PN 01

2 December 2004

2004 PRE-BUDGET REPORT

OPPORTUNITY FOR ALL: THE STRENGTH TO TAKE THE LONG-TERM DECISIONS FOR BRITAIN

The Government’s economic objective is to build a strong economy and a fair society, where there is opportunity and security for all.
The long-term decisions the Government has taken – giving independence to the Bank of England, new fiscal rules and a reduction in debt – have created a strong platform of economic stability. Over the past four years, many industrialised countries have suffered economic downturns, including the US and much of the euro area. More recently, the international economy has been affected by geopolitical uncertainty, rising oil prices, and large current account imbalances and shifting exchange rates between Europe, Asia and the US. The UK has grown continuously throughout this period of global economic uncertainty and it continues its longest unbroken expansion since quarterly national accounts data began 50 years ago, with GDP now having grown for 49 consecutive quarters.

To continue to prosper in the coming decades the UK must respond to the long-term challenges of the rapidly evolving global economy. The international economy is becoming increasingly integrated through greater cross-border trade and investment, driven in part by rapid advances in technology. Emerging market economies are growing strongly and increasing their shares of global output, trade and investment. Within the next twenty years, half the world’s manufactured exports could come from developing countries.

The Government is committed to taking the long-term decisions that will ensure the UK will meet these challenges, by entrenching macroeconomic stability and by building a flexible, enterprising economy with a highly-skilled, high-productivity workforce and a strong science and innovation sector. Flexibility must be combined with fairness, providing security and support for those that need it and ensuring that everyone has the opportunity to fulfil their potential.

MAINTAINING MACROECONOMIC STABILITY

The Government’s long-term economic goal is to maintain macroeconomic stability, ensuring the fiscal rules are met at all times and that inflation remains low. The domestic stability delivered by the Government’s macroeconomic framework has enabled the UK economy to grow steadily through a challenging period for the global economy. Sound macroeconomic fundamentals, recent strong growth rates and continued growth in the world economy point to a further period of relatively strong growth. UK GDP is expected to grow by 3¼ per cent in 2004, in line with the Budget 2004 forecast and up from 2.2 per cent last year. Growth is forecast to remain within the 3 to 3½ per cent range for 2005 as a whole. By early 2006, the output gap is forecast to have closed and GDP growth is expected to be back to trend rates.

The interim forecast update of the projections for the public finances published in this Pre-Budget Report show that the Government is meeting its strict fiscal rules:

the current budget since the start of the current economic cycle in 1999-2000 shows an average annual surplus up to 2005-06 of 0.1 per cent of GDP and the Government is therefore meeting the golden rule on the basis of cautious assumptions. There is a margin against the golden rule of £8 billion in this cycle, including the Annually Managed Expenditure (AME) margin. The current budget returns to balance by 2006-07, and the cyclically-adjusted current budget in the cautious case moves into surplus by the end of the projection period; and
public sector net debt is projected to remain low and stable over the forecast period, stabilising at around 37 per cent of GDP in 2009-10, below the 40 per cent ceiling set in the sustainable investment rule in 2005-06.

MEETING THE PRODUCTIVITY CHALLENGE

Productivity growth, alongside high and stable levels of employment, is central to long-term economic performance in the global economy. The Government’s long-term goal is for the UK to achieve a faster rate of growth than its main competitors. The Pre-Budget Report announcements include:

giving employers the opportunity to access free and flexibly delivered training for their low-skilled employees through a National Employer Training Programme;
establishing an independent review to examine the future skills needs of the UK economy, to be led by Sandy Leitch, (Chairman of the National Employment Panel and formerly a Chief Executive of Zurich Financial Services);
reforms to reduce the regulatory burden on business, including the extension of Common Commencement Dates to other areas of legislation, and progress on the Panel for Regulatory Accountability;
publication of the interim report of the Hampton Review consulting on improvements to the current system of regulatory inspection and enforcement to reduce the administrative burden on business;
setting out the vision of how significant reductions in compliance burdens for small businesses will be delivered through the integration of HM Customs and Excise and the Inland Revenue;
implementation of the changes recommended by the Graham Review of the Small Firms’ Loan Guarantee by end 2005; and
implementation of the ten-year Science and Innovation Investment Framework, through strengthening the partnership with business on raising investment in UK R&D, and taking forward the recommendations of the Lambert Review on business-university collaboration including through the Northern Science and Industry initiative.

Further details of these and other measures to encourage enterprise, productivity and skills are set out below.

Workforce development

The National Employer Training Programme will build on the success of Employer Training Pilots, now operating in over one third of the country with over 15,000 employers and 100,000 employees participating. The national programme will be rolled out from 2006-07 and will cover the whole country in 2007-08. The key features of the National Employer Training Programme are:

brokers who will act for employers and their employees to assess training needs and source high quality training provision that can be delivered flexibly in the workplace;
fully subsidised costs of training to level 2 (equivalent to 5 GCSEs at grade A*-C) where employers are prepared to offer their low-skilled employees paid time to train;
financial support – equivalent to that for a level 2 qualification – towards the cost of a level 3 qualification (equivalent to A levels) for those who can jump straight to level 3;
support from brokers to design and source training packages at level 3 and higher; and
creation of links with Jobcentre Plus in order to support adults making the transition into work to get training in a way that meets the requirements of their employer.

Review of the future skills needs of the UK economy: the Government has asked Sandy Leitch, Chairman of the National Employment Panel and formerly a Chief Executive of Zurich Financial Services, to lead an independent review of the UK’s long-term skills needs and priorities of business and the economy.

The Pre-Budget Report also announces pilots implementing the New Deal for Skills:

Learning allowance: from April 2006, the Government will pilot the approach of allowing longer-term benefit claimants currently on Jobseeker’s Allowance, along with those on Income Support and Incapacity Benefit, to take up free, full-time, work-focused training, where this is judged by their Personal Advisor as the best way of helping them into work. The pilots will also test an additional benefit supplement of £10 a week to cover the extra costs of learning. Receipt of this support will be dependent on participants meeting the conditions of a ‘learning agreement’, covering course attendance and participation, agreed with their Personal Advisor.

Skills Coaches: will be piloted from April 2005 in eight Jobcentre Plus Districts, initially for the unemployed, to provide one-to-one personalised support to identify skill needs and provide guidance on the best training to promote employability.

Regulatory reform

Further initiatives to encourage better regulation and aid enterprise were announced by the Chancellor today. The initiatives are focused on reducing the administrative burdens for business, ensuring that the UK regulates only when necessary and on advancing regulatory reform in Europe.

Common Commencement Dates: following the success of the DTI pilot for employment law, the Government will now extend Common Commencement Dates for new and amended domestic legislation, starting with health and safety, company and consumer legislation in 2005. This will limit the dates when regulatory changes can be made, enabling businesses to plan for new measures and implement them effectively. New regulation in these areas will in future be introduced on two dates each year, 6 April and 1 October, unless there are exceptional reasons for not doing so.

Hampton Review: The interim report of the Hampton Review, 'Reducing administrative burdens: effective inspection and enforcement', is published today. Further details are available in PN 4.

Review of Regulations: The Government will introduce a requirement that Regulatory Impact Assessments will in future specify how and when new regulations will be monitored and reviewed to ensure they are having the intended effect. The Better Regulation Task Force will be asked to monitor this requirement and to report on each department’s compliance in its annual departmental assessments of regulatory performance.

Improving regulation of the financial promotions regime: As part of the Financial Services and Markets Act two-year review, the Chancellor announced today that barriers for individuals who invest in small and growing firms will be removed by enabling self-certification for sophisticated or high net worth investors.

Preventing additions to the requirements of European legislation: the Government does not regulate beyond the minimum requirements of European legislation unless there are exceptional circumstances, justified by cost benefit analysis and extensive consultation with business. The Government is putting in place safeguards to ensure that this approach continues to be followed in the future. Today, the Chancellor and the Foreign Secretary are setting out measures to guarantee that businesses do not face unnecessary burdens from European law, including:

allowing the Panel for Regulatory Accountability to scrutinise carefully measures for implementing European legislation in the UK;
comparing transposition practices with other Member states during implementation; and
the Government taking into account the approaches of other Member States when implementing directives.

Advancing European regulatory reform: The 2004 Four Presidencies initiative sets out a series of joint proposals designed to place regulatory reform at the heart of these EU Presidencies. Significant progress has since been made on: strengthened procedures for competitiveness testing of new EU regulations; new proposals for simplifying existing EU law in 2005; and further action to measure and control the administrative burden associated with new and existing EU laws, which the Commission will implement in a pilot phase starting early in the new year. The Government welcomes these developments and will continue to work with other Member States and the European Commission to advance regulatory reform in Europe.

PROMOTING FLEXIBILITY ACROSS THE REGIONS

The Pre-Budget Report takes new steps to promote greater regional flexibility in order to achieve high levels of regional growth. In a flexible and dynamic economy, regions must be empowered to harness their indigenous strengths, tackle weaknesses in enterprise, skills and innovation, and to promote growth and full employment in all communities. Steps include:

publication of a consultation document setting out Government proposals to involve the regions more in decision making on regional transport, economic development and housing. In this document, the Government proposes to provide clearer funding assumptions - including providing regional transport allocations for the first time and planning guidelines for the longer term - to provide a better basis for regions to plan and to give them a stronger voice in the next Spending Review;
an initial response to the Northern Way Growth Strategy: final report published by the three Northern Regional Development Agencies in September, which sets out a strategy to establish the North of England as an area of exceptional opportunity with a world-class economy and a superb quality of life. The Government welcomes this report and will respond in full in January. The Pre-Budget Report builds on Northern Way recommendations in a number of ways:
- rolling out Employer Training Pilots across the North, as part of a National Employer Training Programme;
- significantly extending the successful Pathways to Work pilots in the North, meeting the Northern Way's recommendation, as part of a major expansion of the Pathways to Work pilots for incapacity benefits claimants;
- ensuring the Northern Way regions can take full advantage of support from the national strategy for Enterprise in Education; and
- welcoming the commitment of the three northern Regional Development Agencies to promote science cities, starting with Manchester, York and Newcastle.

Building on their input into last year’s Budget, the Regional Development Agencies have been asked to provide policy advice to feed into Budget 2005, in a number of areas: aligning regional transport, housing and economic development strategies and associated funding; business support; establishing the concept of science cities; the role of the Voluntary and Community Sector in regeneration of deprived communities; embedding a culture of enterprise; sustainable development; strengthening regional partnerships in adult skills provision.
The Pre-Budget Report also announces that Brian Jackson, the new chairman of the East Midlands Development Agency, will work with all Regional Development Agencies to develop a framework to ensure that focused, tailored coaching is available to business in each region.

INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

The Government's long-term goal is employment opportunity for all – the modern definition of full employment. It aims to ensure a higher proportion of people in work than ever before by 2010. The Pre-Budget Report announces:

a major expansion of the Pathways to Work pilots for incapacity benefits claimants to an additional 14 Jobcentre Plus districts covering the thirty Local Authority Districts with the highest concentrations of incapacity benefits claimants, thereby extending this groundbreaking approach to around one-third of the country;
a package of measures to further help people on incapacity benefits move into work, including changes to permitted work rules to improve opportunities to move from benefits to full-time employment, and placing employment adviser support within GPs’ surgeries;
an extension of the £40 per week In-Work Credit for lone parents to six further pilot areas, to reinforce the gains to work for lone parents in the areas that need it most;
a Housing Benefit Reform Fund worth £180 million during 2006-08 to enable the roll out of flat-rate allowances and to improve the administration and structure of the Housing Benefit system;
piloting a Learning Allowance that will allow benefit claimants to participate in full-time training; and
increasing by £3 a week the income threshold above which the Working Tax Credit is tapered, in line with inflation to £5220 in 2005-06, so that families whose incomes are rising retain more of their tax credits, ensuring gains to work are maintained.

Further details of measures to increase employment opportunity announced today are given below.

Pathways to Work for Incapacity Benefit claimants

The Pathways to Work pilots are testing improved labour market support for incapacity benefits claimants. The pilots include a series of mandatory work focused interviews for most new claimants, delivered by a skilled Jobcentre Plus personal adviser; new rehabilitation services; and improved financial incentives through a £40 a week Return to Work Credit. Early evidence clearly suggests that the pilots are having a positive impact on incapacity benefits claimants' prospects of a return to work. The expansion of the Pathways to Work pilots announced in this Pre-Budget Report will extend this groundbreaking approach to cover the 30 Local Authority Districts with the highest concentrations of incapacity benefits claimants, taking the coverage of Pathways to Work pilots to around one-third of the country.

In-Work Credit for lone parents

The extension to the In-Work Credit announced in this Pre-Budget Report will extend to a further 84,000 lone parents the offer of an additional £40 a week for the first year after they move into work. The Credit increases the gains to work in the areas where the costs of living are highest, and it is offered to all lone parents within the pilot areas who move into employment having been on benefits for over a year. This extension will bring the total number of lone parents eligible for the In-Work Credit to a quarter of a million, 40 per cent of all lone parents who have been on benefits for a year or more.

BUILDING A FAIRER SOCIETY

The Government is determined to combine flexibility with fairness. Policies that ensure fairness act to minimise the short-term costs that can be associated with the changes that are needed in flexible outward-looking economies. The Pre-Budget Report announces:

a ten year strategy for childcare, setting out the Government’s long-term vision of affordable, flexible, high quality childcare for all parents who need it, and providing parents with real choices in balancing their work and family life;
an extension of paid maternity leave from 26 to 39 weeks from April 2007;
an increase in the entitlement to free nursery education for all three and four year olds to 15 hours a week for 38 weeks a year, reaching all children by 2010;
improvements to the childcare element of the Working Tax Credit, with an increase in the maximum eligible costs to £300 a week for families with two or more children and to £175 a week for one child from April 2005, and an increase in the maximum proportion of costs covered from 70 to 80 per cent from April 2006;
further steps to encourage saving and asset ownership, through Individual Savings Accounts, the Saving Gateway and Stakeholder products;
consultation on the value of payments at age seven in the Child Trust Fund;
a package of measures to promote financial inclusion, by increasing access to banking services, affordable credit and face-to-face money advice;
a £50 payment to households with someone over age 70 in 2005, to help meet the cost of council tax and other living expenses;
action to protect tax revenues and modernise the tax system, including measures to combat tax fraud and avoidance; and
its development priorities for the Presidencies of the G7/8, and further steps to tackle global poverty and reduce developing country debt.

Further detail of these measures is set out below.

Ten year strategy for childcare

'Choice for parents, the best start for children: a ten year strategy for childcare', published alongside the Pre-Budget Report today, sets out how the Government will modernise the welfare state to support families in balancing work and family life and includes the measures below.

Extension of paid maternity leave: to ensure that parents are in control of the choices they make about their work and family life, the Government is setting a goal of twelve months paid maternity leave, transferable from the mother to the father, by the end of the next Parliament. As a first step this Pre-Budget Report announces £285 million to extend the current entitlement of 26 weeks, to 39 weeks from April 2007.

Children’s Centres in every community: 2,500 Children’s Centres will be in place by 2008 and 3,500 by 2010, offering information, health, family support, childcare and other services for parents and children.

Affordable, flexible, high quality childcare for all: all families with children aged up to 14 who need it will have an affordable, flexible, high quality childcare place that meets their circumstances. This will include an out of school childcare place for all children aged three to 14 between the hours of 8am and 6pm each weekday by 2010. Free early education will be extended with a goal of 20 hours free high quality care a week for 38 weeks for all three and four year olds, with a first step of 15 hours a week for 38 weeks reaching all children by 2010.

Improvements in quality: a Transformation Fund of £125 million each year will take effect from April 2006 to invest in high quality, sustainable, affordable childcare.

Promoting saving and asset ownership

The Government seeks to provide targeted support and incentives for saving from childhood, through working life and into retirement. This Pre-Budget Report announces action to further promote saving and asset ownership in three areas:

Individual Savings Accounts (ISAs): When ISAs were introduced in 1999 they were guaranteed to run for ten years to 2009 and the overall annual investment limit was set at £5,000, with a maximum of £1,000 in cash. A higher initial annual limit of £7,000, with a maximum of £3,000 in cash, was extended until April 2006. The Government remains committed to ISAs and plans, subject to consultation, to further extend the existing higher ISA limits until 2009.

Matching savings of low-income savers through the Saving Gateway: The interim evaluation of the first Saving Gateway pilot found that the Government matching savings of low-income savers can be an important new dimension in Government support for saving, encouraging genuinely new saving. The Government will launch a larger, £15 million Saving Gateway pilot in 2005. The new pilot, run again with DfES, will investigate alternative rates of matching, measure the impact of matching for a wider range of income groups and will use the support of a wider range of community financial education bodies.

Stakeholder savings and investment products suite: The Stakeholder initiative will be implemented in April 2005, promoting access to a suite of simple, low-cost and risk-controlled savings and investment products. The Government will continue to consult with industry and consumer groups on the most effective way to market these products.

In addition, the Child Trust Fund becomes fully operational in April 2005; all children born since September 2002 will receive an initial £250 and children from low-income families will receive £500. The Government will now consult on a further universal payment of £250 at age seven, with children from low-income families receiving £500.

Promoting financial inclusion

'Promoting financial inclusion', published today alongside the Pre-Budget Report, sets out a package of measures to tackle financial exclusion including a £120m Financial Inclusion Fund to support initiatives to tackle financial exclusion over the next three years, and a Financial Inclusion Taskforce chaired by Brian Pomeroy to oversee progress. The package includes measures to address financial exclusion in three specific areas: access to banking; access to affordable credit and access to free face-to-face money advice.

Access to banking: the banks and the government share the aim of reducing financial exclusion. They have agreed to work together towards the goal of halving the number of adults in households without a bank account, and of having made significant progress in that direction within two years. Developments will be reviewed at the end of the two-year period to see if further initiatives are needed;

Access to affordable credit:

the Government will consider mechanisms whereby in certain circumstances, private and third sector lenders could apply for repayment to be made by deduction from benefit, in order to boost the ability of private, voluntary and community sector partners to offer affordable loans to those on the lowest incomes;
growth funding will be made available from the Financial Inclusion Fund to boost the coverage, capacity and sustainability of the not-for-profit, or ‘third’ sector in providing affordable loans to the financially excluded, subject to EC state aids approval;
the Government will consult on moves to make it easier for credit unions to lend to more vulnerable individuals and those without a saving record;
the Government will consult on the case for and practicalities of extending the Community Investment Tax Relief scheme to Community Development Finance Institutions specialising in personal lending, any action in this area will be subject to state aids approval; and
reforms to the Social Fund will be implemented in April 2006, aimed at improving the consistency, transparency and effectiveness of the Fund in helping those people most likely to access high cost credit.

Access to free face-to-face money advice: funding will be made available from the Financial Inclusion Fund to increase capacity in the face-to-face money advice sector and to pilot models of money advice outreach aimed at reaching those who do not normally present themselves to debt advisers.

Modernising the business tax system and protecting tax revenues

The Government is taking forward further proposals to modernise the business tax system. A Technical Note, published today on the Inland Revenue website, covers a range of issues including reform of the schedular system for companies. The Government has also decided to align the tax treatment of leasing with other forms of finance and is consulting on the detail of the new rules.

A package of measures to combat tax fraud and avoidance has been announced by the Chancellor today. Further details are set out in PN3.

DELIVERING HIGH QUALITY PUBLIC SERVICES

The Government's long-term goal is to deliver world class public services through investment and reform, while ensuring efficiency and value for money. The Pre-Budget Report announcements include:

a further £520 million assigned to the special reserve for 2004-05 for military operations in Iraq and the UK's other international obligations, and additional resources for counter-terrorism and resilience;
taking action to reduce pressures on council tax in 2005-06 by £1billion by releasing an extra £125 million of resources for England alongside a reduction in ring fencing and other obligations and £512 million from Departmental reallocations.
progress against the programme of public sector relocation, and the publication of Sir Michael Lyons' report on asset management in the public sector; and
the next steps in the Government’s continued public sector reform programme, focusing on devolving decision-making closer to the front-line and providing greater personalisation of services.

PROTECTING THE ENVIRONMENT

The Government’s goal is to deliver sustainable development and a better environment, by addressing the challenges of climate change, poor air quality and environmental degradation in urban and rural areas. The Pre-Budget Report announcements include:

the forthcoming launch of the UK climate change programme consultation and prioritisation of climate change as a key theme for the UK’s presidencies of the G8 and EU;
the launch of a joint Energy Efficiency Innovation Review with Defra , supported by a new R&D fund to accelerate energy-efficient technology;
continuation of the freeze on the main road fuel duties in response to the sustained volatility in the oil market;
narrowing of the duty differential between rebated oils and main road fuels by one penny per litre to help tackle oils fraud and a consultation on vehicles using rebated oils
a package of measures to support the development of biofuels , including a consultative process and feasibility study on a Renewable Transport Fuels Obligation;
plans to align the VAT fuel scale charge with the company car benefit charge to provide consistent tax incentives for less polluting cars; and
restoration from April 2006 of the company car tax diesel supplement on new diesel cars registered from January 2006, to reflect the mandatory introduction of new Euro IV emissions standards.

Further details of measures to protect and enhance the environment are set out below.

Climate change and energy efficiency

The Government is taking a number of steps to tackle the global challenge of climate change and is making this issue a key priority for the UK’s presidencies of the G8 and EU in 2005. The Government will be launching a consultation on the review of the Climate Change programme on 8 December.

As identified in the Government’s Energy White Paper, energy efficiency measures in both business and households are frequently cost-effective, while also improving productivity and reducing bills. Defra and HM Treasury will also be jointly undertaking an Energy Efficiency Innovation Review to examine how technological, policy, financial and organisational innovation, whether by Government, business or consumers, can best contribute to a longer-term step change in energy efficiency. The Government will help focus the growing public and private investment in this area by investing in a £20 million fund to help foster a new partnership to accelerate energy-efficient technology, run by the Carbon Trust.

Delivering a clean and efficient transport system

Road fuel duties : Volatile world oil prices have meant higher UK pump prices than would have otherwise been expected in recent months. Today, the Chancellor, in response to the continued volatility in the oil market announces the continuation of the freeze on main road fuel duties for this year. It remains the Government's policy that in future years fuel duties should rise at least in line with inflation as the Government seeks to meet its targets to reduce polluting emissions and fund public services.

Given the continuation of the freeze on main road fuel duties, the differential for sulphur-free fuel will not be introduced. The Government remains committed to the introduction of cleaner and more environmentally-friendly fuels and will aim to implement the duty differential for sulphur-free fuels when market conditions allow.

Promoting biofuels: From 1 January, 2005, a duty differential of 20 pence per litre will be introduced for bioethanol. To encourage further the introduction of biofuels, the Government is announcing a consultative process and feasibility study on a possible Renewable Transport Fuel Obligation (RTFO). An RTFO would require a specified proportion of aggregate fuel sales to come from renewable sources and would draw on the experience of the obligation for renewable electricity. The consultative process and feasibility study will commence shortly and will seek to establish the cost-effectiveness, administrative feasibility, regulatory burdens and compatibility of an RFTO with other Government objectives.

A new method of biodiesel production is being developed by oil refiners that would allow biomass to be added to hydrocarbon oils in the refinery process to produce an end product indistinguishable from conventional diesel. Current taxation on oils is products based and therefore could not reward such biomass ‘inputs’.

Following discussions with stakeholders on the possibility of extending the duty differential approach to inputs-based production of biodiesel, the Government today announces work towards a pilot project to examine the potential for using duty incentives for inputs-based production and will hold a tendering process after Budget 2005. The pilot project will be launched in 2005 and is expected to start in 2006.

Company car tax : From 6 April 2006, the waiver of the three per cent diesel supplement for diesel cars that meet Euro IV emission standards will cease for cars registered on or after 1 January 2006. The waiver was introduced to encourage early take up of cleaner Euro IV technology and has achieved that purpose. Euro IV emission standards will become mandatory for all new diesel cars registered from 1 January 2006. The waiver will be retained for the life of diesel cars that meet Euro IV emission standards and were registered before 1 January 2006.

NOTES FOR EDITORS

Further details of 2004 Pre-Budget Report announcements can be found on the HM Treasury website: www.hm-treasury.gov.uk.

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GOVERNMENT DEPARTMENT INTERNET SITES

Further information and all published documents relating to Budget 2004 may be found on the Internet at the following addresses:

HM Treasury www.hm-treasury.gov.uk

Inland Revenue www.inlandrevenue.gov.uk

HM Customs and Excise www.hmce.gov.uk