 for their training.
Those skill shortages are a clear sign of the short-term pressures in the economy that must be tackled. At around this point in every recent recovery, when inflation and interest rates have started to rise, a second wave of wage inflation has brought a recurrence of stop-go instability. Past Governments have allowed themselves to be diverted from their long-term aims because of their inability to deal with these short-term pressures.
This time, we must do everything we can to make sure that the long term takes priority. It is because the previous Government held a simplistic and over-rigid view of the relationship between levels of inflation and levels of unemployment that they told us that high unemployment was a price worth paying.
However, there are three reasons to believe that, provided reform and responsibility go hand in hand, it is possible to lay the foundations to deliver both low inflation and high employment in the long term. First, the more our welfare-to-work reforms allow the long-term unemployed to re-enter the active labour market, the more it will be possible to reduce unemployment without increasing inflationary pressures.
Secondly, tax and benefit reforms that remove the barriers to work and structural reforms that promote the skills for work--in other words, Government intervention to create a more responsive labour market--can make possible long-term increases in employment without fuelling inflationary pressures. The more people return to the world of work and the more we tackle skills shortages, the less pressure there is on employers to bid up wages in the short term.
Thirdly, the reality of the more complex and flexible labour markets of Britain today is that pay decisions are made not by the few in smoke-filled rooms, but by millions of employers and employees across the country. The more we all take a long-term view of what the economy can afford, the more we will be able to have job creation and keep inflation and interest rates as low as possible. So we must all be long-termists now.
The reforms that we are introducing will, of course, take time, but it is in no one's interests if today's pay rise threatens to become tomorrow's mortgage rise. The worst form of short-termism would be to pay ourselves more today at the cost of fewer jobs tomorrow and lower living standards in the very near future. So wage responsibility is a price worth paying to achieve jobs now and prosperity in the long term: it is moderation for a purpose.
The choice is between responsibility and reform that would give us higher growth and more jobs, and short-sighted short-termism that will inevitably mean less growth and fewer jobs. In our forecasts for the coming two years, we demonstrate clearly the choices that we all face. If the economy works in the same way as in the past, growth might be 2¼ per cent. next year. If we can combine our reforms with responsibility across the economy, it is possible to achieve growth of 2¾ per cent. next year. Similarly, growth can be 1½ per cent. or 2 per cent. in 1999-2000. In either case, the Bank of England will ensure that the Government's inflation target is met.
So the more successful we are in tackling skills shortages and ensuring the success of the new deal for the unemployed and the more effective the exercise of responsibility in pay determination, the more we can achieve our goals of sustained growth and employment.
I have today submitted this new evidence to the public sector pay review bodies and met the chairmen to explain the choices before us. Just as the Government are offering leadership with responsibility in monetary policy and the management of public finances so that we can achieve those higher levels of growth and employment, so must business leaders and work forces match that with responsibility throughout the whole economy. That means responsibility not just on the shop floor, but from Britain's boardrooms outwards, where, in the interests of all, there must be moderation, not excess, and where an example should be set.
We recognise that, if we are to achieve our long-term goals and secure that new sense of economic purpose, fairness and openness must be at the heart of the approach
to every Budget. Tax avoidance harms those who pay their fair share of taxes. I give notice today that the Budget will introduce those measures that are needed to root out tax avoidance. A fair and open approach to taxation will also be central to our Budget consultations now under way on North sea oil; on alcohol, where the review will conclude early next year; and on charities, where we are working towards a consultation document next spring.
In securing the long term, nothing is more important than our approach to the environment. On Thursday, the Deputy Prime Minister will publish a consultation paper on ways to help with water pollution, with a view to making proposals in the coming Budget. Together we are also looking at how the tax system can reflect our environmental objectives, and we shall do so in light of decisions taken at Kyoto.
In this pre-Budget statement, we are consulting in all areas where it is right and appropriate to consult, we are taking action in all those areas where action is needed immediately, and we are putting to the country the choices for debate--choices that can be made only by us all.
I promised to make one other announcement today. Following a review by Customs and Excise, which will be published tomorrow, I have decided that VAT on the installation of energy-saving materials under existing grant schemes, such as the home energy efficiency scheme, will be cut from 17½ per cent. to 5 per cent. in the spring Budget of 1998. That means that the funds under the schemes will go further and will help to insulate 40,000 more homes per year. The Government will now explore with our European partners the possibility of a reduced VAT rate for a wider range of energy-saving materials.
Our spending review, like our tax policy, is based on allocating resources according to priorities of investment, employment and fairness, so already, within the Government's tough spending limits, we have redistributed resources to priority sectors: from assisted places to cutting class sizes; £4 billion from the windfall tax paid by the utilities to creating jobs; another £1 billion to repairing our schools; from the defence and nuclear programme to the national health service. After the publication of the national asset register yesterday, there will be new scope to reallocate resources to high-priority capital investment.
I can announce one further reallocation today. I now expect our net payments to the European Union to be some £400 million lower than budgeted. Our pensions review is examining the long-term future of pension provision in Britain, including how we can do more to support Britain's poorest pensioners. We must help the thousands who do not claim benefits, but who need them most.
My right hon. Friend the Secretary of State for Social Security and Minister for Women is announcing today that she will finance several projects to find the best way in which to encourage improved benefits take-up by the poorest pensioners, so that they receive what they need.
We have already cut VAT on fuel and power to 5 per cent., as we promised, but it would be wrong to wait until we have the results of our pensions review to take action to help elderly people with winter fuel bills. Although the poorest do receive some help through cold weather
payments, they go only to those on income support, who generally have to wait until after the cold weather for help to be available. The payments are no help at all to most pensioners, including the 1 million not receiving income support entitlements and those on the margins of poverty, and they are of doubtful help even to those who do qualify, who often do not know whether they can afford to spend extra money on fuel when it is cold.
My right hon. Friend the Secretary of State for Social Security and I are simply not prepared to allow another winter to go by when pensioners are fearful of turning up their heating, even on the coldest winter days, because they do not know whether they will have the help they need for their fuel bills. The pensions review will report next year, but we must act in the meantime to help pensioner households.
For this winter and next, every pensioner household will receive £20 extra to help with their bills and every pensioner household on income support--nearly 2 million households--will receive £50 extra. The cost will be met from reallocating the savings on our contribution to the European budget.
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