8 November 2000

STATEMENT BY THE CHANCELLOR OF THE EXCHEQUER ON THE PRE-BUDGET REPORT ON WEDNESDAY 8 NOVEMBER 2000

In 1997 Britain had rising inflation, a deficit of 28 billion pounds, a national debt that had doubled and was at risk of repeating the old familiar stop go cycle.

So, in this Pre-Budget Report - which will address specific and immediate concerns - we will do nothing to put at risk the economic stability that has given us the lowest unemployment for 20 years, the lowest inflation for 30 years, mortgages 4 per cent - 1,000 pounds - below the average of the previous 20 years, and a Budget discipline that has enabled us to cut borrowing and now invest more every year in hospitals, schools and public services.

And this hard-won and newly-won stability now gives Britain an opportunity we can either seize or squander - the opportunity to achieve high and sustained levels of productivity growth, and so ensure long term prosperity not just for some but for all.

Yet every time the British economy has started to grow - as in the 1980s - Governments have taken short-term decisions on tax and spending which have put inflation, interest rates and economic stability at risk.

So, Britain has a choice - the choice that underlies this Pre-Budget Report.

The risk for Britain is to repeat the 80s' mistake of taking economic strength for granted even when we still have a large productivity gap with our competitors and trying to run the economy at a capacity not yet achieved. Our choice - the choice of the Pre-Budget Report - is that we build economic strength by investing and through tax incentives encouraging a new generation of entrepreneurs.

The risk for Britain is a repeat of the late 80s' mistake - claiming a surplus one year could fund tax cuts for every year and - by committing in tax what was yet to be earned - stoking up an unsustainable consumer boom, forcing interest and mortgage rates to rise. We will take no risks with stability. Our choice - the choice of the Pre-Budget Report - is to lock in stability by - as I will announce today - prudently cutting debt and debt interest payments to keep inflation and interest rates low.

The risk for Britain would be to cut investment in education and our infrastructure and perpetuate decades of neglect and undermine our economy. This Pre-Budget Report makes a different choice: to move forward with our three year spending plans that will double public investment - from education and health, to transport, policing, and the environment - and by continuing to cut both debt interest and unemployment, combining public spending with targeted tax cuts to do more for pensioners and, as I will show, give families the lowest direct tax burden for 30 years.

So, this Pre-Budget Statement sets out a balanced approach - first stability and prudence to keep interest rates low, second tackling under-investment and then, when it is affordable to do so, targeted tax cuts for the Nation's priorities.

Let me turn first to the forecasts for the economy.

Since 1997 our first and most fundamental economic choice has been, through Bank of England independence, tough controls on public spending and difficult decisions on tax, to build economic stability.

There were those in this House who predicted our policies would bring recession. I can report to the House that this year:

inflation is meeting its 2.5 per cent target;
long term interest rates are around the lowest for 30 years, the same as those in Germany and lower than America;

I can also report that the economy is forecast to grow by 3 per cent this year:

manufacturing - despite its difficulties - by one and a quarter per cent and exports growing by eight per cent;
consumer demand growing by 3.5 per cent with living standards rising;
and business investment which has grown by 1.5 per cent as we lock in a higher level of investment as a share of our economy, 14.5 per cent, than at any time in 40 years, a bigger share of our economy than of the American economy;
and in total, fixed investment has this year grown by two and a half per cent;
with 1.1 million more men and women in work than in 1997, Britain now has the lowest unemployment since 1979, the lowest long term unemployment since 1978, the lowest youth unemployment since 1975;
the highest employment ever among women;
unemployment now lower in every region. With today one million vacancies spread across the country.
And this month we plan to reach our promised target: 250,000 young people from Welfare to Work.

And it is precisely because we have taken the trouble to build the long term foundation for success, and precisely because we have resisted short termism that would threaten stability in interest rates that I can report that, even in times of uncertainty for the world economy over oil prices and exchange rates, the Treasury forecast for next year is that:

inflation will meet its target of 2.5 per cent;
manufacturing will grow by between two and two and a quarter per cent;
exports will grow by between 7 and 7.5 per cent;
growth will range from two and a quarter to two and three quarter per cent;
consumer demand will grow by two and a quarter to two and a half per cent;
business investment by 1.5 to 2 per cent; and
total investment by four and a quarter to four and a half per cent.

There were those who predicted our public spending plans would lead to higher inflation and that the economy would run out of control:

between 1979 and 1997 inflation averaged 6.2 per cent;
since 1997 it has been less than half as much - 2.4 per cent;
interest rates from 1979 averaged 10 per cent. Since 1997 6 per cent;
mortgage rates from 1979, 11 per cent. Since 1997 mortgage rates an average of 7 per cent;

Growth from 1979 averaged 2 per cent. Since 1997 it has been 2.7 per cent.

So we have steered a course of stability, but we are not satisfied. Long term prosperity for all is our objective, achieving, in this decade, full employment, higher education for the majority of young people, sustained improvements in our public services and with an end to child and pensioner poverty, not just some, but all citizens sharing in rising prosperity.

And long term prosperity for all depends upon us reaching American levels of productivity growth - and on removing the barriers - by tackling under-investment, skill deficiencies, resistance to new technology and restrictive practices wherever they arise: building a stronger enterprise culture open to all.

So, today, as part of the Government's contribution to a new and necessary drive for higher productivity, I am proposing to encourage entrepreneurship and expand investment.

To make Britain the best place in the world for multinationals to locate, we will build upon our cut in corporation tax from 33p to 30p - the lowest of all major countries, the lowest in our history - by consulting on three major changes:

to abolish from April 2001 the withholding tax, not only on international bonds, but normally on payments of interest and royalties between companies in the UK;
to relieve tax on sales of substantial shareholdings by companies;
and in line with the needs of the new economy, tax relief for intellectual property and goodwill, as we create the best modern environment for business in the world.
I can tell the House that this year corporation tax revenues are 2.5 billion pounds lower than forecast.

While it has been put to me that North Sea oil companies, earning higher profits from higher oil prices should be subject to special taxes, I can tell the House that I am determined not to make short term decisions based on short term factors. The key issue is the level of long term investment in the North Sea. And this will be the approach that will guide budget decisions in future.

My second set of proposals help small businesses whose numbers have grown already by 150,000 since 1997. Last year we cut small company corporation tax - once 23p - to 20p and introduced a new 10p rate, an overall cut in small company tax bills of nearly 25 per cent. Today I am publishing for consultation with small businesses a set of proposals that simplify small business VAT and are of direct help to up to half a million small businesses.

Capital allowances and tax credits to encourage investment have already saved over 800 million pounds to business since 1997, a third of a billion pounds to manufacturing.

Because I understand the importance of manufacturing I will now examine, for the Budget, further incentives that help manufacturing: in particular the proposals from the CBI and EEF to extend the R and D tax credit.

To help smaller high risk and e commerce companies recruit and retain the staff they need, we propose to expand tax relief for share options and make Britain the most attractive environment for e commerce. In future, all employees can benefit from our enterprise management incentive scheme - up to a company limit of two and half million pounds worth of share options.

For the period to May 2000, I propose to make provision for companies to limit and settle their liability for national insurance contributions on share options.

Having cut capital gains tax from 40p to 10p for long term investment, I now propose an even further widening of the scope of the 10p rate - to non-trading companies and to venture capital companies so that employees from all types of companies will benefit.

To enhance the contribution of institutional investors, we will consult on the Myners Review proposals to reform the minimum funding requirement and to remove regulatory barriers to investing in venture capital.

To expand savings generally and especially to double the number of low income families who save we will review all capital limits that deter savings. Already nine million ISA accounts have been opened, and 3 billion more is being saved by low income savers. The tax free limit for ISA savers has been set for next year at 5,000 pounds.

I propose to once more set it at 7,000 pounds, a figure I shall set for the next five years.

To build enterprise and balanced economic development across all the regions, public investment, including public private partnerships, we are proposing today regional development agencies have greater freedom to decide locally how money is invested to meet local needs.

The rate of small business creation in high unemployment communities is still a sixth of the more prosperous areas, and unemployment is still twice as high. Future jobs and long term prosperity will come, not from benefit cheques or from the old subsidies, but by a radically new approach - encouraging economic activity and business development on the lines proposed by the Rogers and Cohen Reports.

So, I now propose a radical reform of tax incentives designed to raise business investment in high unemployment areas by one billion pounds. I propose to introduce:

stamp duty exemption for all properties in our most disadvantaged communities;
accelerated tax relief for cleaning up contaminated land;
VAT cuts to reduce the costs of residential property conversions;
tax relief to bring empty flats over shops back into use.

And to consult on:

further business rate relief for small business in assisted areas;
a new and generous tax credit for community investment;
the creation of the first Community Development Venture Fund.
.

And to assist the upgrading of listed buildings central to community life in all parts of the country, I can also announce that we are today asking the European Commission to reduce VAT from 17 and half per cent to 5 per cent on repairs to churches.

I have one further proposal for a special tax relief.

We will not only continue to work for cuts in Third World Debt but now plan to do more to meet the international targets of cutting world poverty by half and cut by two thirds infant mortality which through preventable diseases carries off one in seven of the world's children before the age of 5.

So, as one of a number of proposals that the International Development Secretary and I are working on to tackle child poverty, the Government will investigate a new tax incentive and spending measures to develop, cut the costs for and ensure the supply of anti-TB, anti-malaria and anti- Aids drugs - drugs that could save lives, tragically still unavailable in the poorest countries, but with the potential that must now be realised to reduce avoidable suffering and unacceptable deaths.

I turn to Pre-Budget measures to meet our goal of full employment. In addition to making work pay through the 10p income tax rate, the new working families tax credit and the New Deal which some would abolish but which, as independent research shows, has cut youth unemployment by 40 per cent more than would have happened without it.

The Secretary of State for Education and Employment and I will:

intensify coaching help for the 50,000 young people still out of work;
consult on introducing a new service that will help redundant workers move quickly into new jobs;
investigate how with tax free and in some cases free adult learning we can help upgrade fast changing workforce skills;
extend the New Deal for lone parents with our nationwide programme of choices starting next April and extend to a further 150,000 lone parents not on income support the opportunity to get back to work;
agree a new partnership with the voluntary sector to help those with disabilities who want work to get it, while with a 200 million a year additional package that the Secretary for Social Security will announce tomorrow improving the living standards of those unable to work and carers;
and for each area drawing up local full employment plans addressing all barriers to full employment in their local areas.

Mr Speaker, high productivity and rising employment depend not just on ending decades of under-investment and targeting tax incentives on our priorities, but on entrenching a low inflation culture that prudently keeps interest rates and mortgage rates as low as possible.

It is because we have learned from the mistakes of the eighties and before that I can tell the House that - in spite of demands made to me - I have decided - in the interests of keeping interest rates and mortgage rates as low as possible - to lock in, over the coming years, a fiscal stance that is the same or is tighter than we said at the time of the Budget.

Let me give the House the background and the full financial figures.

Our first fiscal rule - the golden rule, the first rule necessary to keep interest rates and mortgage rates as low as possible - is that over the cycle there must be a current surplus. So however tempting it may be for some to identify large temporary surpluses as an excuse for permanent injections of resources into the economy, our golden rule demands constant prudence.

In the Budget I forecast this year's current surplus at 14 billion pounds. I now forecast this surplus to be 16.6 billion pounds, and in the years from 2001-2, the current surpluses are forecast to be 16, 14, 8, and 8. Figures that ensure we remain on course to balance the current Budget over the economic cycle, even on the most cautious of cases.

Our second fiscal rule - the sustainable investment rule, a bulwark against short termism that again helps keep interest rates and mortgage rates as low as possible - is that while, over the cycle, we will borrow for investment, we do not borrow for consumption and we keep debt at a prudent and sustainable level below 40 per cent of national income.

After a doubling of national debt in the early 1990s the ratio of debt to national income had, by 1997, risen to 44 per cent.

Having made the necessary difficult tax and spending decisions, we have, in the three years since 1997, reduced the ratio of debt to national income from 44 per cent to 41.9 per cent to 39.6 and 36.8 per cent this April.

I can report to this House that two decisions - first, the decision to use the proceeds from the spectrum auction to reduce our debt and second, to use this year's surplus to repay debt - now make possible a further and even more substantial reduction in debt that will keep interest payments low.

Because we are, in total, cutting the stock of debt by as much as one third, I can report to the house that the public sector net debt as a share of GDP will now fall from 36.8 per cent last year to 32.3 per cent this year to 30.9 per cent in 2001-2 and from what was a debt to GDP ratio as high as 44 per cent in 1997, I can report that this ratio is forecast to fall to 30 per cent and remain there in future years.

And with long term interest rates lower and debt well within the 40 per cent ceiling, we are not only well placed to deal with the ups and downs of the economic cycle but have the best platform for years for sustained long term growth

Our budget forecast for net borrowing was a surplus of 6.5 billion pounds this year. We now forecast the surplus to be 10 billion pounds this year, and 6 billion next. In future years the deficits will be 1, 10, 12 and 13 as we borrow to invest.

Mr Speaker, in every one of the next five years, adjusting for the cycle a fiscal stance that is the same or is tighter than at the time of the budget.

And this year, with the spectrum proceeds, the net cash debt repayment will be 28 billion pounds.

So our approach is to reject the old vicious circle of the eighties - rising debt, higher long term interest rates, higher debt repayment costs, lower growth, higher unemployment and enforced cuts in public spending, the old boom and bust.

Instead, as we promised, we have by our decisions created a virtuous circle of falling debt, lower long term interest rates, lower unemployment, lower debt payments and a stronger economy releasing more resources for public spending.

I can report to the House that because of this virtuous circle, lower unemployment has brought savings in social security which, compared with the Budget, provide an additional 1.5 billion pounds next year, and 2 and 2.5 billion pounds in future years.

And in addition to higher government revenues this year from higher employment, higher earnings growth and steady growth, debt interest payments are now lower than we forecast at the time of the Budget - by 2.5 billion pounds next year and 2 billion pounds in the next two years.

When we came into Government we were paying out more in debt interest payments than we were spending on our schools. Soon, as a result of cutting debt payments, we will be able to spend fifty per cent more on our schools than we do on debt interest.

Over the last twenty years, 42 pence of every additional pound spent went to debt interest and social security. In the early nineties it was 50 per cent of every pound.

Debt and social security will require now only 17 pence of every pound - leaving more than 80 pence in every pound of additional spending for hospitals, schools and vital services, enabling us to tackle the long term under-investment in Britain.

It is therefore because we have cut the cost of debt and unemployment - now costing 5 billion pounds less than in 1997 - and because we have also secured sustainable growth that we are able to lock in a fiscal tightening, meet all our fiscal rules, and, within this prudent framework, we are in an even stronger position than in July to tackle under-investment and target tax cuts on our nation's priorities.

Since July I have received representations from people in this House about public spending, including representations which propose spending growth only in line with 2 per cent GDP growth a year. I have studied this proposal in detail. It would mean by year three, cuts in spending of 16 billion pounds and after taking into account the measures I will announce on pensions today, more than 16 billion pounds.

I have rejected these representations and because the economy both needs and can afford - and cannot afford not to -to tackle long term under investment, the Education Secretary will tomorrow, as part of allocating his annual 5 per cent real term increase in education every year, announce resources for the new learning and skills council.

And because investment is needed in our infrastructure not just for social reasons but to build economic strength the Minister for Transport will announce how every region city and town will benefit from new investment in roads, and with new funds from the spending review allocated to each region for economic regeneration the Deputy Prime Minister will shortly publish his rural and urban white papers.

As part of the 5.6 per cent real terms rise in NHS spending each year for the next 3 years, the Secretary of State for Health will announce for each of the next three years his allocations to health authorities up to 2004.

And in addition to the statement on pensions from my Rt Hon Friend the Secretary of State for Social Security tomorrow, and the extra allocation we have made to improve flood defences, my Rt Hon Friend the Secretary of State for Education is announcing today additional allocations to our schools.

The windfall tax is money raised from the utilities specifically for the purpose of extending employment opportunity through the New Deal and educational opportunity, renovating so far 17,000 schools. Such has been the success of the New Deal in getting people back to work that the windfall levy account is underspent by 200 million. So the Secretary of State for Education and Employment and I have decided that, in addition to the rise in education spending this year, lower unemployment means we can allocate new money for every school in every constituency of the country, money to be available this year for repairs and improvements, money to be paid direct to the school.

The head teacher of every primary school will receive a cheque for between 4,000 and 7,000 pounds.

The head teacher of each secondary school, will receive, for the smaller schools 10,000 pounds; for the larger schools 30,000 pounds: prudence once again for a purpose - enabling us to target resources to our priorities and in a sustainable way.

And this prudence also allows us now to match public spending increases by tax cuts targeted on the country's priorities, including making reforms in the tax treatment of transport and the environment - to which I now turn.

Between 1997 and 1999 retaining the fuel escalator introduced in 1993 helped cut borrowing by 30 billion pounds, helping deliver lower interest rates - and enabling us to begin the long overdue investment in transport, the NHS, and schools. And it will have brought about a cut in carbon dioxide pollution by an estimated one to two and a half million tonnes a year by 2010.

But today, like all countries, we are having to deal with the rise in world oil prices from 11 to 31 dollars. Because OPEC itself accepts that the world price is unacceptably high, our international efforts are geared to ensuring that production is raised and prices fall.

So I recognise and understand the very genuine concerns that motorists and haulers have - and it is because here in Britain we have already cut the deficit, already set aside 180 billions for the 10 year transport plan and already shown how we are meeting the Kyoto targets that in the last Budget I removed the fuel escalator, and made environmentally based cuts in car and lorry licences and gave new incentives for environmentally efficient fuels.

And in line with the principles we have set down I am now able today to show how we can complete these reforms and do more to meet people's concerns - without putting at risk either our economic stability, necessary investment in public services, or our environmental gains. Indeed, the reforms I now propose are tailor-made to meet our environmental obligations.

The annual rise in the price of fuel that would automatically be introduced on budget day would raise 560 million pounds putting petrol and diesel up by around one and a half pence a litre. I propose at a cost of 560 million pounds, a freeze in excise duties - an across-the-board duty freeze on all fuels that would initially last until April 2002-- and, if the oil price remains at a high price between now and then, I can tell the house that there would be a duty freeze for a further year.

I intend to go further in three vital respects.

On top of the duty freeze - budgeted for in our fiscal arithmetic - the first of the proposals I will consult upon would itself involve additional expenditure of as much as an extra 1,000 million pounds and help promote substantial benefit to the environment .

Yesterday we published a report showing the environmental benefits from the introduction of ultra low sulphur diesel in reducing local air pollution.

As a result of cuts we made in excise duty on ultra low sulphur diesel, usage in Britain has risen from 20 per cent in 1997 to 40 per cent in 1998 to 100 per cent in 2000. It requires no change to be made in lorry and van engines and it now accounts for virtually 100 per cent of the market for diesel in Britain today. Britain is now leading in this cleaner diesel.

We now need to build on that environmental achievement. The widespread use of ultra low sulphur petrol would further and significantly improve local air quality. Crucially, it would require no change to existing car engines.

And it is now time to make this cleaner fuel available in every petrol station of the United Kingdom, and to make the use of this fuel which requires no change in any car cheaper for everyone.

To do so I propose to cut the excise duty for ultra low sulphur petrol so that it replaces unleaded petrol in every petrol station in Britain and at a lower excise duty.

On 1 October we reduced the duty on ultra low sulphur petrol by 1p a litre.

I propose from Budget 2001 a further reduction of 2p a litre - making a cut of 3p in total on all ultra low sulphur petrol.

And because it is right to maintain the proper balance between petrol and diesel, I propose also from Budget day to match the cut in low sulphur petrol with a 3p cut in excise duties in ultra low sulphur diesel which will go to all diesel users.

I expect ultra low sulphur diesel and petrol to account for 100 per cent of the market next year and when the excise duty cut is introduced at Budget time motorists using any petrol station in Britain to be able to benefit from this duty cut.

It is by giving this incentive for cleaner fuels that we can both advance our environmental principles and ensure - with a 3p cut per litre in all ultra low sulphur duty a cheaper cleaner fuel available in every garage, a better deal for drivers and cleaner air across Britain.

I can also announce that for all the cars which still use lead replacement petrol - where there is no longer an environmental case for a higher duty rate - I propose from Budget day to end the differential and cut the excise duty by 2p per litre.

I now intend to go further to help the haulage industry that is undergoing restructuring.

I propose support for scrapping or converting older lorries with a 100 million investment fund, including help for buying the new lorries that meet the highest technological and environment standards and support for the introduction of logistics and computerisation.

The Deputy Prime Minister will also announce help for an industry-wide training and retraining scheme.

But we can do more.

So that foreign lorries pay their share of the costs of using our roads, we intend to introduce in Britain a vignette system, a British disc under which non-British companies and lorries pay their share to Britain for using British roads.

The Government has considered an essential user rebate or blue diesel scheme for lorry diesel.

Such a scheme would be administratively cumbersome, could be levied only on future purchases of diesel, and would have to be opened to foreign lorries using British roads. It would not help haulers where their fuel prices are directly passed on to customers. It would have no environmental benefits

The scheme I am proposing is far better. Subject to consultation and legal clearance I now propose to bring forward a much needed reform begun last year in vehicle excise duty for lorries that will radically cut rates for larger lorries with traditionally high license fees,. The scheme will be implemented in Budget 2001 - to sweep aside the 100 separate rates, consolidate them into only seven rate bands , linked to environmental standards, and cutting the rates to match the lowest in Europe.

Lorries in the most competitive sector will save over 2000 pounds. Over 250,000 lorries will each pay lower licence fees as a result of a 300 million pound annual cut in licence fees. 100,000 lorries will save over 1,000. The average saving per lorry will be 715 a year and the cuts are the equivalent in value to a cut of 3 pence in the price of diesel for the haulage industry, and again with environmental incentives built in.

Our proposals for the detailed new scheme - and license rates-- are published today and the Government is able to start the transitional arrangements to this new licence system immediately.

I have allocated 265 million pounds for this financial year - half of the annual revenue raised from lorry VED - to be spend before March for a refund scheme that can repay lorry owners up to half of this year's licence fee. 250,000 lorries, and all large lorries, will benefit from the refunds. They will be worth for some of the largest lorries paying the highest fees 1,000 and up to 4,000 pounds this year . Refunds will be paid from next month, payments to be completed by the end of January - the detailed arrangements to be announced by the Minister for Transport.

To help restructuring and investment in farming, the Minister for Agriculture announced last week an addition to this year's 220 million pound package of measures - agri money compensation for arable producers. In addition to freezing duty on red diesel at its current rate of 3p a litre, I also intend in Budget 2001 to abolish VED on tractors and agricultural vehicles completely.

I now have a similar proposal for car license fees. Consistent with our environmental principle that we tax vehicle ownership less, I want now to complete our environmentally based reform of vehicle excise duty for cars .

The new licence fee we are introducing for new cars registered from March 2001 is linked to environmental efficiency.

For all cars under 1200 cc there is also now a lower rate licence fee with a 55 pound deduction on the standard licence.

While this change has been welcomed, many, especially those in rural areas, have put it to me that greater choice would be available to rural motorists and motorists generally if the 55 pound deduction could be accessible for, not just cars under 1200 cc, but for cars up to 1500 ccs, including, for example, the Focus, Golf, Astra, Escort and the Rover 214.

So I propose to extend the lower rate licence fee, the 55 pound discount, to cars up to 1500 cc, to be paid out from July but to be backdated from today. So all those who have a car from 1200 to 1500 cc -an extra 5.4 million cars-will be entitled to 55 pound off their annual licence fee from today.

So in total , over 8.5 million existing cars, one in every three, will now pay 55 pounds below the standard fee.

So, for motorists as a whole , with the duty freeze, the new reduced licence fee and the cut for ultra low sulphur petrol, the proposed Budget package makes changes worth the equivalent of a 4p a litre cut while meeting our environmental objectives.

And by next year for the haulage industry changes that are worth the equivalent of a cut of 8 pence on a litre: in each case meeting our environmental obligations, not putting at risk public investment in vital services, nor the stability of the economy. Measures upon which Ministers are now inviting discussion in the Pre-Budget consultation which will take place as Ministers visit every region of the country

I turn now to specific measures of benefit to families and to pensioners.

Mr Speaker, our aim is that not just some, but every child has the best start in life and that we halve child poverty in the coming decade.

Families need help most at the time when parents are bringing up their children. And as we extend our new integrated system of child support -from 15 pounds a week child benefit for every child to a maximum of 50 pounds - our priority in the coming Budget is the new children's tax credit, a tax cut for families.

This family tax cut, which replaces married couples allowance, will be paid on top of child benefit to around 5 million families at 8.50 pounds a week, worth 442 pounds a year.

On current figures the proposals on which we are consulting would, if implemented, mean that overall the tax burden would not rise next year and I will achieve my aim of next year cutting the direct tax burden on the typical family below 20 per cent. It will fall from 20.3 to 18.6 per cent, the lowest level since 1972.

But I believe in the coming Budget we can offer a larger tax cut for families. My aim is to increase the family tax cut to 10 pounds a week, in total a 520 pound a year tax cut, increasing families' incomes.

And just as we are introducing a new system of child support based on the foundation of child benefit - but at the heart of which is the new working families tax credit - so too it is now time, based on the same principle, to raise pensioner incomes by a tax and benefit reform that will have as its foundation the basic state pension, and will have as an essential building block - like the working families tax credit - a new and generous pension credit.

Our aim for pensions reform is both to end pensioner poverty and to ensure that all pensioners share in the rising prosperity of the nation.

But in a new world of rapidly diverging pensioners' incomes - already 17 per cent of couples are retiring on more than 20,000 pounds a year, and this percentage grows year on year - and where, as a result, inequalities between pensioner incomes are as great as inequalities within the population as a whole - we will best meet our obligations to pensioners by a new approach.

To plan for the future based on a flat rate earnings-linked rise paid to all, which would give exactly the same to those with incomes above 20,000 pounds as to those on middle incomes - and because the income support system would do absolutely nothing for the poorest - would mean that by the time today's 45 year olds were retiring, for every 6 billion pounds extra spent on an earnings link, 2 billion pounds went to pensioners with incomes above 20,000 pounds at today's prices, thus meaning less is available for the middle and lower income pensioners, who are our first priority.

So, we need a policy that does most for those who need most and at the same time ensures that all pensioners - the very poor, those on modest incomes and the relatively comfortable - share in the rising prosperity of the nation.

Let me tell the House what the new system, which will integrate tax and benefits and build upon the basic pension a new pension credit will look like in 2003, and then I will set out the transitional arrangements.

First, for those in and at risk of poverty, we will radically improve the minimum income guarantee.

I can tell the House that the minimum income guarantee, which was 68.80 pounds in 1997, is 78.45 pounds today, and will be raised in April by 14 pounds to 92.15 pounds. For thousands of our poorest pensioners, 700 pounds extra a year.

I can also tell the House today that when the new system is introduced in April 2003, the minimum income guarantee will be set not at 92 pounds, but at 100 pounds a week, 22 pounds a week more than today. For the first time a single pensioner guaranteed at least a 100 pounds a week. And for couples a rise from 106.60 pounds in 1997 to 154 pounds.

And every year after that I can tell the House that the minimum income guarantee will be raised in line with earnings.

With the winter allowance a 32 per cent increase in income even after inflation - demonstrating our determination that no pensioner is left behind as this Government works to ensure that pensioner poverty is a thing of the past.

More than 2 million will benefit. People will be able to claim by phone. They will do so at the point of retirement and whatever adjustments thereafter would need to be made only when circumstances change.

But we have a second obligation - to millions of pensioners who, after a lifetime of hard work, have modest occupational pensions and modest savings, but receive nothing from the system on top of their basic pension and have until now been penalised, not rewarded for their savings. People whom we meet every week in our constituencies - and this Government is determined that people who have worked hard and saved all their lives should now receive more.

Tomorrow the Secretary of State for Social Security's statement will outline the new integrated tax and benefit system - both the pension credit and the new pensioner tax arrangements.

I said in the budget that I wanted the beneficiaries of the new credit to be single pensioners with incomes up to £100 and pensioner couples with incomes up to £150.

I can now tell the House that pensioner couples with incomes below 200 pounds, and single pensioners with income below 135 pounds , many millions of pensioners, will receive the new pension credit.

And I can tell the House that while the pension will rise in line with inflation, the new pension credit will itself rise in line with earnings every year.

In this way, we will give recipients of the pension credit more than even the earnings link in the basic state pension would give them.

The pensioners tax allowance will be set at April 2003 at an even higher level - 6,560 pounds for the single pensioner - and for the next parliament we propose the pensioners tax allowance also rises in line with earnings.

For the vast majority of pensioners, the middle and low income pensioners of Britain, the new system will provide extra cash on top of the basic pension: sums of between one pound and 23 pounds a week.

Achieving all our aims

for millions of the neediest pensioners relief from poverty;
for those on modest incomes a reward for their savings and occupational pensions more than an earning link could offer them;
and ensuring that all pensioners can enjoy a share in the rising standards of living of the country.

As we move to this new and better system the Social Security Secretary and I have decided that the transitional arrangements should ensure that over the next two years, pensioner incomes should rise faster than inflation and indeed faster than earnings.

So from April next year we propose that for the single pensioner there should be a cash increase of 5 pounds a week and for a married couple a rise of 8 pounds a week.

And I can tell the House that the following year we can also guarantee the pension will rise well above prices. There will be a cash increase of 3 pounds for single pensioners and 4.80 pounds for married couples.

Over two years, a cash rise of 8 pounds a week for single pensioners and 12.80 pounds a week for couples.

For pensions 2.6 billion pounds more each year, on top of more for health, education, transport policing and public services.

Mr Speaker, those who would spend this money on tax-cutting should now tell us which hospitals, which schools, which public services they would cut.

We have made our choice

Investment,
Targeted tax cuts.
Keeping mortgage rates low
More for pensions and families.
A stronger, fairer Britain.

Mr Speaker, I have one final announcement.

I have had representations to abolish the winter fuel allowance and indeed abolish the free TV licence for over 75s. I have even received representations to abolish the Christmas bonus.

I have rejected such options that would give with one hand and take with another.

I can confirm that now and in future years the free TV licences will remain for the over 75s as we have promised.

The Christmas bonus will continue and the winter allowance will be paid at 150 pounds.

But the transitional arrangements to our new pension reform will not start next year, but can start this year, indeed they will start this week.

I can confirm that cheques are being sent out from Monday that will be paid to every pensioner household in Britain.

The winter allowance will not be paid at 150 pounds this year.

Nor will it be abolished.

For this year specially - the first year of the transitional arrangements - it will be paid not at 150 pounds, but at 200 pounds to every pensioner household free of tax.

And I commend this statement to the House.

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