1 Budget Overview - continued

Encouraging Work (see chapter 3)

1.25 This Budget encourages work by:

helping people into work by extending the Welfare to Work initiative;
making work pay through a major package of tax and benefit reforms; and
improving skills by tackling skill shortages in areas such as IT and promoting lifelong learning.

Extending the New Deal

1.26 The last Budget launched the Welfare to Work initiative to provide new employment opportunities to people detached from the labour market. The New Deal for young people, to help those aged 18-24 who have been unemployed for six months or more, started in January in 12pathfinder areas. In the first nine weeks, 12,800 young people entered the programme, 8,800 matched to an employer, and 620 found work. The programme will go national from this April. The response from employers has been very encouraging and, in the largest commitment to the New Deal so far, around 40,000 opportunities will be available across the hotel and catering industry, with training provided through a national network of centres partly funded by subsidies available through the New Deal.

1.27 The New Deal for lone parents has also started in lead areas, where 1,100 lone parents have already been helped to find work, and will go national to those lone parents making a new claim for benefits from April, and for all lone parents from October. From June, people unemployed for over two years will benefit from a £75 wage subsidy.

1.28 This Budget extends the New Deal initiative:

for the most disadvantaged young people, and to extend support and training for mentors, the Budget provides for a further £50 million for the gateway element of the New Deal;
for lone parents, new pilots will look at ways of increasing the take-up and effectiveness of the New Deal, at a cost of £10million. There will be changes to the benefit system to reduce some of the risks lone parents face in taking a job that may not last;
for the long-term unemployed, 70,000 new opportunities will be available through new and innovative pilots starting in November 1998. As part of the pilots, the long-term unemployed over 50 years olds will be helped through special measures targeted on their particular needs;
for partners of the unemployed, the Government will ensure that partners over 25 have the option to receive the help they need to get back to work. Childless partners aged under 25 will be included in the New Deal;
for disadvantaged communities, a New Deal For Communities will begin to tackle social exclusion on the most deprived estates;
for disabled people, the Government will offer a new personal adviser service to help disabled people overcome obstacles to work. There will also be changes to the benefit system to reduce some of the risks disabled people face in taking a job that may not last.

Making work pay

1.29 This Budget begins the process of tax and benefit reform - the next stage of the modernisation of the welfare state. Following the measures in the first Budget to help people move off welfare into work, this Budget launches a New Deal for Working Families. The present tax and benefit system does not ensure that work pays: 740,000 people lose more than 70 pence in every extra pound they earn; 130,000 lose more than 90 pence in the pound. In addition, the national insurance contributions (NICs) system leaves thousands of people £1.28 a week worse off when they reach the lower earnings limit for NICs. This means that people on low earnings can often find that the gap between in-work and out-of work income means that work doesn't pay.

1.30 The Budget therefore reforms the tax and benefits system to ensure that work and opportunity are encouraged, rather than penalised, for millions of hard-working families. The key measures include:

NICs: a £1.4 billion reform of National Insurance Contributions will improve work incentives and make it more attractive to employ people moving from welfare to work. A one penny increase in earnings can trigger NICs charges ("entry fees") of £3.20 a week. The Government will abolish these "entry fees" and abolish the additional steps in employer NICs from April 1999. Employers will pay no NICs in respect of their employees' first £81 of earnings a week (up from £64). The Government is committed to making the same change for employees as soon as it can ensure that no one loses benefit entitlement as a result;
the Working Families Tax Credit (WFTC), to be introduced in October 1999, will make work pay for families. It will guarantee a minimum income: every family with full-time earnings of £100 a week will be guaranteed an income of at least £180 a week. And families earnings less than £220 a week, half male average earnings, will no longer pay any net tax. It will ease both the unemployment and poverty traps. Couples will be able to choose to whom the WFTC is paid;
a childcare tax credit within the WFTC will meet 70 per cent of eligible childcare costs up to a maximum cost of £100 a week (currently £60) for a family with one child and £150 a week (currently £100) for a family with two or more children. Unlike the current FC disregard, it will assist families on the lowest incomes.

1.31 Taken together with the introduction of the national minimum wage and the introduction of a 10pence starting rate of tax, when it is economically right to do so, these changes will help to make work pay.

Improving skills and lifelong learning

1.32 An extra £100 million, including an additional £10 million for the University for Industry, will be directed by the Department for Education and Employment (DFEE) to tackling skill shortages in key sectors and to promote lifelong learning, as part of the £250million schools and skills package across the UK.

Promoting Enterprise (see chapter 4)

1.33 The Government cannot itself improve the performance of industry or create dynamic new firms. But, in partnership with industry, it can create the right framework for enterprise and investment. The Government is committed to removing the barriers that hold back business investment and that discourage enterprising individuals from starting dynamic businesses that would allow Britain to be a world leader in the 21st Century.

1.34 This Budget continues the process of tax reform to produce a corporate and capital tax system that: rewards risk taking and encourages enterprise and does not distort corporate investment. The key measures are:

Advance Corporation Tax will be abolished from April 1999;
large companies will pay their corporation tax in quarterly instalments. Small and medium sized companies will be exempted;
the main rate of corporation tax will be cut to 30 per cent from April 1999;
the small companies' rate of corporation tax will be cut to 20 per cent from April 1999;
enhanced first year capital allowances at a new rate of 40 per cent will be extended until July 1999;
capital gains tax (CGT) reform, including a new effective 10 per cent rate on business assets, will tax long-term gains less heavily than short-term gains;
unified Enterprise Investment Scheme (EIS) and CGT reinvestment reliefs will better target capital reliefs for small, higher risk trading companies;
a new University Challenge fund will create £50 million in venture capital to help commercially exploit university research; and
businesses will be helped through tax simplification and improved Revenue and Customs advice and services.

Creating a Fairer Society (see chapter 5)

1.35 The Budget also takes forward the Government's commitment to fairness in tax and spending.

Fairness for families and children

1.36 It promotes fairness for families and children by:

increasing child benefit for the eldest child by £2.50 a week from April 1999, over and above statutory indexation (and carried through to the family premium in income support and related benefits). This will provide an extra £130 a year. As a result of this increase and the changes in WFTC, a couple, with two young children, on earnings of around £220 a week will see their incomes increase by £23 a week. This increased support for children will, in part, be funded by a reduction in the Married Couple's Allowance for under 65s from 15 per cent to 10 per cent from April 1999.
increasing the relevant rates in Income Support, Family Credit and related benefits by £2.50 a week from November 1998;

Main tax rates and allowances

1.37 The Government will take further steps to improve the fairness of the tax system as a whole:

it will introduce a new 10 pence starting rate of tax, when it is economically right to do so;
this Budget makes no changes to the basic and top rates of income tax consistent with the Government's manifesto pledge for this parliament. There will be an indexed increase of 3.6 per cent in the main income tax allowances and the lower rate bands and basic rate limit.

Reducing hospital waiting lists

1.38 The Budget includes a £500 million package to reduce hospital waiting lists in 1998-99, taking the extra amount committed to health across the UK to £2 billion in the first two years of the Government.

Boost to schools

1.39 The Budget includes an additional £250 million boost to schools and skills across the UK, taking the extra amount committed to education to £2.5 billion since the Government came to office.

Protecting the environment

1.40 A fair tax system must also be fair to future generations and help to protect the environment. In last July's Budget the Government gave a clear commitment in the Statement of Intent on Environmental Taxation on the use of the tax system to reduce environmental damage. This Budget starts to deliver on that commitment; it includes a range of measures that will reduce greenhouse gas emissions and improve air quality, as well as reducing the environmental impact of landfill:

the road fuel duty increases will help to reduce emissions of greenhouse gases from road transport;
to improve local air quality, the increase on ordinary diesel will be above that for petrol. Cleaner diesel will receive an increased duty advantage;
the Vehicle Excise Duty (VED) for cars will be frozen this year and the Government intends to introduce a new low VED rate for low emission cars from 1999;
Bus Fuel Duty Rebate will be increased; the Government will consult on how the rebate can encourage buses with cleaner engines;
the rate of VAT on energy saving materials funded by Government schemes will be reduced to 5 per cent, allowing 40,000 more low income households to be helped;
the landfill tax will be increased to reduce the environmental impact of landfill;
scale charges for employees provided with free fuel for private use of company cars will be increased by 20 per cent over and above the usual fuel duty increase in this and the next four years;
industrial and commercial use of energy: there will be a further detailed assessment of whether or not taxes or other economic instruments should be used to help reduce emissions of carbon dioxide, and, if so, how.

Improving public transport

1.41 A £500 million package of help for public transport over the next two years will include £50 million for rural transport which will provide extra support for bus services in rural areas.

Individual savings accounts

1.42 The Budget promotes fairness in savings by:

introducing the proposals for the new individual savings account which will help to spread the savings habit to those on more modest incomes and distribute the tax relief on savings more fairly. The key features, following the consultation launched in December, are:

the new savings account will start in April 1999, and run for at least ten years. There will be no lifetime limit;
there will be an annual subscription limit of £5,000, of which no more than £1,000 can be in cash and £1,000 in life insurance;
the annual limit will be £7,000 in the first year of the scheme only (1999-2000), of which no more than £3,000 can be in cash and £1,000 in life insurance;
no further subscriptions to PEPs will be allowed after April 1999, but the PEPs held at that date will continue under the current rules and with the same tax relief as the new account; and
no new TESSAS can be taken out after April 1999 but existing TESSAS at that date will run their five year course under the current rules. On maturity, the capital may be transferred to the new account.
Stamp duty

1.43 The rate of stamp duty on transfers of property (except shares) below £250,000 (currently 98 per cent of residential property sales) will remain unchanged. The rate will be increased on 24 March (except where transfer relates to a contract made on or before 17 March) from 1.5 per cent to 2 per cent if the price is more than £250,000 and from 2 per cent to 3 per cent if the price is more than £500,000.

Tackling avoidance

1.44 The Budget also seeks to ensure that everyone pays their fair share of tax by tackling avoidance. It includes a wide range of measures to curb avoidance, close loopholes and remove unfair advantages.

Summary

1.45 Taken together, the Budget measures represent a radical and far-reaching step towards a more productive, high-employment economy and a fairer society.

1.46 The Budget tax and expenditure measures are summarised in Table 1.3 below. The detailed measures are then set out in Chapters3 to 5 and Annex C.

Budget 98 index