HMT1

27 November 2002

STEERING A STEADY COURSE: DELIVERING STABILITY, ENTERPRISE AND FAIRNESS IN AN UNCERTAIN WORLD

The Pre-Budget Report, published today by the Chancellor of the Exchequer, Gordon Brown, sets out how the Government is meeting the global economic challenges confronting Britain and, from a platform of stability, delivering an enterprising, fairer Britain, even in an uncertain world.

The Pre-Budget Report shows that, in difficult times for the world economy, the British economy is well placed to steer a course of stability with low inflation and sound public finances. Based on cautious, audited assumptions, the fiscal projections show that the Government is comfortably on track to meet both of its strict fiscal rules over the economic cycle, including in the cautious case.

The Government will be consulting on a range of issues and proposals outlined in this Pre-Budget Report in the run up to Budget 2003.

Key Pre-Budget Report announcements include:

further support to build an enterprise society, with extra help for businesses in 2,000 Enterprise Areas covering the most disadvantaged communities in the country, a major new programme of enterprise education in schools, and a review of the links between business and universities;
a package of measures to improve UK skills, including an employer-led Taskforce to support the improvement and expansion of Modern Apprenticeships, a second year of Employer Training Pilots, and new steps to ensure that UK employers are able to recruit easily and effectively from overseas to meet skills shortages;
further steps to deliver higher employment, building on the success of the first five years of the New Deal, through pilots of a new programme of intensive support in neighbourhoods suffering from very high concentrations of worklessness, and additional support to ease the transition to work;
the next steps to promote saving, including commitments to consult key stakeholders on the detailed implementation of the Child Trust Fund, and to set out proposals to help those of working age plan for their retirement in a Green Paper on pensions and a consultation on radical simplification of pensions tax;
further action to tackle the environmental problems of waste, including proposals for revenue-neutral future increases in the landfill tax, and reform of the Landfill Tax Credit Scheme to ensure that Government funding is used more effectively to support better waste management; and
a concerted strategy to tackle VAT revenue losses caused by fraud, avoidance and non-compliance, designed to deliver more than £2 billion per year in additional VAT revenues by 2005-06.

MAINTAINING MACROECONOMIC STABILITY

The world economy continues to face challenging times. Last year saw the sharpest slowdown in world growth for almost three decades. This year, concern over corporate accounting standards, events in the Middle East, further falls on equity markets and rising oil prices have compounded uncertainty and dented the global recovery. Prospects for the world economy are weaker than at Budget time.

No country is immune to the scale of these global challenges. But strong economic fundamentals and decisive macroeconomic policy action have left the UK better placed than in previous world slowdowns to steer a course of stability and growth. Last year the economy grew at the fastest rate in the G7, while employment is at record highs and unemployment is currently the lowest among the G7 for the first time since the 1950s. The projections in the Pre-Budget Report show that:

the economy is forecast to grow by 1.6 per cent in 2002 due to weakness in the world economy, but to accelerate to 2½ to 3 per cent next year and to 3 to 3½ per cent in 2004 as the global economic recovery strengthens, before returning to trend in 2005;
inflation is forecast to remain low and close to the Government's 2½ per cent target throughout the forecast period;
based on prudent audited assumptions, and despite further weakness and uncertainty in the world economy, the Government is comfortably on track to meet its two strict fiscal rules over the economic cycle, including in the cautious case. Because of the Government's decisions on tax and to reduce debt, fiscal policy is able to support monetary policy in maintaining stability during a period of cyclically weaker global growth; and
the public finances are also sustainable in the long-term. A new analysis of the long-term sustainability of the public finances is published today, which shows that the UK is well placed to deal with future fiscal challenges and in a strong position relative to many other developed countries.

The Government's macroeconomic framework has helped to ensure steady and stable growth in the UK, even in difficult times for the world economy. To enhance its reporting of fiscal developments, and strengthen further the transparency of the framework, the Government is also today publishing a new End of year fiscal report, providing detailed information on the public finances in 2000-01 and 2001-02.

MEETING THE PRODUCTIVITY CHALLENGE

Productivity growth, alongside high and stable levels of employment, is an important driver of long-term economic performance and a key route to higher living standards and greater national prosperity.

The UK's productivity performance has long lagged that of other major economies, and a substantial gap now exists with the US, Germany and France. The Government's goal is that the UK should achieve a faster rate of productivity growth than its main competitors over the next decade, closing the productivity gap.

Promoting enterprise and entrepreneurship

The Government is committed to building an enterprise society in which people from all backgrounds and all areas of the country consider and act upon enterprise opportunities. Details of the Government's strategy are set out in Enterprise Britain: a modern approach to meeting the enterprise challenge, published today.

The Pre-Budget Report announces further action to improve the contribution of the education sector to UK business enterprise and innovation, including:

a new strategy to promote enterprise learning throughout the school and further education systems, in line with the recommendations of the Davies Review of Enterprise and the Economy in Education. To ensure that all young people experience enterprise before they leave school, the Government will provide £60 million so that, by 2005-06, every secondary school can offer five days? enterprise activity to pupils, with pilot schemes to begin next year; and
new steps to enhance collaboration between business and universities, to ensure that UK businesses draw more effectively on universities? research and teaching outputs, improving the UK's innovation and productivity performance. The Government has asked Richard Lambert, former editor of the Financial Times, to lead an independent review and make proposals by summer 2003.

The Government is also taking further steps to ensure that UK businesses can compete effectively in global markets, including by:

consulting on reforms to improve the corporation tax system. The Government will consult further once responses to the current round of consultation have been analysed;
simplifying the corporation tax rules for employee share schemes, to encourage firms to offer such schemes to their employees;
taking further steps to reduce business compliance burdens, by consulting on reform of the Construction Industry Scheme and continuing to consult on simplifying the VAT rules for imports;
improving and extending the Small Firms Loan Guarantee Scheme, to make it available to 25 per cent more businesses; and
launching a new information strategy, managed by the Small Business Service (SBS), to help entrepreneurs access information on Government support and requirements.

Further information on these and other reforms to help businesses are set out in the separate press notices, REV/HMT/C&E 1 and REV/C&E 1.

Promoting enterprise in disadvantaged areas

To tackle the barriers to enterprise that exist within the UK's most deprived areas, the Government has designated 2,000 Enterprise Areas in which measures to boost enterprise will be now concentrated. The Pre-Budget Report describes the range of steps the Government is now taking to support enterprise, investment and wealth creation in these areas, including:

abolishing stamp duty on all commercial property transfers in the 2,000 Enterprise Areas, once state aids approval has been obtained;
giving local authorities new powers to create Business Planning Zones to streamline the system of planning obligations and facilitate business development in these and other areas;
providing targeted advice and support, including through a new SBS starter pack and Inland Revenue Business Support Teams;
providing grants of up to £30,000 for feasibility studies of business incubators which nurture start-ups and early stage SMEs; and
introducing a Community Investment Tax Credit to encourage private investment in enterprises in disadvantaged communities. The SBS will allocate the first round of tax credits by the end of 2002-03.

Improving UK skills

Building Britain's skills base is central to the Government's strategy for raising productivity. A highly skilled workforce allows firms to update working practices and products at the rate demanded by rapidly changing markets, making the economy more productive in the long-term. The Pre-Budget Report sets out new steps to improve workforce skills, including:

a new target to increase the participation of young people post-16 in full-time education and training, including vocational programmes such as Modern Apprenticeships. By 2010, ninety per cent of young people will have participated in a full-time programme by the age of 22, fitting them for entry into higher education or skilled employment;
a new National Modern Apprenticeship Taskforce to support the expansion and improvement of Modern Apprenticeships (MAs). The Taskforce will be led by Sir Roy Gardner and will include individuals from across business and the education and training sector. It will report to the Chancellor and the Secretary of State for Education and Skills, and to the Chairman of the Learning and Skills Council, on a range of issues including the involvement of SMEs in MAs, the MA framework, and measures to support completion rates; and
£130 million to enable Employer Training Pilots to be extended for a second year and to around a quarter of the 47 local Learning and Skills Council areas. The pilots are testing different approaches to improving access to training for those in the workforce. The extension will allow the Government to test a wider range of policy packages in different areas.

The Government is also taking steps to help employers facing skills shortages in the UK recruit from overseas. Migration has always been a source of skills and labour in Britain, helping to improve productivity, raise economic growth, and cover shortages in domestic skills. The Pre-Budget Report describes the next steps, including:

further improvement of the work permits system, with the creation of a new Small Business Unit in Work Permits UK to ensure that SMEs can access information and benefit fully from the scheme; and
extension of the Highly Skilled Migrant Programme to support UK employers in their efforts to recruit highly skilled staff. Since its launch in January 2002, the scheme has helped many highly skilled individuals enter the UK to live and work, with the skills to make a valuable contribution to the UK economy. The Programme will now be extended and the criteria will be changed from January 2003 to improve its effectiveness still further.

Further details of the Government's work to build UK skills and raise productivity are set out in the separate press notice, HMT 3.

INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

The Government's long-term goal is to ensure a higher proportion of people in work than ever before by 2010.

Over the past five years the Government has implemented a comprehensive programme of reform. The New Deal has succeeded in reducing both long-term and youth long-term unemployment by more than three-quarters since 1997, and help has been extended to lone parents, disabled people and other disadvantaged groups. Reforms to the tax and benefit system have made work pay at all levels of the labour market, and especially for those on low incomes.

Despite recent weakness and uncertainty in the world economy, employment is currently at record high levels, with more than 1.3 million people in work today compared with spring 1997. UK unemployment is at its lowest for a generation and below that in any other G7 nation. The Government is determined to build on this success and is now taking further steps to address the remaining barriers that prevent people from taking up work, including:

piloting a programme of intensive support in neighbourhoods with very high concentrations of worklessness from April 2004. The pilots will begin in twelve of the most deprived neighbourhoods in the country. In each pilot area, residents claiming Jobseeker's Allowance will benefit from accelerated access onto New Deal programmes after just three months, and because economic inactivity is often more prevalent than unemployment in these neighbourhoods, more frequent work-focused interviews will also be introduced for all partners and lone parents, with new Incapacity Benefit claimants given more help to ensure that opportunities and barriers to work are addressed;
extending eligibility for the Job Grant, and introducing a new rate of £250 for households with children, to ease the transition to work. Job Grants will replace the existing Back To Work Bonus and the lone parent Income Support run-on;
reforming the administration and design of Housing Benefit to ease the transition to work for tenants. As announced by the Secretary of State for Work and Pensions, the Government is introducing a range of reforms to simplify the claims process and intends to pilot a flat rate local housing allowance for tenants in the deregulated private rented sector;
piloting new measures to improve job retention and advancement among low-paid workers and those moving off welfare as part of a demonstration project from October 2003;
extending Employment Zones to lone parents and people returning to the New Deal for a second time, starting from October 2003. In addition, the Government intends to develop the Employment Zone model further by testing the effect of introducing multiple providers in the largest Employment Zone areas from April 2004. Employment Zones are currently running in 15 disadvantaged areas of Britain, and allow jobseekers and personal advisers to use funds flexibly to overcome individual barriers to work;
expanding the network of new Jobcentre Plus offices, ensuring that all working age benefit recipients are given work-focused support. The Government aims to have opened more than 200 Jobcentre Plus offices by April 2003 and to complete the nationwide roll-out by 2006; and
piloting new means of support to help those with health problems and disabilities find work, including enhanced return to work advice and a new return to work credit of £40 a week, from October 2003, for those who have claimed Incapacity Benefit for three months or more. Further details of this support were set out in the recent Department for Work and Pensions Green Paper.

As announced in Budget 2002, the Government is also introducing the Working Tax Credit from April 2003 to help tackle poor work incentives and persistent poverty among working people, including those without children. On its introduction, the Working Tax Credit will guarantee minimum incomes of:

£237 a week for a family with one child and one earner working full-time on the National Minimum Wage; and
£183 a week for a single earner couple aged 25 or over, without children or a disability, and working full-time on the National Minimum Wage.

BUILDING A FAIRER SOCIETY

Economic strength and social justice must go hand in hand. The Government is committed to building a fairer and more inclusive society in which everyone has the opportunity to share in rising national prosperity.

Reform of the welfare state is at the heart of the Government's strategy for supporting families with children and helping to provide security for all in old age. A modern and fair tax system, which encourages work and saving and ensures that everyone pays a fair share of tax, underpins the Government's reforms.

Support for families and children

The Government is committed to ensuring that every child has the best possible start in life and has set a long-term goal to halve child poverty by 2010 and to eradicate it within a generation. Building on the comprehensive reforms already introduced, the Pre-Budget Report describes further steps, including:

the forthcoming publication of a new document setting out the Government's strategy and next steps to help parents balance their work and family lives, building on the new tax credits, changes to maternity, paternity and adoption leave provision, the new right to request flexible working and the improved support for childcare already announced; and
extra investment in the Social Fund to enhance its ability to help those on low incomes manage their finances. From April 2003, the maximum payment for the fixed element of the funeral grant will rise from £600 to £700, and £90 million will be added to the Discretionary Fund over the three years to 2005-06.

As announced in Budget 2002, the Government is introducing a new Child Tax Credit from April 2003 providing a single, seamless system of income-related support for 90 per cent of families with children. Alongside the Working Tax Credit, this represents the next stage in the Government's reform of the tax and benefit system and will make a major contribution towards lifting children out of poverty.

As a result of all personal tax and benefit reforms since 1997, by April 2003:

families with children will be, on average, £1,200 a year better off in real terms; and
families with children in the poorest fifth of the population will be, on average, over £2,400 a year better off in real terms.

To ensure that families are aware of the new Child and Working Tax Credits and understand what they might be entitled to, the Government has launched a nationwide awareness campaign, using television, radio, press and on-line advertising. This has been supported by 11 regional road shows and partnership working with the voluntary sector. As of 22 November:

over 2 million enquiries had been received. People can call the tax credits response line (0800 500 222) or log on to the tax credits website; and
4 million claim forms had been sent out and so far around 1.4 million claims have been made, ahead of expectations.

Promoting saving throughout life

Saving and assets provide people with security in times of adversity, long-term independence and opportunity, and comfort in retirement. The Government is developing a series of savings products suitable for each stage in the life cycle, to increase incentives to save and empower individuals to make informed and responsible saving choices. The Pre-Budget Report announces progress and the next steps, including:

consulting key stakeholders on the detailed implementation of the Child Trust Fund, to help strengthen the saving habit and spread the benefits of asset ownership to all;
further evaluation of the Saving Gateway, based on evidence gathered from pilot projects launched in August. As of 20 November, 250 accounts had been opened in the pilot areas; and
work to take forward the recommendations of the Sandler review of the markets for medium- and long-term retail savings in the UK. The Pre-Budget Report sets out how the Government and the Financial Services Authority are addressing each of the recommendations of the review.

Saving for a pension should be a key consideration for most individuals throughout their working lives. The Government provides a foundation of support in retirement through the Basic State Pension and the State Second Pension, the Minimum Income Guarantee and, from October 2003, the Pension Credit, which will guarantee minimum incomes in retirement and ensure that people benefit from having saved.

Above the foundation of support provided for today's workers in retirement, Government, individuals, employers, and the financial services industry must work together in partnership to encourage and facilitate private pension provision. The Pre-Budget Report describes how the Government will seek to strengthen this framework of partnership, by:

publishing, on 17 December, a Green Paper on Pensions, setting out proposals for renewing this partnership for the future, and helping today's workers plan more effectively for their retirement; and
consulting on proposals to simplify radically the taxation of pensions and deliver greater flexibility and choice to individuals, businesses and the pensions industry alike. The Government's proposals will be published alongside the Pensions Green Paper.

A modern and fair tax system

A modern and fair tax system encourages work, saving and investment, keeps pace with developments in business practice and the global economy, and ensures that everyone pays their fair share. The Pre-Budget Report sets out further action to strengthen the UK tax system, including:

further steps to encourage charitable giving, including an extension of the existing 10 per cent Government supplement on donations through the payroll for one further year until 2004;
abolition of North Sea Royalty payments from 1 January 2003. Building on the reforms announced in Budget 2002, this will help to ensure that the North Sea tax regime strikes an appropriate balance between encouraging long-term investment and providing a fair share of revenue derived from a national resource - delivering a significant boost to companies investing in mature fields (see press notice REV/C&E 1 for further details);
the first ever concerted strategy to tackle VAT revenue losses caused by fraud, avoidance and non-compliance. The Government is publishing a new paper, Protecting indirect tax revenues, which shows that the growth in cigarette smuggling has been stopped for the first time in recent history and sets out how the Government now intends to tackle long-standing leakages in the VAT system, designed to save more than £2 billion a year in additional VAT revenues by 2005-06 (see press notice C&E 1 for further details);
further steps to tackle tax avoidance, closing loopholes in the tax system which allow some people to avoid paying their fair share of tax, increasing the burden on other taxpayers (see press notice REV/C&E 1 for further details);
consulting on the details of a new regime for stamp duty on land and buildings to be introduced late next year. The new regime will ensure that stamp duty is applied fairly to all relevant transactions and is supported by a modern compliance regime balanced by proper appeal rights. Draft clauses covering the main charge will be published shortly; and
for the third year in a row, a freeze in Class 2 national insurance contributions in 2003-04. Class 3 voluntary contributions will rise in line with inflation (see press notice REV/HMT 1 for further details).

MEETING INTERNATIONAL OBLIGATIONS

Just as it is determined to deliver opportunity and security at home, the Government is also taking steps to secure peace and prosperity internationally. The Pre-Budget Report announces further action, including:

an additional provision of £1 billion this year to ensure that resources are available to meet overseas and defence needs in the fight against global terrorism. These resources will be held in a special reserve and are taken fully into account in the projections for the public finances published in the Pre-Budget Report; and
steps to deliver a global new deal to tackle international poverty, by championing a new $50 billion International Financing Facility (IFF) and improvements in aid effectiveness. The Government will publish shortly a new prospectus for the IFF, which would provide substantially higher aid flows over the long term, helping to achieve the Millennium Development Goals.

DELIVERING HIGH QUALITY PUBLIC SERVICES

On a foundation of economic stability and sound public finances, the Government is able to deliver the investment and reform needed to ensure world-class public services that provide opportunity and security for all.

The 2002 Spending Review provided significant extra investment in public services, with resources matched to reform. Departmental spending on public services will be £63 billion higher by 2005-06 compared with 2002-03 - an average annual increase in public services spending of over five per cent in real terms. Public sector net investment, already projected to be almost three times higher this year than in 1997-98, is planned to rise further to 2 per cent of GDP in 2005-06.

To secure value for money, resources allocated in the 2002 Spending Review are tied to reform and results. The Pre-Budget Report describes how the Government is working to deliver reform, based on:

increased public transparency about what is being achieved. The Pre-Budget Report announces major reforms in public reporting, including:
- twice yearly published progress reports of departments? performance against their Public Service Agreement targets;
- a single web-based portal to all departments? progress reports and other material, from the Treasury website; and
- from next April, regular web-based reporting of progress against all new PSA targets.
stronger independent auditing and inspection to ensure that departments and agencies are held accountable for performance against targets, including through a new independent Commission for Healthcare Audit and Inspection, a Comprehensive Performance Assessment in local government and the new Police Standards Unit; and
maximum local flexibility and discretion to innovate, to ensure that local service providers can respond to local conditions and consumer demands, with new freedoms for high-performing local authorities, Regional Development Agencies, further education colleges and health service organisations.

PROTECTING THE ENVIRONMENT

Sustainable development is vital to ensure a better quality of life for everyone, today and for generations to come. Economic growth and social progress must not come at the expense of the environment. The Government is committed to address the challenge of sustainable development, tackling local environmental threats and controlling and reducing emissions of the gases responsible for global warming.

Details of the Government's strategy for using economic instruments, such as environmental taxes, to achieve environmental and sustainable development objectives are set out in Tax and the environment: using economic instruments, published alongside the Pre-Budget Report. The paper builds on the Government's 1997 Statement of Intent on environmental taxation and the large number of measures that have been introduced since then.

The Pre-Budget Report describes the next steps in the Government's work to protect and enhance the environment, including:

further action to improve waste management to help tackle climate change and local disamenity and to deliver greater economic benefits from recycling. The Government will now:
- consult on a proposal to increase the landfill tax escalator to £3 per tonne in 2005-06, and to increase the rate of tax by at least £3 per tonne in future years, on the way to a medium- to long-term rate of £35 per tonne, to encourage the diversion of waste away from landfill. The Government's intention is that increases will be introduced in a way that is revenue-neutral to business as a whole; and
- reform the Landfill Tax Credit Scheme from 1 April 2003 to ensure that funds more effectively promote the development of sustainable waste management techniques, while continuing to support local community environmental projects.
a new duty rate for bioethanol set at 20 pence per litre below the prevailing rate for ULSP, to ensure the UK benefits from the reduced greenhouse gases and local pollution that the fuel can offer. The Government will set out further details in Budget 2003 following discussion with stakeholders;
further work to introduce a lorry road-user charge to ensure that all lorry operators contribute to the cost of using UK roads, regardless of nationality. The Government will publish a second progress report early next year;
further discussion and consultation on the use of economic instruments to advance environmental objectives, including to promote household energy efficiency, address the environmental impacts of agriculture and encourage the aviation industry to take account of its contribution to global warming, and local air and noise pollution;
a new proposal to allow local authorities to retain additional increases in business rates revenue to spend on their own priorities. The Government will consult on this proposal in 2003; and
a new tax incentive to encourage donations toward the running costs of Urban Regeneration Companies, helping them to play an effective role in stimulating regeneration and growth in many of Britain's urban areas.

Further details of the Government's environmental strategy are set out in the separate press notice, HMT 2.

NOTES FOR EDITORS

Further details of the Pre-Budget Report can be found on this website.

More details are also included in the separate press notices listed below and available on the HM Treasury, Inland Revenue and HM Customs and Excise websites.

HM Treasury

HMT 2 An economic strategy for delivering environmental protection and tackling waste
HMT 3 Developing skills in the UK workforce

Inland Revenue and HM Treasury

REV/HMT 1 Income tax allowances and national insurance contributions

Inland Revenue, HM Treasury and Customs and Excise

REV/HMT/C&E 1 Enterprise Britain: supporting small business, entrepreneurship and innovation

Inland Revenue and Customs and Excise

REV/C&E 1 A modern and competitive business tax system

Customs and Excise

C&E 1 Protecting indirect tax revenues

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Pre-Budget Report 2002 Press Notice index