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Overview

1.1 The Government's central economic objective is to achieve high and stable levels of growth and employment. This Budget will help build a stronger economic future for Britain through reforms that will put work, enterprise and families first. By protecting the environment and ensuring that growth is sustainable, this Budget will also ensure a better quality of life today and for future generations.

1.2 The key elements of the Government's strategy are:

• locking in economic stability as a platform for long-term sustainable growth;
• raising productivity through promoting enterprise and investment;
• increasing employment opportunity with a better deal for working families; and
• building a fairer society, with a better deal for families and children.
  

1.3 The Pre-Budget Report (PBR), published in November, set out the direction of Government policy and measures under consideration to deliver this strategy. A series of regional roadshows has subsequently widened the debate on how to rise to the productivity challenge and secure high and stable levels of growth and employment.

Macroeconomic Strategy and Prospects

1.4 Chapter 2 of the EFSR sets out the Government's macroeconomic strategy and the prospects for the UK's economy and public finances.

The new framework

1.5 In the past, Britain has suffered greater volatility in output and inflation than most other major industrial countries. Such volatility imposed both social and economic costs. On coming into office, the Government therefore introduced a new framework for monetary and fiscal policy to promote economic stability, while ensuring that macroeconomic policy responds sensibly to economic shocks:

• a new monetary framework to deliver low and stable inflation: the Bank of England's Monetary Policy Committee has been given operational independence to set interest rates to deliver the Government's inflation target;
  
• a new fiscal framework, including two strict fiscal rules - the golden rule and the sustainable investment rule - to get the public finances under control. Borrowing has been reduced by a cumulative £29 billion over the last two years and tight control has been maintained over public expenditure; and
  
• a new public expenditure regime which together with new three year spending plans, will provide greater certainty and encourage longer-term planning.

The forecast

1.6 The rewards of the new framework are already evident. Inflation is close to target. Interest rates peaked at 7½ per cent last year, half their peak level in the last cycle. Debt interest payments are falling. And employment is up by more than 400,000 since May 1997; long-term and youth unemployment have fallen by 50 per cent. The Budget 99 forecast, summarised in Table 1.1, confirms that:

• RPIX inflation is forecast to remain at the target level of 2½ per cent; and
  
• growth will be lower this year than last, following the global slowdown. However, the economy is well placed for stronger growth into 2000, in line with independent forecasters. This means that this cycle is set to be much more moderate than those in recent decades.

Table 1.1: Summary of the economic forecast

The fiscal rules

1.7 Budget 99 locks in the economic stability that the new framework has delivered. As a result of the strengthening underlying fiscal position, the fiscal rules are still met while the new Budget measures provide an extra £6 billion support over the next three years to boost the economy during the period when output is below its trend level. The public finances forecast - summarised in Table 1.2 - shows that:

• the surplus on current budget is projected to average 0·4 per cent of GDP over the current economic cycle; and
• net public debt is projected to decline significantly as a proportion of GDP, to below 35 per cent by 2003-04.

Table 1.2: Meeting the fiscal rules

1.8 Meeting these rules will allow the UK to:

• maintain high quality public services and deliver the spending commitments - including £40 billion additional investment in education and health over the next three years - announced in the Comprehensive Spending Review (CSR); and
  
• ensure the overall position of the public finances remains sound. As both rules are set over the economic cycle, they will also allow the automatic stabilisers to play their part so that fiscal policy continues to support monetary policy in the next phase of the cycle.

1.9 In addition, illustrative baseline projections for the next 30 years set out in Annex A of the EFSR indicate a sustainable fiscal position, capable of delivering equitable outcomes for future generations.

1.10 The Government is taking further steps to raise the sustainable rate of growth by tackling the underlying structural weaknesses in the economy. These are explored in Chapters 3-5 of the EFSR.

Raising Productivity

1.11 Chapter 3 sets out the Government's strategy for raising productivity through a better deal for enterprise and investment.

The productivity gap

1.12 The UK produces less per person than other major economies. The productivity gap of 40 per cent with the US and over 20 per cent with France and Germany reflects long-standing weaknesses in the economy:

• the UK has invested less in Research and Development (R&D): the US invests 50 per cent more, as a share of GDP, in business enterprise R&D;
  
• for every £100 per worker invested in new capital equipment in the UK during the last economic cycle, the US and Germany invested £140; and
  
• fewer people have basic skill levels: 22 per cent of adults in the UK have poor literacy skills, 50 per cent more than in Germany.

Measures so far

1.13 The Government has already introduced - in the 1997 and 1998 Budgets and CSR - a number of microeconomic reforms targeted on the five key drivers of productivity growth:

• investment: corporation tax has been reduced to its lowest ever level and tax measures introduced to encourage investment for the long-term;
  
• innovation and enterprise: £1.4 billion additional investment in science will promote high quality research and innovation;
  
• education and skills: an extra £19 billion will be invested over the next three years in raising achievement and improving skill levels;
  
• competition: new competition laws will increase efficiency and deliver a better deal for consumers; and
  
• public sector efficiency: setting challenging performance targets.

New measures

1.14 Budget 99 builds on this start through a further package of measures including:

• a new 10p corporation tax rate for small companies and extension of 40 per cent capital allowances for small and medium enterprises (SME) businesses to encourage entrepreneurial activity and innovative investment;
  
• a new £20 million venture capital challenge to finance early stage high-technology businesses;
  
• a new Research and Development tax credit in 2000 to encourage small businesses investment in R&D;
  
• an additional £100 million for basic science infrastructure to help provide a modern research base;
  
• a new Employee Share Ownership scheme in 2000 to encourage employees to take a stake in the success of their companies;
  
• a new Small Business Service to deliver services to small firms, including a new Automatic Payroll Service;
  
• from 2000, setting an 80 per cent discount for key courses such as computer literacy, funded through Individual Learning Accounts.

1.15 The Secretary of State for Trade and Industry will be making further announcements after the Budget, taking forward the competitiveness agenda.

Increasing Employment Opportunity

1.16 Chapter 4 focuses on the Government's strategy of promoting employment opportunities for all - the modern definition of full employment for the 21st century. It sets out how the Government intends to build a stronger economy by providing a better deal for working people.

Changes in the labour market

1.17 The strategy takes account of major changes in the labour market over the last two or three decades, including:

• growing structural unemployment and rising inactivity amongst certain groups,
  
• an increase in the number of women in work and part-time jobs;
  
• a tax and benefit system which has trapped many families into poverty and unemployment.
  

Measures so far

1.18 Major reforms were introduced in the 1997 and 1998 Budgets and the CSR to take forward the Government's employment strategy based on helping people from welfare to work, and making work pay. For example:

• the Welfare to Work initiative, funded through a £5.2 billion Windfall Tax on the excess profits of the privatised utilities, has already benefited over 350,000 people through the New Deal;
  
• tax and benefit reforms: the Working Families Tax Credit (WFTC) will be introduced in October 1999 providing extra help for 1.4 million working families;
  
• a National Minimum Wage will be introduced in April 1999; national insurance contributions (NICs) reform: removing the burdens on the low paid; and
  
• a New Deal for Communities and Employment Zones will tackle pockets of persistent high unemployment.

New measures

1.19 Budget 99 will build on these measures by:

Delivering Welfare to Work

• providing extra help for young people on the New Deal to ensure there is no option of simply staying on benefit;
  
• providing personalised support to help people over 50 move back to work; and
  
• an Income Support run-on to ease the transition into work for lone parents.

Making work pay

• from October 1999, a minimum income guarantee of £200 per week for full-time working families;
  
• no family will pay net income tax until they earn more than £235 (over £12,000 a year);
  
• eliminating the NICs bill for about 900,000 people earning too little even to pay income tax;
  
• a cut in the NICs bill for low earning self-employed people from April 2000;
  
• a new 10p rate of income tax from April 1999 which halves the tax bill for 1.8 million taxpayers;
  
• and a cut in the basic rate of income tax to 22p from April 2000 to reward work and ensure working families are better off.

Building a Fairer Society

1.20 Chapter 5 outlines the Government's strategy for building a fairer society in which everyone has the opportunity to fulfil their potential. Economic growth, opportunity and fairness go hand in hand: an economy in which a significant proportion of the population is unable to fulfill its potential will be poorer and less productive.

1.21 It also ensures that growth takes place in a way that is fair to today's and future generations. The Government will publish later this year its Sustainable Development Strategy: achieving economic growth while protecting and where possible enhancing the environment and making sure that the benefits are available to everyone, not just the few.

A strategy for fairness

1.22 The Government is therefore committed to:

• ensuring that everyone has access to high quality public services, including decent schools and a modern health service;
  
• ensuring that all families with children are supported through the tax and benefit system;
  
• targeted support focusing on:
  
  • work as the best way out of poverty (as set out in Chapter 4);
    
  • families and children to ensure that every child can thrive and take advantage of new opportunities;
    
  • help for those not in work, including giving a better deal to pensioners;
    
• ensuring that growth is sustainable, respects the environment and is fair to future generations.

Measures so far

1.23 The CSR focused on how public services could be modernised to meet these goals. For example: an extra £40 billion will be invested in modernising health and education over the next three years; child benefit will increase by £2.95 a week for the eldest child from April; and new targeted initiatives such as the Sure Start programme were set up to ensure that all children are ready to learn when they reach school.

New measures

1.24 Budget 1999 focuses principally on tax and other measures that will increase opportunity and protect the environment:

A better deal for families and children

Te introduction of a Children's Tax Credit, replacing the married couples allowance and related allowances, will be worth £416 a year, with increases in the WFTC and Income Support to ensure all children benefit; and

• a 3 per cent real increase in Child Benefit to at least £15 and £10 a week from April 2000 for first and subsequent children respectively.

Modernising public services

• a 1.1 billion package of investment from the Capital Modernisation Fund will provide:
  
  • £470 million to support a national IT strategy;
    
  • £430 million to modernise Accident and Emergency services and improve access to primary care services; and
    
  • £170 million to tackle crime.

Pensioners

• a 1 billion package, including a £100 winter allowance, a minimum guarantee on tax and an increased Minimum Income Guarantee.

Charities

• a review of Charity Taxation consultation document which explores how the tax system can encourage more giving to charity.

Tackling tax abuse

measures designed to ensure individuals and businesses pay their fair share of taxes.

Protecting the environment

• a package of measures aimed at:
  
  • encouraging energy efficiency and tackling climate change through a new climate change levy;
    
  • improving local air quality and supporting the integrated transport strategy through a major reform of the company car tax regime, a reduction to £100 in vehicle excise duty rates for cars with the smallest engines, tax measures to promote environmentally friendly commuting and increases in road fuel duties; and
    
  • encouraging sustainable waste management through increases in the rate of the landfill tax.

IMPACT OF BUDGET MEASURES ON HOUSEHOLDS

1.25 Budget 99 will support families with children and reward work.

1.26 Taken together with the measures announced in Budget 98, it will:

make people better off

• over 20 million households gain, of which 7 million are households with children and 7 million are pensioner households;
  
• on average, households will be £380 a year better off.

support families

• families with children will on average be £740 a year better off;
  
• poorer families will also benefit: 700,000 children will be taken out of poverty.
  

reward work

• working households will on average be £450 a year better off;
  
• the new 10p rate of tax will halve the tax bill for 1.8 million, of whom 1.5 million are low-paid employees;

the Working Families Tax Credit will on average give low earning families an extra £24 a week, compared with Family Credit.

Chart 1.1: Children and working families gain the most

Chart 1.2: Where taxpayers´ money is spent

Chart 1.3: Where taxes come from

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