'When in 1997 we made the Bank of England independent, we also froze
spending for two years, cut the national debt, and imposed the
central objective of British economic policy the goal of high and
stable levels of growth and employment.
Today I can report that:
- British inflation has been its lowest for thirty years;
- interest rates their lowest since 1955;
- this Christmas there are more people in work in Britain than at any
time in our history;
- and economic growth is now strengthening.
And while America, Japan, and half the Euro area have suffered
recessions, the British economy has - uniquely - grown uninterrupted,
free of recession, for every single quarter and every single year
And now is the time for this stable and growing economy to seize the
opportunities of the emerging world recovery.
So Mr Speaker, with the same strength to take the right long-term
decisions that has guided us through the world downturn, this
pre-Budget report sets out the further tough choices we must now
- first, decisions to lock in our hard won economic stability and
fund additional obligations to the war against terrorism and to
- second, long-term choices, stepping up the pace of economic reform,
to strengthen Britain's enterprise culture, British science and the
flexibility of the British economy;
- and third - even as we come through a world downturn and because we
believe enterprise and fairness can advance only if they advance
together: an additional one billion pound a year investment in
Britain's children, to advance our goal that not just some but all
of Britain's children have the best possible start in life and that
no child in Britain i s left behind.
First, the world economy.
While the USA and Japan have been recovering during 2003, growth in
our biggest trading area - the euro zone - is expected to be just 0.5
In Italy 0.4 per cent.
In France 0.2 per cent.
And in Germany it is zero.
I can report that in Britain growth, this year, is now expected to be
2.1 per cent - meeting our Budget forecast.
Mr Speaker, when I made our forecast the Opposition said that it was
not just incautious and wrong but 'a deliberate misrepresentation' of
Britain's economic prospects and not to meet it destroyed
I can report to the House that not only have we met our forecast -
but cumulatively since 2000 Britain's economic growth has been
stronger than Japan, the euro area and the USA.
And I can tell the House that Britain has now enjoyed the longest
period of peacetime growth since records began in 1870 - over 130
And I can also tell the House that, looking forward, we expect
British growth next year to increase by between three to three and a
half per cent and in 2005 to increase again by three to three and a
half per cent.
And in a world downturn, Britain has achieved growth with low
inflation and high employment.
I can report that since 1997 inflation has averaged 2.3 per cent and
that the number of jobs created now exceeds 1.7 million. Unemployment
in America is 6 per cent, in Germany, Italy and the euro area it is 9
per cent, in France 10 per cent, in Britain it is 5 per cent: British
unemployment - for the first time in 50 years - lower than every
one of our major competitors - the euro area, Japan and America.
Even with long-term unemployment cut by 80 per cent, youth
unemployment cut by 75 per cent, I have read pre-Budget
representations that this government's New Deal is an expensive
failure and should be abolished. Today we are setting out evidence
showing that without the New Deal youth unemployment would be twice
as high; without the New Deal half the lone parents who have moved
into work would not have done so; without the New Deal unemployed men
would be 20 per cent less likely to get a job. So the challenge of
this pre-Budget report is not to abolish the New Deal - now, with 2
million helped, the most successful employment programme in our
history - but to strengthen its role in removing forever the scourge
of long-term unemployment in our country.
Mr Speaker, we remain vigilant to both inflation and the continuing
risks from global imbalances, an uneven world recovery and
And I understand the continuing concerns of manufacturers and
exporters - and it is urgent that world trade talks be resumed.
As we achieve more balanced growth, fixed investment is growing this
year by two and a quarter per cent with growth forecast at six to six
and a half per cent next year, and business investment - expected at
Budget time to fall - is rising by three quarters of a per cent this
year, with three to three and a half per cent growth forecast for
Latest manufacturing and industrial production figures show one per
cent growth in just one month and manufacturing output - which has
fallen in both north America and Europe - is expected to grow here by
one quarter of a per cent this year and by around two per cent in
both 2004 and 2005.
With the housing market and consumer spending growth now - as we
forecast - moderating, we expect domestic demand and private
consumption to grow by two and a half per cent this year and in the
following two years - building on six years from 1997 in which
British households have averaged real rises in income above 3 per
cent a year. And with, since 1997, one million more homeowners in
Britain, rising household debt has been matched by rising household
wealth and lower interest payments.
Because this government will never take stability for granted, I have
announcements designed to entrench our stability.
First, the credibility that has come from Bank of England
independence, and the tough decisions to cut inflation, has made
possible a proactive, forward looking approach to interest rates,
cutting aggressively at the right time for the economy and as the
economy strengthens - now locking in long-term stability.
The symmetrical inflation target enables the Bank to be both
pro-stability and pro- growth and the long term credibility of our
symmetrical target will be enhanced - as the independent Office of
National Statistics reports in its paper published today - by
adopting the internationally recognised measure of inflation - the
harmonised Consumer Prices Index:
- more reliable because, taking account of spending by all consumers,
this Consumer Prices Index gives a better measure than the old RPIX
measure of spending patterns;
- more precise because, as in America and the euro area, it takes
better account of consumers substituting cheaper goods for more
I have therefore written to the governor of the Bank of England today
confirming my announcement earlier this year and that, from today,
the operational measure for inflation will be this Consumer Prices
Index and I am setting the new inflation target at 2 per cent.
I can confirm: pensions, benefits and index-linked gilts will
continue to be calculated on exactly the same basis as now.
As before, the target will be symmetrical. Should the rate of
inflation diverge from the 2 per cent target by more than 1
percentage point on either side our open letter system will be
And because discipline in pay setting is essential in both private
and public sectors, I have also written today to Public Sector Pay
Review Bodies informing them that our inflation target is 2 per cent.
Mr Speaker, when in 1997 we broke from the old annual public spending
rounds by setting fiscal rules over the cycle and fixed three year
spending settlements, and then paid off more debt in one year than
all the debt paid off across all the fifty years since 1945, debt
interest payments have been reduced to just 2 per cent of national
income, lower than at any time since 1915: long-term decisions for
stability that have enabled fiscal policy during the world downturn
to support monetary policy and maintain economic growth.
And this government will ensure that for the long-term debt levels
will remain low and sustainable, and in each pre-Budget statement,
report not just on the medium term fiscal position but on the
long-term. Today's report shows that while in Germany, France and the
Euro area state spending on pensions will rise towards 15 per cent of
GDP by 2050, Britain's figure of 5 per cent means - and I quote the
report that, 'the UK public finances are sustainable in the long
term-the UK is in a strong position relative to other countries to
face the challenges ahead'. I have to tell the House that to revert
to the pre-1980 position, an earnings link with pensions, would - by
the end of the period - raise deficits by 3 per cent a year just to
cover this one item with the long-term sustainability of public
finances undermined. Instead this government will proceed on a
prudent and sustainable basis.
Essential also for long-term stability is a flexible housing market
and I welcome the interim reports of:
- the Miles Review on the market for mortgages;
- and the Barker Reviewinto barriers to housing supply.
Kate Barker highlights Britain's weak private rented sector and I
will now consult on a new incentive to encourage the creation in
Britain of real estate investment trusts.
With flexibility central to meeting the Euro's five economic tests, I
am today also publ ishing our first report on labour, capital and
product markets and, as promised in June, the draft euro Referendum
Bill is published today.
Since 1997 Britain has created over 100,000 more businesses; there
are 170,000 more self-employed. But more enterprising as we are,
Britain still lags behind American rates of business creation and
And just as we took hard decisions that have led to a British
consensus on stability, I want to build in Britain an even deeper
lasting British consensus - a shared national economic purpose that
building on our historic strengths - Britain's scientific genius and
creativity, Britain's global reach, Britain's stability - we become,
in the era of globalisation, one of the world's most enterprising,
flexible and successful economies.
I want Britain to be the best location for science and research and
development and I can announce a widening of the successful R&D
credit to include the direct costs of software and power. And as I
examine the Lambert and Sainsbury reviews - and the government puts
forward its reforms in the structure and funding of Higher Education
to promote excellence and opportunity for all - the Budget will
consider even further improvements including for Research and
Technology Organisations. And we will also consider the right
incentives to support one of our great British creative industries:
A flourishing British venture capital industry is vital to growth and
I will consult on raising the annual limit for Venture Capital Trusts
and Enterprise Investment Schemes to £200,000 and increasing,
for two years, income tax relief's for VCT investments to 40 per
cent. And we will extend tax relief for the cost of managing
investments from investment companies to trading companies.
Small firms in Britain seeking investments of up to two million
pounds still face an equity gap. So following the model of Ame rican
Small Business Investment Companies, we will create a new framework
of incentives for small business investment and launch the first
round of a new British fund for enterprise capital.
To encourage new companies to enter the North Sea, I will enhance tax
relief for their costs of exploration. And manufacturers and firms
with turnovers up to #22 million pounds will benefit from 40 per cent
capital allowances worth, over 3 years, nearly #400 million.
So that British manufacturers and British workers do not lose out
from European rules unfairly applied to British firms, the Secretary
of State for Industry and I have asked Alan Wood of the Engineering
Employer's Federation and Siemens UK to review how procurement rules
are practised in Europe and make recommendations.
I can announce the following deregulations: firms applying
international accounting standards will not have to submit a second
and separate set of accounts to the Inland Revenue. For firms with
turnovers below #5.6 million there will now be no independent audit
requirement. I will extend the flat rate VAT scheme whereby firms
simply pay a percentage of total turnover: lowering the VAT charged
by up to 3 per cent; for first year start up businesses by up to 4
per cent, in total the Government is announcing today 147 regulations
for reform or removal, 650 over two years.
Because half of regulations emanate from Europe, the coming Irish,
Dutch, British and Luxembourg Presidencies are proposing a joint
initiative to drive forward deregulation as we seek more flexible
capital, product and labour markets not just in Britain but in
Mr Speaker, our goal is full employment for every region and nation
of the United Kingdom. And we are closer than ever to achieving it.
While the first stage of Britain's New Deal was to move people from
welfare into jobs, the next stage is to help people move from low
skilled work to higher skilled work .
So I can announce today that the Windfall Tax Reserve - previously
for job creation - will now be reallocated to a new deal for skills.
To extend employer training pilots to a third of the country - from
14,000 up to 80,000 employees, most of whom have left school early
and without qualifications - we will provide #190 million in the
coming year for paid time off and skills training.
To further this new deal for skills, everyone on jobseekers allowance
will be assessed for their skills and - starting with pilots for the
long term unemployed - attend a mandatory skills course. Overall, a
second chance for adults in or out of work without basic skills to
learn, whether through further education, work-based learning,
distance learning or trade union learning - and today to further
boost skills training we are publishing a paper on the tax treatment
of subscriptions and fees for professional bodies.
Alongside the Allsopp report published today on regional statistics,
the Secretary of State for Work and I are also publishing for each
region of the country full employment plans. For 2,000 enterprise
areas covering high unemployment communities in 417 constituencies:
in addition to fast track planning and abolishing stamp duty, I can
announce - subject to state aid approval - first year 100 per cent
investment allowances to renovate vacant commercial premises. And I
can confirm that as a result of the Lyons Review we will relocate out
of London and the south east 20,000 civil service jobs, to the
benefit of the regions and nations of the UK. Local authorities who
successfully promote small business creation should be rewarded for
doing so. And the Deputy Prime Minister and I propose that any
additional business rate income be shared with local authorities.
Although I will consult further before the Budget, we expect local
authorities to be eligible for an additional #150 million in 2005,
#300 million in 2006, risi ng to #450 million a year.
Budget 2002 announced relief's on income and donations for local
Community Amateur Sports Clubs. The importance of sport to our
communities and to our whole country has been demonstrated most
powerfully as the England Rugby World Cup triumph is enthusiastically
celebrated throughout the whole of the United Kingdom. I know that
the whole House will not only want to congratulate their success but
encourage the next generation of sportsmen and women. There are
100,000 amateur sports clubs in Britain who deserve greater support.
Under our proposals, becoming a Community Amateur Sports Club
entitles them to 80 per cent rates relief worth between one and three
thousand pounds a year for the typical club - and by doubling the
thresholds at which community clubs are exempt from corporation tax
to a new rate of #50,000, the vast majority will be exempted from any
such tax altogether. And in partnership with the sports governing
bodies we will work to ensure that all sports clubs - over 100 in
each constituency - can share in the considerable financial benefits
as they promote sports in their communities.
The Home Secretary - who will announce tomorrow the details of our
#125 million 'Futurebuilders' fund for voluntary and community
organisations - the Culture Secretary and I will report in the Budget
on what more we can do to encourage and help all those prepared to
volunteer in school sports, local sports as well as mentoring in
community service. We will also review Inland Revenue treatment of
football supporter's trusts.
I have two announcements on whisky and spirits. While tobacco fraud,
VAT fraud and oils fraud are now in decline, recent trends suggest
that despite a freeze in spirits duty for six Budgets an estimated
one bottle in every six of spirits sold is evading duty. So I will
now make provision to implement in the next Finance Bill the Roques
Report recommendation - that we stamp s pirits bottles. If, after
discussion with the industry, there is still no workable alternative
proposed, we will legislate. If we have to impose stamping, the
Economic Secretary will discuss with the industry the most cost
effective scheme and I will consider extending the freeze on the duty
for whisky and all spirits not just for one year but for every year
of this Parliament
I propose also to consult on a new framework for the tax treatment of
green fuels - a commitment to prior announcements, three years ahead,
of incentives to increase usage and promote investment in new fuel
efficient technologies. The Budget willalso introduce incentives for
rebated low sulphur fuel and gas oils. And we will consult on
recycling revenues from landfill tax; extending eligibility for 80
per cent reductions from the climate change levy; and, subject to new
industry wide commitments on the environment, extending in Northern
Ireland until 2012 an eighty per cent discount on the aggregates
Also published today are measures extending our VAT compliance
strategy, and closing loopholes involving trusts, seafarers foreign
earnings deductions and tax paid on the personal income of owner
managers of small companies.
Our pension proposals published in detail today include a single set
of rules that set the tax free lump sum at 25 per cent of the value
of an individual's pension fund; more flexible annuity rules; and
provision for older workers to draw occupational pensions. Because
consultation on the proposed single lifetime tax allowance for
pension saving has revealed contrasting interpretations of its
impact, I am asking the National Audit Office to provide, by Budget
time, an independent evaluation of the numbers affected. Our aim is
to secure a broad based national consensus on the way forward. If a
decision is made to proceed, the measures will be introduced in April
2005. Otherwise the current regimes will remain in pla ce.
I turn to the coming spending round.
In advance of the independent Gershon efficiency review, the Chief
Secretary has written today to all Government Departments asking them
to bring forward their plans for reform and cost savings in
transaction services, in back office services and in procurement -
where we propose a new framework. With modernisation and reform the
condition of future spending settlements, the Treasury in return,
will - for Public Service Agreements - abolish the input and process
targets, and abolish Service Delivery Agreements entirely. And while
local performance standards and local publication of performance data
will progressively replace national targets, the Deputy Prime
Minister and I are agreed that:
- having set aside for English local authorities an additional #3.3
billion for the coming year;
- the Government will, to ensure next year reasonable levels of
council tax, be prepared to use capping powers where appropriate
I turn now to the public finances.
I reported to the House last week on our resolve to ensure our Armed
Forces are properly supported in all they do.
The whole House will wish to thank them for the service they give in
peace and in war.
And I can also reaffirm that we will meet all our international
development responsibilities in Iraq and for the war against poverty
in Africa and round the world.
To date the money spent or set aside for the war against terror
including in Afghanistan and for our action in Iraq is #5.5 billion.
I can tell the house that for Iraq #2 billion has been carried
forward into the Special Reserve for 2003-4.
And I believe it prudent and right todayto set aside a further #500
million for this year, and an extra #300 million for next year:
raising our allocations for the war against terrorism and for action
in Iraq to #6.3 billion.
So having taken account of these new provision s for Iraq and
elsewhere, and the cost of incentives for enterprise and other
measures announced today to equip Britain to take advantage of the
opportunities of the global upturn, our current budget figures for
2003-4 - and for the years to 2008-9 - are, in billions: minus 19,
minus 8, minus 5, zero, plus 4 and plus 8.
Our first rule is the Golden Rule that over the cycle we balance the
current budget. Having accumulated surpluses at the start of the
economic cycle of 2.1 per cent of GDP in 1999-2000, 2.1 per cent of
GDP in 2000-2001 and 0.9 per cent in 2001-02, we not only meet our
first fiscal rule, the Golden Rule, that we balance the budget, but
even on cautious assumptions we have an average annual surplus over
the whole cycle of around 0.2 per cent of GDP - meeting our first
rule in this cycle by a margin of #14 billion. And even on the
cautious case moving back to balance by the end of the forecast
Our second rule - the Sustainable Investment Rule - is that net debt
will be below 40 per cent of national income.
I can tell the House that debt this year is actually rising to 42 per
cent of national income in France, 50 per cent in Germany, just under
50 per cent in the USA and 80 per cent in Japan. But in Britain debt
this year and in future years will be well below 40 per cent - at
32.8, 33.8, 34.6, 35.1, 35.4, and 35.5 per cent - meeting our second
rule by a margin of 60 billion pounds and doing so over the cycle and
in every year.
So with both rules met it is right and prudent that - as in America,
Japan, France and Germany - we borrow at this, the right time in the
Net borrowing adjusted for the economic cycle which is forecast this
year at 3.5 per cent of national income in Germany, 3.9 per cent in
France, 4.5 per cent in America and 6.9 per cent in Japan, is in
Britain 2.4 per cent this year and in future years 2 per cent, 2.2
per cent, 2.0 per cent, 1.9 per cent and 1.7 per cent of national
Adjusted for the cycle our deficit, as I state in our Annual
Convergence Report submitted today to the European Union, is and
remains - unlike the deficits of these G7 colleagues - below 3 per
cent of GDP and below 3 per cent in every single year.
And in each year, before adjusting for the cycle, Britain's borrowing
is also substantially below the G7 average and falling to just half
the level of the USA.
Let me give the House, in detail, the comparative figures.
This year while net borrowing is for France 4.2 per cent of national
income, Germany 4.2 per cent, the USA 4.9 and Japan 7.4. It is for
Britain 3.4 per cent.
Next year net borrowing in France is 3.8 per cent of national income,
in Germany 3.9 per cent, in America 5.1, and in Japan 6.8. In Britain
it is 2.6 per cent.
And in 2005 while for France borrowing is 3.6 per cent of national
income and in Germany it is 3.4 per cent, in America 4.9, and in
Japan 6.9 per cent, in Britain it is just 2.4 per cent.
So compared with a British deficit of eight per cent ten years ago,
and an average of six per cent over the early nineties, net borrowing
this year and future years to 2008-9 is - as a percentage of GDP -
3.4, 2.6, 2.4, 2.1, 1.9 and 1.7 per cent, with, for this and future
years, the cash figures 37 billions, 31 billions, 30 billions, 27
billions, 27 billions and 24 billions - able to meet all our
- in Iraq;
- and at home;
Maintain the lowest level of debt in the G7;
Still announce a deficit that is in each and every year substantially
below America, Japan, Germany and France;
Meet all our fiscal rules;
And able to move forward with the spending plans we have set out:
- by 2006 #15 billion pounds more a year for education than last
- #59 billion more a year for public services;
- and by 2008 for health alone #41 billon more.
Allowing us to employ, in total, 25,000 more doctors, 20,000 more
teachers, 80,000 more nurses and 90,000 classroom assistants as we
invest in and reform our public services.
Mr Speaker, it is sustained economic growth, built on the foundation
of long term stability and low debt, that has underpinned our
investment plans and makes them affordable for now and the future
And so I can now make two further announcements.
The first on children's benefits.
Nothing is more important to the future of our whole country than
that, with the best schooling, services and financial support, every
child has the chance to develop their potential to the full.
For mothers and fathers struggling to balance work and family
responsibilities, help with childcare costs - once available to only
47,000 parents in 1997 - is now available to almost 300,000. But
today it is time to begin to face up to a long standing grievance:
that financial help for approved child care be offered not just to
some families but available right up the income scale to working
families facing child care costs.
So in advance of other decisions in the Spending Review, I can
announce as a first step that for every employee whatever their
income level, employers will be able - as long as the offer is made
to every employee - to provide - free of both employee national
insurance and income tax and free of employer national insurance -
#50 pounds a week for approved child care.
I can also announce that we will respond to two other long standing
concerns: help with child care costs will now be available when
approved child care is provided in the child's own home and after
consultation we will widen the definition and therefore the numbers
of approved child carers for whom the #50 pounds a week or tax
credits can be offered.
We now expect child care places to double from 750,000 in 1997 to 1.5
million by 2006 - helping over 2.2 million children.
In April, for the first time our country will pass a milestone in
opportunity for our children: a nursery place guaranteed for every
three and four year old - six months ahead of our planned schedule.
But we know also that the most important formative years are from the
cradle to the nursery school. So for 500 communities the Minister for
Children will fund school-parent links so that long before schooling
begins infants are introduced to early learning and books, and
support is on offer to parents. Building from and including Sure
Start, Neighbourhood Nurseries and Early Excellence Centres, I can
confirm that over the next five years there will be one thousand
Children's Centres: Children's Centres that can become - for parents
as well as children - as much a focus of community life as the local
school, the local place of worship and the local park.
Our goal: a Children's Centre for every community; this generation
meeting its obligations to the next.
Mr Speaker, we will be judged not just by what we do for services but
on what we do for child benefits. So building upon the new child tax
credit - and at a cost of #1 billion pounds a year - we will
increase, from April, the child element not just by inflation or
earnings but by 13 per cent - an extra payment to be paid to 7
million children of #180 a year - an extra #3.50 a week.
Because every child should be born into a world of opportunity not
condemned to poverty, maximum help for the first child worth just #27
a week in 1997 will rise in April to #58. And for two children from
just #44 a week to #100 a week.
Before housing costs a two child family on half average earnings now
better off than in 1997 by #75 a week - #1 billion more a year to
meet, on this basis, our goal for 2004 to reduce child poverty by one
quarter - as step by step, we halve child poverty by 2010 and
eradicate it in a generation.
I have one final announcement.
I st ated earlier that starting in April 2005 local authorities
promoting enterprise can receive from central government #150 million
a year extra, rising to #450 million a year.
>From April 2004 also I am now able to do more for local council tax
payers: to allocate across the United Kingdom - free of ring-fencing
- for local authorities as they set their budgets, an additional #406
million; in England #340 million extra.
Making the total available to English local authorities, #3.6 billion
more next year than this year.
Cash to meet the needs and concerns of council tax payers.
The strength to make the best long-term decisions for Britain
And I commend this Pre Budget Report to the House.'