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KENNETH CLARKE'S BUDGET SPEECH SECTION 3: VAT ON FUEL

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Before I set out the Government's new plans for public expenditure over the next three years, I have one piece of b...
Before I set out the Government's new plans for public expenditure over the next three years, I have one piece of business to conclude from the March Budget. My RHF's decision to extend VAT to domestic fuel and power was in my view fully justified and I have no intention of asking Parliament to change the measure which it has already voted in favour of and put on the statute book.

To reduce borrowing, we had to raise revenue. In a full year, VAT on domestic fuel will raise nearly £3 billion, without affecting the job-creating sectors of the economy. It will also help to meet Britain's commitment to aim to return carbon dioxide emissions to their 1990 levels by the end of this decade. But the Government recognised from the outset that the poorest would need extra help. I can now announce to the House our detailed proposals.

First, even before the extra help we intend to provide, all those on income-related benefits will get a substantial increase next April under the normal uprating rules. Benefits will rise by 3 1/2 per cent - a lot more than many people in work will get next year. But on top of that automatic increase, the Government has decided to provide further substantial help.

For poorer households other than pensioners and the disabled, we will calculate the benefit increases that would be paid at the April 1995 uprating from VAT on fuel, and pay them a year early - this coming April. This will ensure that extra help is available before the bills arrive. In April 1995, we will adopt a similar approach, bringing forward the VAT element in the benefit uprating once more. And in April 1996, this extra payment will remain as a permanent addition to benefit.

For poorer pensioners and disabled people on income-related benefits, we intend to go further. Next April, we will give a special increase on top of the normal uprating: 50 pence a week for single people and 70 pence a week for couples. In April 1995, this will be doubled to £1 a week for single people and £1.40 a week for couples, partly through the normal uprating and partly through a further special increase. And by April 1996, benefits will be £1.40 a week higher for single poorer pensioners and £2 a week higher for couples than they would otherwise have been.

The immediate impact next April will be to give a pensioner couple on income support a total increase in benefit of £4 per week. Cold weather payments will also be increased, to help the most vulnerable groups during periods of exceptionally cold weather. Next winter these payments will go up from £6 to £7 a week; and there will be a further increase to £7.50 a week from November 1995.

This, Mr Deputy Speaker, is a substantial package of help, which fully discharges the promise we have made. It will ensure that the introduction of VAT does not put the cost of fuel beyond the reach of the poorest in our society. That promise was, of course, restricted to people on means-tested benefits, benefits which exist precisely in order to help those in the greatest need. But, Mr Deputy Speaker, I do recognise that there is another group who have struggled to cope over recent years and will also have difficulty in meeting their higher fuel bills.

Many retired people on modest incomes have worked hard all their lives and have been careful to put something aside each week. Often these savings mean that they cannot claim benefit. Yet while millions of families and businesses have benefited from falling interest rates over the last three years, many of these people feel that they have lost out again. Falling inflation helps to preserve the real value of their savings, but the interest retired people receive on their savings has dropped very sharply.

The Government has therefore decided to give extra help not just to those on modest incomes, but to all pensioners. We will do so in three ways. 1) First, my RHF the Secretary of State for the Environment has decided to boost the Home Energy Efficiency Scheme by £35 million a year over the next three years. An equivalent extension will be made in Northern Ireland. This will provide substantial financial assistance with home insulation, helping people to reduce their fuel bills whilst staying warm. By almost doubling the present provision, we will be able to extend eligibility to all pensioners and all disabled people.

2) I shall help savers and particularly those whose incomes are made unpredictable by changes in interest rates. I intend to introduce a new pensioner's guaranteed income bond which will combine a fixed rate of interest, guaranteed for five years, with regular monthly interest payments. Full details will be announced in the new year, but I can tell the House now that the rate will be a competitive one. Pensioners will be able to invest their savings, with complete security, and know exactly what income they will be getting - month in, month out.

3) Third, and most significant, I intend to make a special addition to pensions - and to the benefits linked to it - over and above the normal uprating in line with the retail prices index. Over the next two years I propose to give to all pensioners exactly the same extra help with their fuel bills as those pensioners on income-related benefits will be getting.

This extra help will build up over time. By April 1996, the weekly retirement pension for a pensioner couple will be £1.85 a week higher than it would otherwise have been without the VAT increase. A single pensioner will receive £1.30 a week more. The help I have outlined for pensioners will not precisely match increases in fuel bills in each and every household. But on average, pensioners are likely to find that, after taking account of falling real fuel prices, the extra help they receive will broadly cover changes in fuel bills, including VAT, over the course of this Parliament.

This is the first break since 1980 from our policy of uprating pensions strictly by the retail prices index. It must be regarded as wholly exceptional and it cannot be repeated whenever a particular tax or price increase is opposed on the grounds that retired people should not pay it. In a very difficult year for public spending, this amounts to a huge package of extra help. Fifteen million people will benefit. We shall be providing around £400 million of extra help next year, and around £1 1/4 billion extra in the year 1996-97.

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