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Pre-Budget Report
25 November 1997
The purpose of this, the first annual pre-Budget Statement is to report the Government's assessment of the economy; to outline our Budget aims; and to encourage an informed debate on the detailed choices before us.
To achieve our national economic objectives - high and stable levels of growth and employment - the next Budget must address three challenges.
The first challenge is to increase our productivity.
Britain today is some 20 per cent less productive than our main competitors and has been for years.
Second, the challenge of employment 3½ million working age households - almost 20 per cent - have no one earning a wage.
And third, the challenge of stability. For forty years our economy has an unenviable history, under governments of both parties, of boom and bust. Stop-go has meant higher interest rates, less investment, fewer successful companies and lost jobs. It has been the inevitable result of a failure to take the long-term view.
So the real choice facing Britain in the coming Budget and beyond is between, on the one hand, muddling through as we have done for decades from one stop-go cycle to another.
Or, on the other hand, breaking with our past, burying short-termism and securing long-term strength through stability, sustained increases in productivity, and employment opportunity for all.
This is not a challenge for government alone; it is a challenge that must also engage both the understanding and the commitment, and indeed, the energies of all of us, Government, managers, investors, and workforce together.
So at the heart of this pre-Budget report is the recognition that only by greater openness and informed debate can this country achieve that shared understanding of the tasks ahead and that shared sense of national economy purpose that has eluded us for so long.
First, stability.
The major industrialised countries are expected to grow by 2¾ per cent this year and 2½ per cent next year, despite the recent turbulence we have seen in Asian economies and financial markets.
It is imperative that governments and central banks around the world remain vigilant. But it is the task of government, at all times, to ensure a long-term and stable framework, exactly the approach this Government is pursuing.
When we came to power, the economy was already facing yet again the very pressures that have produced the boom-bust instability of the past.
Consumer demand was accelerating, growing three times as fast as industrial production, as over £30 billion was released in building society windfall payments.
Inflation was predicted to go far beyond its 2½ per cent target and expected at that time to rise towards 4 per cent next year; all this was happening because the necessary decisions on monetary and fiscal policy had not been taken.
It is because this Government has learned the lessons from past instability when interest rates rose into double figures that, starting in May, we put in place a new monetary and fiscal framework.
Following our reforms at the Bank of England, long-term interest rates have come down. No one doubts the Bank of England's determination to achieve the Government's inflation target.
With our five year deficit reduction plan, public borrowing which was £23 billion last year is now forecast, excluding the windfall tax revenue, to be £12 billion this year and £6 billion next year.
We said in our Manifesto that we would work within existing spending limits. This we are also achieving, as we promised.
The deficit has fallen from 4½ per cent of national income two years ago to just 1½ per cent this year, and ¾ per cent in 1998-99, well within the Maastricht criteria.
There is a risk that the structural deficit - which takes account of the economic cycle - may turn out to be larger. So we will be both cautious and prudent and I can tell the House we will learn the lessons of 1988 when it was wrongly assumed the structural deficit had disappeared and the penalty was the return of boom and bust.
And while I recognise the concerns of exporters about the exchange rate, I also understand that what companies fear most is a return to the boom-bust instability of the past.
So this summer and autumn, hard decisions have had to be made on both interest rates and deficit reduction and I am now more optimistic that we are on course to put the economy on track for stable and sustainable growth.
And it is to reinforce our commitment to the long term that we will publish proposals for a code for fiscal stability.
We will legislate so that there is a duty on Government to report to Parliament on how it is meeting its fiscal rules. In this way everyone can plan for the future on a much clearer and better informed basis.
Let me explain why meeting our fiscal rules matters so much, and why they are essential preconditions for long-term social and economic progress.
It is because the borrowing levels we inherited are costing the country £25 billion a year in interest payments alone, which is more than our country's total budget for schools, that we had to act.
Our aim is to reduce the huge sums spent simply servicing debt, in order that more of our money can be spent on meeting the people's priorities.
The prize for this country - valued especially by a Government which is committed to good public services - is sustainable public finances that allow consistent and long-term investment in our priorities.
By reallocating resources we will be investing an additional £2.3 billion in education. And this year we will invest an extra £300 million in patient care in the NHS - and next year an extra £1.2 billion - over and above that planned by the last Government.
And I can tell the House that - as our comprehensive spending review reallocates resources towards higher priority areas - there will be real year on year increases in spending on front-line patient care.
The key to strong public services is long-term prosperity through higher productivity.
Government, industry and people together must now work to systematically remove all barriers to productivity: in product markets through encouraging competition and innovation; in capital markets through measures to enhance growth and investment, not least for innovative small businesses; and in the workplace through encouraging the creativity and flexibility of inventors, managers and workforces.
After our successful Budget initiative of July to encourage one of the most neglected of our creative industries - film - it is time to do more to encourage other creative industries where from science, computer software and communications to design, fashion and music, our British genius for creativity has made Britain a world leader.
This year, entrepreneurs in small and medium sized companies can draw on our £200 million doubling of capital allowances to invest in new technology.
From next year the new National Endowment for Science, Technology and the Arts will make grants to encourage creative talents.
But I can also say today, that in advance of the Budget, the President of the Board of Trade and I are examining how, to improve productivity, we can help leading-edge businesses gain funds to develop new technologies; how we can improve Britain's poor record of investment in research and development; and how we can make it easier for small businesses to draw on venture capital to create jobs and a more entrepreneurial culture.
And it is to encourage and reward long-term investment that we are completing a review of capital gains tax, the conclusions of which will be announced in the Budget.
Our poor record on investment in Britain also reflects our low level of national saving. Half the adult population have hardly any savings at all.
To encourage more people to save we will introduce from April 1999 new individual savings accounts, the details of which will be put out to consultation next Tuesday.
But there is one decision on investment that should not be delayed. In July we implemented the first stage of corporate tax reform, cutting the main rate of corporation tax by 2 per cent to 31 per cent, its lowest level ever.
And, following the abolition of payable tax credits, we began to consult, as promised, on the second stage.
Advance corporation tax, it has become abundantly clear, is now a hindrance to sensible business planning and investment decisions. Britain needs a reformed system that matches the needs of modern companies and favours the long term.
So to allow companies to plan ahead I can confirm today that in April 1999 advance corporation tax will be abolished.
At that point we will begin the move to paying corporation tax by quarterly instalments. Small companies will be exempt from this change and special arrangements will be made for medium sized companies. We will phase in the change over four years and we will substantially preserve companies expectations for using their existing surplus ACT.
This afternoon the Inland Revenue is publishing full details of the proposed changes. And we will now start consultations on their implementation.
To help ease the transition, and to take one stage further our pro-business and pro-investment agenda, I can announce that in the Budget, the main rate of corporation tax will be cut again by 1 per cent to 30 per cent from April 1999 - the lowest tax rate of any major industrialised country.
The July Budget started from the understanding that the greatest waste of our economic potential and the most serious cause of poverty is unemployment, denying opportunity to 3½ million working age households where no one works.
In July we said that instead of simply compensating people for unemployment, our priority is to tackle the root causes of unemployment and poverty by providing new opportunities for work.
In the last few months, with the help of Martin Taylor, the Government has been systematically addressing all the obstacles that prevent people taking up and benefiting from work:
We have concluded that to help people move from benefits to wages, nothing less than a comprehensive tax and benefit reform and the modernisation of the welfare state is required. This strategy involves three basic elements: providing skills for work; making work pay; and creating new job opportunities.
First, to offer skills for work, the Secretary of State for Education and Employment will shortly publish proposals for Individual Learning Accounts and for the University for Industry.
Secondly, I want everyone who can work to be better off in work than on benefit. So the Government now proposes an integrated tax and benefit plan involving action at every level.
To maximise the rewards from work, a 10p starting rate of tax and a reform of benefit tapers will be introduced when it is prudent to do so.
To ensure that work pays for families with children, we propose a working families tax credit, backed up by affordable child care;
And to ensure the rewards of these reforms flow directly to the employee we are committed to a statutory national minimum wage.
We will now consider in detail the working families tax credit; cash paid through the wage packet directly to families on low incomes, side by side with the national minimum wage. The proposal would build on the successful elements of family credit, and involve better help through the tax system for child care costs.
We will now also consider the future structure of national insurance for the low paid. Under the current system, some low paid employees face marginal tax rates of over 100 per cent. To improve rewards from work, to simplify administrative burdens on employers, as we want to do, and to encourage them to take on more people, it is now right to consider the scope for bringing the national insurance structure for the low paid more closely into line with income tax.
And finally, there are men and women who have been excluded for too long and who need extra help to get back into work.
In the Budget we made a start by announcing a new deal worth £4 billion that provides jobs for young unemployed, the long-term unemployed, lone parents and the disabled.
The new deal for the young unemployed will start in pilot form in January and extend nationwide for the young unemployed in April, with the support of some of our best known companies. I can also announce today that some of Britain's leading bus and rail companies have agreed to play their part by introducing a new travel pass for young people on our new deal, cutting by at least 50 per cent their travel fares.
Disabled men and women who want to should also have the right to work. As the first step in implementing the £195 million programme for people with disabilities, the Secretaries of State for Social Security and Education and Employment, will be now inviting bids for the first wave of new projects to start in spring 1998.
Helping lone parents into work is the most effective long-term way to tackle their family poverty. The new deal for lone parents began in eight areas in July. Already it is yielding results where it counts - in higher living standards for lone parent families.
So from next year our welfare to work programme will be extended to help every lone parent who wants advice and help. And from April every single parent coming on to benefit will be offered help to find work if that is what she or he wants.
Lone parents need and have a right to expect affordable child care. Indeed, since May the Secretaries of State for Social Security and Education and Employment have been working with the Treasury on plans to make a reality of a national child care strategy. And, paramount in our family policy, are the interests of the child.
Tomorrow they will announce a five year plan to extend out-of-school childcare clubs to every community in Britain. Funds will be available to set-up as many as 30,000 new out-of-school clubs, which will provide places for nearly 1 million children.
The total cost, £300 million over five years, now budgeted for in our plans, the biggest ever investment in childcare, will be shared between the Exchequer and the new opportunities fund.
To staff the new clubs 50,000 young people across Britain will be offered training as childcarers through our welfare to work programme.
Under our plan, every lone parent who needs it will be able to find an out-of-school club in their community. A national child care strategy is no longer the ambition of workless parents. It is now the policy of this country's Government.
Today while nearly one in five working age households have no one working, we also have extensive skill shortages throughout our economy. The proportion of manufacturing firms reporting skill shortages is up 70 percent on a year ago.
We will now introduce pilot projects nationwide under which any employer who takes on and trains a young or long-term unemployed person and keeps them on, can now receive up-front three-quarters of their new deal allocation thus giving immediate help with training costs - in the case of young people about £1700 and for the long-term unemployed, £1500.
These skill shortages are a clear sign of the short-term pressures in the economy today that have to be tackled.
At around this point in every recovery, when inflation, and interest rates have risen, a second wave of wage inflation has brought a recurrence of stop-go instability.
Past governments have allowed themselves to be diverted from their long-term aims because of their inability to deal with short-term pressures.
This time we must do everything we can to make sure that the long term takes priority.
There are three reasons to believe that provided reform and responsibility go hand in hand it is possible to lay the foundations to deliver both low inflation and high employment over the long term.
First, the more our welfare to work reforms allow the long-term unemployed to re-enter the active labour market, the more it will be possible to reduce unemployment without increasing inflationary pressures.
Second, tax and benefit reforms, which remove the barriers to work, and structural reforms which promote the skills for work - in other words, Government intervention to create a more responsive labour market - can make possible long-term increases in employment, without fuelling inflationary pressure.
The more people return to the world of work, and the more we tackle skill shortages, the less pressure there is on employers to bid up wages in the short term.
But third, the reality of the more complex and flexible labour markets of Britain today is that pay decisions are made not by the few in smoke filled rooms but by millions of employees and employers across the country.
And the more that we all take a long-term view of what the economy can afford, the more we will be able to have job creation and keep inflation and interest rates as low as possible.
So we must all be long-termists now.
The reforms we are introducing will take time. But it is in no one's interest if today's pay rise threatens to become tomorrow's mortgage rise.
The worst form of short-termism would be to pay ourselves more today at the cost of fewer jobs tomorrow and lower living standards in the very near future.
So wage responsibility is a price worth paying to achieve jobs now and prosperity in the long term. It is moderation for a purpose.
The choice is between responsibility and reform that would give us higher growth and more jobs; and short-sighted, short-termism, which will inevitably mean less growth and fewer jobs.
In our forecasts for the coming two years, we demonstrate clearly this choice we all face. If the economy works in the same way as in the past, growth might be 2¼ per cent next year.
But, if we can combine our reforms with responsibility across the economy it is possible to achieve growth of 2¾ per cent next year.
Similarly, growth can be 1½ per cent or 2 per cent in 1999-2000.
In either case the Bank of England will ensure that inflation comes down to the Government's target.
So the more successful we are in tackling skill shortages and ensuring the success of the new deal and the more effective the exercise of responsibility in pay determination, the more we can achieve our goals of sustained growth and employment.
I have today submitted this new evidence to the Public Sector Pay Review Bodies and met their chairmen to explain the choices before us.
And just as the Government is offering leadership with responsibility in its monetary policy and the management of the public finances, so that we can achieve higher levels of growth and employment, so must business leaders and workforces match this with responsibility throughout the whole economy.
This means responsibility, not just on the shop floor but also from Britain's boardrooms outwards - where in the interests of all there must be moderation not excess and where an example should be set.
But we recognise that if we are to achieve our long-term goals and secure a new sense of economic purpose, then fairness and openness must be at the heart of the approach to every Budget.
Tax avoidance harms those who pay their fair share of taxes. I give notice today that the Budget will introduce those measures which are needed to root out tax avoidance.
A fair and open approach to taxation will also be central to our Budget consultations now under way: on North Sea oil; on alcohol and tobacco where the review will conclude early next year; and charities which is working towards a consultation document next spring.
In securing the long term nothing is more important than our approach to the environment.
On Thursday the Deputy Prime Minister will publish a consultation paper on ways to help deal with water pollution, with a view to making proposals in the Budget.
Together we are also looking at how the tax system can reflect our environmental objectives, and will do so in the light of decisions at Kyoto.
So in this Pre-Budget Statement we are consulting in all areas where it is right to consult, taking action in all those areas where action is needed, and putting to the country the choices for debate - choices that can be made only by all of us.
There is one announcement that I promised to make today. Following a review by Customs and Excise which will be published tomorrow I have decided that VAT on the installation of energy saving material under existing grant schemes, such as the home energy efficiency scheme will be cut from 17.5 per cent to 5 per cent in the spring Budget. This will mean that the funds under these schemes will go further, helping to insulate 40,000 more homes per year.
The Government will now explore with our European partners the possibility of a reduced rate of VAT for a wider range of energy-saving materials.
Our spending review like our tax policy is based on allocating resources according to the priorities of investment, employment and fairness.
So already within this Government's tough spending limits we have redistributed resources to priority areas; from the assisted places scheme to cutting class sizes; from the windfall tax paid by the utilities to creating jobs and repairing our schools; from defence and the nuclear programme to the National health Service.
And after the publication of the National Asset Register yesterday there will be new scope to reallocate resources to high priority capital spending.
I can announce one further reallocation today. I now expect our net payments to the European Union to be some £400 million lower than budgeted.
Our pensions review is looking at the long-term future of pension provision in Britain, including how we can do more to support Britain's poorest pensioners.
We must help the thousands who do not claim benefits and who need them most.
The Secretary of State for Social Security is announcing today that she will finance a number of pilot projects so that we can find the best ways of encouraging improved benefits take-up by the poorest pensioners.
We have already cut VAT on fuel and power to 5 per cent.
As we promised.
But it would be wrong to wait until we have the results of our pensions review to take action to help the elderly with winter fuel bills.
At the moment, although the poorest do get some help through cold weather payments, these payments only go to those on income support and they generally have to wait until after the cold weather until help is available.
They are of no help at all to most pensioners, including the million not getting their income support entitlements; no help to those on the margins of poverty; and of doubtful help even to those who do qualify who often don't know whether they can afford to spend extra money on fuel when it is cold.
The Secretary of State for Social Security and I are simply not prepared to allow another winter to go by when pensioners are fearful of turning up their heating even in the coldest winter days because they do not know whether they will have the help they need for their fuel bills.
The pensions review will report next year. But we must act in the meantime to help pensioner households.
For this winter and next every pensioner household will receive £20 extra to help with their bills.
And every pensioner household on income support - nearly two million - will receive £50 extra.
The cost will be met from reallocating the savings on our contributions to the European budget and the money will be paid in time to meet winter fuel bills.
So every pensioner household will now see the benefits of: this Government's cut in VAT on fuel, our abolition of the gas levy, new competition and tougher regulation of the utilities and now the Government's new fuel payment.
As a result of these changes, the average pensioner household will be helped by up to £100 a year, and poorer pensioner households on income support will be helped by up to £130 a year.
This is a Government that keeps its promises and is prepared to take action where action needs to be taken.
A Government that is meeting the people's priorities, even as we confront the difficult choices our country must make to build for the long term.
This year, in 1997, we have made a start and we will do more year on year.
Our approach to the coming Budget shows we are already setting a new course for Britain and building a united country where everyone has opportunity and everyone a contribution to make.
Pre Budget Report 1997 index page
