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Pre-Budget Report

12.31 pm

The Chancellor of the Exchequer (Mr. Gordon Brown): When in 1997 we made the Bank of England independent, we also froze spending for two years, cut the national debt and imposed the responsibilities of the new deal—hard choices made to restore, as the central objective of British economic policy, the goal of high and stable levels of growth and employment.

Today, I can report to the House that British inflation has been at its lowest for 30 years; interest rates are their lowest since 1955; this Christmas, there are more people in work in Britain than at any time in our history; and economic growth in this country is now strengthening. While America, Japan and half the euro area have suffered recessions, the British economy has—uniquely—grown uninterrupted, free of recession, in every single quarter in every single year since 1997. Now is the time for this stable and growing economy to seize the opportunities of the emerging world recovery.

So, with the same strength to take the right long-term decisions for Britain that have guided us through the world downturn, this pre-Budget report sets out the further tough choices that we have to make: first, decisions to lock in our hard-won stability and to fund our additional obligations to the war against terrorism and Iraq; secondly, long-term choices that step up the pace of economic reform to strengthen Britain's enterprise culture, British science and the flexibility of the British economy; and thirdly, even as we come through a world downturn and because we believe that enterprise and fairness can advance only if they advance together, an additional £1 billion a year investment in Britain's children to advance our goal that not just some but all Britain's children have the best possible start in life and that no child is left behind.

First, the world economy. While the USA and Japan have been recovering during 2003, growth in our biggest trading area—the eurozone—is expected to be just 0.5 per cent. In Italy, growth is 0.4 per cent.; in France, 0.2 per cent.; and in Germany, zero. But I can report that in Britain growth this year is now expected to be 2.1 per cent., meeting our Budget forecast.

When I made our Budget forecast, the Opposition said it was not just incautious and wrong but "a deliberate misrepresentation" of Britain's economic prospects and not to meet it destroyed credibility. I can report to the House that not only have we met our forecast, but cumulatively since 2000 Britain's economic growth has actually been stronger than Japan, the euro area and the USA.

I can tell the House now that Britain has enjoyed the longest period of peacetime growth since records first began in 1870—130 years ago. So, Mr. Speaker, let me share this with the House: my sleepless nights have not been due to the economy nor to the Opposition. I can also tell the House that, looking forward, we expect British growth next year to increase by between 3 to 3.5 per cent. and in 2005 to increase again by 3 to 3.5 per cent.

In a world downturn, Britain has achieved growth with low inflation and with high employment. I can report that since 1997 inflation in Britain has averaged

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2.3 per cent., and that the number of jobs created in our economy now exceeds 1.7 million. Unemployment in America is 6 per cent.; in Germany, Italy and the euro area it is 9 per cent.; in France it is 10 per cent.; in Britain it is just 5 per cent. For the first time in 50 years, British unemployment is lower than that of every one of our major competitors—the euro area, Japan and America.

Even with long-term unemployment cut by 80 per cent. and youth unemployment by 75 per cent., I have read pre-Budget representations that this Government's new deal is said to be an expensive failure and should be abolished. Today, in the pre-Budget report we are setting out the evidence showing that without the new deal, youth unemployment would be twice as high; without the new deal, half the lone parents who have moved into work would not have done so; and without the new deal, unemployed men would be 20 per cent. less likely to get a job. So the challenge of this pre-Budget report is not to abolish the new deal—now, with 2 million people helped, the most successful employment programme in our history—but to strengthen its role in removing for ever the scourge of long-term unemployment in this country.

We remain vigilant in regard to both inflation and the continuing risks from global imbalances, an uneven world recovery and geopolitical uncertainties. I also understand the continuing concerns of manufacturers and exporters. It is therefore urgent that world trade talks be resumed.

As we achieve more balanced economic growth, fixed investment is growing this year by 2¼ per cent., with growth forecast at 6 to 6½ per cent. next year. Business investment, which was expected at Budget time to fall, is actually rising by three quarters of a per cent. this year, with 3 to 3½ per cent. growth forecast for 2004. The latest manufacturing and industrial production figures show a 1 per cent. growth in just one month, and manufacturing output—which has fallen in both North America and Europe—is expected to grow here by one quarter of a per cent. this year, and then by around 2 per cent. in both 2004 and 2005.

With the housing market and consumer spending growth now—as we forecast—moderating, we expect domestic demand and private consumption to grow by 2½ per cent. this year and in the following two years, building on six years from 1997 in which British households have averaged real rises in income above 3 per cent. a year. With—since 1997—1 million more home owners in Britain, rising household debt has been matched by rising household wealth and lower interest payments.

Because this Government will never take stability for granted, I have announcements designed to entrench that stability. First, the credibility that has come from Bank of England independence and the tough decisions to cut inflation have made possible a proactive, forward-looking approach to interest rates, cutting aggressively at the right time for the economy and, as the economy now strengthens, locking in long-term stability.

The symmetrical inflation target enables the Bank to be both pro-stability and pro-growth. The long-term credibility of our symmetrical target will be enhanced—as the independent Office for National Statistics reports in its paper published today—by adoption of the internationally recognised measure of inflation, the

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harmonised consumer prices index. It is more reliable because, taking account of spending by all consumers, this consumer prices index gives a better measure than the old RPIX measure of spending patterns. It is more precise because, as in America and the euro area, it takes better account of consumers substituting cheaper for more expensive goods. I have therefore written to the Governor of the Bank of England this morning confirming my announcement earlier this year, and confirming that from today the operational measure for inflation will be this consumer prices index, and I am setting the new inflation target at 2 per cent.

I can confirm that pensions, benefits and index-linked gilts will continue to be calculated on exactly the same basis as now. As before, the target will be symmetrical. Should the rate of inflation diverge from the 2 per cent. target by more than 1 per cent. on either side, our open letter system will be triggered. And because discipline in pay setting is essential in both private and public sectors, I have also written today to the public sector pay review bodies, informing them that our inflation target is 2 per cent.

When, in 1997, we also broke from the old annual spending rounds by setting fiscal rules over the cycle and fixed three-year spending settlements, and then paid off more debt in one year than all the debt paid off across all the 50 years since 1945, debt interest payments were reduced to just 2 per cent. of national income—lower than at any time since 1915. Those long-term decisions that we made for stability have enabled fiscal policy during this world downturn to support monetary policy, and therefore to maintain economic growth. This Government will ensure that for the long term, debt levels will remain low and sustainable. In each pre-Budget statement, we will report not just on the medium-term fiscal position, but on the long-term position. Today's report shows that while in Germany, France and the euro area state spending on pensions will rise towards 15 per cent. of GDP by 2050, Britain's figure of 5 per cent. means—I quote the report—that

I have to tell the House that to revert to the pre-1980 position—an earnings link with pensions—would, by the end of the period, raise deficits by 3 per cent. a year just to cover this one item, with the long-term sustainability of the public finances undermined. Instead, this Government will proceed on a prudent and sustainable basis.

Essential also for long-term stability is a flexible housing market, and I welcome the interim reports this week of the Miles review on the market for mortgages and of the Barker review into barriers to housing supply. Kate Barker highlights Britain's weak private rented sector, so I will now consult, before the Budget, on a new incentive to encourage the creation in Britain of real estate investment trusts.

With flexibility central to meeting the euro's five economic tests, I am today also publishing our first report on labour, capital and product markets; and as promised in June, the draft euro referendum Bill is published today.

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Since 1997, Britain has created over 100,000 more businesses; there are 170,000 more self-employed. But more enterprising though we are, Britain still lags behind American rates of business creation and success. And just as we took hard decisions that led to a British consensus on stability, I want to build in Britain an even deeper-lasting British consensus: a shared national economic purpose that, building on our historic strengths—Britain's scientific genius, British creativity, Britain's global reach and Britain's stability—means that we become, in this era of globalisation, one of the world's most enterprising, flexible and successful economies.

I want Britain to be the best location for science and for research and development, so I can announce a widening of the successful R and D credit that will include the direct costs of software and power. As the Government examine the Lambert and Sainsbury reviews, and put forward our reforms in the structure and funding of higher education to promote excellence and opportunity for all, the Budget will consider even further improvements, including for research and technology organisations. We will, in addition, consider the right incentives to support one of our great British creative industries: British film. A flourishing British venture capital industry is vital to growth. I will also consult on raising the annual limit for venture capital trusts and enterprise investment schemes to £200,000, and on increasing for two years income tax relief for VCT investments to 40 per cent. We will extend tax relief for the cost of managing investments from investment companies to trading companies.

Small firms in Britain seeking investments of up to £2 million still face an equity gap, so following, again, the model of American small business investment companies, we will create a new framework of incentives for small business investment. We will therefore launch the first round of a new British fund for enterprise capital. To encourage new companies to enter the North sea, I will enhance the tax relief for their costs of exploration. Manufacturers and firms with turnovers up to £22 million will benefit from 40 per cent. capital allowances, which will be worth, over three years, nearly £400 million to manufacturing and industry.

So that British manufacturers and British workers do not lose out from European rules unfairly applied to British firms, the Secretary of State for Trade and Industry and I have asked Mr. Alan Wood of the Engineering Employers Federation and Siemens UK to review how procurement rules are practised in Europe and to make recommendations.

I can announce the following deregulations. Firms applying international accounting standards will not have to submit a second and separate set of accounts to the Inland Revenue. For firms with turnovers below £5.6 million, there will now be no independent audit requirement. I will extend the flat rate VAT scheme whereby firms simply pay a percentage of total turnover, lowering the VAT charged by up to 3 per cent., and for first year start-up businesses by up to 4 per cent. In total, the Government are announcing today 147 regulations for reform or removal. Because half of regulations emanate from Europe, the coming Irish, Dutch, British and Luxembourg presidencies are proposing a joint initiative to drive forward deregulation as we seek more flexible capital, product and labour markets—not just in Britain, but across Europe.

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Our goal is full employment for every region and nation of the United Kingdom, and we are closer than ever to achieving it. While the first stage of Britain's new deal was to move people from welfare into jobs, the next stage is to help people move from low-skilled work into higher-skilled work. I want to announce today that the windfall tax reserve, which was previously allocated for job creation, will now be reallocated to a new deal for skills.

To extend employer training pilots to a third of the country—from 14,000 up to 80,000 employees, most of whom have left school early and have no qualifications—we will provide £190 million in the coming year for time off and for skills training. To further that new deal for skills, everyone on jobseeker's allowance will be assessed for their skills and, starting with pilots for the long-term unemployed, they will attend a mandatory skills course.

Overall, that provides a second chance for adults—either in or out of work and without basic skills—to learn, whether through further education, work-based learning, distance learning or trade union learning. Today, further to boost such skills training, we are publishing a paper on the tax treatment of subscriptions and fees for professional bodies.

Alongside the Allsopp report on regional statistics, which is published today, the Secretary of State for Work and Pensions and I are also publishing today for the first time the full employment plans for each region of the country. For 2,000 enterprise areas, which cover high unemployment communities in a total of 417 constituencies, I can announce that, in addition to fast-track planning and abolishing stamp duty, there will—subject to state aid approval—be first-year 100 per cent. investment allowances to renovate vacant commercial premises.

I can also confirm that, as a result of the Lyons review, we will relocate out of London and the south-east 20,000 civil service jobs—to the benefit of the regions and nations of the UK. Local authorities which successfully promote small business creation should be rewarded for doing so. The Deputy Prime Minister and I propose that any additional business rate income should be shared with local authorities. Although I will consult further before the Budget, we expect local authorities to be eligible, as a result, for an additional £150 million in 2005, £300 million in 2006, rising to £450 million a year for local authorities.

Budget 2002 announced reliefs on income and donations for local amateur sports clubs. The importance of sport to our communities and to our whole country has been demonstrated most powerfully as the England rugby world cup triumph is enthusiastically celebrated all across the United Kingdom. I know that the whole House will want to congratulate the team on their success and also encourage the next generation of sportsmen and women.

There are 100,000 amateur sports clubs in Britain, which deserve greater support. Under our proposals, becoming a community amateur sports club will now bring an entitlement to 80 per cent. rates relief, which is worth between £1,000 and £3,000 a year for a typical club. By doubling today the thresholds at which community clubs are exempt from corporation tax to a

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new rate of £50,000, the vast majority will be exempted from such tax altogether. In partnership with the sports governing bodies, we will now do more to ensure that all sports clubs—roughly, over 100 in each of our constituencies—can share in the considerable financial benefits as they promote sports throughout their communities.

The Home Secretary—who will announce tomorrow the details of our £125 million fund for voluntary and community organisations—the Secretary of State for Culture, Media and Sport and I will report in the Budget on what more we can do in Britain to encourage and help all those prepared to volunteer in school sports and local sports, as well as in community service and mentoring. At the same time, we will also review the Inland Revenue's treatment of football supporters' trusts.

I have two announcements on whisky and spirits. While tobacco fraud, VAT fraud and oils fraud are now in decline, recent trends suggest that despite the freeze in spirits duties for six Budgets, an estimated one bottle in every six of spirits sold in this country is evading duty, so I will now make provision to implement in the next Finance Bill the Roques report recommendation that we stamp spirits bottles. If, after discussion with the industry, there is still no workable alternative proposed, we will legislate. If we have to impose stamping, the Economic Secretary will discuss with the industry the most cost-effective scheme and I will then consider extending the freeze on the duty on whisky and all spirits, not just for one year but for every year of this Parliament—[Laughter.] And I drink water.

I propose also to consult on a new framework for the tax treatment of green fuels: that we make a commitment to prior announcements, three years ahead, of incentives to increase usage and thus promote investment in new fuel-efficient technologies. The Budget will announce the way forward on that measure and it will also introduce incentives for rebated low-sulphur fuel and gas oils. We will also consult on recycling revenues from landfill tax; extending eligibility for the 80 per cent. reduction from the climate change levy; and, subject to new industrywide commitments on the environment, extending in Northern Ireland until 2012 an 80 per cent. discount on the aggregates levy.

Also published today are measures extending our VAT compliance strategy and closing loopholes that involve trusts, seafarers foreign earnings deductions and tax paid on the personal income of owner-managers of small companies.

Our pension proposals, published also in detail today, include a single set of rules that set the tax-free lump sum at 25 per cent. of the value of an individual's pension fund; more flexible annuity rules; and provision for older workers to draw occupational pensions earlier. Because consultation on the proposed single lifetime tax allowance for pension savings has revealed contrasting interpretations of its impact, I am asking the National Audit Office to provide, by Budget time, an independent evaluation of the numbers affected. Our aim is to secure a broad-based national consensus on the way forward. If a decision is made to proceed, the measures will be introduced in April 2005; otherwise, the current regime will remain in place.

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I come to the coming spending round. In advance of the independent Gershon review of efficiency, the Chief Secretary has written today to all Departments asking them to bring forward their proposals for reform and cost savings in the areas of transaction services, back office services and procurement—where we propose a new Whitehall framework. With modernisation and reform the condition of future spending settlements, the Treasury will in return—for public service agreements—abolish the input and process targets, and we will abolish service delivery agreements entirely. And while local performance standards and local publication of performance data will progressively replace the national targets, the Deputy Prime Minister and I are agreed that, having already set aside for English local authorities next year an additional £3.3 billion, the Government will be prepared to use capping powers where appropriate and necessary to ensure next year reasonable levels of council tax.

I turn now to the public finances. I reported to the House last week on our resolve to ensure that our armed forces are properly supported in all they do. The whole House will wish to thank them for the service they give in peace and in war. I can also reaffirm that we will meet all our international development responsibilities in Iraq and for the war against poverty in Africa and around the world.

To date, the money spent or set aside for the war against terror, including in Afghanistan and for our action in Iraq, is £5.5 billion. I can tell the House that for Iraq £2 billion has been carried forward into the special reserve for 2003–04; and I believe it prudent and right today to set aside a further £500 million for this year, and an extra £300 million for next year—raising our allocations for the war against terrorism and for action in Iraq to £6.3 billion in total.

So, having taken account of those new provisions for Iraq and elsewhere, and the cost of incentives that I have announced for enterprise and other measures to equip Britain to take advantage of the opportunities of the global upturn, our current budget figures for 2003–04, and for the years to 2008, are, in billions: minus 19, minus 8, minus 5, zero, plus 4 and plus 8.

Our first rule is the golden rule that over the cycle we balance the current budget. Having accumulated surpluses at the start of the economic cycle at 2.1 per cent. of national income in 1999, 2.1 per cent. in 2000 and 0.9 per cent. in 2001, we not only meet our first fiscal rule—the golden rule—that we balance the budget, but even on cautious assumptions we have an average annual surplus over the whole cycle of around 0.2 per cent. of gross domestic product, meeting our first rule in this cycle by a margin of £14 billion; and even on the cautious case, moving back to balance by the end of the forecast period.

Our second rule—the sustainable investment rule—is that net debt will be below 40 per cent. of national income. I can tell the House that debt this year is actually rising to 42 per cent. of national income in France, 50 per cent. in Germany, just under 50 per cent. in America and 80 per cent. in Japan. But in Britain, debt in this year and future years will be well below 40 per cent—at 32.8, 33.8, 34.6, 35.1, 35.4, and 35.5 per

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cent.—meeting our second rule by a margin of £60 billion, and doing so over the cycle and in every single year.

With both rules met, it is right and prudent that—as in America, Japan, France and Germany—we borrow at this, the right time of the economic cycle. Net borrowing adjusted for the economic cycle, which is forecast this year at 3.5 per cent. of national income in Germany, 3.9 per cent. in France, 4.5 per cent. in America and 6.9 per cent. in Japan, is in Britain 2.4 per cent. this year, and in future years it will be 2, 2.2, 2, 1.9 and 1.7 per cent. of national income.

Adjusted for the cycle, our deficit, as I state in our annual convergence report submitted today to the European Union, is and remains—unlike the deficits of those G7 colleagues—below 3 per cent. of GDP and below it in every single year. In each year, before adjusting for the cycle, British borrowing is also substantially below the G7 average and it is falling to just half the level of America.

Let me give the House, in detail, the comparative figures. This year, net borrowing is for France 4.2 per cent. of national income; in Germany it is 4.2; in the USA it is 4.9; and in Japan it is 7.4.—but for Britain it is 3.4 per cent. Next year, net borrowing in France is 3.8 per cent. of national income; in Germany 3.9; in America 5.1; and in Japan 6.8 per cent. In Britain, it is just 2.6 per cent. And in 2005, while for France borrowing is 3.6 per cent. of national income; in Germany 3.4; in America 4.9; and in Japan 6.9; in Britain it is just 2.4 per cent.

So compared with a British deficit reported by the Conservative party 10 years ago of 8 per cent., and an average of 6 per cent. over the early 1990s, net borrowing this year and future years to 2008–9, as a percentage of GDP, is 3.4, 2.6, 2.4, 2.1, 1.9, falling to 1.7 per cent.—with, for this and future years, the cash figures 37 billion, 31 billion, 30 billion, 27 billion, 27 billion and 24 billion—so we are able to meet all our commitments in Iraq and at home; maintain the lowest level of debt in the G7; still announce a deficit that, in each and every year, is substantially below that of America, Japan, Germany and France, meeting all our fiscal rules; and move forward with the spending plans we have set out: £15 billion pounds more a year for education, £59 billion more a year for public services and, by 2008, £41 billion more for health, allowing us to employ, in total, 25,000 more doctors, 20,000 more teachers, 80,000 more nurses and 90,000 classroom assistants, as we invest in and reform our public services.

It is sustained economic growth, built on the foundation of long-term stability and on low debt, that has underpinned our investment plans and makes them affordable for now and the future. And so I can now make two further announcements. The first is on children's benefits—and here I should declare an interest. Nothing is more important to the future of our whole country than the best schooling, services and financial support, ensuring for every child the chance to develop their potential to the full.

For mothers and fathers struggling to balance work and family responsibilities, help with child care costs—once available to just 47,000 parents in 1997—is now available to almost 300,000. But today it is time to begin to face up to a long-standing grievance: that financial

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help for approved child care be offered not just to some families but be available right up the income scale to working families facing child care costs.

So in advance of other decisions that I make in the spending review, I can announce as a first step that for every employee, whatever their income level, employers will be able—as long as the offer is made to every employee—to provide free of both employee national insurance and income tax and free of employer national insurance £50 a week for approved child care.

I can also announce that we will respond to two other long-standing concerns: help with child care costs will now be available when approved child care is provided in the child's own home; and, after consultation, we will widen the definition and therefore the number of approved child carers for whom the £50 a week or tax credits can be offered. We now expect child care places to double from 750,000 in 1997 to 1.5 million by 2006, helping over 2.2 million children in our country.

In April, for the first time our country will pass a milestone in opportunity for our children: a nursery place guaranteed to every three and four-year-old—six months ahead of our planned schedule. But we know also that the most formative years are from the cradle to the nursery school. So for 500 communities in Britain, the Minister for Children will fund school-parent links so that long before schooling begins infants are introduced to early learning and books, and support is on offer in this way to parents. Building from and including Sure Start, neighbourhood nurseries and early excellence centres, I can confirm that over the next five years there will be 1,000 children's centres—children's centres that can become, for parents as well as children, as much a focus of community life as the local school, the local place of worship and the local park. Our goal is a children's centre for every community: this generation meeting its obligations to the next.

We will be judged not just by what we do for services, but by what we do for child benefits. So building upon the new child tax credit—at a cost of £1 billion a year—we will increase, from April, the child element not just by inflation or earnings, but by 13 per cent: an extra payment to be paid to 7 million children of £180 a year, an extra £3.50 a week. And because every child should be born into a world of opportunity, not condemned to poverty, maximum help for the first child—worth just £27 a week in 1997—will rise in April to £58 and, for two children, from just £44 a week in 1997, to £100 a week.

Before housing costs, a two-child family on half average earnings will now be better off than in 1997 by £75 a week—£1 billion more a year to meet, on this basis, our goal for 2004 to reduce child poverty by a quarter, as step by step, we halve child poverty by 2010 and eradicate it in a generation.

I have one final announcement. I stated earlier that, starting in April 2005, local authorities promoting enterprise can receive from central Government £150 million a year extra, rising to £450 million a year. But from April 2004 also, I am now able to do more for local council tax payers: to allocate across the United Kingdom, free of ring-fencing, for local authorities as they set their budgets, an additional £406 million—in England, £340 million extra—making the total available to English local authorities £3.6 billion more next year than this year: cash to meet the needs and concerns of council tax payers.

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Economic stability, enterprise and fairness and the strength to make the best long-term decisions for Britain—I commend this pre-Budget report to the House.

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