Budget 2004 - Prudence for a purpose: a Britain of stability and strength

The Government’s economic objective is to build a strong economy and a fair society, where there is opportunity and security for all.

The long-term decisions the Government has taken – giving independence to the Bank of England, new fiscal rules, and a reduction in debt – have created a strong platform of economic stability. The UK economy grew continuously throughout the global turndown that began in 2001, while many of the world’s major economies experienced recession. The UK is now experiencing the longest period of sustained low inflation for over thirty years and unemployment is the lowest of the G7 major industrialised economies.

Economic stability provides the platform for building prosperity, achieving social justice with security and opportunity for all, and maintaining investment in public services. With the world economy now strengthening, the challenge is to lock in the UK’s stability and strength, and equip the UK to continue to succeed over the long term in a more competitive global economy.

In an increasingly knowledge-driven global economy, success lies in a flexible economy with a strong science and innovation base, and a highly skilled and educated workforce. The Budget sets out a programme of long-term investment in schools, colleges and universities, to give every young person the chance to make the most of their talents. It also sets out plans for new investments in science and innovation, and in a highly skilled workforce through apprenticeships and a New Deal for skills.

The Government is determined that continued progress towards a flexible and highly productive economy is matched with reforms which promote fairness. This Budget continues the action the Government is taking to create a fairer, more inclusive society with opportunity and security for all.

MAINTAINING MACROECONOMIC STABILITY

The Government’s long-term economic goal is to maintain macroeconomic stability, ensuring the fiscal rules are met and that inflation remains low. Following growth of 0.8 per cent in the third quarter, UK GDP rose by 0.9 per cent in the final quarter of 2003, above trend rates and the fastest rate of quarter-on-quarter growth for over three and a half years. As in the 2003 Pre-Budget Report, the recent pick-up in activity seen over the latter half of 2003 is expected to be consolidated through 2004 and into 2005. The Budget 2004 forecast is that:

UK GDP is expected to grow by 3 to 3½ per cent in both 2004 and 2005, unchanged from both the Budget 2003 and the 2003 Pre-Budget Report forecasts. By 2006, with the output gap closed, growth is expected to return to its trend rate of 2½ to 3 per cent; and
CPI inflation is expected to rise through the course of this year to reach its 2 per cent target by mid-2005, as the lagged effects of sterling’s depreciation against the euro since 2002, combined with the effects of the strengthening recovery in the world economy, feed through to higher import prices. The credibility of the Government’s monetary policy framework is also expected to contribute to returning inflation to target through anchoring inflation expectations.

The public finances are sound and the Government is on track to meet its fiscal rules.

PROMOTING PRODUCTIVITY AND FLEXIBILITY

Productivity growth underpins strong economic performance and sustained increases in living standards. The Government’s long-term goal is for the UK to achieve a faster rate of productivity growth than its main competitors. Recent data show that the UK is making some progress in closing the productivity gap with Germany and France. Budget 2004 sets out the next steps the Government is taking to build on this success and further strengthens the drivers of productivity growth, including:

the publication of a consultation document to inform the preparation of a ten-year investment framework for science and innovation, as part of the 2004 Spending Review, committing to grow public investment in the science base faster than the trend rate of GDP growth over the next Spending Review period;
a commitment to increase NHS funding for R&D by £100 million by 2008, to underpin the creation of a new UK Clinical Research Collaboration for the effective and efficient translation of scientific advances into patient care;
a New Deal for skills to ensure that individuals are helped to develop the skills they need for employment and employers can develop the skilled workforce needed for the success of their business, and extending Employer Training pilots to six new areas;
reforms to reduce the regulatory burden on businesses, including consulting on the implementation of phasing out payment via employers for Working Tax Credit, strengthened Government scrutiny of regulatory proposals, and changing the structure of the UK’s tax administration;
devolving delivery of regional and local Business Link services from the Department of Trade and Industry to the Regional Development Agencies;
full details of the Local Authority Business Growth Incentives scheme, allocating £1 billion over three years to boost the role of local authorities in promoting enterprise and economic growth;
the Barker Review of housing supply, published today, concludes that house building must rise substantially to reduce house price inflation and increase the number of affordable homes. The Government agrees with the need for a significant increase in housing development over time. It intends to implement a programme of reform to planning and delivery of development as recommended in the Review and consider a package of measures to increase housing supply, including social housing investment, alongside a Planning-gain Supplement by the end of 2005;
a new entitlement for graduates of the world’s top 50 business schools to come to the UK to seek employment; and
seeking views on how property investment funds (a UK version of the successful US Real Estate Investment Trusts) should be structured, to encourage more efficient investment in commercial and residential property.

Further information on these and other reforms to help businesses are set out in Budget Press Notice 4, Encouraging Enterprise, Investment and Productivity.

PROMOTING FLEXIBILITY ACROSS THE REGIONS

Budget 2004 also takes new steps to promote greater regional flexibility. In a flexible and dynamic economy, regions must be empowered to harness their indigenous strengths, tackle weaknesses in enterprise, skills and innovation, and to promote growth and full employment in all communities. Key steps include:

developing further the framework to ensure that regional and local institutions have the flexibilities they need to harness indigenous strengths and overcome regional economic disparities. The Regional Development Agencies (RDAs) were asked to work together to identify the top ten institutional barriers that they believe are currently hindering effective coordination of policy decisions and service delivery in the regions. The Government has published today a full response to the RDAs in Devolving decision making: 2 – Meeting the regional economic challenge: Increasing regional and local flexibility;
the involvement of the nine English RDAs in preparatory work for the Budget. Budget 2004 reflects and responds positively to their contributions; and
as a valuable contribution to the Government’s commitment to achieving a greater regional balance of economic activity, publication of Sir Michael Lyons’ final report, Well Placed to Deliver? – Shaping the Pattern of Government Service, which sets out a series of recommendations for relocating civil servants and other public sector workers from London and the South East.

The RDAs have an excellent understanding of what is needed to drive economic growth in the regions and how delivery organisations can cooperate more effectively to deliver this. Building on their input into last year’s Budget, the RDAs were asked to provide policy advice in five areas: barriers to business start-ups; provision of Government services to small businesses; access to finance for small and medium sized firms; barriers to skills provision; and knowledge transfer between businesses and universities.

The Government is announcing several new measures today in response to the RDAs’ representations, including:

overcoming barriers to business start-ups, the Government is announcing today specific proposals to ensure that the measures it has introduced provide support for businesses that re-invest their profits and grow their businesses;
providing government services to small businesses, the Government is announcing today that regional and local Business Link services will be devolved to the RDAs, with a framework for setting national standards and services to be developed with SBS, the RDAs and other Government departments funding business support;
improving access to finance for small and medium sized firms, the Budget announces measures to smooth the flow of funds into Venture Capital Trusts, and its intention to launch a pathfinder round of Enterprise Capital Funds, which will be commercial funds investing a combination of private and public monies in small high-growth businesses;
overcoming barriers to skills provision, as set out in Devolving Decision Making: 2 – Increasing Regional and Local Flexibility, the Government is announcing today its commitment to address any institutional barriers identified by the Regional Skills Partnerships to creating an effective and integrated approach to regional skills delivery, whilst taking into account the balance with national policy; and
encouraging knowledge transfer between universities and businesses, the Government is announcing today that it will build the Higher Education Innovation Fund as a permanent third stream of funding for universities in England to further build the capacity in the university sector for knowledge transfer. The Government will develop this policy as part of its ten-year investment framework for science and innovation.

The Government has set out its full response to the RDAs’ input into Budget 2004 in a series of regional press notices published today.

INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

The Government’s long-term goal is employment opportunity for all - the modern definition of full employment. It aims to ensure a higher proportion of people in work than ever before by 2010. To achieve this, individuals who want and are able to work should be provided with the support they need to enable them to find employment and develop skills. The Government recognises that each individual will face different barriers to work. Delivering full employment therefore requires a personalised approach, with services tailored to the needs of the individual and local circumstances. The Government is taking further steps to move towards its aim of full employment opportunity for all, including:

the piloting of a mandatory work-focused interview regime for some existing claimants of incapacity-related benefits in the Pathways to Work pilot areas;
the piloting of a preparation premium of £20 per week in the Pathways to Work pilot areas, for existing claimants of incapacity-related benefits who undertake relevant activity that supports a return to work;
the introduction of a worksearch premium of £20 per week, available to those in a family in receipt of the Working Tax Credit who are not working, in six pilot areas with high levels of worklessness;
the introduction of a second set of Local Housing Allowance Pathfinders in the private rented sector from April 2005;
a package of measures to simplify the rules around Housing Benefit;
from October 2004, an increase in the adult and youth rates of the National Minimum Wage to £4.85 and £4.10 respectively, and the introduction of a National Minimum Wage for 16 and 17 year old workers of £3.00 an hour; together with the Learning and Skills Council and employers, the Government will work to achieve minimum pay levels for apprentices in England of £70 to £80 per week;
an extension of measures for lone parents in six cities with large lone parent populations, including access to NVQ level 3 training; and;
‘Fair Cities’ initiatives, to be established in three areas later this year, to improve employment outcomes for people from disadvantaged ethnic minority groups.

BUILDING A FAIRER SOCIETY

The Government is committed to promoting fairness alongside flexibility and enterprise so that everyone can take advantage of opportunities to achieve their full potential in a modern, flexible economy. The reforms of the welfare state introduced by this Government reflect its aims of eradicating child poverty, work for those who can and ensuring security for all in old age. The Government is also committed to a modern and fair tax and benefit system, which encourages work and saving and ensures that everyone pays their fair share of tax. This Budget sets out the next steps the Government is taking to support these aims, including:

reforming financial support for 16 to 19 year olds, to increase the proportion of young people who reach the age of 19 equipped with the skills they need to succeed in a modern global economy;
additional funding for Sure Start, early years and childcare of £669 million in 2007-08 compared to 2004-05, an average annual real growth rate of 17.3 per cent;
a Children’s Centre in all of the 20 per cent most disadvantaged wards in England by 2008, moving towards the goal of a Children’s Centre for every community;
a £100 payment to pensioner households with someone aged 70 or over to help with their council tax bills;
simplifying the taxation of pensions, replacing the complexity of eight existing regimes with a single, simplified regime with a lifetime allowance for tax-privileged pension saving;
promoting financial inclusion, focusing on helping households access affordable banking and credit;
taking action to protect revenues and modernise the tax system, including measures to combat fraud and avoidance; and
implementing the O’Donnell review recommendations to establish a new customer-focused tax service, integrating the Inland Revenue and HM Customs and Excise.

As a result of personal tax and benefit measures coming into effect in 2004-05, including the £180 per year increase in the child element of the Child Tax Credit announced in the 2003 Pre-Budget Report, by October 2004, in real terms:

families with children will be, on average, £175 a year better off, while those in the poorest fifth of the population will be, on average, £425 a year better off;
a single earner couple with 2 children, with earnings up to the median for full time workers - £22,000 per year - will be at least £4.20 a week better off; and
a lone parent with 2 children, working 16 hours a week at the National Minimum Wage, will be at least £16.00 per week better off.

As a result of all personal tax and benefit measures introduced since 1997, by October 2004 families with children will be, on average, £1,350 per year better off in real terms while those in the poorest fifth will be, on average, £3,000 a year better off in real terms.

As a result of personal tax and benefit measures introduced since 1997, in 2004-05 pensioner households will be, on average, £1,350 a year better off in real terms while the poorest third will be, on average, £1,750 a year better off.

DELIVERING HIGH QUALITY PUBLIC SERVICES

The Government’s goal is to establish world class public services, with extra investment tied to reform and results. The Government’s strategy is to deliver improvements in public services through sustained investment and reform to ensure that taxpayers receive value for money.

The 2004 Spending Review will set spending plans for 2006-07 and 2007-08 and will confirm the plans set for 2005-06 in the 2002 Spending Review. In doing so it will consolidate and build on the step change in funding for key public services achieved in previous spending reviews. In Budget 2004, the Government:

sets out plans for public service efficiency savings of 2.5 per cent a year over the Spending Review period, building on the findings of the Gershon Efficiency Review, the Lyons Review of public sector relocation and the O’Donnell Review of the revenue departments, and sets out how this efficiency agenda will be developed in the 2004 Spending Review; and
to reflect the high priority the Government attaches to education, England education spending will grow by an annual average of 4.4% in real terms across the 2004 Spending Review period. By 2007-08, spending will be £7.4 billion higher in England than in 2005-06 and £8.5 billion higher for the UK on top of the uplift for 2005-06 already in spending plans. By 2007-08, education spending in the UK will be 5.6% of GDP, up from 5.4% in 2004-05.

This will mean:

Children's Centres in each of the 20% most disadvantaged wards, reaching over half of all poor children in England;
a transformation of all secondary schools to 21st century standards in the next 10 to 15 years with up to one thousand more specialist schools and academies;
more schools offering extended services, making after schools provision and support the norm, and binding schools into the heart of communities;
continued progress on standards in schools, and closing the gap in attainment between the best and worst off pupils; and
an expansion of Higher Education to deliver an advance in progress towards the Government's target that by 2010, 50 per cent of young people will have gone to Higher Education by age 30, while maintaining per student funding levels in real terms.

PROTECTING THE ENVIRONMENT

The Government is committed to delivering sustainable growth and a better environment. It is using a range of economic instruments to address the challenges posed by sustainable development, to tackle local environmental threats and to control and reduce emissions of the gases responsible for climate change and poor air quality. Budget 2004 describes the next steps in the Government’s strategy, including:

new eligibility criteria for climate change agreements, which will increase the number of businesses that can participate in the scheme, and a freeze in the rates of the climate change levy;
a package of measures to promote household energy-efficiency including a reduced rate of VAT for ground source heat pumps, and possibly for micro-combined heat and power units from 2005, and incentives for the private rented sector to invest in energy-efficiency;
duty rates for sulphur-free fuels raised in line with inflation from 1 September 2004, the duty for ultra-low sulphur fuels set at 0.5 pence per litre above this level from the same date, an increase in rebated fuels rates, and three-year certainty for duty rates on biofuels and road fuel gases;
reforms to the tax treatment of company vans and emergency vehicles, taking 85 per cent of drivers of company vans out of the system altogether;
publication of the third progress report on the lorry road-user charging scheme, which now moves the scheme into the procurement phase, and sets out decisions on key aspects of the scheme’s design; and
reform of the aggregates levy relief scheme in Northern Ireland.

Further details of the Government’s environmental strategy are set out in the separate press notice, PN 03.

Notes for editors

Further details of Budget 2004 announcements can be found on this website. Additional detail is also included in the press notices which can be found on the Budget 2004 Press Notices index. Copies of Inland Revenue and HM Customs and Excise Budget Notes can be found on their websites at www.inlandrevenue.gov.uk and www.hmce.gov.uk respectively.

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