Text of the 1993 Budget – 30 November 1993
Below is the text of the 1993 Budget, held on 30th November 1993 and presented in the House of Commons by the Chancellor of the Exchequer, Kenneth Clarke.
Budget Statement
Mr. Deputy Speaker (Mr. Michael Morris) : Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that, at the end of the Chancellor’s speech, copies of the Budget resolutions will be available to hon. Members in the Vote Office.
The Chancellor of the Exchequer (Mr. Kenneth Clarke) : A politician presenting his first Budget is rather like a lion tamer trying out his act for the first time, but I have decided to tackle the difficulties I face in a direct way, on the basis of the clear policy objectives that I set myself when I became Chancellor.
INTRODUCTION
My first priority has been to sustain the economic recovery now under way and to create the right climate for growth and for jobs. I have been determined to take no risks with inflation. We have brought inflation down to the lowest level for a generation and low inflation must now remain a permanent feature of the British economic landscape.
To achieve these objectives, the task of my first Budget has been to set the Government’s finances on a sustainable path for the rest of the decade, to make the decisions necessary now to secure lasting recovery and rising living standards in the future.
“The Financial Statement and Budget Report”, together with a number of press releases filling out the details of our spending plans and my Budget tax proposals, will be available from the Vote Office as soon as I have sat down.
ECONOMIC SITUATION AND PROSPECTS
Britain’s economic performance this year has been encouraging. It is now clear that the recovery started in the first half of 1992, well before sterling’s departure from the exchange rate mechanism. GDP has risen for six successive quarters, and in 1993 as a whole, I now expect the economy to grow by about 1 per cent.
Unemployment has fallen since the beginning of the year, at a much earlier stage in the economic cycle than past experience would suggest, and crucially the recovery has been accompanied by continuing low inflation. Underlying inflation has not been lower since 1968, and unit wage costs in manufacturing have actually fallen this year, allowing British industry to establish a durable improvement in our competitiveness.
As a result, despite the weakness of activity in the other major European countries, Britain’s trading performance over the last year has been excellent. Exports to countries outside the European Union were up by no less than 14 per cent. in the last three months compared with a year ago a sharp increase in our market share. After the last three difficult years, that performance convincingly demonstrates the strength of British manufacturing today. Continued growth in consumer spending, together with further increases in exports and investment, should bring faster growth in 1994. Economic forecasting is an unreliable art, to which in my opinion far too much importance has been attached in recent years, but on the best judgment I can make, growth next year should be about 2 per cent. With considerable spare capacity in the economy, inflationary pressures remain subdued. The tax measures announced in March, and the further measures I shall be announcing today, will push inflation up a little in the next few months, but this should not feed through into higher inflation over the medium term.
I expect underlying inflation to remain inside the Government’s 1 to 4 per cent. target range over the year ahead, and to decline steadily into the lower half of that range by the end of this Parliament. Monetary policy will continue to be directed towards meeting that objective.
Monetary policy
As now, my decisions on interest rates will be based on a careful assessment of monetary conditions and inflationary trends, focusing particularly upon the growth of narrow and broad money, changes in the exchange rate and movements in asset prices.
On the basis of these indicators, I felt able last week to reduce interest rates to 5 per cent., the lowest level for 16 years. The effect of that is very marked. Since 1990, industry’s interest bill has been slashed by nearly £12 billion each year, and the typical mortgage borrower is now paying £170 less each month. That is a massive boost to spending power, fully justified by the remarkable progress that we have made on inflation.
Starting with last week’s change, I decided to give the Bank of England responsibility for the precise timing of interest rate movements. That underlines my commitment to the new framework for monetary policy established by my predecessor last September.
Funding policy
The increasing credibility of that framework has brought our long-term interest rates down to their lowest level for over 25 years. That fact also demonstrates the ease with which this year’s borrowing requirement has been financed, but the very success of the funding programme, coupled with last year’s substantial gilt sales to banks and building societies, has squeezed the liquidity of the banking system, complicating the task of managing the money markets. To offset the purchases made by banks and building societies last year, I intend to sell some £7 billion worth fewer gilts than would otherwise be necessary to fund the public sector borrowing requirement through to the end of 1994-95. Using this flexibility in our established funding policy will ease money market pressures, while continuing to ensure that borrowing is financed in a non-inflationary way.
RISKS TO THE RECOVERY
World economic developments
As I turn to look towards 1994, the prospects are encouraging, but two substantial risks remain. First, there is the continuing weakness of world economic activity, particularly in continental Europe. With Britain the only major country in the European Union likely to have grown at all in 1993, what manufacturing industry needs most is a pick-up of activity in the rest of Europe.
However, economic recovery on the continent will not be enough on its own. Europe’s economic problems are not just cyclical. The continent as a whole faces a number of deep-rooted and long-standing challenges, inflexible markets and declining competitiveness, which have combined to produce mounting structural unemployment.
There were more jobs created in Britain in the 1980s than anywhere else in Europe, and in the period ahead we must not only fight to export our goods and services, but also to win the battle of ideas in Europe. We must continue to work for more flexible and deregulated labour markets right across the continent, and we must continue to fight for free trade, not just within the European Union, but between the Union and the rest of the world. The first essential step is to secure a satisfactory conclusion to the GATT round.
The public finances
The second major risk to the recovery in Britain is the public finances. The overriding need is to place the public finances on a sound footing. That is the immediate task of the Government, and it is the main theme of my Budget today. Business can plan ahead with confidence only if it knows that Government borrowing is under control. My task today is to deliver that confidence.
FISCAL POLICY
In his excellent Budget in March, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) [Interruption.] who at this moment is no doubt commenting on my remarks on television, announced a series of tax measures designed to reduce public sector borrowing over the medium term. But necessary and controversial as those measures were, they still left the prospect of a borrowing requirement of over 4 per cent. of GDP by the end of this Parliament. In my judgment, we now need to go further. The first Budget that combines decisions on taxation and spending, a reform instituted by my right hon. Friend, gives me the opportunity to do so.
As a prudent Government, we cannot sit by, simply hoping that faster growth and forecasting changes will come to our rescue. As a Government committed to high quality public services, we must prevent ever larger sums being swallowed up in debt interest payments. As a Government with a long-term tax-cutting agenda, we must stop ever more national debt piling up for future generations to pay. As a Government determined to deliver sustained recovery, we must ensure that billions of pounds of the nation’s savings are not poured into the public sector savings that are better used by the private sector, to support investment, expansion and jobs.
It may seem easier to take the short-term view, but Britain’s recovery can only be sustained if we tackle the deficit now. In my opinion, the Budget must sort out the problem of public borrowing once and for all. The measures I am announcing today will in themselves reduce the public sector borrowing requirement by a further £5 billion in the next financial year, by £7 billion in 1995-96 and by £10 billion in 1996-97, equivalent to 1 per cent. of GDP by the end of this Parliament.
Coming on top of the measures announced by my right hon. Friend in March, these are substantial sums, but, in my judgment, this is the minimum necessary to ensure that the public finances are on a sustainable track for the rest of the decade. It will help to reduce the public sector borrowing requirement from just under £50 billion in the current year to about £38 billion next year. It should eliminate borrowing to finance current spending by 1997-98 and eliminate Government borrowing entirely by the end of the decade. In short, my proposals today should meet their objectives in full establishing sound public finances into the next century.
VAT ON FUEL AND POWER
Before I set out the Government’s new plans for public expenditure over the next three years, I have one important piece of business to conclude from the March Budget. My right hon. Friend’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 [Interruption.] a commitment to which the parties opposite were fully committed until we turned to do anything about it. However, 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 per cent. a lot more than many people in work will get next year. On top of that automatic increase, the Government have 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. In April 1996, this extra payment will remain as a permanent addition to benefit. Beyond that, 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 p a week for single people and 70p 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. 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 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.
However, I recognise over and above the promises that we have already given 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 that retired people receive on their savings has dropped very sharply. The Government have therefore decided to give extra help not just to those on modest incomes, and not just to those who receive benefit, but to all pensioners. We will do so in three ways. First, my right hon. Friend 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.
Secondly, 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.
Thirdly, 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 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 for pensioners that I have outlined will not precisely match increases in fuel bills in each and every household, because not everyone has an average fuel bill, 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 with VAT bills.
Fifteen million people will benefit. We shall be providing around £400 million of extra help next year, and around £1 billion extra in the year 1996-97.
These massive sums more than deliver the Government’s firm commitment to help the less well-off groups in society. They extend that significant help to all our pensioners. I am sure they will be welcomed by everyone who wants to see revenue raised in a sensible and fair way.
PUBLIC SPENDING
Let me now turn to the Government’s new spending plans for the rest of this Parliament. In June, the Cabinet imposed tight ceilings on public spending over the next three years a real terms freeze in the new control total over the next two years, with growth limited to 1 per cent. a year thereafter. In my view, as I have frequently said, nothing tougher has been attempted since this Government came to power in 1979.
Anyone who has actually run one or more of the big Departments of State knows how unacceptable it would be to contemplate cuts in the health service, in our education system, or in the resources needed to improve law and order. In a modern and civilised society, no one can regard all public spending as a bad thing.
Of course, more spending is not the only way to improve our public services. Quality public services also depend crucially on greater efficiency, better value for money, and, where sensible, on the involvement of private sector money, management and advice. Earlier this year, my right hon. Friend the Chief Secretary launched a series of fundamental public expenditure reviews to establish more clearly what the Government’s spending priorities should be. Already, this programme is producing dividends. The first four reviews have played a key role in this year’s public expenditure survey.
I can now announce to the House that overall, even including the package of help with fuel bills that I have just announced, the Government’s new spending plans are fully consistent with the tough limits agreed by the Cabinet in June.
For the next three years, Government expenditure will grow by substantially less than the projected growth of the economy. Public spending will therefore fall as a proportion of national income, from around 45 per cent. this year to 42 per cent. in 1996-97.
Public sector pay
To achieve this, we have started with a rigorous approach to the Government’s administrative costs. Central Government running costs, including paybills, will be frozen at this year’s cash level. Pay increases for public sector staff will therefore have to be paid for by greater efficiency or by savings in the cost of running government itself.
However, we have also had to conduct a searching examination of spending on Government programmes. That examination began with the largest spending programme of all, social security.
SOCIAL SECURITY
Social security spending is increasing at an underlying rate of more than 3 per cent. a year in real terms, well above the sustainable growth rate of the economy as a whole. If this trend continues, it will place a quite impossible burden on the working population in the future our children and our children’s children. If we do not plan the social security programme properly, we shall be unable to give effective help to those who need it most.
A good social security system, under which the better-off and people in work pay to support the poor and the disadvantaged, is an essential feature of a modern civilised state. In reviewing the social security budget, the Government’s objectives have been to ensure that the social security system is better targeted on today’s real needs and to make it simpler and less susceptible to fraud.
Job seeker’s allowance
Let me start with two proposals designed to help people back into work. The present convoluted system for helping the unemployed includes two entirely separate benefits income support and unemployment benefit and two quite separate bureaucracies for delivering them the Employment Service and the Benefits Agency, employing between them no fewer than 44,000 civil servants to do the one job.
We intend to cut through this bureaucratic maze by introducing, from April 1996, a single benefit for the unemployed the job seeker’s allowance. This will align rates and rules and reduce the contributory element of the benefit from 12 to six months. But it will also build on the success of the restart programme introduced in the 1980s, by drawing a much closer link between the receipt of benefit and the claimant’s demonstrated willingness to look for work. It will be reinforced by a strengthening of restart itself; by an extension of community action places; and by the introduction of pilot schemes offering intensive guidance, assessment and a financial incentive to long-term unemployed people who need it most.
Family credit
Our second proposal should have a more immediate impact. The House will be aware of the rising level of concern about the causes, consequences and costs of the growth of lone parenthood in this country. There are many lone parents and married mothers as well who have no desire to remain trapped in poverty or dependent on benefits, but who believe that they have no choice. As a result of the cost of childcare, they simply cannot afford to go out to work. That cannot be right. The Government have therefore decided to introduce next autumn a new allowance available to those on family credit who need to pay for childcare. This will be worth up to £28 each week per family and it should help tens of thousands of mothers to get back into work and off income support. [Interruption.] I am sure that it will be warmly welcomed by all those who want to see the poorest parents back on the road to financial independence.
Statutory sick pay
I turn next to statutory sick pay. At the moment, employees who go sick and meet the qualifying conditions are entitled to receive sick pay at specified rates. After the first three days of sickness, their employers are entitled to reimbursement from the Government for 80 per cent. of the cost. We have no plans to reduce the sick pay entitlements of employees, but, with effect from next April, we propose to stop reimbursing the cost of statutory sick pay for the largest employers.
For smaller companies, the current special exemptions will be extended. At present, those with national insurance bills of less than £16,000 a year are fully reimbursed after the first six weeks of each statutory sick pay claim. I propose to increase that threshold to £20,000, to bring more companies into the scheme, and to provide full reimbursement after only four weeks. Two thirds of all employers will therefore continue to get help.
Employers’ national insurance contributions
The transfer of these costs from the taxpayer to business will reduce public spending by around £700 million a year over the next three years, but to ensure that business as a whole does not lose, my right hon. Friend and I have decided to reduce the main rate of employers’ national insurance contributions by 0.2 per cent. from next April. This means that, for well managed companies with low sickness rates, there will be a net reduction in the cost of employing people. Other companies will have a much sharper incentive to improve their management of sick leave and to take a greater interest in the health of their own employees.
However, with unemployment in Britain still far too high, it is vital that we do everything we can to reduce the cost of providing employment. Having reviewed the position, I have therefore decided that, even in a year of acute fiscal stringe the pay scale. To improve companies’ incentives and ability to provide that kind of job, I propose, again from next April, to reduce each of the lower rates of employers’ national insurance contributions by one full percentage point.
Overall, the reductions in national insurance contributions I have announced will reduce the cost to employers of providing jobs by £830 million next year, rising to £1 billion by 1996-97. That £1 billion is well above the overall cost to employers of the reforms that I have announced to statutory sick pay.
In our discussions within the European Union, my right hon. Friend the Prime Minister and I have repeatedly made clear our view that the surest route to higher employment is not the dirigisme of the social chapter, but measures to reduce the cost of creating jobs. That is the message that we will be taking with us to the European Council in Brussels next week.
Invalidity benefit
My right hon. Friend the Secretary of State for Social Security also plans a significant reform of the current regime for invalidity benefit. For those who are disabled and incapable of work, invalidity benefit is important and necessary. But the astonishing growth in the numbers receiving the benefit in recent years indicates that it is now being claimed by many people who are not genuine invalids. The Government have decided to make a number of changes to the benefit, which will refocus it for the future on those who are genuinely incapable of work. My right hon. Friend proposes to introduce a new benefit incapacity benefit to replace sickness and invalidity benefit. The new benefit will involve a tighter and more objective medical test.
The Government have always made clear their intention to bring the tax treatment of invalidity benefit into line with that of the retirement pension and most other income-replacing benefits. Now that the necessary administrative arrangements can be made, I propose from April 1995 to bring its replacement, the new incapacity benefit, into tax.
State pension age
Finally, I can announce one further decision which will have little immediate effect, but will certainly make a considerable difference to the affordability of the modern welfare state in the next century.
After careful consideration, the Government have decided that the state pension age should eventually be equalised at the age of 65. The change will be phased in over ten years, starting in the year 2010, so it will not affect anyone currently aged 44 or older. By the year 2020, the state pension age in Britain will be broadly in line with that of most of our industrial competitors, although we will still have more generous arrangements than in the United States, where the pension age is to be equalised at the age of 67. All developed countries are making similar changes for similar reasons. Women nowadays tend to spend more of their lives in paid employment. They also live longer than men. Pension schemes need to recognise this, and end the current discrimination between the sexes.
In the next century, the ratio of working people to retired people will fall sharply, and the burdens on taxpayers will rise. The Government’s decision will moderate those burdens, eventually by some £5 billion a year, and so help to ensure that they are sustainable. The basic pension is, and will remain, a cornerstone of the welfare state. The Government are committed to it and to retaining its value.
The proposals on social security overall that I have announced today will in themselves save some £2 billion a year by 1996-97. Nevertheless, even taking these savings into account, we will still be spending £5 billion more on social security in 1996-97 than we planned last year. The social security budget will continue to grow in real terms, but at a more affordable rate than we have seen in recent years. At the same time, we have honoured our manifesto commitments, we have fully protected the real value of pensions and benefits, and we have provided generous help with fuel bills. These are not short-term measures to deal with today’s problems. The Government have the courage to take a clear and far-sighted view of the modern social security system. We must make sure that it is a system that future generations will be able to afford. This Government will never take part in any attempt to dismantle the welfare state. We intend to see a better welfare state, well run, well judged and one that meets the priorities of modern society. My right hon. Friend the Secretary of State for Social Security will fill out the details in his uprating statement tomorrow.
OTHER PROGRAMMES
Let me turn now to a number of other areas where savings have been found this year.
Local authorities
The first area is local authorities. Growth in total standard spending in England, adjusted for changes in responsibilities, will be limited to 2.3 per cent. next year. There will in addition be extra provision for community care. The Government will continue to use their powers to cap excessive spending by local authorities where that is necessary to protect the local taxpayer.
Housing
The second area is housing. Here too savings have been made on last year’s plans. Nevertheless, the new plans for social housing provide for more than 153,000 new homes over the three years to 1994-95, fully meeting our manifesto commitment. In addition, the Government will press ahead with plans to improve value for money in the housing association sector and to introduce more private finance into the development of social housing.
Transport
The third area is transport. British Rail’s and London Transport’s investment programmes will be maintained at levels substantially higher than in the 1980s, but to make room for this continuing investment in public transport, there will be modest reductions in the previously planned provision for the roads programme. In the past five years, real expenditure on roads has grown on average by more than 10 per cent. a year. With construction prices next year more than 25 per cent. lower than when the roads programme was announced in 1989, the new plans will sustain the recent improvements in our roads network at less cost to the taxpayer.
Defence
The final area where savings have been found is defence. In the next two years, spending will be some £250 million and £500 million lower than previously planned. In 1996-97, it will be about the same in cash terms as in the previous year. The new plans will be delivered in part by lower procurement and employment costs, and through the planned sale to a private sector housing trust of married quarters for service personnel.
In addition, my right hon. and learned Friend the Secretary of State for Defence has set in hand a major review of all aspects of support, right back to the headquarters in Whitehall. Savings can and will be made without affecting our foreign policy commitments.
Priority programmes
The new method of controlling the total of public spending has brought big improvements in the system of Cabinet government. The Cabinet now decides its priorities collectively and brings to the House a single package that reflects our key policy objectives. Savings identified in a number of programmes have allowed the Government to meet in full the priorities and promises set out in our manifesto. I turn now to those priorities.
Health
We are all proud of the contribution that the national health service makes to the quality of life in this country. Even in a very tough year, we have decided to increase, once again, the level of real resources going into the health service. National health service spending will be over £1 billion higher next year in cash terms and over 1 per cent. higher in real terms than this year’s plans. Indeed, the programme is set to rise in real terms in each of the next three years.
To ensure that these very substantial extra resources are translated into more and better health care, my right hon. Friend the Secretary of State for Health will be insisting on substantial increases in efficiency and firm containment of pay and the drugs budget. The NHS will be able to maintain the steady improvement of recent years in treating more patients and treating them better.
Education
Our second priority is education. Increased educational opportunities and better standards are an essential investment in the future. Over the next two years, we will therefore be adding more than £1 billion to the plans for the education programme. This will ensure record levels of participation in further and higher education.
Our manifesto predicted that one in three young people would be in full-time higher education by the year 2000. With seven years to go, we have virtually reached that target already, but with a third of our young people now going to university, the ordinary taxpayer cannot be expected to pay for all their costs. Tuition is free; but why should the bus driver or the pensioner also pay higher taxes to finance all the living costs of tomorrow’s lawyers ?
I am glad to say that the recent explosion in student numbers has revealed as ridiculous the fears that the student loan scheme might deter students from poorer families. My right hon. Friend will therefore, as predicted, be bringing forward proposals to reduce the level of the means-tested grant for student maintenance and replace it with an expanded loan entitlement for students. Even taking this into account, spending on education will still be no less than £1 billion higher in 1996-97 than it is this year.
Employment and training
I turn thirdly to training. My right hon. Friend the Secretary of State for Employment plans to introduce a new apprenticeship scheme. This will provide a major boost to work-based training and increase substantially the number of young people obtaining the technical and craft skills which not only employers but trade unions agree the country has been lacking. There will also be an increase in training opportunities for the adult unemployed.
Science
The fourth priority is science. The plans fully protect the real value of spending on basic science and technology next year.
Home Office
Finally, in the vital area of criminal justice, previous plans for Home Office spending will be maintained in full. Next year, spending on the police service will increase by over 4 per cent. Over time, the management reforms and reduction in paperwork announced by my right hon. and learned Friend the Home Secretary could put over 5,000 more police officers on frontline duty. A re-ordering of priorities will also allow for extra provision to be made for more prison places and for victim support. Efficiency improvements will meet in full the costs of new policies, including our proposals to deal with juvenile offenders.
CAPITAL AND PRIVATE FINANCE
Spending on health, education, training and science contributes significantly to the long-term economic performance of the economy, by improving the nation’s stock of so-called human capital the health, knowledge and skills of the population as a whole. Important though it is, this contribution is very difficult to quantify. This year, however, as promised last autumn, the public sector accounts will identify separately the amount the Government plan to spend on physical capital projects, including improvements to the nation’s infrastructure.
Overall, the new plans provide for total public sector capital spending over the next three years of around £22 billion a year. But just as that figure takes no account of the massive investment programmes of the former nationalised industries which are now thriving in the private sector, so too it ignores the very large amount of investment which is stimulated by Government policies, including investment in housing and urban regeneration. On top of this, the private finance initiative is now adding to spending in areas for which the public sector in the past has traditionally taken responsibility.
To make a success of this private finance initiative and to deliver the increase in capital spending within the public services that I want to see will require a complete change of culture within Government, together with imagination and innovation on the part of the private sector. That cannot be expected to happen overnight. Even so, the flow of private sector projects to date has still, in my view, been disappointingly small.
To speed the process up, I have already announced the establishment of a working group chaired by Sir Alastair Morton, who I am sure can be expected to work alongside me as something of a warrior in this cause. In the meantime, the Government are today giving the go ahead to three substantial new transport projects under the private finance initiative : first, the extension of the Docklands light railway to Lewisham; secondly, a new air traffic control centre for Scotland; thirdly, the refurbishment of the west coast main line, one of our most important routes, linking some of the biggest cities in the country London, Birmingham, Manchester, Liverpool and Glasgow. The private finance initiative also offers major opportunities for improved services in the NHS. There are almost 40 NHS projects where private finance is already involved or being considered, ranging from cardiac units to hospital car parks. At Aintree in Liverpool, a scheme involving the construction of a 100-bed patient hotel, four operating theatres and other facilities is going ahead a model for other private finance projects.
In addition, my right hon. and learned Friend the Home Secretary will be taking forward proposals to finance and build six new prisons using private finance. He has already announced that he also intends to involve the private sector in the provision of secure training centres.
Finally, I have always made clear my view that roads provide a major opportunity for private finance. My right hon. Friend the Secretary of State for Transport will be informing the House shortly about the Government’s plans for taking forward motorway charging in the light of responses to his Green Paper, but I can announce today that, when the technology is ready, we intend to introduce a system of electronic motorway charging in this country. This will be a massive high-technology project in its own right.
In the meantime, the Government plan to introduce new contracts under which the private sector will design, build, finance and operate roads. My right hon. Friend will hold discussions with the construction industry and others to identify the best road schemes to start with. Bringing private finance and management into the roads programme offers the prospect of substantial benefits for the construction industry, the motorist and the taxpayer alike. I am sure this will be warmly welcomed.
Resource accounting
I have one other announcement to make to improve the way in which the taxpayer’s money and public sector capital is used and accounted for.
In my opinion, Government accounting for public spending has become archaic. In my view, the time has come to move to a system of accounting which identifies more clearly the cost of resources. This will put Departments on to a similar accounting basis not only to commercial organisations but to many other parts of the public sector. I shall be publishing a paper in the first half of next year on the introduction of accruals-based resource accounting by Departments, and its implications for the way expenditure is planned and controlled, and money is sought from Parliament.
PUBLIC SPENDING SUMMARY
The new spending plans reflect the carefully chosen priorities of an enlightened and responsible Government. We have taken strong measures to keep public sector pay and Government administration costs under tight control. We have taken a number of crucial steps to restrain the growth in social security spending, while fully meeting our commitments to the poorest members of society.
We have increased resources to support the Government’s priorities, particularly health, education and training and science. We have protected spending on law and order. We have injected new momentum into the private finance initiative. We have honoured all our manifesto commitments. Most important of all, we have managed this substantial reallocation of resources and choice of priorities without breaching the spending ceilings agreed by Cabinet last June. This significant achievement owes a great deal to the new arrangements for the public expenditure survey introduced last year by my right hon. Friend, the Member for Kingston upon Thames (Mr Lamont), but a great deal of credit is also due to my colleagues on the Cabinet known as the EDX Committee, and most particularly to my right hon. Friend the Chief Secretary to the Treasury, to whose skill and tenacity I should like to pay the warmest possible tribute.
TAXATION
I now turn to my proposals for taxation. My task is simple. I need to raise revenue, but to do so in a way which does least damage to the economy.
Loopholes
At a time when taxes are having to go up, it is particularly important to collect all the tax which is properly due. So let me begin with my proposals to counter tax avoidance.
Suggesting that Budgets should close tax loopholes is stating the obvious. Every Budget over the last 14 years, and indeed every Budget that I have listened to before that, has closed some tax loopholes. It is not a big new idea. The tax avoidance industry is always ingenious, but it is one industry which this Government has certainly never helped. [Interruption.] The right hon. and learned Member for Monklands, East (Mr Smith) would not know what a loophole was if he were looking one in the face.
My Budget today contains a particularly good crop of new proposals to combat tax avoidance, starting with an end to the ploy which is apparently growing under which salaries are paid in gold bars, coffee beans, cowrie shells, or other exotic payments in kind, simply to avoid national insurance contributions and delay paying tax.
I also intend to counter the abuse of the tax relief for profit-related pay; tackle the avoidance of stamp duty on property transactions; halt the use of shell companies to avoid payment of tax; and end the use of indexation to create or increase capital gains tax losses. These measures will yield about £2 billion in the next three years. Claims that more might be found in this way are, I regret to say, much exaggerated.
EXTENDING THE TAX BASE
Next, I propose to broaden the tax base. I have never disguised my personal view that the coverage of value added tax in this country is too narrow. Under the EC’s sixth VAT directive, there are serious limits on the Government’s ability to extend it to things which are exempt, but we do have the freedom to introduce separate taxes, and that is what other European countries do. I propose to follow their example in two particular areas, which I believe are well suited to this country.
Air passenger duty
First, air travel is under-taxed compared to other sectors of the economy. It benefits not only from a zero rate of VAT; in addition, the fuel used in international air travel, and nearly all domestic flights, is entirely free of tax. A number of countries have already addressed this anomaly.
I propose to levy a small duty on all air passengers from United Kingdom airports. This will be set at £5 for departures to anywhere in the United Kingdom and the European Union; and £10 for departures to other destinations. The new duty will come into force next October, and will raise some £330 million in a full year. There will be exemptions for transfer passengers and small planes. This means, for example, that most flights between the Scottish islands will not bear tax.
Insurance premium tax
Second, we have always tended to tax financial services in this country much more lightly than other sectors, including manufacturing. In this Budget, I have decided to tackle one sector of this industry which is exempt from VAT. Virtually every other member state charges an ad valorem tax on insurance premiums. I propose now to do the same.
The rate will be only 3 per cent., among the lowest in Europe, and the tax will apply to most general insurance of risks located in the United Kingdom. It will come into force next October, and will raise over £750 million in a full year.
To avoid driving business offshore, I propose to exempt the reinsurance of risk, and the insurance of most ships, aircraft and international transit goods. To avoid taxing exports, I propose to exempt export credit; and to avoid taxing savings, I shall exempt long-term insurance such as life assurance, including assurance for endowment mortgages.
For the typical family with motor, home contents and building insurance, this tax will cost about 35p a week.
INCOME TAX
I shall return later in my statement to the existing indirect taxes, and particularly to VAT, but before I do, let me set out my proposals for direct taxation.
First, I propose to freeze again the personal allowance for income tax, the threshold for higher rate tax and the income limit for the age-related allowances. I do not propose to change the inheritance tax threshold or the exempt amount for capital gains tax; or the lower, basic or higher rates of income tax. The 20p lower band will be extended by a further £500 next year as planned, to £3,000. I intend to raise one allowance which has been frozen for the last four years the blind person’s allowance. This will rise next April from £1,080 to £1,200.
These proposals will yield £560 million in 1994-95, relative to an indexed base, rising to £745 million in 1995-96.
Married couple’s allowance
Now that husbands and wives are taxed independently one of the best taxation reforms in recent years the married couple’s allowance is a bit of an anomaly. As announced in March, from next April it will be limited to 20 per cent. Given the need to raise extra revenue, I propose to reduce the rate of relief further, to 15 per cent from April 1995. This will yield £830 million in 1995-96, rising to over £1 billion in a full year.
Mortgage interest relief
I propose to take a similar approach to mortgage interest relief. As the House is aware, the rate of mortgage interest relief will fall from 25 to 20 per cent. in April. From April 1995, I propose to reduce it further, to 15 per cent., raising an additional £970 million in 1995-96. For those with mortgages of £30,000 or more, this will cost around £10 a month. That is a tiny fraction of the benefit borrowers are still receiving from the very substantial reduction in mortgage rates in the last three years.
The limit on loans qualifying for mortgage interest relief will remain at £30,000.
BUSINESS TAXATION
The tax increases that I have announced will enable me to give some modest help to businesses.
Corporation tax
There will be no change to the main rate of corporation tax, which remains the lowest in the European Union, or to the small companies’ rate, but I propose to raise the profits limit for smaller companies by 20 per cent. This will reduce corporation tax bills for 30,000 companies.
Foreign income dividend scheme
To help reinforce Britain’s place as Europe’s most attractive location for international business, I shall implement proposals to make surplus advance corporation tax repayable on dividends paid out of profits earned abroad by companies based in the United Kingdom.
Export credit
For exporters, I propose to make an extra £200 million of export credit cover available in 1996-97, and to cut export credit premiums for certain important developing markets, including India, Mexico and Turkey. British exporters of capital goods have been very successful in winning orders over the last year, particularly outside Europe. My right hon. Friend the President of the Board of Trade and I want to see that continue.
Uniform business rates
The business rates poundage increase next year, based on the 1.8 per cent. September retail prices index, will be the lowest since introduction of the uniform business rate. For properties in England and Wales still protected by transitional relief, I propose to cut the maximum real increase in rate bills next year by a half, to 10 per cent. for larger properties and 7 per cent. for smaller properties. Small properties that are used for both domestic and business purposes the shop where the owner lives at the back will face no real increase at all. Separate arrangements will be made in Scotland and Northern Ireland.
This will bring significant relief next year to over 600,000 business properties throughout the United Kingdom. It will cost a little over £100 million next year.
SMALL BUSINESSES
My particular priority this year has been to help small businesses. In my opinion, the biggest contribution any Chancellor can make to reducing unemployment over the medium term is to ensure that the conditions are in place for new businesses to become established and for small businesses to grow. As a country, we generate plenty of budding entrepreneurs and any number of good inventions and ideas; yet all too often, those ideas stay on the drawing board as money is channelled instead into the safer larger companies.
My proposals seek to address three separate problems facing small businesses today : the burden of regulation; the shortage of external finance; and cash flow.
Deregulation
I can announce today four contributions to my right hon. Friend the Prime Minister’s campaign to turn the tide of excessive regulation, which threatens to engulf our smaller firms.
Simplified assessing
First, the Finance Bill will include the initial tranche of legislation to implement the plans announced in March to reform the current regime for assessing personal tax. The new system will be simpler and more efficient. The changes will be of particular benefit to the self-employed.
Income tax and national insurance contributions
Secondly, my right hon. Friend the Secretary of State for Social Security published last month the report of the working group set up to consider the options for aligning income tax and national insurance contributions. My right hon. Friend and I agree with the group’s conclusion that there are significant savings to be had from using the same definitions, same paperwork and same audits for income tax and national insurance. We are now looking at the group’s main recommendations, and will be bringing forward proposals early next year.
VAT threshold
Thirdly, on the administration of VAT, firms are currently required to register for VAT when their turnover reaches £37,600 a year. I intend to raise this to £45,000 with effect from tomorrow. This will allow up to 75,000 more traders to opt out of VAT altogether.
Statutory audit
Finally, the statutory audit. The Companies Act requires all companies to have their accounts audited, but for the smallest companies the expense can be out of all proportion to the benefit. When I was at the Department of Trade and Industry, I continually pressed for a change to that. My predecessor announced consultation in the March Budget. I can now announce the conclusions.
My right hon. Friend the President of the Board of Trade and I have decided that most companies with a turnover between £90,000 and £350,000 a year in future need only get an independent accountant’s report on whether the company’s accounts correctly reflect its books. For the 40 per cent. of companies with turnover of less than £90,000, we propose to take the deregulation a step further. For those small companies, the audit requirement will be abolished altogether.
Finance for industry
However, I do not just want to lighten the burden of regulation. I believe that positive steps are required to increase the flow of risk capital into small businesses.
Capital gains tax
For managers and employees to leave steady jobs and take a chance by going into business on their own, the risk must be worth while. At 40 per cent, our top rate of income tax is the lowest in the European Union, and I intend to keep it that way, but our capital gains tax regime still bears disproportionately on the successful entrepreneur.
In 1991, we increased the capital gains tax relief for business people who sell up on retirement, by providing a complete exemption from capital gains tax on the first £150,000 of capital gains and a half exemption on the next £450,000. I now propose to increase those limits to £250,000 and £750,000 respectively. By rewarding those who have been successful in the past, that individual facing a capital gains charge should be able to defer the tax indefinitely by reinvesting those gains in an unquoted trading company.
Venture capital trust
I also intend to create a new type of investment, a venture capital trust, which will channel savings specifically into unquoted trading companies. Investors will receive dividends and capital gains entirely free of tax. By investing through a trust, they will also be able to spread their risk across a number of different companies. My hon. Friend the Financial Secretary will shortly be issuing a consultation paper fleshing out the details.
Enterprise investment scheme
In my view, there remains, too, a strong case for encouraging equity investment in unquoted trading companies.
I propose to introduce a new scheme, the enterprise investment scheme, to do just that. The enterprise investment scheme will differ from the old business expansion scheme in several important respects. To target the money where we want it to go, property-related investments will be excluded. Up-front tax relief will be limited to 20 per cent., but any losses on investments will qualify for income tax and capital gains tax relief; and all capital gains within the scheme will be entirely free of capital gains tax. The limit for investors will be £100,000 a year.
Most important of all, to help those who are looking to invest their expertise as well as their money, people previously unconnected with the companies they invest in will be able to take up paid directorships. The cost of the new scheme could eventually rise to some £50 million a year. Taken together with my proposals on capital gains tax and the new venture capital trust, I believe that it could generate substantial new investment in the unquoted company sector.
Late payment
Finally, on the small business sector, I turn to the problem of small companies’ cash flow. There is one issue which year after year tops the list of Budget representations made to all of us by the small business community the problem of late payment. There can be nothing more frustrating than delivering a quality product on time at a competitive price and then finding that one does not get paid for months. Late payments wreak havoc with cash flow, and for many small firms they can make the difference between survival and failure. The habit of late payment is corroding our business culture. I am quite sure that it needs to be dealt with.
There are many options for tackling that problem, and my right hon. Friend the President of the Board of Trade and I will be looking at two in particular : first, a new British standard for payment performance; and, secondly more significantly legislation to provide for interest on late payments. Late payment was a serious problem for small businesses throughout the last recession. I believe that the time has now come to take that issue head on.
INDIRECT TAXATION
The Government’s clear policy has always been to shift the burden of taxation, over time, from income to spending. This reflects the Government’s underlying political philosophy that people should be allowed to keep as much of their own money as possible. Provided the less well-off are helped, it is fairer and less damaging to the economy to tax people on how much they spend and consume than on the work they do.
In line with this policy, even in a very difficult year, I have been able to avoid any increase in income tax rates. But to do this I have had to raise further revenue from indirect taxation. Let me start with the excise duties.
Road fuel duty and vehicle excise duty
First, I propose a modest increase in the vehicle excise duty on cars the tax disc of £5 a year. The duty on lorries will be unaffected.
Secondly, on road fuel duties, with effect from 6pm tonight, I propose to raise all the road fuel duties by 3p a litre. Even so, petrol will still cost less in the United Kingdom than in most countries in the European Union, and it will be cheaper than it was in real terms in the early 1980s. It is not good policy in these environmentally conscious days to keep road fuel costs so much cheaper than they used to be. Taken together, these increases will raise around £0.75 billion next year. Bus fuel duty rebate will be held at pre-Budget levels.
In March, my predecessor announced that fuel duties would increase on average by at least 3 per cent. in real terms in future Budgets in order to restrain carbon dioxide emissions. My right hon. Friend the Secretary of State for the Environment subsequently announced in July that the Government would be looking at further measures in this area to help to meet our Rio commitment.
I have now decided to strengthen the March commitment by increasing road fuel duties on average by at least 5 per cent. in real terms in future Budgets. This will complete Britain’s strategy for meeting our Rio commitment. We are the first country in Europe to do this; and we have done so in a way that minimises the additional costs to industry.
Others in this country some others in this House and in Europe continue to canvas unrealistic blueprints for a new European Union-wide carbon tax, which would impose massive new burdens on British industry. Any critic of the Government’s tax plans who claims also to support the international agreement to curb carbon dioxide emissions will be sailing dangerously near to hypocrisy.
Tobacco
Next, I come to tobacco. With effect from 6pm tonight, the total tax on a packet of 20 cigarettes will go up by 11p a duty increase of 7.3 per cent. The duties on other tobacco products will rise by the same proportion.
In addition, I have decided to strengthen the commitment on tobacco duties that the Government have given in the past. I intend to increase tobacco duties on average by at least 3 per cent a year in real terms in future Budgets.
I believe that the approach we are adopting in Britain is the most effective way to reduce smoking. It is clearly nonsense for some European countries to ban advertising to protect state-owned tobacco industries, but then impose markedly lower levels of tax.
Wine, beer and spirits
Turning next to the duties on alcohol, let me start with beer. I have listened carefully to the arguments put by the industry about the declining consumption of beer in this country, the effect of the change to end-product duty and the growth of cross-Channel imports of beer. Taking all these factors into account, I have decided that, for the first time in five Budgets, there will be no increase this year in the duty on beer.
Mr. David Blunkett (Sheffield, Brightside) : That is what comes of having a beer-swilling Chancellor.
Mr. Clarke : Let me assure the House that this decision has nothing whatever to do with the drinking habits of the Chancellor of the Exchequer, and to prove it, I am also proposing to freeze the duty on spirits for a further year.
The spirits industry, which is a major United Kingdom export business, is facing problems similar to the brewers’. I know that my proposals will be warmly welcomed by the House, and will give right hon. and hon. Members from Scotland something to celebrate on St Andrew’s day.
For wine, sparkling wine and cider, I propose to raise the duty in line with inflation. This will add 2p to a bottle of wine. But it will not take effect until after Christmas. [Laughter.] For those hon. Members who are still here, the overall effect of all the tax measures I have announced will be to raise revenue next year by a little under £1 billion. By 1995-96, that will rise to about £5 billion, and to £6 billion by 1996-97, about per cent. of GDP.
These sums fall a long way short of the reduction in the borrowing requirement I judge necessary. As I announced earlier, I intend with my Budget to reduce the public sector borrowing requirement next year, not by £1 billion, but by £5 billion, with a reduction by 1996-97 of £10 billion.
The central challenge I have faced in finalising this Budget is how this gap could be bridged. Every commentator realised that one of my options must be to extend the VAT base. The main candidates are food, children’s clothes, transport, sewerage and newspapers. A powerful case for each of them can be made, and no amount of lobbying need put us off, but before looking at that, I have always made clear that my first responsibility as Chancellor is to get public expenditure under the firmest possible control.
I have already announced that the Government’s new spending plans fully meet the remit agreed by Cabinet in June, but when the House comes to study the Red Book it will see that the figures for the new control total in each of the next three years are markedly lower than those set out in the March Budget and the cash ceilings agreed by the Cabinet in June.
The explanation for this difference is simple. The Cabinet has decided to establish new spending plans which are not just consistent with the ceilings that we set for ourselves in June, tough though they were. We have decided to set plans which in each of the next three years are lower than the June ceilings.
Our spending plans for the coming year have been reduced by more than £3 billion. The new control total for next year will be £3 billion below the level we set last year, and £8 billion below the plans for that year that we first set two years ago.
That is not all. In 1995-96, we have reduced the new control total by £1 billion and in 1996-97 by nearly £3 billion. Taking into account lower debt interest payments resulting from lower borrowing, I expect that, as a direct result of the Budget, total public spending over the next three years will be around £10 billion less than we assumed at the time of the March Budget.
Including also the reduction in cyclical spending as the economy recovers, and other changes, the total reduction in public spending over the next three years compared to the March Budget projections will be no less than £15 billion.
Those public expenditure savings dramatically reduced my need to raise taxes to get the borrowing requirement down. As a result of that achievement and only because of that I can now confirm that I have no need this year to propose any changes to the VAT base. Throughout the public spending round, all my Cabinet colleagues understood that the essential job in this Budget was to move back towards a balanced budget ; and we all understood the clear preference on this side of the House for this to be done, so far as possible, by firm control of public spending. That is what we said we would deliver, and that is what we have delivered, because that is what is required to keep the recovery going.
CONCLUSION
My Budget today puts Britain firmly on course for a sustained period of rising prosperity and falling unemployment, based on low inflation and healthy public finances.
This is a no-nonsense Budget which deals directly and firmly with the main challenges facing the country today. Above all, it is the Budget of a responsible Government which is determined to bring lasting recovery to Britain.