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Spending Review

3.31 pm

The Chancellor of the Exchequer (Mr. Gordon Brown): With permission, Madam Speaker, I should like to make a statement.

The public spending allocations for 2001-04 that I am announcing today are possible because, having eliminated the £28 billion deficit that we inherited and having reduced the national debt, the state of our public finances is strong. In the economic cycles of the past 30 years, the current budget deficits averaged £109 billion. The national debt doubled and by 1997 had risen to 44 per cent. of national income. Stop-go in the economy meant stop-go in the public finances.

Our first task was to create stability and sustainable public finances and, having set clear fiscal rules over the economic cycle, a current budget in balance, borrowing only to invest within prudent and cautious limits. Today, we have not only low inflation and stable growth but year-on-year current budget surpluses and debt falling below 40 per cent. of national income--indeed, debt being repaid this year and next. It is this sustained and sustainable improvement in public finances that makes possible a sustained and sustainable improvement in our public services.

Our second task was to encourage the work ethic and secure rising employment. Today, with the assistance of the new deal, unemployment is at its lowest for 20 years, and almost 28 million people--more people than ever before--are in work in our country. Now, building on that foundation of stability and strengthened economic fundamentals, we can move to the next stage in creating a better future: to make good the damage done by the legacy of decades of underinvestment across our public services, and to realise long-term national goals that we have set for a decade. They are to close the productivity gap with our competitors, to deliver and sustain full employment, to secure higher education for a majority of our young people, to halve and then abolish child poverty and to build strong public services as we create a Britain where there is security and opportunity not just for some people but for everyone.

The first conclusion of this year's spending review is that prudent, targeted, long-term investment is not only a social good but, in a changing and often insecure world, an economic necessity. It is only by investing in education, science and the future of our children that we can equip ourselves for future economic success and ensure opportunity for all. It is only by investing in health, transport, the environment and law and order that we can ensure a more productive economy and security for all.

Just as stability and economic strength make possible new investment, so too new investment will reinforce stability and create longer-term economic strength. So, while we will raise current expenditure only in line with our neutral view of trend growth by 2½ per cent. a year, we propose to tackle the long-term neglect of investment in our country with a step change in capital investment for education, science, health, policing and transport and infrastructure.

As I announced in the Budget, net capital investment will more than double, rising from £7 billion this year to £18 billion by 2004, within a ceiling for public investment of 1.8 per cent. of national income as we renew our public services.

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The second conclusion of our spending review is that it is by tying new resources to reform and to results and by locking in incentives, penalties, inspection and information that we ensure that new investment goes to the front-line services: in secondary as well as primary schools, new targets for literacy, numeracy and IT; in hospitals, new systems of inspection; in law and order, reforms of criminal justice; in defence, the next stage of the strategic defence review; in local government, new public service agreements; and in transport, the new partnership between public and private sector. At every stage, money will be tied to output and to performance.

Let me give the full details of the financial background. In the Budget, I confirmed that the current surpluses from 2000 would be £14 billion, £16 billion, £13 billion, £8 billion and £8 billion in the succeeding years. I also confirmed that net borrowing would be minus £6.5 billion, minus £5 billion, plus £3 billion, plus £11 billion and plus £13 billion--lower borrowing in every year than in any year of the previous Parliament. I said that, as a share of national income, debt will be 35, 34, 33, 33 and 33 per cent. Thus, even with our programme of public investment, we meet both our fiscal rules, and we do so even on the most cautious case and even on the most cautious view of trend growth at 2.25 per cent.

In accordance with the code of fiscal stability, I will publish the second set of fiscal forecasts of the year in the autumn, but I can already report to the House that, since the Budget, the fiscal position has further strengthened. For the year ending March 2000, the current surplus is healthier than originally forecast at the time of the Budget. [Interruption.] The Opposition are not used to these announcements. The current surplus is not £17.1 billion, but £20.4 billion. Debt as a share of GDP has been reduced from 37.1 to 36.8 per cent.

Indeed, I will use a further underspend of £2.5 billion in annually managed expenditure to repay more debt. Two billion pounds in departmental expenditure can be carried forward. However, on grounds of prudence, I have decided to allow a carry forward of only £1.5 billion and to allow spending of only half of that this year and half next year, and to allocate the remaining sum to repay more debt.

It is only because we have put the public finances on a sustainable footing that I can raise spending today. That same discipline allows me to inform the House that, this year, we have repaid £6.2 billion more debt than the £11.9 billion originally planned--in total, a debit repayment this year of £18.1 billion. That is the largest repayment of debt in any year since the war.

We have not, and will not, relax that discipline. So I have three policy announcements to underspin--[Laughter]--underpin the strength of our public finances. Further limited sales of spectrum will take place by the end of 2001. We will not repeat the mistakes of the North sea oil windfall. We will not repeat the mistakes of the privatisation sales, where receipts were immediately used up in current spending. I can confirm that all the capital proceeds will, as with the £22 billion from the first sale of spectrum, go to further reducing the burden of debt.

As debt is reduced, so too are debt interest payments. The first spectrum sale alone will save the bill for debt interest by a further £1 billion a year by 2003-04. As I will confirm later this afternoon, that money will go, year after year, directly to improve our public services.

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Secondly, Departments and authorities will make asset and property sales of £4 billion a year over the next three years. That makes £4 billion a year released by realising unproductive assets that we do not need to fund service improvements that we do need. Because money is tied to modernisation, the new public service agreements signed with Departments, and now signed for the first time with local government, will specify not only agreed outcomes, but precise timetables for making necessary reforms.

I can tell the House that as a result of the fall in the share of administration costs in total government spending, new money makes possible a substantial shift in spending to front-line services to recruit more nurses, doctors, teachers, classroom assistants and police--more staff for our front-line services. With the success of the new deal, the bills for social and economic failure are £3½ billion lower, enabling us to transfer £3½ billion every year from paying unemployment benefits to funding public services.

With that improvement comes a radical shift in the composition of public spending in our country. Our promise was to reduce the costs of failure--the bills for unemployment and debt interest--in order to reallocate money to key public services. In the two decades from 1979 to 1997, rising debt interest and unemployment and social security accounted for 42 per cent. of all extra public spending. That meant that 42p in every additional pound was not available to the key public services.

In the coming three years, unemployment, social security and debt interest payments will account not for 42 per cent., but for only 17 per cent. of extra public spending--even as we direct more money to child benefit and the minimum income guarantee. That leaves 80 per cent. of new money for health, education, transport, policing and other public services. The extra resources are available to us not at the expense of prudence, but because of our prudence.

Within our fiscal rules and within the envelope that I set in the Budget, and have strictly adhered to, I can announce that spending on public services--what is called the departmental expenditure limit--is able to rise from £195 billion this year and from our previously planned £203 billion next year to £212.1 billion, then £229 billion, then £246 billion in 2003-04. By 2004, an extra £43 billion a year will be allocated to front-line services in our country. Sustained improvements in public services are now made possible because, with stability and strengthened economic fundamentals, lower debt interest and lower unemployment, we have sustained improvements in our public finances.

I turn now to the departmental allocations. In recent years, in addition to their conventional responsibilities, Britain's defence forces have taken on a new and valued role in international peacekeeping and in conflict prevention, promoting human rights and peace throughout the world, including in Sierra Leone and Kosovo. To complete the restructuring agreed in the strategic defence review, and to fund new equipment and increase the mobility of our front-line forces, defence spending, which has fallen in real terms every year since the end of the cold war, will now increase in real terms. The allocations are £23.6 billion next year, rising to £25 billion in cash in 2003-04.

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The rise in the Foreign Office budget from £1.2 billion next year to £1.32 billion in 2003-04 will not only finance the proper representation and promotion of Britain abroad. My right hon. Friend the Foreign Secretary will also announce today that the British Council will receive extra funds, and the budget for the BBC World Service will rise substantially from £174 million this year to £180 million next year and £210 million by the end of the period in order to achieve our new target of 153 million World Service listeners by 2002.

Because we take seriously our international responsibilities to the environment, the Government are also announcing today a special £85 million fund to assist with the nuclear clean-up at Chernobyl.

The international community's clearest duty and greatest challenge is to halve world poverty by 2015 and to make primary education universal for every child. Our international aid budget will therefore rise from £2.8 billion this year to £3.1 billion next year, then £3.3 billion and £3.6 billion by 2004--a real-terms rise of 6.2 per cent. a year, in contrast to the falling share of national income devoted to overseas aid from 1979 to 1997, now a rising share of national income today and in the future, as we honour in full our commitment to debt relief, which is our obligation to the poorest countries of the world.

I turn to our second set of decisions--new investment to build stronger communities. The Home Office budget will rise from £8.2 billion this year to £9.6 billion next year, to £10.3 billion the year after and £10.6 billion in 2003-04, an annual rise in real terms averaging 6.4 per cent. a year. And tomorrow the Home Secretary will set out both his targets and how this allocation will be spent.

To implement fully the Good Friday agreement, an extra £316 million over three years will help fund the modernisation of policing and criminal justice in Northern Ireland, and in this way help underpin peace and future prosperity.

Every community in the land is weakened by the evil of drugs. In return for challenging new targets to cut drug- related reoffending by 50 per cent. over the decade and to treat twice as many addicts through the new National Treatment Agency, the new anti-drugs budget will be set at £870 million in 2002 and rise to £931 million and £996 million by 2004, an average annual real growth rate of 10 per cent.

Strengthening our local communities involves a new partnership with local government based on increased investment and new targets. The three-year settlement for local government--an annual real-terms rise of 3 per cent. over and above inflation--will be set out in full by the Minister for Local Government and the Regions, and Ministers in Scotland, Wales and Northern Ireland will make related announcements.

Local and national Government need to work ever more closely in a new partnership for reform and for improvement, particularly in our poorest areas. For decades, our whole country has been scarred by deep and persistent deprivation and underachievement in high- unemployment communities. While much previous spending has been directed to dealing with the consequences of economic and social failure, it is time now to invest in tackling the causes--poor school results, poorer standards of public health and low levels of economic activity.

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Today, our poorest council estates suffer unemployment four times and burglary rates three times the national average, and mortality rates are 30 per cent. higher. These unjustifiable and divisive inequalities cannot any longer be tolerated. Both Government and communities must raise their sights, with a new target to raise up the poorest areas and thereby narrow the gap between these areas and the rest of the country.

So we will not only extend the new deal for communities but strengthen the institutions--from our schools to our health centres--on which these communities depend. In return for local service agreements that require new minimum standards in school attainment, public health, law and order and job creation, a new neighbourhood renewal fund will provide, by 2004, new resources worth £400 million.

In this spending round, housing--and our objective of decent affordable housing for all--will receive the priority it deserves and the resources it needs: an additional £1.6 billion of new investment by 2004, a real-terms rise averaging in this round 12 per cent. a year.

Across the social sector, we will ensure that half a million more houses will be modernised or repaired. This is part of a 10-year plan to eliminate all substandard housing; and, as we implement key recommendations of the Rogers report, reclaimed brownfield sites will account for 60 per cent. of new housing, creating thousands of new construction jobs.

Investment in the future must mean also investment in a cleaner environment. To meet our climate change commitments, the Minister for the Environment will announce how new resources will promote emissions trading and energy efficiency in Britain's homes. Further announcements will be made on the use of renewable energy and recycling by local authorities.

In rural communities, the new rural transport fund has extended the rural network, with 2,000 new or improved bus services. The rural transport fund will now be increased from an annual allocation of £60 million to £95 million; and there will be an announcement later of new finance available for maintaining the post office network in both rural and urban areas.

As farming restructures, deals with BSE and meets challenging targets to move from the old farm production subsidies to the new environmental improvement payments, the agricultural budget--including the Intervention Board--will increase from £1 billion this year to £1.35 billion by 2004, an average annual real-terms increase of 6 per cent. The Food Standards Agency will see its budget for its important work rise from £87 million this year to £111 million by 2004.

Extending access, particularly for our young people, to the arts and to sport will strengthen every community. With a 4.3 per cent. annual real-terms rise in the budget of the Department for Culture, Media and Sport, there will be significant improvement in funding for the arts. My right hon. Friend the Secretary of State for Culture, Media and Sport will give details of new funding to encourage children to use our libraries, museums and arts and to encourage sports, especially in schools and throughout our communities.

Strengthening communities of course involves strengthening our social services and our health service. The NHS plan will be announced next week. There will also be a major package of investment in services for

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elderly people, including the Government's response to the royal commission on long-term care. My right hon. Friend the Secretary of State for Health will announce the detail of this and other allocations from the health and social services budget next week.

I can also confirm that, in the autumn, the Government will publish our proposed plans for a new pensioner credit, with a view to further announcements on a Budget timetable.

The strong civic society that we seek is built not by rights alone, but by rights and responsibilities. So we will match our Budget tax reliefs to encourage the giving of money with new measures today to encourage the giving of time. Extra resources of £60 million pounds by 2003-04 will have the clear aim of encouraging 1 million more of our citizens to be volunteers in community service.

I turn now to the investment that we must make in our economic future. Britain has great strengths. It is the best place in Europe to do business, with world-class companies in science and technology, but to build for the future we must put in place the long-term investment that is the precondition of a strong economy and of bridging the productivity gap with our competitors. We must avoid the short-termism of the past.

Working with business, the role of Government in the modern world is not to subsidise loss makers or to attempt to pick winners. The new role of Government is to invest in science and innovation, to promote competition and small business development, to encourage balanced regional development, to meet the pressing needs of transport and infrastructure and, most of all, to invest in those great drivers of prosperity--education and skills.

I deal first with investment in science. With our investment in a £1 billion public-private partnership with the Wellcome Trust to re-equip university science, and extra resources to support pioneering medical research that will be announced later, we will raise the science budget by 5.4 per cent. a year in real terms.

To ensure that invention in Britain leads to manufacturing in Britain and jobs in Britain, my right hon. Friend the Secretary of State for Trade and Industry will also announce new resources for a university challenge fund that commercialises inventions, and for university- based regional enterprise centres.

Britain's small businesses are the backbone of local economies. To offer the new services that businesses have themselves requested, the budget of the new Small Business Service will rise substantially, from just under £200 million this year to £277 million by 2004. That will include a national internet service offering comprehensive business advice and a consultancy service for start-ups. It will be worth up to £2,000 for start-ups in high- unemployment areas. As a result, the numbers of small businesses that employ people, which have already risen from 1.2 million in 1997 to 1.3 million now--a rise of 10 per cent. under this Government--can expand in every area of the country.

The newest and most decisive challenge in the new century, demanding higher levels of investment, is to master and lead in the new information technologies. To make Britain best for electronic trading and to bridge the growing digital divide, we have agreed a three-year programme of rapidly rising investment in our

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communities and a new fund, which my right hon. Friend the Prime Minister will announce, to ensure that by 2005 Britain will have all Government services offered online.

Investment in innovation, infrastructure and skills is essential in every region if there are to be high levels of productivity in Britain and full employment throughout our country. To secure that balanced regional development, regional development agencies will receive additional resources, and their budgets will be increased by £500 million a year by 2003-04.

There will not only be new funds but new flexibilities, so that local people can promote local priorities and meet local needs they have identified. In the north-west, there is the regional plan to promote innovation and research; in the north-east, increasing entrepreneurship; in Yorkshire and Humberside, funds for small business development; in the east midlands, information and communications technology; in the west midlands, modern manufacturing; and in the south-east and south- west, as in Scotland, Wales and Northern Ireland, the promotion of clusters of growth. In every region there is new support for skills, for employment and for schools and colleges to promote enterprise open to all.

The overall settlement for Scotland provides for an increase of £3.4 billion a year by 2003-04, which is an annual real-terms rise of 4.4 per cent. A separate announcement will be made by the Scottish Executive.

For objective 1 areas in the United Kingdom--in Wales, Cornwall, Merseyside and South Yorkshire--and for objective 2 and 3 areas, I am today announcing a new approach that will raise their levels of investment. Within our departmental allocations that we are making today, the Government will ensure funding for the European share of objective 1, 2 and 3 projects. For European Union structural funds, that is estimated to total £4.2 billion over three years, including an estimated total of £600 million for new objective 1 programmes in English regions.

The settlement also increases funding for Wales by a total of 5.4 per cent. a year in real terms, and allows for match funding. It includes a special allocation to ensure funding of the European share of Wales's objective 1 needs--an allocation to Wales of £80 million, £90 million and £102 million over the next three years. I am also transferring management of the European social fund allocations of £149 million for Wales over the next three years to the Welsh Assembly.

It is because of the importance to all regions of modern transport and infrastructure that we will now make a step change in investment in public transport. In the Budget, we removed the automatic fuel escalator, and extra money was allocated to roads and public transport this year. Now we are able to raise spending on roads and public transport by significant extra sums to meet the needs of business and the public, from £4.9 billion this year to £6 billion next year, then to £7.4 billion and £9.1 billion in 2003-04, which is a real-terms rise of 20 per cent. a year to 2004. Details of the targets to improve bus and rail services and to cut road congestion, and of the allocation of funds, will be set out in the 10-year plan to be published by the Deputy Prime Minister on Thursday this week.

The modern economy can succeed only when it uses all the talent of all its people. Any potential squandered is a resource denied to this country's future. In this

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review, we allocate new funds to advance our goal of full employment. For 70,000 employers, nearly 500,000 young people and for Britain, which has seen long-term youth unemployment fall by 70 per cent., the new deal has been succeeding and is a central building block for our policy of full employment. Long-term youth unemployment, which rose to 500,000 in the 1980s, is 50,000 today.

The windfall levy raised more than £5 billion, with £1.6 billion allocated to investment in our schools, and £3.5 billion to employment creation. Because the new deal has been even more successful than forecast, with more people getting back to work more quickly, there is an underspend that enables us to fund the new deal well into the next Parliament, and to transform what started as the new deal for the young unemployed into a permanent deal for all long-term unemployed.

Having helped 500,000 on the new deal, we now set plans to help the next 500,000. Next year and until 2003, I expect £1.7 billion to be available from the windfall levy to do more to coach the hard-to-employ young unemployed and systematically to create new opportunities for our long-term unemployed, nearly 1 million single parents and thousands of disabled men and women who want to work.

To bring both child care and employment within the reach of more parents, child care investment will rise from £66 million this year to £200 million by 2003-4, as we deliver, as we promised, our national child care strategy.

Because of our success in cutting unemployment, social security spending, which grew by 4 per cent. a year in the previous Parliament, is growing by 1½ per cent. a year this year and over the next three years, and the budget for unemployment-related benefits is falling.

To make further social security savings by tackling fraud and error, we are announcing new investment in staff and technology. Having cut errors in income support claims by half, we now plan to cut fraud and error in the jobseeker's allowance and in income support payments, first by 25 per cent. by 2004, and then by 50 per cent. Some, including the Leader of the Opposition, have proposed savings of £1 billion from social security fraud in the next Parliament. Our proposals achieve savings in excess of £1 billion.

I turn now to investment to ensure that all children have the best start in life. Today's children will be tomorrow's doctors, scientists, engineers and nurses--our future work force in every area. By investing in children, we are investing in our country's future. We have invested £7 billion a year more in families during this Parliament, raising child benefit by 35 per cent. and guaranteeing a minimum family income under the working families tax credit; and from next April, the new children's credit will be worth £442 a year to the typical family.

It is now time to take further steps. The war against child poverty requires not only additional cash but the support and encouragement of all forces of care and compassion in every community. It can be won only by the combined efforts of parents and the private, voluntary, charitable and public sectors working together. In a unique initiative, after consultation with charities and voluntary organisations, we will create a national children's fund with a budget over three years totalling £450 million, to help children and young people at risk.

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The children's fund will work with national children's charities and local community organisations, secular and faith based, and will support those dedicated staff and committed volunteers who offer one-to-one help to young people and to parents at risk, and £70 million will be allocated to a network of local and regional children's funds.

I turn to investment in education. With the funds that my right hon. Friend the Secretary of State for Education and Employment allocated from the first spending review, he has made major reforms in education, ensuring nursery education for every four-year-old; cutting class sizes for five to seven-year-olds; raising literacy and numeracy standards for 11-year-olds by 6 and 10 percentage points; and reforming and expanding higher and further education.

Education qualifications are, in the modern world, the surest route to opportunity and security for all. All children should be ready to learn when they reach school. From the first spending review came sure start, which is now lifting 50,000 children and their parents out of poverty.

In the second review, and tied to targets for improving child development and parental responsibility, we will by 2004, with a budget of £500 million, expand the number of children helped in our country to 345,000. With nursery places already increasing from 200,000 in 1997 to 400,000 in 2002, my right hon. Friend the Secretary of State for Education and Employment will announce funds for the next stage in our expansion of nursery education.

Having improved standards in our primary schools, the next task is to raise standards as decisively in the secondary schools, so the expansion of resources that my right hon. Friend will announce for all schools is designed to back up reform and to bring radical improvement in the comprehensive system to ensure that opportunity for all means the highest standards of education for all.

My right hon. Friend will consult on and fund a new target for our secondary schools: by 2007, not today's 60 per cent., but 85 per cent. of 14-year-olds must meet literacy, numeracy and computer standards. To raise Britain's appallingly low staying-on rate at school, we are setting aside £150 million a year for education maintenance allowances worth up to £40 a week. Our new and challenging target is: by 2004, 80,000 more 16 to 18-year-olds in education and nearly 60 per cent. of young people having left school or college with A-levels or their equivalent by age 21.

Under the new deal for schools, 17,000 of our schools will have had some improvement, modernisation or renovation by 2002, and every one of our schools--32,000 of them--will be linked to the internet by that date. Our objective by 2004 is 500,000 more computers in our schools. By 2010, we want the majority of young people to be going on to higher education. My right hon. Friend is allocating £100 million extra to higher education in 2001-02, a 4.6 per cent. real terms increase in total. The review provides further finance that will raise the numbers in part-time and full-time higher and further education towards that goal of 50 per cent.

State pupils secure two thirds of the top A-level qualifications, but only half the places in some of our leading universities. To bridge that gap, the Secretary of State for Education and Employment is today setting a new objective to improve access. The Higher Education

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Funding Council for England will provide financial help for universities submitting plans for year-on-year improvements in the widening of access.

Two million adults have a reading age of seven or lower. Adult illiteracy is not just a failure of our society, but--as business leaders around the country have told me--an economic inefficiency that the country cannot tolerate. In the coming weeks, the Secretary of State will announce the provision of new resources to tackle those barriers to opportunity and earnings.

The best education for all, from early learning to lifelong learning, is not only a time-honoured social ideal but, in today's world, an absolute economic necessity. That is why we have decided to make increased investment in education the priority of this year's review, and to back sustained long-term reform with a sustained increase in resources.

In the Budget I was able to allocate new resources to the national health service, amounting to a rise of 6.1 per cent. a year in real terms over the four years to 2004. I was also able to allocate an additional £1 billion to United Kingdom education for this year. Today, in return for the new targets for improved standards, we can allocate further resources for UK education for the next three years.

Under the last Government, UK education spending rose by an average of only 1.5 per cent. a year in real terms. Over the next three years, it will rise by 5.4 per cent. in real terms. Spending will rise from last year's £40.6 billion and this year's £45.8 billion to £49.5 billion, £53.4 billion, then £57.7 billion. The money that I have announced in the Budget and today will deliver, over the four years from now until 2004, an average annual increase of 6.6 per cent. in real terms--an annual rate of growth far in excess of the 1.5 per cent. achieved from 1979 to 1997.

I have one further and final announcement to make. In March, the Secretary of State for Education and Employment made special payments direct to head teachers for books and equipment. They ranged from £3,000 to £9,000 for primary schools, and from £30,000 to £50,000 for secondary schools. A total of £290 million went direct to head teachers, to be spent by schools for use in the classroom.

The Government have decided to continue that innovation, but next April the Secretary of State will allocate to our head teachers not £290 million but £540 million. As a result, head teachers in every one of our smaller primary schools will next year receive not £3,000, but a payment of £6,000. The larger primary schools will receive not £9,000, but £20,000. For the smaller secondary schools there will now be payments of £50,000, rising, for the larger secondary schools, to £70,000. Those payments will now be made not just for one year, but for every year until 2004.

We have made our choice: improved investment in health, education, transport and social services, and in our communities. It is now for those who oppose our spending plans to state clearly where their cuts would fall. This Government have been prudent for a purpose. Our

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choice is stability, employment and sustained long-term investment, now and into the next Parliament, to create a Britain of security and opportunity for all.

I commend this statement to the House.

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