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The Chancellor of the Exchequer (Mr. Gordon Brown): The task of this pre-Budget report is to rise to the global economic challenge facing this country and to set out how, upon a foundation of stability and growth, we can and will build a stronger and fairer Britain even in an uncertain world.
I start with the state of the world economy. America is in recession, as are Japan and other Asian economies such as Singapore, Taiwan and Hong Kong. The euro area is slowing rapidly. World trade growth has slowed dramatically, from 12 per cent. last year to only 1 per cent. this year. Growth among the main G7 economies is expected to slow, from 3½ per cent. last year, to just 1 per cent. this year. Indeed, for the first time in three decades, each region of the world has slowed at one and the same time and more sharply than before. Independent forecasters expect the world downturn to be deeper and longer, with economic growth in 2002 of just 1½ per cent. in the euro area, 0.7 per cent. in the USA, and minus 0.6 per cent. in Japan.
No one country can insulate its economy from such a synchronised slowdown. In addition, no one can yet judge the full and final impact of the traumatic and tragic events of 11 September. These testing times demand decisive action. Therefore, in Britain, interest rates have been cut seven times in nine months, and Britain's interest rates are now the lowest for nearly 40 years. With public spending and public investment increasing this year, our fiscal policy isat the right time of the economic cyclecomplementing and supporting monetary policy and thus supporting stability and growth.
In the past, when the main economies of the industrialised world have gone into a downturn, Britain has invariably come off worst. Indeed, in every major global slowdown since 1945, Britain has entered weaker, suffered longer, experienced higher inflation and endured higher unemployment. So it is at a time like this that our new monetary and fiscal regimeBank of England independence, the symmetrical inflation target, our new fiscal rules and the tough decisions we have taken to reduce debtis being tested.
When the world turned down in 1998, decisive action by the newly independent Bank of England ensured that the British economy sustained its growth. Throughout 2001 Britain has continued to grow, and monetary policy has played its full part. First, the Bank of England has been able to take pre-emptive action because British inflation has been at or near our target of 2½ per cent. for four years, by contrast with inflation increasing to 10 per cent. when the world economy slowed last, in 1990. In the past two years, Britain has had the lowest annual inflation rate since 1963. Indeed, our average inflation has been lower than that of any comparable country in Europe.
Secondly, the symmetrical inflation target which was set in 1997 at 2½ per cent. means that inflation below that figure is as undesirable as inflation above it. Deflation is as unacceptable as inflation. It is because, in 1997, we put in place a symmetrical targetone that is pro-growth as well as anti-inflationthat, whereas Britain was unable to act decisively or acted too late at every other time since 1945 when the world faced a slowdown, this time the
I come to the forecasts for growth. At the time of last year's pre-Budget report, independent forecasters said that United States growth in 2001 would be 3.4 per cent.they now expect it to be just 1 per cent. For Germany, they expected growth of 3 per cent: now actual growth is expected to be 0.7 per cent. For Japan, they expected growth of 2 per cent: now actual growth is expected to be minus 0.5 per cent.
Last year, we forecast that British growth in 2001 would come in at a range from 2¼ per cent. to 2¾ per cent., and we based our public finance projections on 2¼ per cent. I can tell the House that our expected growth figure this year is exactly that2¼ per cent. So while some pre-Budget representations to me claimed that Britain was worst placed of any country to withstand the global slowdown, in fact the OECD and IMF have both forecast that Britain this year will have the highest growth of any of the G7 countries.
In the period ahead there are of course real risks for both Britain and the world. But it is because of the decisive action taken on monetary and fiscal policy that I remain cautiously optimistic about the prospects for the British economy. While next year independent forecasts expect the United States to grow by less than 1 per cent. and the euro area to grow by just over 1 per cent, we now forecast British growth next year of 2 per cent. to 2½ per cent., and then to rise in 2003 to 2¾ per cent. to 3¼ per cent. as the economy returns to trend in 2004.
While the British economy has been stable, it can and must be stronger. All countries are having to respond to unique economic circumstances: an overshoot and then a collapse in information technology investment in the United States and then in IT production, which are both down 12 per cent., a downturn that contributed to falling industrial production as a wholeit is now down 4.3 per cent. across the G7and then a dramatic slowdown in world trade in industrial goods from 13 per cent. growth last year to almost zero now, along with the large increase in business uncertainty since 11 September.
With manufacturing output having fallen across the worldby an estimated 5 per cent. in the G7 countriesBritish manufacturing output has fallen over the same period by 2 per cent., after rising by 2 per cent. in 2000. There are consequent effects for both exports and imports and for business investment, whose share of national income none the less continues near an all-time high. The challenge for Britainfor manufacturing and across the economyis both to maintain our hard won stability and to accelerate the productivity improvements that will increase output, jobs and wealth.
The global risks which demand continuing vigilance are both cyclical and structural. There are downside risks if America takes longer to recover or if there is a long-term change in oil prices or long-term changes in company or consumer behaviour after 11 September; that would lead to a much more uncertain world economy in which Britain would have to work even harder to make our productivity gains. Further out, there are upside risks of inflationary
Sofar from deferring our enterprise agendathis is exactly the right time to press ahead with supply side reforms to encourage new investment and higher productivity, and it is now right that we take forward the measures on enterprise on which we have been consulting. Further statements on manufacturing will be made in the next few days by the Secretary of State for Trade and Industry, and on the reform of our planning laws by the Secretary of State for Transport, Local Government and the Regions, with proposals to increase the flexibility, speed and responsiveness of the planning land use system.
Today, I can tell the House that we will proceed with four tax cuts for enterprise and the abolition of one further tax in its entirety. To help British business, and particularly manufacturers, to invest in the technologies of the future, I have decided following consultation that we will in next year's Finance Bill legislate for a new research and development tax credit for large companies, which is a tax cut to boost innovation. To increase investment and reward entrepreneurship, we will from next April make a second tax cuta cut in capital gains tax to 20 per cent. for business assets held for more than one year and only 10 per cent. for business assets held for two. Three quarters of taxpayers with business assets will pay only a 10p rateoverall a capital gains tax regime more favourable to enterprise than that of the United States.
To reward managers taking risks in new business ventures, I now propose to double the reach of our share option scheme to all businesses with assets of up to £30 milliona tax incentive that I will introduce immediately.
Because, for small businesses, I want to cut tax bills and red tape, I can confirm that the Budget will extend the 10p corporation tax band, cutting taxes for small companies, and that from April a new flat-rate and simplified scheme for payment of value added tax will both cut form filling and save a typical small business up to £1,000 a year. There is a strong case also for cash help for small firms to bring their payroll and tax systems online, and I am publishing today, and consulting on, the Carter review.
In each year since 1997, I have abolished at least one tax, most recently abolishing betting duty. For 54 years since the 1947 Budget, tax has been levied on the football pools. I have agreed that the tax on pool companies will be 15 per cent. on their gross profits but, after an agreement with the industry that guarantees the continuation of its funding of the Football Foundation and the Foundation for Sport and the Arts, I am abolishing football pools tax altogether.
This change will take effect from 1 April and, just as people no longer have to pay tax when they bet, they will no longer have to pay tax when they do the pools. Every charity or local sports club that runs pools based competitions will see its tax liability abolished too. And the details of our consultation on the tax status of amateur sports clubs will be announced by my right hon. Friends the Minister for Sport and the Financial Secretary to the Treasury on Friday.
I turn now to jobs. Today, my right hon. Friend the Secretary of State for Trade and Industry and I are publishing our joint report on regional economic policy and on the work of regional development agenciesset up by my right hon. Friend the Deputy Prime Ministerto tackle regional inequalities and achieve balanced economic growth across the United Kingdom.
The key focus is on local innovation, indigenous investment and improved infrastructure and skills in our regions. And to complement the locally based venture capital funds that we are forming in every region of the country, we are today publishing our prospectus for a new £50 million fund to help small firms in every region to access the risk capital that they needcapital that is often not available from the banks.
New investment, new businesses and new jobs are also the key to regenerating high-unemployment communities in our country. A new community investment tax credit, on which I am publishing details today, will match every £100 million of private investment with £25 million of additional public investment. And, as a special measure to help the slowest growing and highest unemployment areas of Britain, we will, in 2000 wards in constituencies throughout the country and for all property transactions for homes and business properties worth up to £150,000, abolish stamp duty from Friday. And in the Budget, I propose to legislate to take more business property transactions in these areas out of stamp duty.
The Government will do all they can to fight unemployment in normal times and in times like these. And I can report that Britain's unemployment rate is this year the lowest since the 1970s. For the first time in a century, unemployment in Britain is lower than in Japan, and lower than in America. Compared with Britain, the unemployment rate in the euro area is 50 per cent. higherthe equivalent of 1 million more British people in work.
Because we will not retreat from our commitment to full employment, my right hon. Friend the Secretary of State for Work and Pensions will tomorrow announce in this House new measures to help the newly redundant and to expand the new deal to help the long-term unemployed back to work.
And because a third of the existing work force lacks basic or level 2 qualifications, and because the old voluntaristic approach has not worked, we have been investigating the joint Trades Union Congress and Confederation of British Industry proposals for a tax credit for in-work training. Following today's report from the performance and innovation unit we will, from September next year, pilot a new approach combining direct financial support for businessespecially small businesswith time off for training, under which employers, employees and Government each accept their responsibilities.
Because the skills of the future start in the schools of today, my right hon. Friend the Secretary of State for Education and Skills will be announcing further projects funded from the capital modernisation fund, as we meet our commitment to raise the share of national income spent on education.
When we came to power, debt was too high and debt interest payments ran at 3½ per cent. of national income. So we maintained spending limits, took the necessary tax decisions and cut debt. We also set tough fiscal rules for the long termrules not just for a year or two but across the economic cycle: rules that demand a tighter approach in the best of times and allow the automatic stabilisers to work fully at a time like this, in both cases fiscal policy supporting monetary policy. And because from 1997 we tightened fiscal policy by 4 per cent. of national income, we have been able to reduce net debt, not just in one year but across the economic cycle.
I said in the Budget in March that we would repay £34 billion of the national debt this year. In fact, by cautious budgeting, we were able to repay in the last year not £34 billion, but a total of £37 billion of debt. In total, since we came to power, we have now repaid £51 billion of the national debt.
In 199697, debt was 44 per cent. of our national income. Two years ago we brought it down to 36 per cent. This year it has been brought down to 31 per cent. That is in contrast to nearly 40 per cent. in America, 40 per cent. in Germany, over 40 per cent. in France, over 50 per cent. in the euro area and in Japan, and 95 per cent. in Italy. Britain's debt is now the lowest share of national income of all these G7 countries, and the lowest of all our major European competitors.
We had a choice last year: we could use the mobile phone proceeds from the spectrum auction for current spending. In fact, by using the £22 billion for reducing our debt burden, we achieved a permanent saving of £1 billion a year in debt interest payments£1 billion that is available, not on a one-off basis, but each year and every year.
Let me give the House the full figures. Debt interest payments were running at £29 billion a year when we came into power, and that was more paid out in debt interest than all the money spent on all our schools in the country. I can report that debt interest, which fell to £26 billion last year, will fall again to £22 billion this year, and we expect it to fall again next year to £21 billion, just 2 per cent of our national income.
Just as, last year, we paid off more debt in one year than previous Governments paid off in all of the previous half century, so this year debt interest payments will consume less of our national income than at any time in a centurysince the time of the first world war.
The Government's determination to keep a steady hand on the public finances and the economy is for a purpose. With debt and debt interest payments down, it has been possible, even as corporate and other revenues have declined, to maintain our three-year spending plans for health, schools and public services, respond to the emergencies that have arisen, and now borrow at the right time for the economy to make essential investments in the national interest, while still meeting the fiscal rules that we have set over the economic cycle, even on cautious assumptions and even on our cautious case. Our cautious assumptions include deliberately cautious forecasts for equity prices, oil prices, interest rates and economic
The current budget is projected this year to be in surplus by £10 billion and in future years by £3 billion, £4 billion, £7 billion and £8 billion. Net public borrowing is projected to be £2½ billion and in future years, £12 billion, £15 billion, £13 billion and £13 billion. We are also well within our sustainable investment rule: that debt be at or below 40 per cent. of national income, with debt projected to be 31 per cent. in every one of the next five years.
Taken together, the monetary and fiscal figures I am publishing today show we are also well within the Maastricht criteria. Consistent with our policy on the euro, we are undertaking the preliminary and technical work necessary to allow our assessment of the five economic tests.
Let me turn now to decisions on spending that have resulted from the terrible events of 11 September. I can report that for new equipment and immediate operational requirements an additional £100 million has been made available to the Ministry of Defence. To cut off the supply of finance to terrorists and to fund other anti-terrorism measures, we have set aside extra resources of £20 million for this year alone.
To fund the need for additional policing since 11 September, a further £30 million has been made available to the Met and to other police forces. To fund humanitarian assistance to Afghanistan, and elsewhere, and to meet the new international development obligations since 11 September, Britain is contributing an extra £100 million.
In this pre-Budget report we are also preparing for the Budget and for the coming spending round. As the Prime Minister has said, meeting our international development responsibilities is not an option but a duty. Out of the tragedy of 11 September a new sense of our obligations to each other across the world has been born, and a recognition that if globalisation is to work for all the people of the world, including the poor, thenas the Secretary of State for International Development has been urginga new deal for prosperity must be forged between the richest developed countries and the poorest developing countries.
The UK Government will therefore propose to the financing for development conference of the United Nations that to meet the world's agreed 2015 development goalsevery child in primary schooling, a two thirds reduction in child mortality, a halving of world povertythe international community should now establish a new international fund leveraged up to $50 billion a year to help achieve for the developing countries after 2001 what was achieved for Europe with the Marshall plan after 1945.
I can confirm that in the next spending round we will not only raise significantly the amounts of our own overseas development aid but also raise its share in national income, a measure for which I hope there will be broad all-party support across this House.
This challenge of giving must of course be met by the Government on behalf of the people, but people too, encouraged by Government, should be empowered to give more themselves. For the first time, gift aid is providing a 28 per cent. addition to every donation by taxpayers to recognised charities and thus is now being widely used. Special end-of-year appeals to contribute foreign coins to charities can also receive the 28 per cent. addition. I have also asked the Inland Revenue to consult charities on an innovation that could take gift aid to a new level and allow taxpayers to donate directly to their designated charities on the annual tax form and so gain further tax relief for doing so.
The cause of the environment also reminds us of how closely our lives are bound up with what happens in the world. In the 21st century, as we now know, the global environment is the local environment. To stem the tide of global warming the Deputy Prime Minister is leading the pressure for new international agreements, and because these issues are also central to our Budget and spending review, we are consulting from today on a total of 10 new environmental measures. They include additional tax relief for businesses investing in environmentally friendly technologies, and new tax incentives to encourage the fuels and the vehicles of the futureall the measures reflecting Britain's commitment to energy efficiency, innovation and conservation and to playing our part in safeguarding the environment.
We are investing £180 billion over the next 10 years in transport; and so that foreign lorries pay some of the environmental and other costs of using British roads, we are also publishing today our consultation document on introducing a charging system under which non-British companies and lorries pay their fair share.
I turn to the pre-Budget consultation on measures for families and for pensioners. The old welfare state that we inherited paid out benefits, too often without regard to individual circumstances or personal responsibility. Today, the working families tax credit is making work pay for nearly 1.3 million families400,000 more than on family credit; 150,000 families are getting help with child care. Since 1997, lone parent employment in this country has risen by 20 per cent. and today 200,000 more lone parents in work are receiving the working families tax credit. Building on this, we will later this week introduce legislation for the next step: extending the principle of the working families tax credit to make work pay for those without children as well.
The children's tax credit, the first recognition of children in the tax system in a generation, provides up to £520 extra a year for 5 million families in this country. Later this week, we will publish the new legislation for that next step: on top of universal child benefit, we will integrate in one seamless payment all income-related support for children, as we advance towards our goal of abolishing child poverty.
For the first time, all support for children will now be paid to the main carerusually the mother, and that is the best way to strengthen families. I shall return to the subject of children in the Budget next spring, when I hope to have a little more first-hand knowledge to talk about these matters.
For the first time, through tax credits, the tax system is paying money to families rather than taking it, with tax rates now ranging from 40 per cent. at the top to as low as minus 200 per cent. for low paid families; tax credits, therefore, are modernising the welfare state, encouraging work and helping families without stigmatising them.
Today the Secretary of State for Work and Pensions and I are announcing new measures that will apply the same approach to pensionsmore help for every pensioner in Britain, most help going to those who need it most. Next March, the pension will rise, as we have already announced, by £3 a week for individual pensioners and £4.80 for couples. But the long-term guarantees that we are proposing today not only tackle the poverty faced by the poorest, weakest and frailest, but reward, rather than penalise, the modest savings and occupational pensions of the majority. And they are backed up by a tax policy that is fair to those who have provided well for their retirement.
Upon the foundation of the basic state pension, we have already announced our first guaranteeno pensioner will have an income below £98 a week in April 2002, or £100 a week in April 2003, and no couple will receive less than £154 a weekat least £1,000 more a year than in 1997, a 24 per cent. real-terms increase in the minimum income guarantee.
Today we are also setting aside new funds, £2 billion in total, to provide a second guarantee from 2003. For all pensioners in communities around this country whose hard work has secured a small occupational pension or modest savings but who have, in the past, been penalised for their thrift and savings, I can confirm that any pensioner with income in retirement below £135 a weekand any pensioner couple with income below £200 a weekwill see their hard-earned savings and occupational pensions rewarded with extra money, not penalised, as they were in the past, by losing the chance of benefits.
For a single pensioner on the basic state pension, with £1,000 a year in occupational pension, the pension credit will mean an extra £600 a year. For a pensioner couple with the basic state pension and occupational pension of £1,500 a year, the pension credit will mean an extra £900 a year. Together, the minimum income guarantee and the pension credit will be available to half of all pensioner households, 5.4 million pensioners in total. The Secretary of State for Work and Pensions will set out the full details tomorrow.
For those pensioners who pay tax, we offer a third guarantee: when the new system is introduced in 2003, we will raise the pensioner's tax allowance at least in line with earnings for the rest of this Parliament. For all Britain's 11 million pensioners, I can also announce a fourth guarantee: that the Secretary of State for Work and Pensions and I have decided that the basic state pension will always rise by at least £100 a year for single pensioners and by £160 for couples. In future, the state
So these are our guarantees: for every pensioner an increase of at least £100 a year every year in the basic state pension; and for 5.4 million pensioners starting on the pension credit in 2003 up to an additional £1,000 per household; free TV licences for all pensioners over 75; for the poorest pensioners a minimum income guarantee of £100 a week; and for every pensioner household a £200 winter fuel allowance each and every year of this Parliament; every pensioner in Britain better off; meeting our obligations to those who in peace and war have worked for, fought for and served and built our country all their working lives.
I turn now to the long-term funding of the national health service and the decisions that we have to make for the 2002 spending review. Building the 20th-century health service was among the greatest achievements of an earlier generation. Renewing that health service for the 21st century is among the great challenges for our generation.
For decades NHS funding was decided on a year- to-year basis with no certainty for professionals or for patients. Having put the public finances in order and released extra resources in 1997, 1998 and 1999, the 2000 spending review provided an average real-terms increase of around 6 per cent. a year for the NHS to 2004significantly above the historic average of 3.3 per cent.
Because we knew that money has to be matched with modernisation, the 10-year NHS plan is also implementing significant reforms: devolving 75 per cent. of the NHS budget to primary care trusts; setting national service frameworks for the main diseases and conditions; reforming contracts for family doctors, consultants and nurses; and changing working practices with greater diversity of choice and provision.
Within the framework of the 10-year plan, reporting to the Prime Minister and the Secretary of State for Health, further work is being done on management, accountability and incentives in a reformed NHS.
Today we can further support health service reform. Because of the prudence, debt is lower and debt interest payments are lower. And I am able to announce that, even in these testing times, while meeting all our fiscal rules, we are releasing for next year an extra £1 billion for the NHS. UK health spending in the coming year will now rise by £6 billionby 9.6 per cent. in cash terms, 7 per cent in real terms. The Secretary of State for Health and his Scottish, Welsh and Northern Ireland counterparts will announce how this extra money will be spent.
But our resolve is to tackle the immediate, medium- term and long-term needs of the health service. The pressures on the NHS, the vital place it has in the fabric of Britain and the critical role it plays for the British people mean that we must plan not just one to three years ahead, but five years, 10 years and even 20 years ahead. So in the Budget in March 2000, 18 months ago, I said that to prepare for the next spending round an independent review should examine long-term NHS funding needs, over the next 20 years.
The review is being conducted by Mr. Derek Wanless, formerly of NatWest. Today he is publishing his interim report. It is a 220-page detailed examination of future trends in health care and future funding issues on which he will consult widely. But the first question he said that he had to ask is whether a publicly funded tax-based health service could itself be a significant pressure on costs and whether a tax-funded health service remained the best way forward.
So he has looked at other European and international methods of funding and finds that all health systems are facing rising pressures. In systems which rely on private medical insurance, he concludes that compared to the NHS, there is less cost control, more uneven coverage, and many left out. And in systems which rely predominantly on social insurance, he has found excessive administrative overheads, insufficient incentives for cost control and, for example in France, large costs for employers and for employees who pay charges for every GP and hospital visit even after their social insurance premiums.
Mr. Wanless has also examined in detail the cost pressures facing the service for the future. He concludes that there will be significant pressure both from technological innovation and from rising public expectations, but less pressure than is commonly thought from an ageing population. He highlights the potential long-term gains, building on the reforms of the NHS plan, from a better use of work-force time and of resources generally, including the gains to be had from investment in information technology.
Mr. Wanless emphasises in particular a problem that goes back over decades to the foundation of the NHSa history of under-investment over 50 years and a long-term lack of capacity. And comparing Britain to other European countries, such as France and Germany, his figures show a decisive difference in the area of finance, despite some significant closing of the gap in the past couple of years: that these countries have, over decades, committed significantly more public resources as a share of national income to health care.
The Wanless report highlights the difference it will make for patients if the NHS is put on a sustainable long-term footing and if we secure the best use of resources. Building on the 100 new hospitals, the 10,000 new doctors, the booked appointments of the 10-year plan, more new beds in single rooms, swift access to the best drugs and treatment, and greater patient choice, the goal is a world-class health service that meets the needs of all people in Britain and puts patients first.
Mr. Wanless will publish his final conclusions next year in time to inform the 2002 spending review, and he will consult in the next few months experts, patient groups, all interested members of the public and the doctors, nurses and all staff who work so hard and give so much of themselves to the NHS every day.
The spending review will be the time for final decisions. What can be done will depend on the economy and the public finances. Indeed, over the past four years, through savings on debt interest, reallocating resources and economic growth, we have been able to do more for the NHS. I believe that as we plan to make our Budget and spending decisions next year and to fulfil all our commitments to economic prosperity and to social justice, it will be right to devote a significantly higher share of national income to the national health service.
The decisions we will be making will be for a decade and more. And the way we make these decisionswhether we can forge a new consensus across parties and across Britainwill determine not only the long-term future of the NHS, but the character of our country. I believe that out of this debate an enduring national consensus can be built around the two central conclusions at the heart of this report: that a publicly funded national health service is best for Britain and that a modernised national health service will need significantly greater capacity and significantly more long-term investment.
Economic stability is the foundation. A steady and prudent approach to the public finances follows. I believe that we will have the strength to take the right decisions and to build a stronger, fairer Britain, and I commend this statement to the House.