HM Treasury

Spending Review

18 July 2000

Statement by the Chancellor of the Exchequer on Spending Review 2000

The public spending allocations for 2001 to 2004 that I am announcing today are possible because - having eliminated the 28 billion pounds deficit we inherited and having reduced the national debt - the state of our public finances is strong.

In the economic cycles of the last 30 years the current budget deficits averaged 109 billions pounds, the national debt doubled and rose to 44 per cent of national income in 1997 and stop-go in the economy meant stop-go in the public finances.

So our first task was to create stability and sustainable public finances - and having set clear fiscal rules over the economic cycle - a current budget in balance, borrowing only to invest within prudent and cautious limits - today we not only have low inflation and stable growth but year-on-year current budget surpluses and debt falling below 40 per cent of national income. Indeed debt being repaid this year and next.

And it is this sustained and sustainable improvement in our public finances that makes possible a sustained and sustainable improvement in our public services.

Our second task was to encourage the work ethic and secure rising employment. And today with the assistance of the New Deal, unemployment is at its lowest for 20 years and almost 28 million people, more people than ever before are in work in our country today.

Now, building on the foundation of stability and strengthened economic fundamentals, we can move to the next stage in creating a better future:

And the first conclusion of this year's Spending Review is that prudent targeted long-term investment is not only a social good, but in a changing and often insecure world an economic necessity.

It is only by investment in education, in science and in the future of our children that we can equip ourselves for future economic success and ensure there is opportunity for all.

It is only by investing in health, transport, the environment and in law and order that we can ensure a more productive economy and security for all.

And just as stability and economic strength makes possible investment, so too new investment reinforces stability and creates longer-term economic strength.

So, while we will raise current expenditure only in line with our neutral view of trend growth - by 2. 5 per cent a year - we propose to tackle the long-term neglect of investment in our country with a step change in capital investment for education, science, health, policing and in our transport and infrastructure.

As I announced in the Budget, net capital investment will more than double, rising from 7 billion pounds this year to 19 billions by 2004 , within a ceiling for public investment of 1.8 per cent of national income as we renew our public services.

The second conclusion of our Spending Review is that it is by tying new resources to reform and results, and by locking in incentives, penalties, inspection and information that we ensure new investment goes to front line services:

At every stage money will be tied to output and performance.

Let me give full details of the financial background.

In the Budget I confirmed the current surpluses from 2000 onwards would be 14 billion pounds, 16,13, 8 and 8 billion pounds.

My Budget also confirmed net borrowing will be minus 6.5, minus 5, plus 3, plus 11, plus 13 billion pounds, lower borrowing in every year than in any year of the last Parliament.

I said that, as a share of national income, debt will be 35 per cent, 34, 33, 33, 33 and thus even with our programme of public investment we meet both our fiscal rules and do so even on the most cautious case and a cautious view of trend growth at 2.25 per cent.

In accordance with the code of fiscal stability, I will publish the second fiscal forecasts of the year in the autumn. But I can already report that since the Budget the fiscal position has further strengthened.

For the year ending March 2000, the current surplus is healthier than originally forecast at the time of the Budget. Not 17.1 billion, but 20.4 billion pounds.

Debt as a share of GDP has been reduced even more, from 37.1 to 36.8 per cent.

Indeed, I will use a further underspend of 2.5 billion pounds in annually managed expenditure to repay debt. Two billion pounds in departmental expenditure can be carried forward.

However, on grounds of prudence, I have decided to allow a carry forward of only 1.5 billion pounds and to allow spending of only half of that this year and half next year - and to allocate the remaining half a billion to repay more debt.

It is only because we have put the public finances on a sustainable footing that I can raise spending today. It is this same discipline that allows me to inform the House that this year we have repaid 6.2 billion pounds more debt than the 11.9 billion originally planned. In total a debt repayment of 18.1 billion pounds, the largest repayment of debt in any year since the War .

Madam Speaker

We have not and will not relax our discipline. So I have three policy announcements to underpin the strength of the public finances.

Further limited sales of spectrum will take place by the end of 2001. And we will not repeat the mistakes of the North Sea Oil windfall and of the privatisation sales where receipts were immediately used up in current spending. I can confirm that all the capital proceeds will - as with the 22 billions from the first sale - go to further reduce the burden of debt.

As debt is reduced so too are debt interest payments. And the first spectrum sale alone will reduce the bill for debt interest by a further 1 billion pounds a year by 2003-04. Money that - as I will confirm later this afternoon - will - year after year - go directly to improving public services.

Second, departments and authorities will make asset and property sales of 4 billion pounds a year over the next three years - 4 billion a year released by realising unproductive assets we do not need to fund, service improvements we do need.

And because money is tied to modernisation, the new public service agreements signed with departments - and for the first time with local government - will not only specify agreed outcomes but precise timetables for making necessary reforms.

And I can tell the House, as a result of efficiency targets and a fall in the share of administration costs in total Government spending, new money makes possible a substantial shift in spending to the front line services - to recruit more nurses, doctors, teachers, classroom assistants, and police, more staff in our front line services.

And with the success of the New Deal, the bills for social and economic failure are now 3.5 billion lower, enabling us to transfer 3.5 billion each year from paying unemployment benefits to funding public services.

And with this improvement comes a radical shift in the composition of public spending. Our promise was to reduce the costs of failure - the bills for unemployment and debt interest - in order to reallocate money to the key public services.

In the two decades from 1979 until 1997, rising debt interest and unemployment and social security accounted for 42 per cent of all extra public spending and that meant that 42 pence in every additional pound spent was not available to the key public services.

In the coming three years, unemployment, social security and debt interest payments will account for not 42 per cent but now only 17 per cent of extra public spending, even as we direct more money to child benefit and the minimum income guarantee - and that leaves around 80 per cent of new money for health, education, transport, policing and other public services. Extra resources now available to us, not at the expense of our prudence, but because of our prudence.

So within our fiscal rules and within the envelope I set in the Budget and have strictly adhered to, I can announce that spending on public services - what is called the departmental expenditure limit - is able to rise from 195 billion pounds this year and our previously planned 203 billion next year to 212.1 billions and then to 229 billions in 2002-2003 to 246 billions in 2003-2004. By 2004 an extra 43 billion pounds a year now to be allocated to front line services.

Sustained improvements in public services now made possible because with stability and strengthened economic fundamentals, and lower debt interest and lower unemployment, we have sustained improvements in our public finances.

So I now turn to the departmental allocations.

In recent years, in addition to their conventional responsibilities, Britain's defence forces have taken on a new and valued role in international peacekeeping and in conflict prevention - promoting human rights and peace throughout the world including in Sierra Leone and Kosovo.

To complete the restructuring agreed in the Strategic Defence Review - to fund new equipment and to increase the mobility and efficiency of our front line forces - defence spending, which has been falling in real terms every year since the end of the Cold War, will now increase in real terms. The allocations are 23.6 billion pounds next year rising to 25 billion in 2003-2004.

The rise in the Foreign Office budget from 1.2 billion pounds next year to 1.32 billion in 2003-2004 will not only finance the proper representation and promotion of Britain abroad but also the Foreign Secretary is announcing today that the British Council will receive extra funds and the budget for the BBC World Service will rise substantially from 174 million pounds this year to 180 million pounds next year, to 210 million by the end of the period to achieve our new target of 153 million World Service listeners by 2002.

Because we take seriously our international responsibilities to the environment - and following an interdepartmental review of nuclear safety - the Government is announcing today a special 85 million pound fund to assist nuclear clean up at Chernobyl.

The international community's clearest duty and greatest challenge is to halve world poverty by 2015 and make primary education universal for every child.

Our international aid budget will rise from 2.8 billion pounds this year to 3.1 billion next year, then 3.3 billion and 3.6 billion by 2004, a real terms rise of 6.2 per cent a year - in contrast to the falling share of national income devoted to overseas aid from 1979 to 1997, now a rising share of national income today and in the future, as we honour in full our commitment to debt relief, our obligation to the poorest countries of the world.

I turn to our second set of decisions, new investment to build stronger communities.

The Home Office budget will rise from 8.2 billion pounds this year to 9.6 billion next year, to 10.3 billion the year after, to 10.6 billion pounds in 2003-2004, an annual rise in real terms averaging 6.4 per cent a year. And tomorrow the Home Secretary will set out both his targets and how this allocation will be spent.

To fully implement the Good Friday Agreement, an extra 316 million pounds over three years will help fund the modernisation of policing and criminal justice in Northern Ireland, and in this way help underpin peace and future prosperity.

Every community in the land is weakened by the evil of drugs. In return for challenging new targets to cut drug related re-offending by 50 per cent over the decade and to treat twice as many addicts through the new National Treatment Agency, the new anti-drugs budget will be set at 870 million pounds in 2001-2002 and then rise to 931 million pounds and 996 million pounds by 2004, an average annual real growth rate of 10 per cent.

Strengthening our local communities involves a new partnership with local government based on increased investment and new targets. The three year settlement for local government - an annual real terms rise of 3 per cent over and above inflation - will be set out in full by the Minister for Local Government. Ministers in Scotland, Wales and Northern Ireland will make related announcements.

Local and national Government need to work even more closely in a new partnership for reform and improvement in our poorest areas.

For decades our whole country has been scarred by deep and persistent deprivation and under-achievement in our poorest communities.

While much previous spending has been directed to dealing with the consequences of economic and social failure, it is time now to invest in tackling the causes of failure - poor school results, poorer standards of public health, and low levels of economic activity.

Today, our poorest council estates suffer unemployment four times and burglary rates three times the national average, with mortality rates 30 per cent higher.

These unjustifiable and divisive inequalities cannot be tolerated. Both government and communities must raise their sights, with a new target to raise the poorest areas up and thereby narrow the gap between these areas and the rest of the country.

So we will not only extend the New Deal for Communities but strengthen the institutions - from our schools to our health centres - on which communities depend. In return for local public service agreements that require new minimum standards in school attainment, public health, law and order and job creation, a new Neighbourhood Renewal Fund will provide, by 2004, new resources worth 400 million pounds a year.

In this spending round, housing - and our objective of decent affordable housing for all - will receive the priority it deserves, and resources it needs - an additional 1.6 billion pounds of new investment by 2004, a real terms rise averaging 12 per cent a year.

Across the social sector, we will ensure that half a million more houses will be modernised or repaired, part of a ten year plan to eliminate all substandard housing. And as we implement key recommendations of the Rogers Report, reclaimed brown field sites will account for 60 per cent of all new housing, creating thousands of new construction jobs.

Investment in the future must mean investment in a cleaner environment. To meet our climate change commitments the Environment Minister will announce how new resources will promote emissions trading and energy efficiency in Britain's homes, and there will be further announcements on the use of renewable energy and recycling by local authorities.

In rural communities, the new Rural Transport Fund has extended the rural network with 2000 new or improved bus services. And the Rural Transport Fund will be increased from an annual allocation of 60 million pounds to 95 million pounds. And there will be an announcement of new finance available for maintaining the Post Office network in both rural and urban areas.

And as farming restructures and deals with BSE and meets challenging targets to move from the old farm production subsidies to the new environmental improvement payments, the agriculture budget including the Intervention Board will increase from 1 billion pounds this year to 1.35 billion by 2004, an average annual real terms rise of 6 per cent. And the Food Standards Agency will see its budget rise from 87 million pounds this year to 111 million by 2004.

Extending access, particularly for our young people, to the arts and to sport will strengthen every community.

With a 4.3 per cent annual real terms rise in the budget of the Department of Culture, there will be significant improved funding for the arts and the Secretary of State will give details of new funding to encourage children to use our libraries, museums and arts and to encourage sports in schools and in our communities.

Strengthening communities must involve strengthening our social services and our health service. Our NHS plans will be announced next week. There will also be a major package of investment in services for elderly people - including the Government's response to the Royal Commission on Long Term Care. The Health Secretary will announce the detail of this and other allocations from the health and social services budget next week.

I can also confirm that in the autumn the Government will publish its proposed plans for a new pensioner credit with a view to further announcements on a Budget timetable.

The strong civic society we seek is built not by rights alone but by rights and responsibilities. So we will match our Budget tax reliefs to encourage the giving of money with new measures today to encourage the giving of time, extra resources of 60 million pounds by 2003-2004 with a clear aim - to encourage one million more of our citizens as volunteers in community service in our country.

Madam Speaker

I turn now to the investment we must make in our economic future. Britain has great strengths - the best place in Europe to do business, with world class companies in science and technology - but to build for the future , we must put in place the long term investment which is the precondition of a strong economy and of bridging the productivity gap with our competitors and avoid the short-termism of the past.

Working with business, the role of modern Government is not to subsidise loss-makers, or to attempt to pick winners.

The new role of Government is to invest in science and innovation, to promote competition, small business development and enterprise for all, to encourage balanced regional development and meet the pressing needs of transport and infrastructure and most of all to invest in the greatest driver of prosperity - education and skills.

First, investment in science. With our investment in a one billion pound public private partnership with Wellcome to re-equip university science and extra resources to support pioneering medical research, we will raise the science budget by 5.4 per cent a year.

And to ensure invention in Britain leads to manufacturing in Britain and jobs in Britain, the Secretary for Industry will announce new resources for the University Challenge Fund that commercialises inventions and for university-based Regional Enterprise Centres.

Britain's small businesses are the backbone of our local economies. And to offer new services businesses have themselves requested, the budget of the new Small Business Service will rise substantially from 197 million pounds this year to 277 million pounds by 2004. This will include a national Internet service offering comprehensive business advice and a consultancy service for start-ups, worth up to 2,000 pounds for start ups in high unemployment areas. So that the numbers of small businesses who employ, which have already risen from 1.2 million in 1997 to 1.3 million, can expand in every area of the country.

The newest and most decisive challenge in the new century demanding higher levels of investment is to master and lead in the new information technologies from the Internet to e-commerce.

To make Britain best for electronic trading and to bridge the growing digital divide, the Review has agreed a three year programme of rapidly rising investment in our schools and our communities and a new fund the Prime Minister will announce to ensure that by 2005, Britain will have all Government services offered on line.

Investment in innovation, infrastructure and skills is essential in every region if there is to be high levels of productivity in Britain and full employment throughout our country.

To secure balanced regional development, Regional Development Agencies will receive new resources, their budgets increased by 500 million pounds a year by 2003-2004. There will not only be new funds but new flexibilities so that local people can promote local priorities and meet local needs they have themselves identified; in the North West promoting innovation and research; in the North East, increasing entrepreneurship; in Yorkshire and Humberside, small business development; in the East Midlands, information and communications technology; in the West Midlands, modern manufacturing; in the South East and South West, as in Scotland, Wales and Northern Ireland, with their devolved decision-making, the promotion of clusters of growth; in every region new support for skills, employment and for schools and colleges to promote enterprise open to all.

The overall settlement for Scotland provides for an increase of 3.4 billion pounds a year by 2003-04, an annual real terms rise of 4.4 per cent. A separate announcement will be made by the Scottish Executive.

For the Objective 1 areas in the UK - in Wales, Cornwall, Merseyside, South Yorkshire - and for Objective 2 and 3 areas I am announcing a new approach that will raise their levels of investment.

Within our departmental allocations we are making today the Government will ensure funding for the European share of Objective 1, 2 and 3 projects.

For EU structural funds this is estimated to total 4.2 billion pounds over three years, including an estimated total of 600 million for new Objective 1 programmes in English regions.

The settlement increases funding for Wales by a total of 5.4 per cent a year in real terms and allows for match funding - and includes a special allocation to ensure funding of the European share of Wales' Objective 1 needs, an allocation to Wales of 80 million, 90 million, 102 million pounds over the next three years. I am also transferring management of the European Social Fund allocations for Wales of 149 million pounds over the next three years to the Welsh Assembly.

It is because of the importance to all regions of modern transport and infrastructure that we will now make a step change in investment in public transport.

Having in the Budget removed the automatic fuel escalator, extra money was allocated to roads and public transport this year. And now we are able to raise spending on roads and public transport by significant extra sums to meet the needs of business and the public, from 4.9 billion pounds this year to 6 billions next year, then to 7.4 billions and 9.1 billions in 2003-2004, a real terms rise of 20 per cent a year to 2004. Details of the targets to improve rail and bus services and to cut road congestion and of the allocation of funds will be set out in the Ten Year Plan published by the Deputy Prime Minister on Thursday.

The modern economy can succeed only when it uses all the talent of all its people. Any potential squandered is a resource denied to the country's future. In this Review we allocate new funds to advance our goal of full employment.

For 70,000 employers, nearly 500,000 young people and for Britain, which has seen long-term youth unemployment fall by 70 per cent, the New Deal has been succeeding, a central building block for our policy of full employment.

So long-term youth unemployment which rose to 500,000 in the 1980s is 50,000 today.

The Windfall Levy raised over 5 billion pounds with 1.6 billion allocated to schools, 3.5 billion to employment creation.

Because the New Deal has been even more successful than forecast, with more getting back to work more quickly, there is an underspend, enabling us to fund the New Deal well into the next Parliament, and to transform what started as the New Deal for the young unemployed into a permanent deal for all long-term unemployed.

Having helped 500,000 on the New Deal, we now set plans to help the next 500,000. Next year and until 2003, I expect 1.7 billion pounds to be available from the Windfall Levy to do more to coach the hard-to-employ young unemployed and to systematically create new opportunities for our long-term unemployed, nearly one million single parents and thousands of disabled men and women who want to work.

To bring both child care and employment within the reach of more parents, child care investment will rise from 66 million pounds this year to 200 million by 2003-2004, as we deliver our national child care strategy.

Because of our success in cutting unemployment social security spending, which grew by 4 per cent a year in the last Parliament, is growing by 1.5 per cent a year over the next three years and the budget for unemployment related benefits is falling.

To make further social security savings by tackling fraud and error we are announcing new investment in staff and technology. Having cut errors in income support claims by half, we now plan to cut fraud and error in the job seekers allowance and income support payments, first by 25 per cent by 2004 and then 50 per cent.

It is by continuing a prudent policy - economic stability, the New Deal, and tackling fraud and waste - that we are able to reallocate funds from unemployment and debt interest, to be used for our priorities in education and health.

I turn now to investment to ensure all children have the best start in life. Today's children will be tomorrow's doctors, scientists, engineers and nurses - our future workforce. By investing in children, we are investing in our country's future.

Having invested 7 billion pounds a year more in families - raising Child Benefit by 35 per cent to 15.50 pounds, guaranteeing a minimum family income under the Working Families Tax Credit and from next April the new Children's Tax Credit giving the typical family 442 pounds a year - it is time to take an additional step.

The war against child poverty requires not only additional cash but the support and encouragement of all forces of care and compassion in every community. And it can only be won by the combined efforts of parents and private, voluntary, charitable and public sectors working together.

So in a unique initiative - and after consultations with charities and voluntary organisations - we will create a national Children's Fund with a budget over 3 years totalling 450 million pounds to help children and young people at risk.

The Children's Fund will work with national children's charities and local community organisations - secular and faith based - and support those dedicated staff and committed volunteers who offer one-to-one help to young people - and parents - at risk. 70 million pounds will be allocated to a network of 50 local and regional children's funds.

Madam Speaker

I turn to investment in education as a whole.

With the funds the Secretary of State for Education allocated from the first Spending Review he has made reforms in education -ensuring nursery education for every four year old, cut class sizes for 5-7 year olds, raised literary and numeracy standards for 11 year olds by 6 and 10 percentage points, and reformed and expanded higher and further education.

Education qualifications are, in the modern world, the surest route to opportunity and security for all.

First, all children should be ready to learn when they reach school.

From the first Spending Review came Sure Start - now lifting 50,000 children and their parents out of poverty. In this second Review - and tied to targets for improving child development and parental responsibility - we will, by 2004, and with a budget of 500 million pounds, expand the number of children helped to 345,000.

And with nursery places already increasing from 200,000 in 1997 to 400,000 in 2002 the Secretary of State for Education and Employment will announce funds for the next stage in the expansion of nursery education

Second, having improved standards in our primary schools, the next task is now to raise standards as decisively in the secondary schools --- so that the expansion of resources the Secretary of State for Education and Employment will announce for all schools is designed to back up reform and to being about radical improvement within the comprehensive system to ensure opportunity for all means the highest standards for all

The Secretary of State for Education and Employment will now consult on and fund a new target for our secondary schools - by 2007 not today's 60 per cent but 85 per cent of 14 years olds must meet literacy, numeracy and computer standards.

To raise Britain's appallingly low staying-on rate, we are setting aside 150 million pounds a year for education maintenance allowances worth up to 40 pounds a week. Our new and challenging target is by 2004, 80,000 more young 16-18 year olds staying in education and by age 21 nearly 60 per cent of young people will have left school or college with A levels or their equivalent.

Under the New Deal for Schools 17,000 of our schools will have had some improvement, modernisation or renovation by 2002, and every one of our 32,000 schools will be linked to the Internet, with the objective of by 2004 500,000 more computers in our schools.

By 2010 we want the majority of young people to go on to higher education. The Secretary of State is today allocating 100 million pounds extra to higher education in 2001-02, making a 4.6 per cent real terms increase in total. And the Review provides further finance that will raise the numbers in part-time and full-time higher and further education - towards our goal of 50 per cent of young people going into higher education by the end of the decade.

State school pupils secure two-thirds of the top A Level qualifications but only half the places in some of our leading universities. To bridge this gap the Secretary for Education is today setting a new objective to improve access. The Higher Education Funding Council will provide financial help for universities submitting plans for year-on-year improvements in widening access.

2 million adults have a reading age of 7 or less. Adult illiteracy is not just a failure of our society but - as business leaders round the country have told me - an economic inefficiency that cannot any longer be tolerated. In the coming weeks, the Secretary for Education will announce the new resources provided to tackle these barriers to opportunity and earnings.

Madam Speaker

The best education for all, from early learning to lifelong learning, is not only a time-honoured social ideal, but in today's world an absolute economic necessity.

That is why we have decided to make increased investment in education the priority of this year's Review and to back sustained long-term reform with a sustained increase in resources.

In the Budget I was able to allocate new resources to the NHS, amounting to a rise of 6.1 per cent a year in real terms over four years to 2004.

I was also able to allocate an additional one billion pounds to UK education this year.

Today, in return for new targets for improved standards, I can allocate further resources for UK education for the next three years.

Under the last Government, UK education spending rose by an average of only 1.5 per cent a year in real terms .

Over the next three years, UK education spending will rise by 5.4 per cent a year in real terms.

Spending will rise from last year's 40.6 billion pounds, and this year's 45.8 billions to 49.5 billions next year: 53.4 billions the year after; then 57.7 billions.

And the money I have announced in the Budget and now today will deliver, over the four years up to 2004, an average annual increase of 6.6 per cent in real terms. An annual rate of growth far in excess of the 1.5 per cent achieved from 1979 to 1997.

I have one further announcement.

In March the Secretary for Education made special payments direct to head teachers for books and equipment ranging from 3,000 pounds to 9,000 pounds for primary schools and from 30,000 pounds to 50,000 pounds for secondary schools. 290 million pounds in total that went direct to the head teacher, to be spent by the school for use in the classroom.

The Government has decided to continue this innovation.

But next April the Education Secretary will allocate to our head teachers not 290 million pounds, but 540 millions.

As a result, head teachers in every one of our smaller primary schools will next year receive not 3,000 pounds but a payment of 6,000 pounds.

The larger primary schools, not 9,000 pounds but a payment of 20,000 pounds. For the smaller secondary schools there will now be payments of 50,000 pounds rising for the larger secondary schools to a payment of 70,000 pounds. And these payments will now be made not just for one year but for every year until 2004. And every school throughout our country.

So, Madam Speaker, we have made our choice. It is now for those who oppose our spending plans to state clearly where their cuts would fall.

This Government has been prudent for a purpose.

Our choice is stability. Employment. And sustained long-term investment, now and into the next Parliament to create a Britain of security and opportunity for all.

And I commend this Statement to the House.

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