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12.31 pm
The Chancellor of the Exchequer (Mr. Alistair Darling): The core purpose of this Budget is stability, now and in the future. Its core values are fairness and opportunity, founded on stability and strength.
In every country in 2008, every Government have one aim: to maintain stability through the world economic slowdown. Britain, with its central role in the world’s financial system, is no exception. But with low inflation, record levels of employment, and unemployment at its lowest level for a generation, and with the action that we took last year to curb inflation, Britain is better placed than other economies to withstand the slowdown in the global economy.
This year’s Budget is a responsible Budget that will secure stability in these times of global economic uncertainty. We will do everything in our power to maintain stability, keeping inflation and interest rates low and maintaining our record of growth. Whilst other countries have suffered recessions, the British economy has now been growing continuously for over a decade—the longest period of sustained growth in our history. Because of the changes we made to entrench stability and increase the flexibility and resilience of our economy, I am able to report that the British economy will continue to grow throughout this year and beyond.
Even in today’s difficult and uncertain times, we are determined that we will not be diverted from our long-term aim: to equip our country for the challenges of the future, to confront climate change and to end child poverty in a generation. This Budget is about equipping Britain for the times ahead and making sure that everyone, no matter what their circumstances, can exploit their full potential. It is about building a fairer society, offering more opportunity—a fair Britain in which everyone can succeed.
Throughout the world, economies have benefited from the globalisation of trade and investment, which has delivered strong world growth. Here in Britain, our openness, our global reach and our history of scientific invention and creative success make us uniquely placed to succeed in the global economy. But with the benefits of globalisation, we see, too, how problems in one part of the world can quickly spread to another. Turbulence in the global financial markets, which started in the American mortgage market, has affected all economies, from the United States to Asia, as well as Europe.
We have seen significant disruption across many credit markets, with a number of them barely functioning at all, and since the turn of the year, global stock markets have been affected. This poses a major risk to the world
economy, and so we welcome yesterday’s commitment by the world central banks, including the Bank of England, to address these concerns.
Here, the action that we took last autumn to support Northern Rock and protect depositors and savers means that despite seeing the worst period of financial disruption for a generation, we have maintained confidence and stability in the banking system.
Between the early 1970s and the mid-1990s, the UK was one of the least stable economies in the G7. Today, we are the most stable. In the past, our economy suffered from high unemployment and high inflation, but today unemployment is lower than in Germany, France and Italy.
Welfare reform makes work pay and encourages people off benefits. Our strengthened competition regime has increased the flexibility of product and labour markets, backed by fair employment laws.
So the reforms that we have made since 1997—independence for the Bank of England and tough fiscal rules—mean that Britain is now more resilient and more prepared to deal with future shocks, and it is better equipped to meet the challenges of rapid global change.
We are developing new strengths in the industries of the future—the creative industries account for 7 per cent. of our economy; pharmaceuticals account for a quarter of the UK’s research and development.
Ours is the only major industrial economy to see an increasing share of trade in global services—from 7 per cent. a decade ago to 8Â1/4 per cent. today.
In the knowledge-intensive services, the UK is second only to the United States. High-tech manufacturing has grown by 30 per cent. in the last 10 years.
Driven by improved productivity, the UK’s GDP per head—the average income for every man, woman and child—has gone from the lowest amongst the group of seven leading industrial economies in the early 1990s to being second only to the United States last year.
Right across the world countries have lowered their forecasts for growth in the coming year.
In Japan growth is forecast to be 1.4 per cent., in the euro area and the United States, 1.6 per cent., and in Canada, 1.8 per cent. Even in the fastest growing markets—China, India and Brazil, which have enjoyed record growth in recent years—it is expected to slow. Despite the slowdown in the world economy, in 2007 the British economy grew by 3 per cent.—the fastest growth of any major economy.
This year my forecast is that—as growth in the world economy slows further—growth in the British economy will be between 1Â3/4 per cent. and 2Â1/4 per cent. in 2008, but faster than that in Japan, the US and the euro area.
I expect growth to shift towards companies and exports, with growth rising to 2Â1/4 to 2Â3/4 per cent. in 2009 and 2Â1/2 to 3 per cent. by 2010. My forecast shows that the UK economy will continue to grow throughout this period of global uncertainty—a view supported by the Bank of England, the International Monetary Fund and the Organisation for Economic Co-operation and Development.
In the past, inflation has overshadowed many Budgets. From the 1970s until the early 1990s, the British economy suffered through the failure of successive Governments to deliver economic stability.
We have seen recent increases in world food, fuel and energy prices. The reforms that we have made since 1997 mean we can be confident about the inflation outlook. There will be no return to the inflation rates of the early 1990s.
As is happening in many countries because of commodity prices, inflation in the UK will rise in the short term as higher oil and food prices feed through into domestic inflation. But inflation is forecast to return to target in 2009 and remain on target thereafter.
The success of the Monetary Policy Committee and the resilience of the UK economy is clear. Energy prices have tripled since 2002, but over this period inflation has averaged just 2 per cent. and growth has averaged 2Â3/4 per cent.
To provide certainty and to build on this foundation of stability, I am today writing to the Governor of the Bank of England to re-affirm that the inflation target for the Monetary Policy Committee remains 2 per cent. on a CPI basis, which will entrench our commitment to low inflation.
The discipline we have shown on pay in the public sector will support the Bank of England in maintaining low and stable inflation. The reforms we made and this hard won stability mean that—whereas in previous decades, the UK economy suffered more than other economies in the face of global economic downturns—we enter this period of uncertainty better placed than any other major economy. For that reason, I will continue to reject proposals for a £10 billion programme of unfunded tax and spending commitments, which would put that stability at risk.
Our fiscal policy, like our monetary policy, is designed to support stability. It is founded on tough fiscal rules underpinned by the code for fiscal stability and forecast on the basis of cautious assumptions, which are audited by the independent National Audit Office. Our fiscal rules—to keep debt low and stable and to borrow only for investment over the economic cycle—deliver sound public finances in the medium term. They protect public investment and they allow fiscal policy to support monetary policy at the right time to support economic stability and growth.
Over the past 10 years, at all times we have taken the necessary action to meet our fiscal rules. The disciplines we have imposed mean that borrowing is much lower than it was before 1997, and so too is debt. Between 1979 and 1997, borrowing was 3.4 per cent. of national income. Since 1997, it has averaged just 1.2 per cent. Debt, which at the start of the economic cycle in 1997 was 43.3 per cent., has now fallen to 36.6 per cent. of GDP. It is precisely our commitment to this discipline and stability that gives us the flexibility now to respond to the global economic challenges we face today.
Given the fundamental strength of our public finances, it is right to allow fiscal policy to support monetary policy over the period ahead, helping to maintain stability in the face of global downturn. For environmental reasons, we will increase fuel duty by Â1/2p per litre in real terms from 2010. Fuel duty is due to rise again in April, but because I want to support the economy now and help business and families, I will postpone that increase until October.
I can tell the House that our Budget projection for the current budget balance in 2008 will come in as forecast. Our projection for net borrowing, at £36 billion, is £1.4 billion lower than I forecast at the time of the pre-Budget report. Debt this year is also forecast to be lower than the pre-Budget report, at 37.1 per cent. As a result of the decisions in this and recent Budgets that come into effect this year—including a reduction in the main rate of income tax from 22p to 20p—fiscal policy is able to provide real support for the economy this year. This is a responsible approach—within the disciplines of our fiscal rules—that will help entrench the resilience of the UK economy.
Borrowing next year, which peaked at 7.8 per cent. of national income by 1993—that is equivalent to £110 billion today—next year will rise to £43 billion, some 2.9 per cent of national income, less than at its peak and less than the average level of borrowing between 1979 and 1997. And because of the decisions taken in this Budget, it will fall to 2.5 per cent., then 2 per cent., then 1.6 per cent. and then 1.3 per cent. by 2012-13, supporting stability and resilience in the economy. That is £38 billion and then £32 billion, £27 billion and £23 billion by 2012-13.
Even taking into account the turbulence in financial markets and the support we are providing to the economy now, the current balance this year is in line with my forecast at the pre-Budget report, at minus £8.8 billion. Next year it will be minus £10 billion, then minus £4 billion, before returning to a surplus in 2010 of £4 billion, then £11 billion and then £18 billion by 2012, forecast to meet the golden rule over the economic cycle. The Budget shows that we are meeting our first fiscal rule—the golden rule—with the current budget in surplus over the economic cycle.
In the previous two cycles, the then Government failed to meet the golden rule. In the cycle between 1986 and 1997, they failed by a margin of £240 billion, and in the cycle from 1977 to 1986 by £140 billion. In the past, the then Government borrowed to fund the immediate pressures of the day, with no long-term return for the taxpayer. It is vital that today our fiscal discipline means that over the cycle we borrow only to invest. Vital investment—in transport, schools and hospitals—has been protected and increased. So whereas in 1996-97 public sector net investment was £5.4 billion, over the forecast period it is set to rise further from £33 billion next year to £37 billion in 2010—the highest in three decades.
Borrowing for investment within the fiscal rules means that we will meet our second fiscal rule—the sustainable investment rule—in each year and over the cycle. This year, debt will be lower than in the US, lower than in the euro area and lower than in Japan. Debt levels are forecast to be 38.5, 39.4, 39.8, 39.7 and 39.3 per cent of GDP by 2012-13: every year lower than in 1997.
In the 18 years between 1979 and 1997, investment increased by only 20 per cent. in cash terms and reached a low of just 0.3 per cent. as a share of national income. But I can tell the House that, by 2011, investment will have increased by 500 per cent. since 1997 and will have trebled as a share of national income. By 2011, we will have seen the longest sustained expansion of investment in public services since 1945. It is an achievement that we can be rightly proud of, and we remain committed to continued investment in these public services.
Building on the platform of stability provided by the fiscal rules, successive spending reviews have delivered sustained increases in spending addressing the backlog of underinvestment in public services. Public spending grew by 3.6 per cent. a year in real terms between 1997 and 2007. Following the comprehensive spending review last October, public spending in the coming three years will grow by 2.2 per cent., building on past increases and underpinned by stretching value for money reforms.
In 10 years, spending on health has almost doubled, and spending on education is up by 58 per cent. As a result, waiting lists are down, and school standards are up. Transport spending is now 90 per cent. higher, with more people using public transport than ever before.
Aid for the world’s poorest countries has doubled in real terms. The defence budget has seen the longest period of increased spending in a generation. This year, we again expect to spend over £2 billion more supporting our troops on the front line, including £900 million on military equipment.
I want to take this opportunity to pay tribute to our servicemen and women, and their families, in Iraq and Afghanistan. We are deeply proud of the bravery, professionalism and courage they display in serving our country.
This has been an exceptional commitment to improving public services. By 2010-11, we will have seen the longest sustained expansion of investment in public services in recent history. In 1997, the annual cost of servicing our national debt was 9 per cent. of public spending. Today, it is 5 per cent., freeing up an extra £23 billion each year to invest in public services—around half the entire budget for schools. In the early 1990s, as much as three quarters of all new public spending went on debt and social security costs. The figure today is just a third of that, allowing us to target spending where it is needed.
We have turned welfare into work and borrowing into wealth creation, and it is essential that we continue to help everyone who can get into work to do so, so we will bring forward further proposals to reform housing benefit to ensure that work pays. From April 2010, all long-term recipients of incapacity benefit will attend work capability assessments, helping them into work. These reforms will continue to free up resources for investment.
It is right that, like any other organisation, the public sector is as efficient as possible and that it delivers value for money. Over the past year, public sector employment has fallen. At the same time, private sector employment has grown strongly, leading to record levels of employment, which again underlines the resilience of the British economy.
All Departments have now published plans that will deliver another £30 billion in savings each year from 2010. All these savings will be reinvested in services and will examine all major spending areas to identify where further reform can be made to deliver better value for money and to maintain improvement in the public services.
The Prime Minister has made it clear that spending must be matched by reform. Reform remains vital. It is not optional; it is essential. It is common sense. Since 1997, we have responded to people’s expectations for
better public services after decades of underinvestment and neglect. We have driven up standards, developed a greater diversity of providers, tackled failing services, and ensured that the maximum benefit was gained from the investment that we put in.
Ten years ago there were 600 schools in which less than a quarter of pupils gained at least five good GCSEs; today, there are fewer than 50. Compared with 1997, 10 per cent. fewer people die from cancer each year thanks to faster and better treatment and more specialist doctors. But the test for public services in the future is not whether they are better than before or simply good enough. It is whether they are as good as they can be. So if the focus of the past decade was on repairing the old, the focus of the next must be on developing genuinely world-class services.
After a decade of hugely increased investment, we will continue our spending at a sustainable rate alongside our wider objectives for the economy and public services. This Budget therefore confirms the spending plans set out in last year’s comprehensive spending review, and makes an assumption for continuing real growth in public spending after 2011 at a rate of 1.9 per cent. a year, which will allow departmental resources to continue to grow broadly at the same rate for the next three years.
I now want to turn to the steps that I believe are necessary to equip this country for the future. There is no greater moral imperative than to make sure that every child has the highest aspiration and ambition and the best possible opportunity to go as far as they have the talent to go—not some children, but every child in this country.
If we are to build a fairer future for our children, we must eradicate child poverty in Britain. Between 1979 and 1997, the number of children living in poverty doubled. Since then, I can report that 600,000 fewer children live in relative poverty, and we have halved the number of children living in absolute poverty. We have set ourselves an ambitious target to eradicate child poverty by 2020 and to halve it by 2010, and today I want to do more to deliver that ambition.
I will help families to escape permanently the cycle of deprivation that has blighted too many lives. Central to that is helping more parents into work. We want to demonstrate our commitment to supporting parents through a contract in which the Government undertake to provide the support that families need to move into work, and the other side of this contract is that we look to families to make a commitment to improve their situations where they can.
From October 2009, we will change the rules for housing and council tax benefit so that parents are better off in work than on benefit. As a result, a family with one child on the lowest income will gain up to £17 a week. This measure alone will lift 150,000 more children out of poverty. And I can do more to help all children of hard-working families.
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