HMT 1

27 November 2001

THE PRE-BUDGET REPORT: BUILDING A STRONGER, FAIRER BRITAIN IN AN UNCERTAIN WORLD

The Pre-Budget Report, published by the Chancellor of the Exchequer, Gordon Brown, today sets out how the Government aims to meet the global economic challenges facing Britain, and, based on a foundation of stability and growth, build a stronger, fairer Britain even in an uncertain world.

Building a stronger, fairer Britain in an uncertain world reports that the British economy is forecast to sustain steady and stable growth with low inflation and sound public finances. The UK is forecast to grow by 2¼ per cent this year, within the Budget 2001 forecast range of 2¼ to 2¾ per cent. The fiscal projections show that the Government is firmly on track to meet the fiscal rules over the economic cycle, including in the cautious case.

The Chancellor will be consulting on the issues and proposals outlined in this Pre-Budget Report in the run up to the 2002 Budget.

Key Pre-Budget Report announcements include:

a package of measures to raise productivity by promoting enterprise and skills, including proposals to give lower skilled working people greater access to training and tax incentives to boost research and development and investment in disadvantaged areas;
further steps to make work pay and deliver rising employment, by extending the New Deal and through legislating for a new Working Tax Credit from 2003 that will extend the principle of the Working Families' Tax Credit to reward the work of people on low incomes whether or not they have children;
a further package of support for pensioners, including:
- a new Pension Credit which starts to benefit 5.4 million pensioners from 2003;
- the winter fuel payment at £200 each year for this entire Parliament; and
- a guaranteed minimum increase of £100 for single pensioners and £160 for pensioner couples in 2003-04 in the annual level of the basic state pension.
- further steps to support families and tackle child poverty, through legislating for a new Child Tax Credit from 2003, built on the foundation of universal Child Benefit, bringing together the support for children currently provided through the child elements of the Working Families' Tax Credit, the Disabled Persons' Tax Credit, Income Support/Job Seeker's Allowance, as well as the existing Children's Tax Credit;
- an extra £1 billion for the NHS next year from reallocating resources from lower debt interest payments. Health spending in the coming year will now rise by 10 per cent in cash terms, 7 per cent in real terms;
- publication of the interim report of the Wanless Review into long-term funding of the NHS; and
- to protect the environment the Government will be extending enhanced capital allowances (ECAs) to encourage investment targeted at a wider range of environmental objectives, including further energy-saving technologies, cleaner fuels and vehicles, reducing demand for water and improving water quality.

MAINTAINING ECONOMIC STABILITY

These are testing times for Britain and the global economy, with the tragic events in America having an impact on every economy around the world. The world economy has slowed more sharply this year than at any time over the past two decades.

No country can insulate itself from world economic events. But as a result of the tough decisions the Government has taken, and the platform of stability it has created, the British economy enters these testing times with low inflation and the public finances under control, making the UK better placed to steer a course of economic stability.

The updated projections in the Pre-Budget Report show that:

the economy is forecast to grow by 2¼ per cent this year - the fastest rate of growth in the G7. Growth is expected to be between 2-2½ per cent next year and between 2¾ and 3¼ per cent in 2003 as global growth recovers; and
the Government is firmly on track to meet its two strict fiscal rules over the economic cycle. The improvements in the public finances in the past 4½ years mean that fiscal policy is able to support monetary policy this year and next in maintaining economic stability.

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MEETING THE PRODUCTIVITY CHALLENGE

Improving productivity performance is vital for long-term prosperity. In testing times, it is more important than ever that Britain achieves faster productivity growth than its major competitors, closing the productivity gap that exists between Britain and many other advanced industrial countries and delivering rising living standards for all.

The productivity challenge is one which must be met through a sustained effort across the economy as a whole. Because closing the productivity gap requires a broader effort from employers and employees, as well as from government, the Pre-Budget Report welcomes progress made by the CBI and TUC in working together to identify a range of key areas for action.

The Pre-Budget Report describes the steps the Government is now taking to support the drivers of productivity growth - strengthening competition, innovation, investment, enterprise and skills in every community and region across the country:

taking further steps to build a modern, pro-enterprise business tax system, including by improving the capital gains tax business assets taper, and publishing draft legislation for an exemption for capital gains and losses on substantial shareholdings and a new regime for providing relief to companies for the costs of intellectual property, goodwill and other intangible assets; (see press notice REV/HMT 3 for further details);
planning to introduce a volume-based research and development (R&D) tax credit for large companies in Budget 2002. The Government will consult further on details of the credit shortly (see press notice REV/HMT 3 for further details);
enhancing Enterprise Management Incentives (EMI) to help smaller companies attract the top level employees they need to maximise growth. The Government is now introducing measures to double the gross asset limit for qualifying companies to £30 million. A Statutory Instrument will be laid before Parliament immediately, to take effect from 1 January 2002 (see press notice REV/C&E 1 for further details);
publishing next month a Green Paper on planning reform following the most comprehensive review of the land use planning system in the past 50 years. It will make proposals to improve the speed, flexibility and responsiveness of the planning system;
introducing a package of measures to support enterprise and encourage growth among small business, improving access to finance, reducing the burden of VAT on small companies and publishing an independent review of payroll administration (see press notice REV/C&E 1 for further details);
introducing a package of measures to promote enterprise and investment in Britain's most disadvantaged communities (see press notice REV/HMT 2 for further details):
- following Lord Rogers' report on revitalising towns and cities, the Government is introducing an exemption from stamp duty for all property transfers up to £150,000 in disadvantaged areas from 30 November 2001;
- setting out further details of the proposed Community Investment Tax Credit (CITC) to encourage private investment by enterprises in under-invested communities. Following a period of consultation, the Government is announcing that the overall cap on the amount of tax credits that can be awarded in any year will be removed;
confirming details of a radical programme of further enhancements to the overall competition regime, including modernisation of the regimes for investigating mergers and markets, and criminal penalties for individuals engaging in hard-core cartels;
publishing Productivity in the UK: 3 - the Regional Dimension, setting out a new analysis of Britain's regional productivity challenge; and
setting out the emerging areas for action identified by Sir Gareth Roberts in his review of the supply of scientists and engineers, aimed at strengthening the UK's science base and encouraging R&D and innovation.

Internal links

In Budget 2001 the Government stated that a voluntary approach to workforce training was not enough to tackle the "chronic UK problem of low skilled adults". To make a significant difference in the number of people without basic and level 2 skills, and allow the UK to close the skills gap with its competitors, requires a new training policy that ensures the Government, employers and individuals all meet their responsibilities in this area.

Budget 2001 stated the Government was willing to consider possible fiscal measures, including a new tax credit. The Performance and Innovation Unit report on workforce development, published today, also sets out a range of options to overcome barriers to training, including a statutory right to time off for training and development.

In the Pre-Budget Report, the Government says it will now examine an approach based on four complementary, linked elements which would require commitments by stakeholders - the Government, employers and individuals. These are: financial support for employers whose staff take time off; free learning provision for employees; and entitlement to take-up training and extended guidance and support

To identify the most effective and efficient way forward, different pilots will test a number of elements:

the level of financial support needed to compensate employers for the time their employees spend on training. Different pilots will offer compensation of 100% of wage costs or more for small employers, with less than 100% for the largest employers;
the amount of time low-skilled employees would be entitled to devote to training on full pay. The pilots will test periods of between 35 and 70 hours of paid time off each year;
incentives and rewards for successful completion of courses; and
levels of subsidy up to 100% for courses and accreditation costs.

£40 million has been allocated to undertake these pilots from September 2002. Chapter three of the Pre-Budget Report sets out in detail the Government's new approach.

INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

With the help of the New Deals, the Government has made significant progress in tackling structural weaknesses and improving the underlying strength of Britain's labour market.

Since 1997, long-term unemployment for those 25 and over has been cut by 70 per cent and long-term youth unemployment has been cut by 75 per cent. Help has been extended to lone parents, disabled people and other disadvantaged groups. Britain now has a strong base from which to face testing economic times.

The Government is determined to advance its goal of having a greater proportion of people in work than ever before by the end of the decade. It is working to achieve this by helping people move from welfare to work, easing the return to work, and making work pay. The Pre-Budget Report describes the steps now being taken to:

tackle economic inactivity in the labour market, ensuring that all working age benefit recipients are given work-focused support via a new organisation, Jobcentre Plus, which will radically change the way in which the Government helps working age citizens. A new paper, The Changing Welfare State: employment opportunity for All, examining labour market inactivity in detail, will be published tomorrow; and
pilot transitional employment opportunities, to improve support for communities with concentrations of long-term unemployment and strengthen the Job Transition Service for people affected by large-scale redundancies. The Secretary of State for Work and Pensions will announce details tomorrow.

The Government has also put in place a series of reforms to ensure that work pays more than welfare at all levels of the labour market, through:

the introduction of the 10p rate of tax and the widening of the band, and reducing the main rate of tax to 22p;
reforms to national insurance contributions so that fewer people on low incomes now pay and removing the unfair "entry fee"; and
the introduction of the Working Families' Tax Credit which is helping to make work pay for nearly 1.3 million families.

The Pre-Budget Report describes how the Government is now building on these measures by introducing a new Working Tax Credit from 2003, to reward the work of people on low incomes, whether or not they have children.

The Working Tax Credit is designed to tackle poor work incentives and persistent poverty among working people and will be complemented by a new tax credit for families with children (see below). The rates and thresholds for the Working Tax Credit will be set in Budget 2002.

FAIRNESS FOR FAMILIES AND COMMUNITIES

The Government is committed to building a fairer and more inclusive society in which everyone can benefit from rising prosperity.

The Pre-Budget Report sets out the next stage of the Government's reforms: tackling child poverty, providing security in old age, rewarding saving and creating a fair and efficient tax system.

Supporting families and tackling child poverty

The Government is determined to step up its efforts to tackle child poverty, supporting all families with children in recognition of the costs and responsibilities that come with parenthood. Even in difficult economic times, it is determined to meet its goal to halve child poverty in 10 years and abolish it within a generation.

As a result of the Government's personal tax and benefit reforms since 1997:

there are now 1.2 million fewer children in relative poverty than there would otherwise have been;
families with children are, on average, £1,000 a year better off;
a family on average earnings of £25,400 a year with two children is £520 a year better off and has the lowest direct tax burden since 1972; and
a family on half average earnings of £12,700 a year with two young children is £3,000 a year better off.

The Pre-Budget Report describes how the Government is making further progress by introducing a new Child Tax Credit from 2003, built on the foundation of universal Child Benefit. The new Child Tax Credit marks another step forward in tax and benefit integration, creating for the first time a seamless system of income-related support for families with children. It will be complemented by the new tax credit for work - the Working Tax Credit. Decisions on rates for the Child Tax Credit will be made in Budget 2002.

Fairness for pensioners

Over the past 20 years, the gap between the incomes of rich and poor pensioners has grown dramatically. The Government is committed to developing sustainable policies which tackle pensioner poverty and which enable pensioners to share in the country's rising prosperity.

The first priority has been to help those most in need. Around 2 million pensioners now benefit from the extra support the Government introduced through the Minimum Income Guarantee (MIG) which will be uprated in line with earnings throughout this Parliament.

This Pre-Budget Report outlines the next steps in the Government's strategy to tackle pensioner poverty by:

introducing a new Pension Credit from 2003 to tackle the unfairness and complexities of the old system and ensure that pensioners on low and modest incomes are rewarded, rather than penalised, for their savings;
guaranteeing that the annual basic state pension will rise by £100 for a single pensioner and £160 for pensioner couples in 2003-04. Subsequently the basic state pension will rise each year by 2.5 per cent or the increase in the September Retail Price Index, whichever is higher. This builds on the increases in 2001-02 and 2002-03 that benefited single pensioners by £4.55 above prices; and
maintaining the winter fuel payment - paid annually to around 8 million households - at £200 for the remainder of this Parliament.

The Pension Credit will deliver substantial gains to all pensioners on low and modest incomes. Around half of all pensioner households stand to gain. The new Credit will:

guarantee a minimum income for pensioners;
reward saving for retirement;
revise the MIG capital regime;
abolish the weekly means-test; and
protect the position of people on Housing Benefit and Council Tax Benefit.

The Secretary of State for Work and Pensions will publish details of the Pension Credit tomorrow.

Savings provide people with independence, long-term opportunity, comfort in retirement and security if things go wrong.

In April 2001, the Government published a consultation document on two new proposals to extend the benefits of saving and asset-ownership - the Saving Gateway and the Child Trust Fund. The Saving Gateway would be an account targeted at low-income individuals, providing a Government-funded match for all money saved, up to a limit. The Child Trust Fund is a proposal for a universal account, with an endowment paid to all children at birth and ages 5, 11 and 16, with children from the poorest families receiving the most help.

Responses to the consultation have been overwhelmingly positive and the Government is now:

launching a number of Saving Gateway pilot projects to assess how best to make the Saving Gateway work; and
publishing a follow up report, Delivering Saving and Assets, presenting detailed results from the initial consultation and presenting options for these policies for further consultation.

A modern and fair tax system

To continue to build a modern and fair tax system, the Government is:

replacing the current 17.5 per cent duty on pools betting with a 15 per cent tax on pools companies' gross profits, as a result of which the major football pools companies have agreed to extend their funding of sports and the arts for a further two years;
announcing results from the first year of its Tackling Tobacco Smuggling strategy, showing that the Government is on track to achieve its target of stopping and then reversing the growth in tobacco smuggling by 2003 and has secured a 76 per cent reduction in the revenue lost from cross-Channel smuggling of alcohol and tobacco (see press notice C&E1 for further details); and
launching shortly a new consultation on measures to provide tax relief to support community amateur sports clubs that make a positive contribution to their local communities.

DELIVERING STRONG PUBLIC SERVICES

By maintaining stability and building a stronger economy, the Government is laying the foundations for sustainable increases in investment to deliver world class public services.

Built on the foundation of prudence and stability, the Government is increasing spending on public services by £50 billion in 2003-04 compared with 2000-01. 75 per cent of this increase will be spent on the Government's priorities of health, education, transport, housing and law and order. Between 2000-01 and 2003-04, in real terms:

education spending will grow by an average of 5.6% each year;
health spending will grow by an average of 5.7% each year; and
transport spending will grow by an average of 14% each year.

The Government is currently considering future priorities and investment as part of the 2002 Spending Review. The Pre-Budget Report describes the Government's priorities for the review, including:

continuing to raise standards and improve outcomes in education and skills, as the foundation of a modern, competitive economy;
improving national healthcare for all. Budget 2001 announced that Derek Wanless, former Group Chief Executive of NatWest Bank, would undertake a review of the technological, demographic and medical trends over the next two decades that may affect the health service in the UK as a whole. Following widespread consultation, an interim report is now being published;
providing an additional £1 billion to the National Health Service in 2002-03 by reallocating resources from lower debt interest payments;
ensuring that transport receives the long-term investment needed to meet the plans and targets set out in the Transport 10 Year Plan; and
raising the performance of police forces in return for investment, and tackling the causes of crime.

PROTECTING THE ENVIRONMENT

Sustainable development is vital to ensure a better quality of life for everyone, today and for generations to come. While economic growth is key to rising national prosperity, it must not come at the expense of the environment.

To fulfil its commitment to sustainable development, the Government is pursuing a far-reaching strategy to tackle climate change and improve air quality, to regenerate cities and to protect the countryside.

The Pre-Budget Report describes the next steps the Government is taking to deliver its environmental objectives, including:

responding to the Green Technology Challenge (GTC) by proposing to extend enhanced capital allowances (ECAs) to encourage investment targeted at a wider range of environmental objectives; further energy-saving technologies, cleaner fuels and vehicles, reducing demand for water and improving water quality;
launching a consultation on modernising road haulage taxation, which will examine two options for lorry road-user charging - time-based charging and distance-based charging - to ensure that hauliers from overseas contribute fairly towards the costs they impose in the UK. The Government is committed to ensuring that the UK haulage industry would not pay more as a result of a new lorry road-user charge, through implementing offsetting reductions in other taxes on lorry operators. This builds on recent reforms to lorry VED;
publishing shortly a consultation document on Powering Future Road Vehicles, to encourage low-carbon vehicles and fuels such as hydrogen fuel cells;
continuing to encourage the development and production of practical alternative transport fuels with environmental benefits over current conventional fuels. Following the Green Fuels Challenge, the Government is announcing fuel duty exemptions for pilot projects involving hydrogen, biogas and methanol as road transport fuels;
continuing to pursue environmentally-based reforms of vehicle taxation, including consulting on options for modernising motorcycle VED and discussing with stakeholders tax changes to encourage van users to develop and adopt new technologies with environmental benefits; and
continuing to promote a sustainable countryside through the aggregates levy which will be introduced at £1.60 per tonne in April 2002, as announced in Budget 2000. Today the Chancellor announced that the Government is attracted to phasing in the aggregates levy over five years for aggregates used in processed products in Northern Ireland.

For further details of the next steps in the Government's environmental strategy see the separate press release HMT2.

NOTES FOR EDITORS

Further details of the Pre-Budget Report are also included in the separate press notices listed below:

HM Treasury

HMT 2 Protecting the environment, today and for the future

Inland Revenue and HM Treasury

REV/HMT 1 Income tax allowances and national insurance
contributions
REV/HMT 2 Enterprise in disadvantaged communities
REV/HMT 3 Enterprise and innovation - the key to a modern
business environment

Inland Revenue and Customs and Excise

REV/C&E 1 Boosting investment and growth for small businesses

Customs and Excise

C&E 1 Tackling fraud and smuggling

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