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Pre-Budget Report
03 November 1998
In this year's Pre-Budget Report we seek to steer a course of stability amid a world economic downturn. We set in place measures to increase productivity and provide support for enterprise. We introduce new measures to make work pay for all our people and we show how we will invest in health, education and our infrastructure, to provide the modern services on which people rely, in each case long term decisions that will equip our country for the future.
The background to this report is the global downturn, which started in Asia and which has reverberated throughout every continent. It has not only shifted the balance of risks in the world economy from fears about inflation to fears about growth, but has forced every country, every continent, every international financial institution to cut their estimates for growth.
World trade growth is set to fall by two thirds.
Forecasts for world growth as a whole have now been virtually halved.
One quarter of the world is in recession.
And my objective, the objective for Britain, is that in this uncertain world, Britain not only steers a stable course but that, by building up our long term strength, is more than equal to any and every challenge the global economy presents.
Because in the last eighteen months British inflation has been brought down to its target of 2.5 per cent, and because Britain has set in place a new long term monetary framework, with the independence of the Bank of England, Britain is better placed than in the past to face these global difficulties.
And because too, Britain has tackled its structural deficit in the public finances we are more able to steer that stable course.
But as all forecasts round the world have made clear there is acute uncertainty about the eventual outcome of the global financial instability.
So we are conscious of the balance of risks - the risk on the one hand of a sharper slowdown in the world economy as a result of instability and its effect on confidence, the risk on the other that inflationary pressures might persist.
The Pre-Budget Report is set with this firmly in mind, no denial of short term difficulties, no diversion from policies for long term strength.
And our challenge in the year ahead is to strengthen the three essential foundations for that long term strength and success.
First, Britain now has, for the first time, a consistent long term framework for both monetary and fiscal policy - one that has an inbuilt capacity to respond credibly to short term pressures and one from which we will not be deflected.
Second, with business, we are putting in place a strategy to tackle a fundamental long term economic weakness, the 40 per cent productivity gap with our most successful competitors - and these measures include investment in education and innovation, and new encouragement for enterprise and competition.
And third, with our Welfare to Work programme and by ensuring that work pays, we are extending opportunity to all, creating a Britain where no one is excluded, and everyone has a contribution to make, a Britain that is both enterprising and fair.
First, the foundation of long term economic stability.
Official figures now show that by spring 1997, with consumer spending growing at an unsustainable pace, inflation was heading way above the country's 2.5 per cent target, to twice that of our competitors, 4 per cent and above, and that Britain was set to repeat the boom-bust cycle that had led to 15 per cent interest rates for a whole year in 1990.
Because immediate action was taken - making the Bank of England independent, and tackling the inflationary pressures - inflation is today at our target of 2.5 per cent. And I can announce that for future years our forecast is that it will stay on target. As a result, Britain's long term interest rates have come down from over 7 per cent to 5 per cent; the differential between Britain and Germany has narrowed by nearly one per cent; long term interest rates are now the lowest for 35 years, the lowest since Britain's boom-bust cycle became entrenched.
And because Britain has brought inflation under control it has been possible, as the world has turned downwards, for interest rates to be able to respond more quickly and in a more forward-looking way than in past British economic cycles.
In the previous economic cycle, interest rates remained in double figures for over four years. In contrast, the Bank of England has already been able to reduce interest rates to respond to a changed international environment.
Long term monetary stability is a pre-condition of economic success and I reaffirm my support for the Bank of England's independence - its remit and membership - and I do not believe that any political party - putting the long term interests of Britain first, will, on reflection, bring party politics and short-termism back into interest rate decisions.
It is also because Britain now has a new long term fiscal framework - with clear disciplines set out in the Code for Fiscal Stability that we are laying before Parliament today - that, as world growth slows, fiscal policy is able to make its contribution to stability and future growth in Britain.
The official figures published today confirm that in our first year we cut the budget deficit from 28 billion pounds to 8 billion pounds.
This tightening has continued throughout our second year, a total fiscal tightening in two years of three and three quarters per cent of national income. So fiscal policy has played its part with interest rate policy in tackling inflationary pressures.
I can tell the House that, because we have concentrated on our priorities and cut waste, spending will be a total of two billion pounds below the ceilings we inherited.
As a result, our current budget this year is expected to be five and a half billion pounds in surplus, and what was prudently projected to be net borrowing of one billion pounds is now expected to be a debt repayment of one and a half billion pounds.
The golden rule is that over the cycle, we balance the current budget, in other words on current spending that we eliminate the structural deficit. I can report to the House that because of the tough action we have taken since we came to Government this is exactly what we are now achieving.
Having broken with short termism and created, for the long term, a stable monetary and fiscal framework, with an inbuilt capacity to be more responsive to the economic cycle, fiscal and monetary policy can both together contribute to stability and growth in the coming years.
My forecast for 1999 - of one to one and a half per cent growth for 1999 - will see Britain steering a stable course even when one quarter of the world is in recession.
And as the economy returns to its sustainable growth path, we expect growth in 2000 to be between two and a quarter per cent and two and three quarters per cent. And in 2001 between two and three quarters and three and a quarter per cent.
It is because we are cautious about the balance of risks in the economy that we have based public finance forecasts on deliberately more prudent assumptions than before.
First, our public finances are planned on an estimate of 2¼ per cent trend rate of growth, one quarter per cent lower than the assumption that we inherited.
Second, our forecasts have revised downwards the ratio of VAT receipts to projected consumer spending, reducing estimated revenues by nearly 4 billion pounds over the next five years.
Third, revenues from tackling fraud have been set at a more cautious level than in the last Parliament.
Fourth, we have discontinued the imprudent practice of assuming revenues from privatisations that have not even been agreed.
In each case our assumptions have been independently audited by the National Audit Office.
And, because of the experience of the early 1990s, we have adopted a more prudent approach to forecasting income tax and corporation tax revenues, including a cautious estimate of revenue from self assessment.
So, even after making most prudent assumptions and then taking into account the world downturn, we meet our first rule - to balance our current budget over the cycle.
We expect the current surplus to be 1 billion pounds next year, 3 billion pounds in 2000-2001, 8 billion pounds the year after that, 10 billion pounds and 11 billion pounds in the two years to follow. For the same years, net borrowing is expected to be 4 billion pounds and successively 5, 2, 2 and 1. Figures better in every year of this Parliament than in any year of the last Parliament.
An estimated current surplus for the coming 5 years of 33 billion pounds, a margin that shows that we are equipped to cope with further uncertainties.
This 33 billion pounds contrasts with, under the last Government, a deficit of 149 billion pounds over the economic cycle, as national debt doubled.
Our second rule, the sustainable investment rule, requires that, as we borrow for investment, debt is set at a prudent and stable level.
In the last year of the last Government, that debt ratio was 45 per cent.
In the next three years, to meet the needs of a modern infrastructure, public investment will double.
As a result of our overall prudence, debt as a proportion of GDP is set to fall below 40 per cent to 39 per cent next year, to 38 and then to 36½ per cent.
And members who take a special interest in the Maastricht criteria will want to know that in each year of the next five years Britain is comfortably within the Maastricht guidelines.
Long-term economic stability, from which we will not be diverted, is the foundation for future success.
But we will only achieve our long term goals for growth and employment through an even more radical modernisation of our economic policy in favour of opportunity, enterprise and work.
We need to push ahead with modernisation in every area - improving productivity, expanding opportunity and investing in our future. And in every one of these areas our economic policy is based on getting the best out of all our people and all their potential - in other words, on maximising economic opportunity for all. What makes for a good economy also makes for a good society - one that is fair and cohesive.
So I now turn to the first conclusions from the review we have conducted with British business into removing the barriers to productivity.
As our seminars with business have revealed, the only way for Britain to be at the forefront of the new knowledge-based economies of the future is by modern policies for education, employee participation, small business development and science and innovation.
Our first recommendations concern the quality of education. With our 19 billion pound investment in educational reform, we have set out demanding targets for literacy, numeracy, teaching standards and qualifications. And with my Rt Hon. Friend the Secretary of State for Education and Employment's announcement today of a 250 million pound investment in a new traineeship programme for teenagers, we have now made it possible for every young person after 16 to stay on in part-time or full-time education, to get qualifications and to have the opportunity of a job.
But to meet the productivity challenge we must do far more to encourage the ambitions of all our children, not least by bringing the world of education and the world of work into closer contact.
Over the next year we plan to enlist business leaders to take the world of work and business into our classrooms.
And to encourage businesses to offer expertise and management to help to our schools and colleges, I can announce that the Budget will allow businesses to claim tax relief when they second staff to schools and colleges.
But as our productivity discussions with business have also revealed, Britain can do more to remove the barriers to opportunity and to ambition.
The opportunity not just to acquire the best skills but the ambition to work your way up and use your creative talents, the ambition to start and build a successful business, the ambition to see the firm in which you work succeed and you succeed with it.
Today, only a fraction of British employees and an even smaller minority of those outside senior management own shares in the companies that they work in and yet the evidence is that employee commitment is a vital strength for companies competing and succeeding in the global economy.
And I want, through targeted tax reform, to reward long term commitment by employees and I want to remove, once and for all, the old 'them and us' culture in British industry. I want to encourage the new enterprise culture of team work in which everyone contributes and everyone benefits from success. So, in the Budget we will make it easier for all employees - and not just a few - to become stakeholders in their company.
I want to double the number of firms in which all employees have the opportunity to own shares.
Many employees already hold shares through their pension funds. So I will propose to pensions funds and other institutions that they should provide better and more direct public information to their members and investors.
In future, more of our wealth and jobs will come from small and growing businesses.
In just eighteen months we have announced cuts in the rate of corporation tax on large companies twice to 30 pence, and for small companies twice to 20 pence - its lowest level ever.
In the Budget we will consider a further tax reduction for small businesses. In particular we will consider converting the temporary investment allowance we introduced last year into a permanent tax cut.
But I have in mind a bigger reform to cut the burden of tax and red tape. Small businesses getting started and growing, lack not only the resources to pay tax but the back up to administer national insurance, income tax, their VAT payments and their payroll systems.
From April 1999, the Inland Revenue and the Contributions Agency will be merged. And we propose to roll out, on a nationwide basis, a new comprehensive service for new businesses, helping replace time consuming bookkeeping by offering a one stop advice service administered by a national helpline, backed up by local offices.
So from now on every department of government will have an obligation to encourage enterprise and entrepreneurs.
And I can confirm to businesses also that we will re-examine planning regulations and building control to identify barriers to productivity and job creation and how the planning system can be speeded up in Britain to help us emulate the success of hi-tech clusters and corridors like America's Silicon Valley.
Access to bank finance is critical to the success of every single small business. I have therefore asked the banks to work with Mr Don Cruickshank to assess what steps can be taken to more effectively serve the needs of businesses in the economy.
And to open up and enhance competition we will ensure, with a 20 per cent increase in new funding, that the Office of Fair Trading has the necessary resources to break down barriers which prevent new firms entering markets and keep prices high for consumers. Further announcements on how the new arrangements will proceed will come from my Right Honourable Friend the Secretary of State for Trade and Industry when he publishes his Competitiveness White Paper.
Our policy is pro-small business, pro-share ownership, pro-tax simplification and pro-competition.
Our policy is also pro-skills and pro-science.
To turn scientific inventions in Britain into jobs for Britain we need to do more to honour the spirit of invention, facilitate the exploitation of invention and encourage the commercialisation of invention.
More than ever innovation is the key to higher productivity. So we must see that inventions which are created in Britain are developed and manufactured in Britain.
The first step is a higher quality and quantity of research and development. So the Government will consult small business on supplementing the current tax relief for R&D with a more effective tax credit for small business based on the volume of R&D investment.
Three months ago we announced a partnership with the Wellcome Trust to invest over one billion pound to re-equip university science in Britain, the largest ever investment in Britain's science base.
Having received an overwhelming response from universities to our new University Challenge Fund - the private public partnership for commercialising scientific inventions - we are now inviting further private sector involvement.
I now want to complete the path that takes inventions from the science lab through to high tech venture capital and then to the national and global marketplace.
So I am announcing today that to develop business expertise in science and to transfer technology from the science lab to the marketplace, we will endow up to eight new Institutes of Enterprise in British universities. A further signal of our determination that the genius of British invention will once again become an engine for British growth and jobs.
A strong venture capital industry supporting high tech, high risk investments is critical to the future of Britain.
Today we have only six per cent of the early stage high tech venture capital of the United States. So we will consult on and consider new incentives, including how to encourage our most successful companies to invest in start-ups, and how we can provide new sources of venture capital and management expertise for entrepreneurs.
The productivity challenge is one that must be met by the public sector and not just the private sector.
Next month, for the first time, the Government will publish Public Service Agreements which set, for all departments, clear targets for improved performance. And to help them meet these targets and to monitor performance we are establishing an advisory panel from business and management.
Absenteeism costs the public sector up to 6 billion pounds a year. Specific targets are being set for each department to reduce absence rates by 20 per cent by 2001 and 30 per cent by 2003.
We are working with business, not just to promote higher productivity, but to secure policies for a sustainable environment.
I am publishing today the Report of Lord Marshall, formerly President of the CBI, into the role of economic instruments and the business use of energy. I thank him for his work, which substantially moves forward the debate, and the Government will give full consideration to his recommendations as part of its wider strategy on climate change.
Today I am also publishing a consultation document, containing proposals for a 50 pound reduction in Vehicle Excise Duty for the smallest and most environmentally efficient cars.
Just as the Government is modernising our industrial economy, so too we are modernising employment policy.
The House will be pleased to know that by next April 300,000 people will have benefited from the New Deal. That is now giving men and women previously left out and excluded a new sense of hope.
Already, 29,000 companies have signed up to the New Deal and 30,000 have found jobs with employers, jobs they would not have had without the New Deal.
We are now ready to extend the New Deal. From 30 November, 60,000 opportunities will be created for the long term unemployed in 28 areas of the country.
In Northern Ireland, in support of the peace process, we will now guarantee new opportunities to all those men and women who have been unemployed for more than 18 months.
We will also extend nationwide the New Deal skills shortage programme, and offer up-front support for training to help fill the vacancies that come on-stream every month.
And by March next year I can confirm that to tackle skill shortages there will be 120 centres for I.T. and high tech training in every part of the country.
Side-by-side with the New Deal there will be new guarantees that work will pay more than benefits.
From April, as a result of abolishing the entry fee to national insurance, all employees will receive a tax cut of 66 pounds a year.
And business will be pleased that I can announce that from April, employers will not pay national insurance on earnings below 83 pounds a week, the 1999 level for the personal tax allowance.
When it is economically right to do so - and so that work pays more - we will introduce the ten pence starting rate of income tax.
From 1st April, 1.9 million employees, including 1.3 million women, will benefit from the minimum wage.
And I can also confirm that the minimum income guarantee for a low paid family, which as a result of the working families tax credit was announced at 180 pounds will, as a result of the minimum wage and tax and benefit changes we are making, be raised to 190 pounds a week from October next year.
So that work pays - a guaranteed minimum of 190 pounds - with no income tax to pay on incomes below 220 pounds a week.
This will guarantee a minimum income for a lone parent with one child of at least 5.50 pounds an hour, and for an adult with 2 children 6.37 pounds an hour.
To enable parents and carers to balance work and family responsibilities, I want to provide extra help for child care. We have provided resources for up to one million new child care places over the next four years. And today, consistent with our national child care strategy we will extend our new childcare tax credit to cover all children up to age 14. And in the case of children who are disabled, and who have greater needs, until the school leaving age of 16.
We will also match the working families tax credit with a new disabled person's tax credit that will ensure that work pays for a disabled man or woman who takes a job.
A disabled person, with one child, moving from benefit to full time employment, will be guaranteed a minimum income of 220 pounds a week, with no income tax payable on income below 274 pounds a week.
Disabled men and women taking up work will be as much as 78 pounds a week better off.
So under this Government, disabled people, who want to work, will now be guaranteed fair treatment at work and work will pay.
And matching the minimum income guarantee for disabled persons in work there will be a new disability income guarantee of 128 pounds a week for the severely disabled out of work.
And at the same time, we are guaranteeing pensioner couples a new minimum income of 117 pounds a week. And this will be followed in the Budget with a guarantee that pensioners will have no income tax to pay unless their income rises above a new specified level.
And as a result of the measures we have taken - by following up our cut in VAT on fuel with tougher regulation and our new winter fuel payments - I can say that pensioners are saving 108 pounds on their fuel bills and the poorest pensioners are saving 140 pounds.
So our task as a country for the coming year, steering a course of stability, is to meet the productivity challenge, to extend fairness and welfare to work, and to make the modern investment we need in our future.
Investing in our Future
And I am pleased to announce that following the modernisation of the private finance initiative there will be new investment in our infrastructure - in over 1,000 schools, in over 25 hospitals and in dozens of public transport projects - over the coming three years an additional 11 billion pounds.
And I can also confirm that over the three years from next April, public investment itself will double and do so at the right time - the right decision, the right course of action for our country.
I have one further announcement.
Because of our prudence in the management of public finances, Government spending is well within the limits we set.
Our prudence is for a purpose.
Therefore, to ensure in every part of the United Kingdom the health care that people - and especially elderly people - need this winter, I am today making an additional and immediate winter cash allocation, to be spent in the next five months, of two hundred and fifty million pounds more for our National Health Service.
And I can confirm that because this Government believes in the best health and the best education, not just for a few but for all our people, we will invest an additional 40 billion pounds in the modernisation of education and our health service over the next three years.
Public services that in the months and the years ahead are safe in this Government's hands.
A Government that is steering a stable course, prudently investing in our future, proudly building strong public services and consistently keeping its promises to the British people.
And I commend this Statement to the House.
Pre-Budget Report 1998 index page
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