HM Treasury


17 March 1998

The Chancellor's 1998 Budget Speech

17 MARCH 1998

Section 1: Introduction

Only once in a generation is the tax system fundamentally reformed.

The Budget I bring before the House and country today begins the task of modernising not just taxation but the entire tax and benefits system of our country.

We do this to encourage enterprise; to reward work; to support families; to advance the ambitions not just of the few but of the many.

For decades, under Governments of both Parties, the great economic strengths of our country have been undermined by deep-seated structural weaknesses - instability, under-investment and unemployment.

So behind the detailed measures of this Budget is the conviction that we must break for good from the conflicts and dogmas that have held us back and have for too long failed our country.

We must build a national economic purpose around new ambitions for Britain.

First, stability.

We must break from our history of stop-go and the false trade offs between inflation and unemployment.

The new ambition is long term economic strength and stability based on an unshakeable commitment to prudent monetary and fiscal rules.

Second, enterprise.

Instead of punishing success by high taxation or offering the incentive of low taxation to only a few, the new ambition is a tax system that makes all work pay, that encourages skills and rewards enterprise and entrepreneurship throughout the economy.

Third, welfare reform.

The new ambition is a modern welfare state that, instead of trapping people in poverty, provides opportunity for all.

And fourth, strong public services.

Instead of simply defending unreformed public services, or denigrating them simply for being public, the new ambition is to have modern schools and hospitals where investment and reform go hand in hand.

So this will be a Budget that demonstrates that a modern Government with new ambition for Britain can advance both enterprise and fairness and can advance them together. And that, by rewarding work and rewarding work at every level, everyone and not just one section of society benefits: a Budget that advances the ambition of all.


Section 2: Stability and prudence

First, stability.

By spring last year, with consumer demand already rising by 5 per cent and the money supply by 11 per cent but industrial production up only 1½ per cent, the economy was exhibiting the same symptoms of instability from policy errors that produced the boom-bust economy of the late eighties.

To avoid a lurch backwards towards the kind of boom-bust instability that brought interest rates as high as 15 per cent in the late 80s, the Government, and then the Bank of England, took action to ensure stability. And I followed this tightening of monetary policy by putting in place a tough five year deficit reduction plan.

Last November, I was able to report that I was more optimistic that the economy was on course to get back on track for sustainable growth. That remains my view.

But I also warned that there were risks ahead - on the one hand the effects on the world economy of turbulence in Asian financial markets, and on the other, the domestic risk that an unaffordable rise in wage inflation would lead to higher interest rates and slower growth.

These risks remain.

A deteriorating situation in Asia has forced all governments to revise downwards their forecasts for growth. And while this Government contributed to swift international action, continuing uncertainties require continuing vigilance.

Similar vigilance is also required at home in the face of inflationary pressures. In the last few months wage settlements have risen, even in the manufacturing sector where I fully recognise that a strong pound makes life difficult for exporters.

Our aim is a stable and competitive pound in the medium term and I know that exporters agree with me that we must avoid any return to stop-go.

It would not be right to sacrifice long-term goals in the face of short-term pressures.

No-one should be in any doubt about this Government's, and the Bank of England's, determination to meet our inflation target.

And I can now report that because of the action already taken, inflation, which when we came to power was heading well above our target and towards 4 per cent, is now forecast to peak at 3 per cent this year and be at our target of 2½ per cent next year.

And it is because we have established a sound long-term framework and the expectation of low inflation that long-term interest rates have come down substantially from over 7½ per cent just before the Election to below 6 per cent now, the lowest rate for 33 years.

Growth this year and next will depend crucially on what happens to wage inflation over the coming year.

It would be the worst of short-termism to pay ourselves more today at the cost of higher interest rates, fewer jobs and slower growth tomorrow. All of us must therefore show greater responsibility.

If our Welfare to Work reforms can be complemented by responsibility across the economy, we could achieve two and a half per cent growth this year. But if wage bargaining proceeds in the same short-termist way as in the past, then growth this year could slow to 2 per cent.

Similarly growth could be between one and three quarter per cent and two and one quarter per cent next year and, as the economy returns to its sustainable path, growth could be between two and a quarter and two and three quarters per cent in 2000.

Stability also requires a commitment to prudence in fiscal policy.

The Chancellor is above all the guardian of the people's money.

Last year spending exceeded revenues by £23 billion, and when we came into power we inherited not only a cyclical deficit but also a substantial structural deficit in excess of 2 per cent of national income. Immediate action was required to secure long term deficit reduction.

The five year deficit reduction plan I put in place last July is not only on track but is being achieved more quickly than expected.

A substantial fiscal tightening has been achieved this year, with borrowing coming down by more than £17 billion, over 2 per cent of national income.

It is because at this stage of the cycle it is important to err on the side of caution that my Budget will lock in this fiscal tightening for 1998-99.

So even if we exclude the windfall tax, borrowing - which the last Government had planned at £19 billion for this year is now expected to be £5 billion, a fall from 3 per cent of national income last year to around a half a percent this year, comfortably within the Maastricht criteria.

On the same basis borrowing is expected to fall to just under £4 billion in 1998-99.

By 2000, the Budget is forecast to be in balance.

But our fiscal objectives are more long term - to meet the golden rule - that over the cycle government revenues will cover consumption - and to keep debt at a prudent and stable level.

Previous Governments have made the mistake, most recently in the late eighties, of claiming that they had solved our deficit problem when all they had was a short term surplus. Surpluses in 1988 and 1989 collapsed into a deficit approaching £50 billion in just four years, the biggest deficit in our history. What was claimed to be the end of one crisis turned out to be only the beginning of the next.

We are determined to avoid such mistakes. To balance the Budget for one or two years and then let it run out of control in the years that follow is simply to fail those who depend on public services being sustained year in, year out.

So this, more than ever, is the wrong time to be complacent or in any way to compromise our commitment to long term fiscal stability.

Just as we locked in our commitment to sound money through the Bank of England, it is now time to lock in a framework which guarantees sound finances.

Our code of fiscal stability will place a duty on this Government, and every future Government, to report to Parliament on a consistent basis and provide full explanatory information on how it is meeting the fiscal rules it has set.

Stability and prudence are merely the preconditions for success, the platform from which success can be built.

It is time now to show similar ambition and determination in the pursuit of long term increases in productivity.


Section 3: Enterprise

For years as a nation our capacity to consume has not been matched by our capacity to produce.

And it is because we have had insufficient capacity to sustain anything other than low rates of growth that our upturns have been too short and too fragile, our downturns too deep and too destructive.

But with a platform of stability in place and with lower long term interest rates, I believe we are now in a position to establish, for the first time for decades, a virtuous circle of low inflation, high investment and a higher level of sustainable growth.

And over the next few years we must seize this opportunity - by challenging ourselves to lift our productivity in each and every industry towards the levels of the world's best.

I want us to be as determined to raise productivity as we have been tough minded about the need for stability.

Breaking free from old ideas of state control and crude laissez-faire, our new ambition for Britain must be to encourage enterprise and entrepreneurship, to boost education and skills and - as our competition bill will ensure - to open markets to competition and new opportunities, in other words to implement for our country a medium term strategy for growth.

First then, our proposals to help businesses invest and grow.

To encourage long term investment, today we will put in place the company taxation reform we started last year, by abolishing one tax in its entirety.

From April next year, companies will no longer have to pay advance corporation tax.

A new instalments system of payment for larger companies' corporation tax will be introduced.

In the last Budget we reduced the main rate of corporation tax by 2p to 31p.

In this Budget we reduce it further by another 1p to 30p from April 1999.

This is the lowest main rate of corporation tax of any major industrialised country. The lowest in the history of corporation tax in Britain.

When it is finally in place companies will pay over £1.5 billion less in corporation taxes each year.

The lower and fairer tax regime that business has wanted for years is now in place under this Government. It will contribute to making Britain the best place in the industrialised world in which to invest.

Businesses need to plan for the long term so today I make a commitment that for the rest of this parliament corporation tax will be at 30p or less.

Stability is important, not least in our North Sea oil industry where planning horizons are long. Next month we will publish a consultative document on the future of the North Sea fiscal regime.

In the new economy, however, jobs will come not simply from having a small number of large businesses but a large number of small and growing businesses.

Today we will make five major changes that will help small business:

we will cut tax;

we will cut the costs of investing;

we will cut the burden of red tape;

we will promote research and innovation; and

we will increase the rewards for doing well.

First, following the consultation on our corporate tax proposals, I will exempt medium, as well as small-sized companies from paying corporation tax by instalments.

Taken together with the abolition of advance corporation tax, this will improve the cash flow for small and medium-sized companies paying dividends by about £1 billion.

But I want to do more.

85 per cent of taxpaying companies in our country - 350,000 companies - are covered by the small companies' rate of tax.

In the last Budget, I cut the small companies' tax rate from 23p to 21p.

I have now decided to go further. From April next year small companies' tax will be cut again to 20p. And we will also keep the rate at this level or below not just for a year, but for the Parliament.

We are not only cutting the tax rate but also cutting the cost of investing.

For twelve months from July, first year capital allowances for small and medium sized companies will be set at 40 per cent, continuing our commitment to boosting investment.

I want to make it easier and cheaper for small businesses to take on their first employees, but setting up payroll systems costs money and time. So from April next year the Inland Revenue will offer businesses help in setting up their payroll systems, and on a nationwide basis.

For too long the great scientific advances of British universities have gone on to become the manufacturing successes of rival countries. So to help turn British inventions into success for British businesses, I am announcing today plans for a new £50 million venture capital fund open to all universities. A new university challenge fund that will invest today in the innovative businesses that will create wealth and jobs tomorrow.

Encouraging greater R&D investment is also crucial to higher productivity so the Government is today publishing a consultative document indicating a determination to help businesses achieve this.

Our venture capital industry is proportionally much smaller than that in America. But by merging the enterprise investment scheme and capital gains tax reinvestment relief, and by closing loopholes, I am now able to provide more generous, more efficient and better targeted help to encourage venture capital in Britain. I propose a 50 per cent rise in tax reliefs. From now on investors will be able to secure income tax reliefs for investment up to £150,000 a year.

But we must also do more to increase the quantity and quality of long term investment. The capital gains tax regime we inherited rewards the short term speculator as much as the committed long term investor. So it is time also for a fundamental reform of capital gains tax.

In a low inflation environment a complex system of indexation is no longer necessary. Indexation will continue until April 1998 and will then be frozen. The annual exempt amount will rise in line with prices. And, following extensive consultation, I have decided to phase out complex allowances and instead will introduce a new structure of capital gains tax which will explicitly reward long term investment and is based on a downward taper and lower tax rates .

The short term rate of capital gains tax will remain at 40p.

For investors holding non-business assets, who invest for 10 years, the rate of capital gains tax will fall from 40p to 24p.

For those who build businesses or stake their own hard earned money in them, the long-term rate will be reduced even more from 40p to 10p, the lowest rate ever achieved.

So with:

a 30p main rate of corporation tax;

a 20p rate for small companies;

a 10p long-term rate for capital gains tax;

This Government today sends a clear signal of support for enterprise to those who invest in the UK. My message to business is - when you are ready to start out, start up, start investing or start hiring - this Government is on your side.

When half the population have only £200 or less in savings, there is broad agreement that we must do more to encourage savings by everyone.

There is broad agreement also that an easy to access individual savings account, available over the counter in supermarkets and post offices as well as from banks, building societies and financial services providers, can encourage the savings habit among many more people.

I can now report the conclusion from our consultation on the individual savings account.

First, the individual savings account will, as promised, offer complete freedom to move cash in and out and so savers know their cash will always be accessible when they need it.

Second, in response to suggestions from prospective providers, the cash holding for the first year of the new product will be raised to £3,000.

Third, the individual savings account will receive a ten year guarantee that savings of up to £5,000 a year can be invested with all existing tax reliefs.

And fourth, even when new TESSAs and contributions to PEPs cease next year the entirety of capital accumulated in them will be able to continue, with all the accumulated gains, to enjoy tax reliefs. There is, of course, no retrospective element. Whatever accumulated capital there is will remain entirely free of tax, so existing PEP holders will be able to keep their accumulated savings free of capital gains tax and, at the same time, they will be able to save an additional, tax-free £5,000 each year in the new ISA.



Section 4: Work

Just as the modern tax system should encourage investment, so too the tax and benefit system should reflect the value we place upon the responsibilities and rewards of work.

For far too long too many men and women in our country have found themselves working harder and longer, and have still been unable to lift themselves and their families out of poverty into even modest prosperity.

And, for too long we have done too little to help those who work hard to advance up the ladder of opportunity from lower income into middle income jobs, and upwards.

The cap on aspirations must now be lifted.

While Budgets in the eighties acknowledged the need for incentives, the incentives given to the few ignored the even greater problem of disincentives for the many. So it is time to reward the efforts of those who want to work their way up.

First, welfare reform through Welfare to Work.

The New Deal is the most ambitious programme of employment opportunities our country has seen.

From April 6th, every young person unemployed for more than six months will have the offer of work or training. From now on, no young person will be without opportunity.

It is now time to take two further steps that broaden the scope and ambition of the New Deal. Steps which will open up new opportunities to every long term unemployed adult in our country.

From June every one of the 225,000 men and women who have been unemployed for two years or more can benefit from a £75 a week employers subsidy which, for them, will be a passport to work. But the Government is determined to do more and we will offer - initially to 70,000 men and women - an individual service of expert help and advice to find work. In this way we take another step forward in tackling long term unemployment in our country.

Past employment programmes have helped men but often ignored employment opportunities for women. From this year, the New Deal with be extended to thousands of women previously denied chances of work. It will do this in three ways.

First, for a quarter of a million women, who are partners of unemployed men, we will offer expert and personalised help to find work through pilot programmes to be launched in every region of Britain at a cost of another £60 million paid from the windfall tax.

Second, my RHF the Secretary of State for Social Security will announce next week that expert help will now be available on a national basis for all lone parents who want to work and whose children are at school. And we will implement a 12 week linking rule so that they do not risk losing benefits as a result of a brief period in work.

And third, partners of the unemployed under 25 without children, who are not allowed to register as unemployed, will now be given exactly the same opportunities for training and work that others under 25 now enjoy.

With these proposals, equality of employment opportunity for women in our country is now far closer to becoming a reality.

Unemployment blights not just individuals' lives, but whole communities. So we need a New Deal for communities which recognises that the answer to social exclusion is economic opportunity. Working with the social exclusion unit, the Deputy Prime Minister and other Ministers will announce a series of pathfinder projects that will put employment at the centre of initiatives to improve education, health and other services in our poorest communities.

But there is one group of young people who are the most excluded and most discouraged: young people who find themselves homeless. These vulnerable young people do not just need homes: they need jobs. So I want help to be linked to training and preparing them for jobs. Today £50 million is being channelled to help enhance the advice available to the most disadvantaged young people and to create a nationwide network of mentors ready and willing to help advise and motivate young people who could get back to work.

But we must do more. Today, whilst many are unemployed, extensive skill shortages hold back our economy. I can also announce extra help in this Budget to promote investment in skills and lifelong learning.

But our priority must be to provide training in computers, high technology skills, not least to help prepare for the millennium. Over £100 million extra will be allocated in the coming year to tackle the skills gaps in Britain. My RHF the Secretary of State for Education and Employment will announce details of this new skills initiative for Britain.

Our review of post-16 benefits and maintenance will continue along the lines we have already set down.

Having provided new opportunities for work, it is now time to create a modern tax system that will help create jobs.

So I want to announce today a tax reform to cut the costs of hiring at the wage levels where most new jobs are created.

I want to make it easier for companies who are prepared to take on young people looking for a first step on the ladder of employment; and to take on men and women who want to return to work.

The tax and benefit task force headed by Martin Taylor of Barclays will publish its full report this afternoon. I am sure that the whole House will join me in thanking him for the work he has done.

One of his central recommendations - on which he has already consulted employers - is for a simpler, fairer and more employment-friendly national insurance system.

One that makes it easier for employers to hire new employees, and one that also cuts the costs and red tape associated with the two separate and unaligned systems of income tax and national insurance.

His proposal is to restructure employers' national insurance on a revenue neutral basis - which for business as a whole, will involve no additional cost. And to set a rate of employer's national insurance of 12.2 percent, but only after the first £81 of wages.

I have accepted these proposals. From next year the Government will abolish the distorting entry fee for employers' national insurance.

We will abolish the multiplicity of separate national insurance rates.

We will cut the cost of hiring lower paid employees. Employers will now pay no national insurance on any employee earning less than the starting point of the personal tax allowance, £81 a week.

The right to benefit for all employees earning between £64 and £81 a week will be upheld in all the changes we make.

With these changes we are cutting the costs to business of employing 13 million of our lower paid employees.

We are taking up to one million of the lowest paid employees out of employers' tax altogether .

And we are cutting the cost of hiring someone on half average earnings by over £250 a year.

The Taylor Report also recommends similar changes to national insurance contributions for the self-employed. And I will look at these proposals carefully.

Employers and employees will also benefit from a further institutional reform: the establishment of a single organisation to deal with both income tax and national insurance. My RHF the Secretary of State for Social Security and I have agreed that the contributions agency will be transferred to the Inland Revenue with effect from April 1999. This is a Government which does not simply talk about cutting the costs of bureaucracy and red tape but takes the decisive action necessary to achieve it.

Welfare to work is stage one of the reform of the welfare state. This Budget moves us today into stage two - ensuring work pays more than benefits and raising the rewards from work.

When it is right for the economy I will introduce a 10p starting rate of income tax.

Today I announce a tax cut for hundreds of thousands of working families on low income and we will do it through the introduction of a new working families tax credit from October 1999.

Under the present system of family credit there is, quite simply, a ceiling on aspirations for women and for men wanting to work their way up.

In Britain today there are nearly three-quarters of a million working families held back by marginal tax rates in excess of 70 per cent.

There are nearly half a million working families, with children, whose pay is so low that they receive in-work benefits and yet still are required to pay income tax.

The working families tax credit will not only be a tax cut for hundreds of thousands of working men and women with children but it will abolish the grotesque distortion where some low paid employees have had to pay back more than a pound for every extra pound they earn.

Instead of the state paying out benefit through the social security system to working families on low incomes, in future they will receive cash directly through the tax system. And families will be able to choose to whom the credit is paid - either directly or through the pay packet.

By tackling the unemployment trap, and by increasing the help available to families, the working families tax credit ensures that work will pay more than benefits.

And by tackling the poverty trap - through cutting the rate at which help is withdrawn as incomes rise, the working families tax credit ensures that the more you earn the more you take home.

And I say to those who can work: this is our New Deal.

Your responsibility is to seek work. My guarantee is that if you work, work will pay.

And let me spell out in hard cash the difference this guarantee will make.

For families where someone works full-time there is now a guaranteed income of at least £180 a week.

And to the same working family a second guarantee, that no income tax at all will be paid on earnings below £220 a week.

This Government inherited a tax system whereby a family with two children paid tax even when they earned only 25 per cent of average earnings.

Now they will have no income tax bill until they earn over 50 per cent of average earnings.

A transformation in the rewards for work in our country.

And because in future work will pay, those with an offer of work can have no excuse for staying at home on benefits.

I said in the last Budget that in the new Britain everyone had a contribution to make. Now with these new guarantees for working families I can also say: in the new Britain, for millions more people, we will make work pay.

I have one further tax and benefit integration to announce.

For decades thousands of disabled people have been denied a basic right - the right to work. And the tax and benefit system is one of the barriers denying them opportunities.

As a Government we will never compel to work disabled men and women who cannot work, and for those who want to work we will systematically remove the obstacles that at present prevent them from achieving their potential.

So alongside the working families tax credit the Government will introduce a new tax credit for disabled people - paid through the wage packet. And a new 12 month linking rule to improve the incentives for those on long-term benefits to take a job. Together these measures will ensure higher rewards for disabled men and women entering work - making work pay.

Today I also want to make one further change which sends a signal to every employee in the country about the importance Government attaches to work and fair rewards from work. For men and women on lower incomes, middle incomes and upper incomes, right up the income scale.

We said at the Election that we would not raise the basic or top rate of income tax. And we will keep this promise, not just for one year, but for the Parliament.

But I am abolishing the perverse entry fee every employee pays to be part of the national insurance system and in doing so I am cutting national insurance for every employee in the country.

Future reforms will also ensure that no one pays national insurance for the first £81 of their weekly earnings. All employees earning between £64 and £81 will have their rights to benefits protected.

So, from next April, 20 million employees will benefit by paying £1.28 a week, or £66 a year less in national insurance.

This is not just a tax cut for lower income Britain, it is a tax cut for middle income Britain. A tax cut for everyone in work.

Our reforms today signal the biggest change in the structure of national insurance for a generation.

And I have one further change that will make thousands of men and women better off, and in particular make a difference to family incomes.

For too many parents, the costs of childcare has meant either that parents cannot afford to work or find themselves paying out most of their wages on the costs of childcare.

So we will introduce a new child care tax credit as part of the working families tax credit, and put high quality child care within the reach of people who have never been able to afford it.

For spending on childcare of up to £100 a week for the first child and £150 for two or more children, the new tax credit will cover as much as 70% of the cost.

And the rules we draw up, which will be reviewed after two years of experience, will be designed to ensure that parents have access to high quality child care: childminders, day nurseries and out of school clubs.

A change that today makes a reality of choice for hard working families previously denied it: childcare will from now on be affordable for the many and not just the few.


Section 5: Supporting families and children

Families are the bedrock of a stable and healthy society.

And in a fast-changing economy - with its uncertainties and vulnerabilities - families, now more than ever, need the security of support when bringing up children.

Family values means we value families, all families.

So our economic policy must not only encourage a stable and healthy society based on mutual rights and responsibilities but directly support families as they bring up children.

This is not just for the four million children growing up in poverty in Britain today, but for every child who should have the best opportunities.

But the system of child, and indeed family, support this Government has inherited is confused in its aims and contradictory in its impact, and it must be reformed on the basis of clear objectives.

And the starting point in 1998 is exactly the same as stated by Beveridge in 1944:

"That nothing should be done to remove from parents the responsibility of maintaining their children and that it is in the national interest to help parents to discharge that responsibility properly."

But we implement these objectives in a changed economy where parents now are trying to strike the right balance between paid work and family responsibilities. And in this new context I believe that we must do more to encourage family-friendly employment that will help children and their parents. That is why, as part of the social chapter, we will legislate to guarantee unpaid parental leave and I am pleased to confirm that the CBI are in support of this endeavour.

Giving children the best start in life requires good schools, good health services, good child care, good public services as well as cash help. As a country we invest around £10 billion a year in a wide range of services for young children. And for the first time, a broad based review of how we can integrate the whole range of services involved in the support and care of young children and their families is being carried out and proposals will be announced with our spending review in the summer.

Giving a child the best start in life takes more than money, but it cannot be done without money.

And I believe that child benefit remains the fairest, the most efficient and the most cost-effective way of recognising the extra costs and responsibilities borne by all parents.

And raising it allows us to do more for mothers who choose to be at home, working at home bringing up their children.

To underline this view, that child benefit is society's support for, and investment in, the upbringing of children, child benefit should remain and will remain universal where it is already universal and it should be paid, as now, directly to the mother.

So future support for children will be built upon universal child benefit and I am convinced of the case for raising its level. But after careful examination there are three complementary changes I believe we should make.

First, we all know circumstances dictate that some families need more help than others. And that the case for additional support for children in poorer families is strong, but that support should be on the basis of the identifiable needs of children, not on whether there happens to be one parent rather than two. There is, in my view, no case for a one parent benefit and we will not return to that. Additional support should be provided not on the basis of family structure but on the basis of family need.

Second, our benefits system provides less help for children when families need it most - in the early years. Low income families on benefit in or out of work receive £8 a week less for a child under 11 than a child over 11.

This distinction does not reflect the high costs of the early years, and takes no account of the costs to mothers of staying at home when their children are young or of the extra costs of child care if mothers are working. So it is time to do more for children under 11.

To achieve our goals we must look more broadly at the current approach to children and families in the tax system.

The state pays a tax allowance to married couples. But the state pays exactly the same amount at exactly the same rate to unmarried couples with children whether or not they have ever been married. The state pays exactly the same amount at the same rate as married couples allowance to single parents and indeed the state actually pays the same amount for up to a year to couples who separate or divorce and does so whether they have children or not.

Such is the confusion of the current system that if a married couple with children split up, both man and woman can each receive the equivalent of a full married couple's allowance for up to a year. So, separated, they can actually receive up to twice the allowance of a married couple.

And the only way to make sense of the chaotic system is to make our primary aim that of supporting families through supporting children. That is why from next year we propose to raise child benefit by reducing these allowances, now paid at 15 per cent to 10 per cent. This change will not affect any elderly taxpayer, whose extra allowances will be protected.

I have therefore decided that from next April, for the first child, child benefit will be raised by more than 20 per cent.

A £2.50 a week rise in child benefit. This is in addition to the normal uprating for inflation.

At £130 extra per year, this is the biggest increase we have seen in child benefit.

These changes will be fully reflected in the family premium for income support.

It is the right thing to do to support and strengthen families in our country.

And, from November this year, for those on income support and family credit, child support for the under elevens will be raised by an additional £2.50 a week, so that the needs of Britain's youngest and poorest children are properly recognised.

With these measures we can give every child a better start.

And I believe that in future years we can and should do even more. And for those who want to see child benefit raised in future years the question undoubtedly arises as to whether it should be taxed for those at the top of the income scale. It must be right in principle that if child benefit is raised in future, then there is a case for higher rate taxpayers paying tax on it. Following the children's review we will bring forward detailed recommendations for reform.

I have one further announcement: for hundreds of thousands of men and women, care within the family extends beyond caring for children to caring for disabled or elderly relatives.

So valuing families means valuing spouses, grandparents, and all the carers who contribute to the family.

As a first step to recognising the importance of carers within the family, I can today announce I am ending an injustice that the previous Government tolerated. The tax allowance which has been available only to men with children whose wives are incapacitated will now be extended to mothers with dependent children and incapacitated husbands. And because of the importance I attach to ending this unfairness I will backdate this additional help to April 1997.


Section 6: Protecting the environment

I now turn to the environment

The Kyoto Summit was a landmark for international agreements on the environment and the work of my RHF the Deputy Prime Minister in securing agreement has been widely applauded. Having signed up to an 8 per cent reduction in European Union carbon emissions we are determined to play our part - nationally and internationally - in meeting that target. And in these important policy decisions which affect generations ahead there will be proper information, openness and full prior consultation.

First, I can confirm today that VAT on the installation of energy saving materials funded under certain Government grant schemes will be cut from 17 per cent to 5 per cent, helping to insulate 40,000 more homes a year. We are pursuing with our European partners a wider relief.

There has been increasing pressure, not least from businesses themselves, for measures that encourage greater energy efficiency in industry. I am grateful to Sir Colin Marshall, the Chairman of British Airways and until July, President of the CBI, for agreeing to head a Government review into economic instruments to improve the industrial and commercial use of energy. This will include a study of whether or not new economic instruments, such as an industrial energy tax and/or other market mechanisms, should be introduced to help curb industrial emissions; and if so, how.

Concern for the environment is of course not limited to use of energy. Last year we commissioned work on the environmental costs of the quarrying of aggregates and on the options for dealing with water pollution. Detailed results on aggregates will be published in the near future by my RHF the Environment Minister. But we already know that we need to do more to reduce the amount of waste going to landfill. So I will raise the standard rate on active waste from £7 to £10 per tonne from 1 April 1999. But consistent with our environmental objectives, from October next year I am exempting from landfill tax the inert waste used in the restoration of sites.

Road transport is the fastest growing source of carbon emission. So we need a more balanced transport policy.

The Government therefore proposes to make two major environmental-led changes to long term transport policy today.

The quantity and the quality of public transport must be improved. So I am pleased to announce that over the coming three years, as a result of this Budget, a total of over £500 million additional money will be invested in public transport. My RHF the Deputy Prime Minister will announce the details later in the week.

But today I can announce a £50 million a year rural transport fund. Three-quarters of rural parishes and communities have no bus service. Our aim must be to extend the range of transport services throughout the country. So this fund will invite applications from rural communities who want to improve local transport. And as an added incentive I will increase the rebate on fuel paid to bus operators to help keep fares down.

The Government recognises that, for many people especially in isolated areas, car ownership is not a choice but a necessity and so I now want to re-balance car taxation so that it falls less on car ownership. And I want to make the change in an environmentally sensitive way.

From January next year, I am cutting the licence fee for lorries and buses with clean engines by up to £500. But I also want to make a major reform of the licence fee for cars. From next year I plan to reduce the fee for cars with the lowest emissions. For the cleanest and smallest cars, I plan to cut the licence fee by £50.

And, as we make the preparations for this long term environmental change, for this year I propose, at a cost of £145 million, to freeze the licence fee for all vehicles. To encourage lower emissions, the costs of converting company cars to road fuel gases will, from now, be disregarded for income tax purposes. At the same time I am increasing the scale charges for fuel provided by an employer, which will cost the typical company car user around £1 a week. The duty on road fuel gases will be frozen, increasing the incentive to use these cleaner fuels.

The last Government introduced a road fuel escalator, the principle of which we supported. They set it at 5 per cent. Since July it has been 6 per cent. There is agreement that only with the use of an escalator can emission levels be reduced by 2010 towards our commitments.

As a result of the escalator, road fuel tax will rise by 4.4p a litre for unleaded petrol, and for ultra-low sulphur diesel. As is normal, this will take effect on Budget Day at 6 pm. And to encourage all diesel users to switch to cleaner fuels, ordinary diesel will increase by 1p more than that. These increases will reduce carbon emissions by 1.7 million tonnes of carbon.

Of course the price of petrol will also be affected by movements in oil prices. The oil price has fallen by 25 per cent in the last six months, a benefit enjoyed by oil companies that has yet to be passed on to consumers, especially consumers in rural areas who already pay higher fuel prices, something the Office of Fair Trading is already investigating.

But whatever the short term changes in oil prices, the Government has a duty to take a long term and consistent view of the environmental impact of emissions . And we are today publishing in the Red Book an environmental assessment of our proposals.


Section 7: Other tax measures

Now to other tax measures.

I have already said that we will maintain the basic and top rates of tax for this Parliament. As is usual we will increase all income tax allowances, income limits and tax thresholds in line with inflation. I turn now to this year's Budget decision on mortgage tax relief. I can tell the House that I have decided in this Budget to make no further change in the rate or to make any change to Stamp Duty on property below £250,000. For property sales above £250,000, Stamp Duty will be raised to 2 percent from next Tuesday, and to 3 per cent on property sales above £500,000, a change which leaves 98 per cent of house transactions unaffected.

I had a decision to make also on inheritance tax. Many have put to me the case this year for freezing or even cutting the threshold. I have decided to do neither of these things. This year I will raise the threshold for inheritance tax by £8,000. Under this Government there will be no inheritance tax to pay on estates below £223,000. 97 per cent of estates will not have to pay inheritance tax. Rules on inheritance tax concerning chattels will be tightened to ensure proper access.

I also want to improve access to our nation's museums and galleries. I have therefore decided that extra money will be made available to help museums and galleries which do not currently charge for admission to maintain free admission in the coming year.

As I promised, I will raise revenue over the next three years by closing a number of loopholes, including offshore trusts, a total of £1.5 billion. Next month we will be publishing and consulting on draft legislation for a general anti-avoidance rule for direct taxes.

From January 1 next year, alcohol duties will be uprated in the normal way, by 1p on a pint of beer and 4p on a bottle of wine. For a bottle of spirits the duty will be frozen at its current level. And I shall be taking action to clamp down on smuggling and fraud.

On tobacco, in line with the commitment I announced last year, the excise duty will rise by 5 per cent above inflation. From 1 December the tax on a packet of 20 cigarettes will rise by just over 20p. Details of these duty changes together with details of changes to certain gambling duties are published this afternoon.

I have had many budget representations, including many widely publicised campaigns, pressing for new tax reliefs.

I have decided that there is a case for a new tax relief for giving. I want British citizens to be able to contribute more to poverty relief and education in developing countries. For every £100 a British citizen donates, the British Government will contribute up to £40.

I want the Millennium to be remembered not just nationally but internationally for the redemption of debt and the reduction of world poverty.


Section 8: Public spending

I said that this would be a Budget based on prudence for a purpose and that guides us also in our approach to public spending.

When we came into Government we said that while we undertook a strategic review of future spending priorities we would work within a two year ceiling on departmental spending.

The Comprehensive Spending Review - the results of which we will announce this summer - will shape our public spending priorities into the next Millennium.

But as a result of the work of my RHF the Chief Secretary to the Treasury and as a result also of Departmental willingness to root out waste and this year reallocate resources to our priorities, we have already achieved more than some expected.

£400 million to help pensioners with fuel bills, £1.5 billion to patient care in the NHS, £3 billion to employment, and more than £2 billion to education.

Because of our disciplined approach this year we are able to carry over extra money from this year to next.

I have already said that public transport will receive an additional £500 million over the next three years.

But ours is prudence for a purpose - to meet the people's priorities.

We are determined to improve education all round. So I am allocating for the coming year to education an additional £250 million. Making a total additional commitment to education since we came to power of £2.5 billion.

And I can also tell this House that my RHF the Secretary of State for Health will make a statement this week.

The extra money I announced last July for the NHS comes on stream from next month.

I have decided that this allocation to health of £1.2 billion for next year should today be increased by another £500 million to £1.7 billion. This takes the total additional investment we have provided for the NHS in our first ten months to £2 billion.

The NHS is safe in this Government's hands.

Because we will always be prudent, I am allocating £500 million to add to the reserve in 1998-99.

It is because of our prudence that we are able to meet our Manifesto commitments, reduce the deficit and invest more in transport, education and health.


Section 9: Conclusion

The ambitions of the British people are once again the ambitions of the British Government.

So this is a Budget that by its measures, advances both enterprise and fairness.

A Budget that has set new ambitions for Britain.

Budget 1998 index

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