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As I told the House in November, we and other countries have been battling against a succession of shocks that have hit the world economy. At the end of 2007, problems in the international mortgage markets began to put a damaging squeeze on credit. In early 2008, we also saw dramatic volatility in many commodities prices, adding to uncertainty and putting pressure on growth. Last autumn, the dramatic failure of one of the
top investment banks in America— Lehman Brothers—shattered already fragile confidence and brought the international financial system to its knees.
Since then, an extraordinary international financial crisis has fed into the wider economy, causing a steep and widespread world recession. A crisis that started in the developed economies has spread to emerging and developing countries too. Industrial production has fallen and unemployment is rising, by 5 million in the United States alone. In the past few months, world trade fell, and while our exports are down 14 per cent., exports in Germany are down 21 per cent., in China 26 per cent., and in Japan 45 per cent. So for the first time since the second world war, the world economy is expected to contract this year.
In the past few months we have seen considerable economic uncertainty, and that has fully justified the action we, and other countries, have taken to support businesses and people. Since the autumn, we have put the banks on a stronger footing, cleaning up their balance sheets and helping to boost bank lending. As a result, banks will be able to lend billions of pounds more this year and next to homebuyers and businesses. Getting credit flowing again is the essential precondition for economic recovery.
In the pre-Budget report, I announced a range of measures to help the country through the recession, putting £20 billion back into the economy. That help is coming through now, from an income tax cut, and a VAT reduction that will continue until December. There is increased support for pensioners, as well as investment in vital public services and accelerated capital projects, which is protecting thousands of jobs in this country. Because of the reforms we have made to the welfare system since 1997, that comes on top of extra help when families need it most.
I fully understand the anxiety behind calls to support those whose wages have fallen. This is exactly the support that our flexible system can offer, and is already offering. As shorter working weeks or irregular patterns reduce wages, those receiving tax credits can see an automatic increase to compensate for the loss of income. In March alone, for example, 355,000 families were receiving on average £35 a week more to support them, through tax credits—all the more reason why we need to keep tax credits and not scrap them. This demonstrates how our welfare system automatically helps people when they need it most.
Fiscal support has been complemented, too, with sharp reductions in interest rates by central banks right across the world. The Bank of England interest rate is now down to half a per cent., the lowest it has ever been. That has reduced the cost of mortgages and loans. The average saving, since October, for the 4Â1/2 million families with tracker mortgages, is over £230 a month. And we have now given the Bank of England new means to support the flow of credit and put money into the economy. Inflation has come down, which means that people’s income will go further.
Taken together, the total support that we have provided to the UK economy is expected to protect up to half a million jobs. Other Governments across the world have been doing the same. The total amount of fiscal support across the G20 will amount to over $5 trillion.
There has also been unprecedented co-ordinated action at an international level. The G20 group of economies came together, first in November and then in London earlier this month, to fight this global recession. We agreed to take whatever action was necessary to deliver the International Monetary Fund forecast of global growth of over 2 per cent. by the end of next year. In total, we agreed over $1 trillion of additional support for the world economy.
There are no quick fixes; there is no overnight solution—but because of the progress we have made, here and internationally, we can begin to restore confidence, save jobs, and bring the world economy more quickly out of recession. Of course, we must make sure we deliver on these agreements, starting at the meeting of Finance Ministers in Washington this week. I want the next meeting of European Union Finance Ministers to be focused on rebuilding growth in Europe, based on the foundations laid by the G20 in London. But we also need a clear path to recovery here—both fiscally and by investing to build Britain’s future.
The UK went into this global recession with employment at an all-time high, and inflation, public debt and interest rates at low levels. But no country can insulate itself from this worldwide downturn. The position here, as in every country, deteriorated in the autumn. In the last few months, world trade fell at the sharpest rate since 1945, and, as an open economy, we are the world’s sixth biggest exporter of goods and the second largest exporter of services, and we are affected by the collapse in demand in other countries. The unexpected severity of the recession has led the IMF to downgrade its own forecasts for the world economy three times since October. We, as well as other countries as diverse as Japan and France, India and the US, have reduced our growth estimates.
The United Kingdom economy contracted by 1.6 per cent in the last quarter of 2008. For the first quarter of this year, I expect the economy will again contract by a similar amount. And my forecast for GDP growth for the year as a whole will be minus 3Â1/2 per cent.—in line with other independent forecasts. But because of our underlying strength, and the measures we are taking domestically and internationally, I expect to see growth resume towards the end of the year. The IMF forecasts published today confirm the problems that all countries will face this year. But they also show that the British economy will suffer less than Germany, less than Japan, less than Italy and less than the euro area as a whole this year. The British economy is diverse, it is flexible and it is resilient, which is why I believe we can be confident in recovery.
Next year, because of the pick-up in world demand, the continuing benefit of lower prices and the substantial recovery measures being put in place, I am forecasting growth of 1Â1/4 per cent. in 2010. In future, the sources of our growth will be more varied—and we need to ensure that we play to our country’s strengths. It will increasingly come from an expansion in investment by businesses in the industries of the future, such as low-carbon, advanced manufacturing and communications. These industries, together, are as important to the British economy as the financial services sector. That is why it has been so important that, for example, we have increased investment in Britain’s science base by 88 per cent. in real terms
over the last 10 years. Growth will also be driven by the opportunities to export as the global economy doubles in size in the next two decades.
From 2011, I am forecasting that the economy will continue to recover, with growth of 3Â1/2 per cent. from then on. To account for the impact of the global shock, I have further adjusted trend output—the productive potential of the economy. But in future years, the economy will recover towards a trend rate of growth of 2Â3/4 per cent. Inflation is expected to continue coming down sharply, reaching 1 per cent by the end of this year. I am writing to the Governor of the Bank of England, in the usual way, to confirm that the inflation target remains unchanged at 2 per cent. Retail prices index inflation is forecast to remain negative, falling to minus 3 per cent. by September, before moving back to zero next year.
The deepening global recession has had an impact on the public finances here and in every country across the world, and in this Budget, I will set out steps to ensure that they are on a sustainable path. And owing to the measures that I will announce today, the current deficit is expected to halve within four years. But before I turn to that, I want to set out the additional help we will give to people and businesses to get through the recession—and build towards recovery.
We know from previous recessions that people’s greatest fears are the loss of their job and their family home. All over the world, as the economy slows, unemployment is rising. In the UK, the claimant count increased in February by 137,000. Today’s figures show that in March it went up by 74,000—making the total claimant unemployment rate 4.5 per cent. It is not in any Government’s power to prevent all job losses, and, even when the recovery is under way, it will take time for unemployment to start falling. But Governments must give people targeted help to find new jobs as quickly as possible and, where necessary, to gain the new skills which will allow them to do this. This is not just morally the right thing to do, but economically essential. All the evidence shows that the longer people are out of work, the more difficult it becomes for them to re-enter the labour market. So today I will announce steps to ensure that a short-term job loss does not turn into a lifetime on benefits.
The core of the Government’s approach is the Jobcentre Plus network; its help has almost halved the average time that people spend out of work compared with previous recessions. Even in the tough economic conditions since November, it has helped over a million people move back into new employment. I am determined that this support can continue to be given to people who lose their jobs. In November, I increased resources for the Jobcentre Plus network and the new deal by £1.3 billion. I can announce today an additional £1.7 billion worth of funding, so that everyone can receive the high-level and high-quality support to which they are entitled.
Most people, even now, continue to find work within a matter of weeks, but we need to step up help to those who have greater difficulty in getting back into the labour market. So there will be additional support, through the flexible new deal, for people who have been out of work for 12 months. I am also determined that we do even more to protect young people from the damaging impact of long-term unemployment. The
alternative is a return to the days when a whole generation of young people found themselves abandoned to a future on the scrap heap. We will not repeat that mistake.
So I want to offer a guarantee. From January, everyone under the age of 25 who has been out of work for 12 months will be offered a job or a place in training. Those in work will receive a wage; those in training will receive additional money on top of their benefits. To provide these extra opportunities, we are working with employers to create or support as many as 250,000 jobs. That will include delivering local services and traineeships in social care and other high-demand sectors, as well as jobs for people of all ages in particularly badly hit communities.
I also want to do more to help people gain the crucial skills that will be needed in the future. So, as part of my guarantee to young people, I will spend over £260 million of new money for training and subsidies, to help them get the skills or experience that they need in sectors with strong future demand. We will also provide extra investment to ensure that we deliver on our guarantee for every 16 and 17-year-old who wants to stay in education or training, to make sure that they can do so. To deliver that, for the next two years I am providing a further £250 million this year and £400 million in 2010-11. That will allow an additional 54,000 places in sixth forms and further education colleges for students in the next academic year. For this and other measures, there will be consequential provisions, where appropriate, for Scotland, Wales and Northern Ireland.
I will shortly set out long-term measures for housing and for businesses to help build the recovery, but first I want to set out how we can offer more support now in these areas. One of the biggest fears when people lose their jobs is that they and their families will lose their homes, and I want to do more to reduce the number of repossessions. Last year, I increased and extended the support for the mortgage interest scheme, which covers mortgage interest payments when people lose their jobs. Today I can announce that I will maintain the higher level of support for a further six months to help home owners as long as they look for a new job. That is in addition to the scheme to help people stay in their homes if their income falls.
The housing market is also being held back by a lack of mortgage credit, and the Government have already taken action to encourage an increase in mortgage lending; this year the major UK banks will increase the availability of mortgages by around £20 billion. To build on this, today I can announce the introduction, following state aid approval, of the scheme to guarantee securities backed by mortgages. That will help ease the flow of mortgage finance.
The recession and the credit crunch have made it much harder for people to take their first step on the housing ladder. This is not just difficult for those involved, but also undermines the entire housing market. So to help, I have decided to extend the stamp duty holiday on properties sold for less than £175,000 until the end of the year. Sixty per cent. of residential properties will continue to be exempt, which will encourage modest and middle-income home buyers. I can also announce a further £80 million extension to HomeBuy Direct, the Government shared equity mortgage scheme, which has
already received interest from over 32,000 people since last September. Altogether, this is additional support for those who lose their jobs and new help for people to get on to the housing ladder.
In November I announced a series of measures to help businesses now. Over 100,000 businesses, which employ well over half a million people, have taken up the option to defer their tax bills, and I intend to continue this help. Some 800,000 smaller companies will benefit from the delay in the increase in corporation tax. Last month I announced that we would allow companies to spread out the payments of this year’s uprating of business rates, but today I want to do more to help firms with cash-flow problems. Many viable companies face temporary difficulties because of the shortage of credit, so today I am extending the help which allows loss-making companies to reclaim taxes on profits made in the last three years. This help, which will lead on average to repayments worth £4,000 each year, will now be available for two years until November 2010, and well over 100,000 businesses will have their full current losses entirely wiped out. Today I can also announce additional targeted support for companies’ cash flow, with a top-up trade credit insurance scheme, which will match private sector trade credit insurance provision if insurers reduce their cover to businesses operating in the United Kingdom.
I also want to help the UK’s automotive industry, which has been one of Britain’s success stories over the last decade. But the loss of consumer confidence and the credit crunch have led to a sharp fall in vehicle sales around the world. In order to help the car industry and retail trade, I can announce that we will implement a scrappage scheme next month. It will provide motorists with a £2,000 discount on new cars bought when they trade in cars over 10 years old. It will be a time-limited scheme until March 2010. My right hon. Friend the Secretary of State for Business, Enterprise and Regulatory Reform will announce further details shortly.
We have made our choice to help those who have lost their jobs to find work quickly and, if needed, to learn skills. We are acting decisively to prevent a new generation of young people from becoming a lost generation. We are offering real support to home owners, and to businesses, through this unprecedented economic crisis. We could have decided to do nothing—but we chose to act, because that is the right thing to do. By doing so, we have not just protected people but will also reduce the length and the severity of this recession, lessening the impact on our public finances in the medium term.
I now turn to the public finances and the action that I will take to put them on a sustainable footing in the medium and long term. As I told the House in November, tax revenues were falling. The financial sector, which provided 27 per cent. of corporate tax revenues, was already badly hit then. But since then, with the recession spreading across almost every sector, the wider tax take has also come down sharply. Corporation tax and income tax revenues have fallen. The problems in the housing market have meant a dramatic reduction in stamp duty. In the UK, tax as a share of GDP is 1.2 percentage points lower now than it was a year ago. Here and across the world, tax revenues are down, and it will take some years before they come back up. At the same time, our reformed welfare state is rightly providing support to families, but of course it does come at an added cost
to the Exchequer. Many countries have also intervened to strengthen their banking system, as we have. My public finances forecasts today include a provisional estimate for the potential cost of this, which totals 3Â1/2 per cent. of our GDP.
Around the world, fiscal deficits and Government debt have been rising sharply to levels not seen since the second world war. This is a response to an unprecedented financial crisis and a deep and widespread global recession. Allowing borrowing to rise—protecting services, helping people and businesses—is the right thing to do. The alternative—to take money out of the economy now, as some have suggested—would damage key public services, create more unemployment, lengthen the downturn and lead, in the end, to higher, not lower, debt. This Government, as well as others, have learned from the historic economic mistakes of the inter-war period that countries cannot deflate their way out of recession.
Taken together, my Budget measures today represent a fiscal easing of half a per cent. of GDP this year, followed by a tightening of 0.8 per cent. of GDP each year until 2013-14. I believe this is a sensible pathway to sustainable public finances. It will mean, as I have said, that the budget deficit will be halved in the next four years. At this stage, when there is so much uncertainty, to do so more quickly would prevent us from helping people now, choke off recovery, and stop us investing in the future.
Many countries, as a result of their action to support the economy, have seen higher deficits. In the United States, for example, the Congressional Budget Office expects the deficit to be 13 per cent. of GDP in 2009, 10 per cent. in 2010, and even in 2019, to be above 5 per cent. Our own figures for public sector net borrowing will be £175 billion this year, or some 12 per cent. of GDP. From 2010, as the economy starts to recover, and the measures announced in November and today take effect, borrowing will fall to £173 billion, then £140 billion, £118 billion, and then £97 billion. As a share of GDP, our borrowing will be 11.9 per cent. of GDP next year, and then, as we move towards balance, 9.1 per cent. in 2011-12, then 7.2 per cent., and then 5.5 per cent. in 2013-14.
This downturn will inevitably mean sharp increases in national debt relative to GDP. UK net debt, which includes the cost of stabilising the banking system, will, as a share of GDP, increase from 59 per cent. this year, to 68 per cent. next, then 74 per cent. in 2011-12, 78 per cent., and then 79 per cent. in 2013-14. It will stabilise and then begin to fall from 2015-16. In countries across the world, because of this economic crisis, it will take far longer for deficits to come back into balance. But because of the steps we are taking, I expect the underlying current budget to come back into balance two years later.
We need to help people now. We need to maintain key public services now. We need to invest in the future, but we also need to make sure that we maintain public finances on a sustainable footing. Indeed, this is the best way to drive up economic growth, which, in turn, is the best way to bring down borrowing and rebalance the public finances. We must to this within a time scale that does not damage the recovery. This will require tough decisions, but I am determined that they will be fair decisions.
It cannot be fair that those who should pay tax are allowed to avoid it. Over the last decade, we have taken a number of measures that have reduced tax evasion and avoidance—on average, reducing avoidance by over £1 billion a year. I intend to build on this today. We have identified loopholes and schemes which, when closed, will result in £1 billion of extra revenue over the next three years.
In this Budget, there will be new measures to help pensioners and savers on middle and modest incomes. It is important that everyone is encouraged to save for their retirement, and we will continue to support them to do so. But I intend to address an anomaly which sees a tiny proportion at the top taking a large slice of the help we give people to help to save. It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1Â1/2 per cent of earners. So from April 2011, I will restrict pension tax relief for those with incomes over £150,000 so that it is gradually tapered to the same 20 per cent. that the majority of people receive. We will consult on its implementation. I am introducing measures from today to prevent forestalling, but again only those with incomes over £150,000 will be affected.
I am not proposing to increase taxes on income for this year. However, as the economy recovers and wages start to grow again, it is right that we take additional steps. I believe that it is fair that those who have gained the most should contribute more. Only those with incomes over £100,000 a year—or 2 per cent. of the population—will be affected. In November, I announced a new rate of income tax of 45 per cent. on incomes above £150,000—the top 1 per cent. of taxpayers. In order to help pay for additional support for people now and to invest in the future, I have decided that the new rate will be 50 per cent., and will come in from April next year—a year earlier.
In November, I also announced that I was reducing personal allowances for the very highest earners with incomes over £100,000. These allowances are worth twice as much as those of basic rate taxpayers. I have now decided to withdraw fully the benefit of that allowance for those with incomes over £100,000 from next April. These measures are necessary to build our recovery and secure our country’s economic future.
Along with other measures, including for landfill, company cars and gaming, I can also announce the following. I will continue to monitor oil prices, but I expect that fuel duty will increase by 2p per litre in September, and then by 1p a litre above indexation each April for the next four years. Alcohol duties will go up by 2 per cent. from midnight tonight, and there will be an increase in tobacco duty of 2 per cent. from 6 o’clock this evening. Taken together, these measures will raise over £6 billion by 2012, to secure our economic future and to provide help for people now when they need it most.
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