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GORDON BROWN'S JULY 1997 BUDGET SPEECH

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The following is the full text of the Budget speech by Chancellor of the Exchequer Gordon Brown on Wednesday July 2 1997:

The Budget that I lay before the House today represents more than an allocation of resources and an accounting of revenues. Because behind the numbers and statistics the central purpose of this Budget is to ensure that Britain is equipped to rise to the challenge of the new and fast changing global economy. Not just a few of us. But everyone.

The impact of the global market in goods and services, and of rapidly advancing technology, is now being felt in every home and every community in our country. New products, new services, new opportunities challenge us to change; old skills, old jobs, old industries have gone and will never return.

Yet for our country, the first industrial nation, this new global economy driven by skills, creativity, and adaptability offers a historic opportunity. The dynamic economies of the future will be those that unlock the talent of all their people, and our creativity, our adaptability, our belief in hard work and self-improvement, the very qualities that made Britain lead the world in the 18th and 19th centuries are precisely the qualities we need to make Britain a strong economic power in the 21st century.

But to achieve this we must address the four weaknesses that have held us back for too long and for too many years - instability, underinvestment, unemployment, and the waste of talent. In this Budget I will address each of these weaknesses in turn to ensure stability, investment, work, and opportunity for all. I turn first to stability because without stability all plans for investment, employment and education founder.

In a global economy, long-term investment will come to those countries that demonstrate stability in their monetary and fiscal policies, and in their trading relationships, and for Britain this means stability in our relations with Europe.

In May the Government established a wholly new framework for monetary stability; open and accountable, based on clearly established rules and discipline. The Government sets the inflation target, and the Bank of England sets interest rates to meet that target. This reform signified our determination to break from the short-termism of the past and establish long-term confidence. In this Budget I will match these measures for long term monetary stability with measures designed to promote long-term fiscal stability.

The Chancellor is first and foremost the guardian of the people's money. But during the 1990s the national debt has doubled. This year alone the taxpayer will pay out

25 billion in interest payments on debt, more than we spend on schools. Public finances must be sustainable over the long term. If they are not then it is the poor, the elderly, and those on fixed incomes who depend on public services that will suffer most. So, as with our approach to monetary policy, so in fiscal policy: we will now establish clear rules, a new discipline, openness, and accountability.

My first rule - the golden rule - ensures that over the economic cycle the Government will borrow only to invest and that current spending will be met from taxation.

My second rule is that, as a proportion of national income, public debt will be held at a prudent and stable level over the economic cycle. And to implement these rules, I am announcing today a five year deficit reduction plan.

Together, these rules and this plan will ensure a historic break from the short-termism and expediency that have characterised the recent fiscal policies of our country. As with our monetary policy, our fiscal policy will be all the more credible for being open and accountable.

Immediately upon coming to office the Government invited an independent scrutiny by the National Audit Office of key assumptions in the public finance forecasts. This independent scrutiny will continue into future Budgets with further work by the National Audit Office and, with publication, some months in advance of every Budget, of an assessment for open debate of what is happening to the economy and to the people's money.

My Budget today sets out a forecast for public borrowing this year and next. And for the following three years, projections for the public finances based on different scenarios for the growth of public spending. And I can report that in each and every case, our deficit reduction plan ensures that we are on course to meet the two fiscal rules that guide our approach to the public finances.

Any Budget seeking to achieve high and stable levels of growth and employment must be guided by the true state of the public finances, but also by a clear assessment of the state of the economy. And to that I will now turn.

We have seen a rapid growth of consumer spending, of nearly 4 per cent over the last year. With the prospect of further windfalls' from the building societies, consumer spending is likely to remain strong. There has been a sharp rise of 7 to 11 per cent in house prices, with even higher rises in the South East.

The growth of average earnings has accelerated to 4.5 per cent a year. The rate of broad money growth has been, around 10 per cent for a year. These increases in consumer spending, earnings, and money supply are continuing even as industrial production and manufacturing output have been recovering only slowly.

It is essential that consumer spending is underpinned by investment and industrial growth. Britain cannot afford a recurrence of the all too familiar pattern of previous recoveries: accelerating consumer spending and borrowing side by side with skills shortages, capacity constraints, increased imports and rising inflation.

Already there are warning signs that this pattern could be repeated. In similar circumstances some of my predecessors have ignored these signs while others have deluded themselves into believing that growth, however unbalanced, was evidence of their success. I will not ignore the warning signs and I will not repeat past mistakes.

The Treasury's assessment is that the output gap is close to zero, and there is a risk that output could already be above trend.

In other words our sustainable rate of growth is too low for growth to continue at its current pace without the risk of more inflation. That is why in May I judged interest rate increases were necessary, and events since then have confirmed that this was the correct judgement.

But against these pressures we must take into account both the subdued level of producer price inflation and the current strength of sterling, which, over the last year, has appreciated by 18 per cent. I understand and share the concerns of industry and exporters and will address them.

As the figures demonstrate there is now an imbalance between strong growth in the consumer and service sector and weak growth in the manufacturing and exporting sector. Nonetheless what worries manufacturers even more is that inflation could get out of control and herald a return to the instability of stop-go.

My goal is therefore to ease inflationary pressures without damage to industrial and exporting prospects and to do so in a way that is consistent with our long-term objective of high and stable growth and employment.

In this way we can moderate the upward pressure on interest rates and on the exchange rate. As well as further our objective of sustainable public finances. I have therefore decided to tighten fiscal policy, as a result of Budget measures including the windfall tax, by

5 1/2 billion this year and

4 3/4 billion next year.

And, with the resulting reductions in the deficit, I am able to present an economic forecast putting us back on course for a more balanced and more lasting recovery. And for long-term stability in the public finances. The forecast is that GDP will grow by 3 1/4 per cent this year and 2 1/2 per cent next year before returning to its trend rate.

Consumer spending which is expected to increase by 4 1/2 per cent this year is forecast to grow more slowly at 4 per cent next year. Business investment, which has failed to meet expectations over the past 2 years is forecast to rise strongly this year and next, so increasing investment as a share of GDP.

Finally inflation is expected to remain at 2 1/2 per cent this year, the Government's target, rising slightly to 2 3/4 per cent next year as a result of the failure by the last Government to take early action to control inflation, before returning to 2 1/2 per cent in 1999.

To achieve long-term stability is to achieve something no Government has done for decades. But stability is a necessary, not a sufficient, condition for the Government's objectives of high and stable levels of growth and employment.

A prudent estimate of the current trend rate of growth is only 2 1/4 per cent. Higher growth will have to be achieved rather than assumed. But I believe that as a country we can achieve higher long-term rates of growth if - from this Budget onwards - we expand investment and capacity, promote employment, and increase our country's skills.

If we are to do so more of our companies will have to rise to the level of our best. And it is to far reaching measures that will raise the quantity and quality of investment that I now turn.

Investment

Since 1980 the UK has invested a lower share of GDP than most other industrialised countries, and GDP per worker has been lower too. For every £100 invested per worker in the UK, Germany has invested over £140, the US and France around £150, and Japan over £160 per worker.

The objective behind our two year long corporate tax review - begun in opposition - has been to develop a tax system that encourages personal savings, favours higher levels of investment, rewards long-term investment, and is fair to all. Our consultations on capital gains tax will be completed in time for the next Budget.

Half the adult population of our country hardly save at all. So in order to encourage personal savings the Government will, as promised, introduce from 1999, individual savings accounts, extending the principle of TESSAS and PEPs, continuing to offer favourable tax reliefs for saving. Through the new individual savings account we intend to encourage the habit of saving among people who have never saved before. I can confirm also that this Budget will not proceed with the last Government's proposal to phase out tax relief on employee pension contributions.

But this point in the recovery is also the right time to make changes in corporation tax to encourage more long term investment. My changes in monetary policy were designed to help companies make long-term investment decisions with confidence. My changes in corporation tax are directed to the same long-term objective.

Main corporation tax rate

I want the United Kingdom to be the obvious first choice for new investment. So I have decided to cut the main rate of corporation tax by 2 per cent from 33 per cent to 31 per cent, the lowest ever rate in the UK. This means that we will have the lowest corporation tax rate of any of our major competitors - Germany, France, America or Japan - and we will have it under this Government.

This is a long-term commitment that will increase both inward investment and domestic investment to the benefit of the whole country. Too often British companies have invested too little, and too late in the economic cycle. Because I want companies to get the benefit now the 2 per cent corporation tax cut will start from April 1997.

Tax credits

This tax cut is the first component of this Budget's investment strategy. The second is a structural reform that will also encourage investment. The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits. This cannot be the best way of encouraging investment for the long term as was acknowledged by the last Government.

Many pension funds are in substantial surplus and at present many companies are enjoying pension holidays, so this is the right time to undertake a long-needed reform. So, with immediate effect, I propose to abolish tax credits paid to pension funds and companies.

For PEP holders, for individuals who do not pay tax and for charities, tax credits will continue to be paid until April 1999. By this time the introduction of individual savings accounts will ensure that individuals have the opportunity to continue to be able to save with tax advantages. So they will continue to have favourable tax incentives to invest in equities. Basic and lower rate taxpayers do not pay any extra tax on dividends they receive: that will remain the position. And we will ensure that higher rate taxpayers will pay no more than they do now.

Advance corporation tax will continue to be paid by companies on their dividends at the same rate as now. To stop the yield from ACT being eroded by greater use of foreign income dividends, we are ending the foreign income dividends scheme from 6 April 1999.

International holding companies will continue to pay dividends out of foreign income without paying advance corporation tax. I will make special provision for charities through public expenditure. Tax credits will be paid to them until April 1999 and after April 1999 the Government will fund a five year transitional period. So charities will have seven years in total in which to adjust to the change.

Charities have been pressing for a review of their tax treatment for some time. The Government will now consult widely on how the tax treatment of charities can be made more appropriate to help charities today. Charities too will of course gain, like others, from the longer-term benefit to their shareholdings that higher company investment and profits will bring.

Cut in small companies tax rate

In future new jobs are likely to come from a large number of small businesses than from a small number of large businesses. The route to success is not for the Government to try to pick winners but to create an environment in which more firms have more chances, by their own efforts, to succeed.

That is why I have decided to do more to assist investment in small businesses. I have therefore decided to cut the small companies tax rate by 2 per cent from 23 per cent to 21 per cent, and to do so from April 1997.

Doubling capital allowances

In the past investment incentives have been introduced in recessions when companies are least able to consider new investment. But at this point in the economic cycle an investment incentive should encourage companies considering future investments to bring those investments forward.

I have therefore decided, with immediate effect, to double for one year the level of first year capital allowances on plant and machinery for small and medium-sized firms. This will apply to both companies and unincorporated businesses. This means that if a firm invests within the next twelve months it can set off against tax not a quarter of its investment as hitherto but a half.

Over 3 1/2 million businesses will be eligible for this relief. It will be worth £230 million to small and medium sized businesses next year and £170 million the year after. It will be largely paid for by reinstating the one year carry back time for corporate losses, which was temporarily extended to three years during the recession.

Taken together the cut in corporation tax and the new investment incentive represent a significant boost for small business investment. Britain moves forward with one of the most favourable tax regimes for small businesses of any country.

Film industry

Britain is increasingly leading the world in those industries which most obviously depend on the skills and talents of their workers - communications, design, architecture, fashion, music and film. Our national endowment fund for science technology and the arts will offer talented young artists and scientists, the finance to turn British ideas into successful business ventures.

But despite the British film industry's outstanding record of creative and critical success, too many British films that could be made in Britain are being made abroad, or not at all. The talents of British film makers can and should, wherever possible, be employed to the benefit of the British economy.

So, after today, production and acquisition costs on British films with budgets of £15 million or less will qualify for 100 per cent write-off for tax purposes when the film is completed: a 3 year measure at a cost of £30 million, that will not only boost the number of British films but the British economy by boosting our exports.

Welfare and work

In the new economy however, where capital, inventions, even raw materials are mobile, Britain has only one truly national resource: the talent and potential of its people. Yet in Britain today one in five of working age households has no one earning a wage. In place of welfare there should be work.

So today this Budget is taking the first steps to create the new welfare state for the twenty first century. The welfare state was and remains a great British achievement. It was set up to provide security for all, and opportunity for all, goals as relevant today as in 1945.

But for millions out of work or suffering poverty in work, the welfare state today denies rather than provides opportunity. It is time for the welfare state to put opportunity again in peoples' hands. First, everyone in need of work should have the opportunity to work. Second, we must ensure work pays. Third, everyone who seeks to advance through employment and education must be given the means to advance.

So we will create a new ladder of opportunity that will allow the many, by their own efforts, to benefit from opportunities once open only to a few. Starting from next year, every young person aged 18-25 who is unemployed for more than six months will be offered a first step on the employment ladder.

Tomorrow the Secretary for Education and Employment will detail the four options, all involve training leading to qualifications:

  • a job with an employer;
  • work with a voluntary organisation;
  • work on the environmental task force;
  • and, for those without basic qualifications, full time education or training.

With these new opportunities for young people come new responsibilities. There will be no fifth option - to stay at home on full benefit. So when they sign on for benefit they will be signing up for work. Benefits will be cut if young people refuse to take up the opportunities.

This new deal for the young - is comprehensive, rich in opportunity, linked to the development of skills and has already attracted the support of some of Britain's leading companies. I urge every business to play its part in this national crusade to equip this country for the future by taking on young unemployed men and women.

I appeal to every voluntary organisation to make a further contribution to their community by taking on a young person. And I will make it possible for every member of this House to act as an ambassador for this venture, encouraging young people in their constituencies, consulting, talking to local businesses and bringing them together to play their part in this new deal for young people.

There are 350,000 adult men and women who have been out of work for two years or longer. The second component of our Welfare to Work programme will offer employers a £75 a week subsidy to employ long-term unemployed men and women. Yet many of them who lack skills are debarred by the 16 hour rule from obtaining them. For this group - the unskilled - the 16 hour rule will be relaxed. So that when the long-term unemployed sign on for benefit they will now sign up for work or training.

This programme of £3.5 billion - which includes an unallocated reserve of £500 million - will be the main item funded from the windfall tax on the excess profits of the privatised utilities, the details of which I will give the House shortly.

Lone parents

But in this Budget I will address also the needs of the two other important groups: lone parents and those in receipt of incapacity and disability benefits who, as a matter of principle, should also have the right to work. There are now 1 million lone parents bringing up 2 million children on benefit.

Any welfare to work programme that seriously tackles poverty in our country must put new employment opportunities in the hands of lone parents. So today I am allocating a total of £200 million from the windfall fund for the most innovative programme any Government has introduced for advice, training and day and after-school childcare to support lone parents.

Currently lone parents receive little encouragement to seek work before their youngest child is 16. Under the programme I am announcing today, when the youngest child is in the second term of full time schooling, lone parents will be invited for job search interviews and offered help in finding work that suits their circumstances.

On Friday my RHF the Social Security Minister will explain to the House the full details of how this radical new programme will be introduced.

National childcare strategy

A generation of parents have waited for their Government to introduce a national childcare strategy. From this Budget forwards, child care will no longer be seen as an afterthought or a fringe element of social policies but from now on - as it should be - an integral part of our economic policy.

So, first we will increase the supply of child care in our country and make it more accessible; as part of the new deal for the under 25s, we will encourage voluntary organisations to take on and train young people and help them into careers as child care assistants. We believe that over a five year period as many as 50,000 young people can be trained as childcare assistants.

Second, we will make childcare more affordable - from next summer every lone parent with more than one child who qualifies for family credit, housing benefit or council tax benefit will have the first

100 of weekly childcare costs disregarded in calculating their in-work benefits.

And from now on every lone parent with children of 12 years old or younger will be able to receive help; lottery money will be made available for after school clubs. And as we replace the wasteful and chaotic system of nursery vouchers we will be able to offer reliable access to nursery places for every four year old in Britain.

With these measures, that bring both child care and employment within the reach of many more parents, we have taken the first step to a national childcare strategy for the United Kingdom.

Incapacity benefit recipients

No one in our society, in 1997, should be excluded from the right to work either because of disability or incapacity, if they want to do some work. So as a final element of our Welfare to Work strategy we will also bring forward proposals to help those who are disabled or on incapacity benefit who want training or work. To fund this programme and other measures I have set aside £200 million from the windfall fund.

Taken together these comprehensive and ambitious initiatives mean that, from now on, no section of society should suffer permanent exclusion.

For too long the United Kingdom has been united only in name. From today ours is a country where everyone has a contribution to make.

Tax and benefit reform

The second principle of the new welfare state is to ensure that work always pays. In May I established under the chairmanship of Martin Taylor a review to consider how we can streamline and modernise the tax and benefit system to help employment opportunity and work incentives and assist in strengthening family life.

We will introduce a 10p rate of income tax as soon as it is prudent to do so. A 10p tax rate - combined with a cut in benefit tapers - will reduce in-work poverty. So too will the minimum wage which the Government will introduce after advice from the new low pay commission.

Set at a sensible level, the minimum wage will not only establish a floor under wages but ensure in-work benefits act as a genuine top-up for low paid workers rather than a subsidy for low paying employers.

So I have also asked Martin Taylor to consider at an early stage the advantages of introducing a new in-work tax credit for low paid workers. It would draw upon the successful experience of the American earned income tax credit, which helps reduce in work poverty and now helps 19 million lower paid workers.

Conclusions that emerge from this tax benefit review will inform the judgements in my next Budget, which I have decided will be in spring 1998.

Individual learning accounts and University for Industry

The third component of the new welfare state is the establishment of a skills ladder - so that every employee is encouraged to learn skills throughout their working lives.

It is our intention to introduce individual learning accounts. And, to increase the staying on rates at schools and colleges, we will complete our review of educational finance and maintenance for 16 to 18 year olds to ensure resources are used to support those most in need.

Just as the Open University has, since the 1960s, offered thousands second chances in higher education through television, in their homes, our new University for Industry can, from the 1990s, through satellite cable and interactive technologies bring lifelong learning direct to homes as well as workplaces.

I have allocated from the Welfare to Work budget £5 million to start up the Public-Private Partnership that will fund the University for Industry. By these measures which will create work, make sure that work always pays, and provide recurring opportunities for lifelong learning, the new welfare state will help equip Britain for the new world.

Taxation and fairness

A country equipped for the future should also have a modern tax system based on principle. The tax system sends critical signals about the economic activities a society wishes to promote and deter. Today I start to put these principles into practice by demonstrating our commitment to the environment.

As the statement of environmental principles set out by the Financial Secretary today shows, we are determined that our tax system and economic policies as a whole encourage the good and discourage the harmful. The extraction of aggregates - including stone, sand and gravel - involve significant environmental costs and damage to the landscape, which may go beyond that recognised in the scope and level of the landfill tax.

Too little is also being done to discourage water pollution. The environmental case for charges on polluters needs to be examined carefully. After a period of consultation, I will return with any proposals in these two areas in my next Budget. Existing taxes, including our excise duties, must also advance the Government's environmental objectives.

So to reduce pollution, lorries and buses that meet low emission standards will, from next year, attract a reduction of vehicle excise duty by a maximum of £500.

Rises in vehicle excise duty, broadly in line with inflation, will take place from 17 November. And in line with the environmental objectives I have set down, road fuel duties will increase by an extra 1 per cent every year over and above the annual 5% real rate of increase established by the previous Government. Petrol will go up by the equivalent of 4 pence a litre from 6.00pm this evening.

I have also decided to raise the annual rate of increase in tobacco duties. From 1 December this year these will be increased by an extra 2 per cent a year - this year by another 5p - above the annual 3% real rate of increase established by the previous Government.

In the normal course of events the price of a packet of 20 cigarettes would have risen by just over 14p. Under my proposals the price of a packet will rise on 1 November by 19p. Alcohol and tobacco duties demand careful consideration this year, not least because of the impact of fraud, smuggling and cross border shopping. I have therefore decided to review all alcohol and tobacco duties and while this review is underway, inflation - only rises for alcohol will take effect from January.

Tax avoidance

The tax burden avoided by the few falls on the many. In eight weeks of this Government we have already identified a series of significant tax abuses.

I am introducing measures with immediate effect to end tax abuses through avoidance of corporation tax, VAT and PAYE. Changes to insurance premium tax to block an abuse relating to long-term health insurance will take effect from 1st October. I am also proposing to modernise the rules governing transfer pricing and controlled foreign companies. The details of these changes will be available at the end of my speech.

In total these initial measures will bring in a cumulative total of £1.7 billion over four years. A Government committed to the proper funding of public services will not tolerate the avoidance of taxation and will be relentless in its war against tax avoidance.

I have also instructed the Inland Revenue to carry out a wide-ranging review of areas of tax avoidance, with a view to further legislation in future finance bills. I have specifically asked them to consider a general anti-avoidance rule.

The principle of fairness in taxation will guide all my Budget decisions. So I can today announce that at this, the first opportunity, the Government will honour its pledge to cut VAT on fuel and power.

To help pay for this, we will withdraw tax relief for private medical insurance for the over-60s which costs £140 million a year and which has failed to achieve its original purpose of substantially increasing the take-up of private medical insurance.

I would like to abolish VAT on fuel. But European rules prevent me from doing so. Therefore, VAT will be cut to the lowest level compatible with European law, that is 5 per cent from 1st September, well in advance of winter fuel bills.

In this Budget I have no changes to make to income tax either at the basic or top rate. I will not extend VAT to food, children's clothes and newspapers and public transport fares. Nor will I during this Parliament. This is a Government that keeps its promises on tax.

But to cut fuel bills, I intend to make a further tax cut. The gas levy - imposed by the last Government - has pushed prices for domestic consumers higher than they would otherwise be. So from next April year we are reducing the gas levy to zero. Eighteen and a half million domestic customers will benefit from this change. Their gas bills should fall by about 2 per cent, on average.

As a result of these two changes, and other price cuts already announced, I expect gas prices to fall in real terms by 5 1/2 per cent this year and 11 per cent next year, which will mean a fall of £90 in next year's fuel bills compared with last year's.

Many of the least well insulated houses in Britain are occupied by older people. No pensioner should be in a position where for reasons of finance they cannot adequately insulate their homes. Today with our new programme of training and jobs for young people we are able to expand the national programme of home insulation.

Contractors within the home energy efficiency scheme, and voluntary organisations will be encouraged to take on young people to insulate the homes of pensioners. This will give jobs and new skills to our young people, help and protection to the elderly, and it will improve our environment.

Capital receipts and housing

Poorly insulated housing is but one of the most conscious failures of housing policies of the last twenty years. Even more serious is inadequate provision of low cost rented accommodation throughout our country. This has led to overcrowding the costly and wasteful use of bed and breakfast accommodation and in some cases homelessness.

This Government has a commitment to decent housing at affordable rents because we believe that overcrowding and homelessness on a scale we have seen are intolerable in a civilised society. Building and repairing homes will answer a pressing social need and offer opportunities for skilled and productive employment.

I can therefore announce the first step in a practical and measured programme to phase the release of capital receipts. Local Authorities will have borrowing consents for an additional £900 million - £200 million this year, and £700 million next year - for building new houses and repairing their existing stock.

The detailed proposals for England together with measures specific to Scotland, Wales and Northern Ireland will be announced by the relevant Secretaries of State in due course.

Housing market measures

For most people the acquisition of a house is the biggest single investment they will make. Homeowners rightly expect their investment to be protected by sensible policies pursued by Government. I am determined that as a country we never return to the instability, speculation, and negative equity that characterised the housing market in the 1980s and 1990s.

Volatility is damaging both to the housing market and to the economy as a whole. So stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery.

I have therefore decided it is right to take two measures aimed at stability in the housing market. First I will raise stamp duty from 1 per cent to 1.5 per cent on property sales above £250,000 and to 2 per cent for property sales above £500,000. This will take immediate effect after the Budget resolution has been voted by the House.

Second, continuing the reforms begun by the previous Government which removed mortgage tax relief at the higher rate of 40 per cent in 1991, and cut it to 15 per cent by 1995, I propose to reduce mortgage tax relief by a further 5 per cent from 15 per cent to 10 per cent from April 1998.

The timing of my measure should help to avoid a return to the conditions of the 1980s where the failure to take early action guaranteed worse problems later on. I believe these measures will help to ensure a more balanced recovery.

Windfall tax

Our reform of the welfare state - and the programme to move the unemployed from welfare to work - is funded by a new and one off windfall tax on the excess profits of the privatised utilities. The tax will apply to companies privatised by flotation, and subject to economic regulation under specified Acts of Parliament.

In determining the details of the tax, I believe I have struck a fair balance between recognising the position of the utilities today and their under-valuation and under-regulation at the time of privatisation. The windfall tax will be related to the excessively high profits made under the initial regime.

A company's tax bill will be based on the difference between the value that was placed on it at privatisation, and a more realistic market valuation based on its after-tax profits for up to the first 4 full accounting years following privatisation.

In preparing the windfall tax we looked more broadly at the position of the affected companies. As a result of my earlier announcement - justified on its own merits - to reduce the gas levy to zero, I am satisfied that no company faces an unduly heavy tax burden.

The windfall tax will raise some £2.1 billion from the electricity sector, around £1.65 billion from the water sector, and some £1.45 billion from the remaining companies. After taking the reduction in the gas levy into account, which will cost the Government £400 million over the next three years, the net effect of the gas levy and the windfall tax together will raise £4.8 billion.

After consulting the regulators, it is my judgement that the tax can be paid without any impact on prices, investment, or the quality of service to customers; or, in my view, on employment. In recent weeks many companies have asked to pay the tax in instalments. I have now agreed that this shall be the case. It will be a one-off tax payable in 2 instalments. The first instalment will be paid on 1 December 1997, the second a year later.

Full details of how the tax will apply - and the companies who will pay it - will be set out in an Inland Revenue press release available at the conclusion of this statement.

Deficit reduction plan

Based on the fiscal tightening I have announced today, I can now give full details of our five year deficit reduction plan. The deficit reduction plan is aimed at reducing the structural budget deficit. It is made possible by a long term commitment to financial discipline. It takes into account the uncertainties and risks involved in and forecasting the economic cycle. It is underpinned by a comprehensive review of the way Government spends its money; and it matches rigour today with a long term commitment to prudent and sustainable public finances.

In January this year I announced we would adhere for two years to the agreed control totals for public spending. That commitment is reaffirmed today and integral to the Budget statement. I announced there would be no spending round this year. Nor will there be.

Departments are working within already announced departmental spending totals to reorder spending from low priority to high priority areas. I am pleased to report that they are not only identifying waste and inefficiencies in existing spending but redistributing savings to the long term priorities of this Government, not the last.

The figures I now give for my deficit reduction plan exclude windfall tax revenues. Borrowing was projected in the last Budget to be £19 1/4 billion this year but is now set to be £13 1/4 billion. And borrowing that was projected to be £12 1/4 billion next year is now set to be £5 1/2 billion.

Beyond these years, I am publishing a range of projections based on different assumptions for spending. In every case we meet the golden rule, see debt falling as a proportion of GDP and, because of our discipline, we go below the borrowing projections of the previous Government. And for this year and for the foreseeable future we are comfortably within the Maastricht criteria for levels of both debt and borrowing.

Tough and prudent management is our watchword in what will continue to be a thoroughly disciplined approach to public finances.

National Health Service

The Comprehensive Spending Review will determine overall priorities for the early decades of the new century.

In the case of the National Health Service, the first stage of our cuts in bureaucracy are being implemented this year. By next spring the first conclusions from the strategic review of London hospitals will be implemented; we will act to improve the organisation of services including, to merge NHS trusts. By dismantling the inefficient internal market we will no longer have to spend money promoting competition and servicing innumerable short term contracts and the administration that goes with them, at the expense of patient care.

And because we have reinvigorated the Private Finance Initiative, we will shortly announce a new hospital building programme across the country. We will also act to recoup in full the cost of treating road traffic accidents from insurance companies. This, like the action we are taking against prescription fraud, shows our determination to ensure NHS resources are focussed on frontline care.

In normal circumstances, the £5 billion reserve for 1998-99 - set aside by the previous Government - would be distributed during the annual autumn spending round - with the allocations announced at the time of the November Budget. There is no spending round this autumn and, as a result, there will now be no Budget until next spring. The majority of the reserve will be retained for contingencies that may arise in the coming year.

But now that the long-term changes are underway, I want the NHS to be able to plan also for the year ahead. And I want them to do so in the sure knowledge of a prudent and realistic allocation for 1998-99 which will ensure that services are maintained and patient care is secure.

The long-term plans mean that we are now sure the money will go where it is needed - direct to patient care. I have decided to allocate from the reserve to the NHS for 1998-99 a sum of £1.2 billion. This does more than meet our commitment at the election for a real term increase in resources. Health spending will now rise by 5 per cent - 2 1/4 per cent in real terms - the same as our projection for the trend growth rate of the economy as a whole.

The public rightly wants to see more money put into the NHS. But it wants the money actually to go to patient care. This money is being granted on the firm agreement that the administrative reforms in health will be fully implemented. And frontline patient care will benefit.

Education

Education is our country's priority. It holds the key to our future. But the Government must be satisfied that resources in education are going direct to learning in the classroom. The Secretary of State for Education will bring forward proposals so that every school can meet standards for results and discipline.

Our long-term review of spending on education, schools and local education authorities must meet targets for raising standards in schools in their areas. And they must demonstrate that money is being spent improving the quality of pupils' education. For next year, while we review the future arrangements for Local Authority finance, capping will remain in place.

But I propose to allocate from the reserve for 1998-99 and specifically for use in schools an additional one billion pounds to education. The details will be announced in due course by my RHFs the Secretaries of State for Education and Employment, Scotland, Wales and Northern Ireland.

Traditionally these announcements - of tax revenues and spending allocations - would complete a Budget. But I have one more announcement to make. The windfall tax I have announced will finance the measures I have announced for employment and training. But there is nothing more important to the training of young people than what happens in our schools.

Indeed many of the problems our Welfare to Work programme must now address start in school. We cannot run a first rate economy on the basis of second rate education. In general economic success tomorrow will depend on investing in our schools today. But at the present rate of progress many of our children will be educated for the twenty first century in classrooms built in the nineteenth.

Today 1 million pupils are being educated in classrooms built before the first world war. If our schools are to educate for the needs of the twenty first century economy they must themselves become schools fit to learn in and equipped for the twenty first century. And by encouraging schools to engage in Public/Private Partnerships, the public investment we make can lever in even more resources to renovate our schools.

I want schools not just to repair the roofs and the fabric but to acquire the equipment and computers they need. So I have decided to allocate cash from the proceeds of the windfall tax for an immediate programme of capital investment to equip our schools with the infrastructure, the technology, and the bright modern classrooms they need.

The Paymaster General and my RHF the Secretary of State for Education and Employment will invite schools to submit plans, showing how they propose to upgrade, modernise and become schools fit for the twenty first century. The detail of the plans will be announced by my RHF the Secretary of State for Education in due course.

I therefore propose to make available £1.3 billion over the course of the Parliament, representing a capital investment that averages almost

150 for every pupil in the country. Taken together with the extra year to year expenditure I have just announced this Budget allocates £2.3 billion in new resources for our schools.

With this increase in educational investment we are taking the first step towards delivering our manifesto commitment to increase the proportion of national income spent on education. In education, as in every other area, we are honouring our pledges to the British people.

Conclusion: the people's priorities

The measures I have announced today for stability, investment, employment and opportunity for all will make Britain better equipped and more ready to face the future with confidence.

Previous Budgets pursued the short term interests of the few. This Budget advances the long-term interests of the many.

A Budget equipping Britain for the future - meeting the peoples' priorities. A peoples' Budget for Britain's future.

I commend it to the House and to the country.

SOURCE HM Treasury



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