Government's Economic and Financial Assessment

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Mr. Horam: The Minister talks about sustained growth. As she will be aware, in the previous Parliament, the Chancellor of the Exchequer committed himself not to sustained growth but to sustained development, incorporating economic, social and environmental considerations. The Minister has not yet mentioned that, although, commendably, she mentioned the three other objectives. Is sustainable development no longer central to the Government's economic policy?

Ruth Kelly: The hon. Gentleman has interrupted me so often in the course of my opening remarks that it has been impossible to make progress on the main themes of the Budget documents. In due course I shall examine various points that emerge on the subject of the Budget.

On public finances, our fiscal rules are set not for one year, or even for two, but for the entire economic cycle. From 1997, we tightened fiscal policy by 4.5 per cent. of national income. As a result we have been able to reduce net debt well below 40 per cent., not just for one year but across the economic cycle.

Mr. Redwood: Will the Minister give way?

The Chairman: Order. Before I call the right hon. Gentleman, I make it clear that although it is in order to make points arising from the Minister's speech on the motion, other points should be made in the subsequent debate?

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Mr. Redwood: I am grateful for your guidance, Mr. Pike. I wanted to ask the Minister a question arising directly from her growth forecasts, for the clarification of this important Committee. The Red Book says that the growth rate of the United Kingdom's economy will be 2 to 2.5 per cent. this year, and 3 to 3.5 per cent. next year. No independent forecaster in the City predicts anything like those rather grand figures. Is that still the Government's estimate and, if so, why are all other forecasters wrong?

Ruth Kelly: The right hon. Gentleman will no doubt be aware that in some years the Treasury's economic forecast in the Red Book has exceeded public expectations, and that in others it has been less than the average independent forecast. Since 1997, the Government's economic forecast has, in the main, been far better than it was under the Administration in which the right hon. Gentleman served or, indeed, than that of the average independent economic forecaster. I should not put too much faith in the idea that the ability of independent economic forecasters exceeds that of the Government in producing coherent forecasts.

Although the pre-Budget report showed that, as a result of the global economic downturn, tax receipts were £7 billion less than forecast last year, and £10 billion less than forecast this year, the underlying state of our public finances remains strong. With debt and debt interest payments down, it has been possible, even with lower than expected revenues, to maintain our three-year spending plans for hospitals, schools, transport and public services, and to respond to challenges at home and abroad since 11 September, while still meeting our fiscal rules.

Since 1997, by cutting debt, unemployment and waste, £7 billion a year has been transferred to public services. In 2002–03, an additional £1 billion will be invested.

The envelope for public spending for the years to 2006 has been set. Current public spending will increase from £390 billion this year to £420 billion next year, £444 billion in 2004–05, and £471 billion in 2005–06.

Mr. Bercow: That is an eloquent torrent of statistics, but the Minister cites them as though inputs were a good thing in themselves, irrespective of outputs. Can she explain why a 28 per cent. real-terms increase in expenditure on health in Scotland since her Government took office has been accompanied by an average increase of 25 per cent. in waiting time for NHS treatment?

Ruth Kelly: The hon. Gentleman uses a highly selective and partial set of data to illustrate his point. The health of the average person in Scotland is significantly worse than the health of the average person in the rest of the United Kingdom.

Moreover, if the hon. Gentleman had allowed me to continue, he would have found out that I was about to say that, as we make provision for the necessary increases in public expenditure, my right hon. Friend

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the Chancellor has set three conditions, the first of which is that all money spent must be matched by modernisation, leading to results. That is absolutely key to our public spending targets.

Secondly, just as sustained economic growth demands responsibility in setting private sector pay, so a sustained commitment to better public services demands responsibility in setting public sector pay. Thirdly, at all times, now and in future, we shall never compromise our commitment to meet our fiscal rules and disciplines.

Prudent management, economic stability and growth have made it possible to spend an extra £5 billion more each year on the NHS. However, the costs of technology, new treatments and meeting the public's legitimate and rising expectations are increasing. To put the NHS on a sustainable foundation for the long term, we as a nation must invest more. The fundamental long-term choice that our generation must make is whether the national consensus on the NHS that has existed for the past half century is to be renewed for the years ahead.

It is the Government's view that the NHS system of funding is the most equitable and efficient available. A reformed NHS that offers the most comprehensive insurance policy and meets the rising costs of medical advances can give British people the greater security that they need. To fund such a system, from next April, there will be an additional 1 per cent. national insurance contribution from employers, employees and the self-employed on earnings of more than £4,615 a year. As everyone—employees and employers—benefits from the insurance that the NHS provides, it is right that everyone who can should make a fair contribution. The changes to national insurance contributions need to be understood in the context of wider changes. With the introduction of child tax credit, half Britain's families with children will be better off.

UK health spending will rise from 6.7 per cent. of national income in 1997, and 7.7 per cent. of national income this year, to 8.7 per cent. by 2005–06, and 9.4 per cent. by 2007–08. To ensure that the money invested yields the best results, an annual report to Parliament, prepared by the new independent auditor, will account for the money allocated to the NHS and where it has been spent, and give the results of the expenditure. With investment matched by reform, we have the best chance in a generation to secure the NHS for not just a year or two but the long term.

On productivity, one of the Government's long-term challenges is to build a more prosperous Britain. That will involve higher productivity and investment and a stronger national consensus on the importance of enterprise. As we press ahead with supply-side reforms—

Mr. Luff: Is the Minister able to explain why productivity in the NHS has fallen so sharply over the past couple of years?

Ruth Kelly: The hon. Gentleman makes a salient point. Matching extra spending with reform is one of the things that we must do, which is why we set up the new accountability criteria. It is important that

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resources are used efficiently to build capacity, to secure extra staff and to lead to greater efficiency in the NHS. That is a condition of the money that we are investing.

As we press ahead with supply reforms to remove barriers to growth, the Budget's focus is on two further sets of measures: encouraging high levels of innovation and investment and helping small and growing businesses. There will be a new volume-based research and development tax credit, which will help British manufacturers to invest in the technologies of the future. Capital gains tax will be cut to 20 per cent. for business assets held for one year or more, and to 10 per cent. for assets held for more than two years. That will reward entrepreneurship and give Britain, overall, a capital gains tax regime that is more favourable to enterprise than even that of the United States.

Small businesses account for nearly half the economy's output, and 55 per cent. of all jobs in the private sector—more than 10 million jobs. In order to send out the strongest possible signal about the importance that we attach to that section of the economy, the small companies tax rate has been cut—again—from 20 per cent. to 19 per cent. Additionally, the starting rate of corporation tax has been cut from 10 per cent. to zero. Small companies with taxable profits that are less than £10,000 will pay no corporation tax. That is the most favourable corporation tax regime for small companies in any of the advanced industrialised countries.

A productive Britain is also an inclusive Britain. Moving people from welfare to work and making work pay are at the centre of our strategy. Compared with 1997, there are now 1.5 million more people in work, which gives Britain the best unemployment figures for 25 years. In the mid 1980s, 350,000 young people between 18 and 24 had been unemployed for more than one year. Today, that figure is only 4,900. We are moving closer to our goal of full employment, and we are closer than at any time for a generation. The policies that address long-term unemployment that are set out in the Budget will take us even closer to that goal.

Individuals have a responsibility to take employment opportunities that are available. In return, the working tax credit will fulfil our promise to make work pay. Working families with children will have a guaranteed minimum income of £237 a week, which is £97 more than under income support and substantially more if all benefits are taken together. The benefits of the working families tax credit have been extended. For the first time, single persons and couples aged 25 or over without children will be eligible for in-work support that makes jobs pay.

The Budget is about building a fairer and more enterprising Britain. That means that we must invest in the potential of every child in our country and in improved public services, and we must work to support hard-working families. Today, most women work and many families rely on two incomes. A tax and benefit system that puts families first should recognise the family as the bedrock of society and not

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only parents' rights and responsibilities, but the very real pressures that they face right up the income scale.

In the Budget, we announced £2½ billion of extra support for families, which is a family tax cut that will help nearly 6 million families. As a result, the direct tax burden on a family on average earnings with two children will be below 20 per cent., which is lower than it was in 1997 or any previous year since 1979.

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Prepared 8 July 2002