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Pre-Budget Report and Comprehensive Spending Review

Today I can present the pre-Budget report and the conclusions of the comprehensive spending review. The background to this year's report and spending review is a time of increased international economic uncertainty and a more fragile global environment which has already seen turbulence in America, Asia and Europe. The theme of this year's pre-Budget report is that, provided we maintain the course for economic stability that we have set, we can respond to that global environment. We will do so by taking no risks with stability and no risks with unaffordable promises that put the public finances at risk. We can respond as well to the rising aspirations of the British people, and we can do that by taking the right long-term decisions for our country. Today I will set out how we will maintain that stability and strong economy, meet our international obligations, improve our public services and invest more in the highest standard of education and health care, and equip our country for the future as we meet these new global challenges. Let me start with the economic figures. In March, inflation had risen to over 3 per cent. but decisive action has brought it down to below our target of 2 per cent., and I am able to forecast that inflation will again be on target next year and the year after. We are determined to hold firm to our economic framework, which has proved resilient over the past 10 years and which we can be confident will do so now and in the future. While this year growth in America is expected to be 2 per cent., in Japan 2.3 per cent. and in the euro area 2.6 per cent., growth in Britain—with exports and investment rising and employment at record levels—is expected to be 3 per cent. this year: Britain, the fastest growing major advanced economy in the world. That underlying strength of the economy will stand us in good stead as we face the current international instability that started in the American mortgage market and has now spread across the world. The full impact of turbulence in the international financial markets is as yet unclear. The House will rightly want to discuss in some detail the current international instability and its effect on Northern Rock, and I intend to make a full statement to the House later this week. The International Monetary Fund has said that this international uncertainty will have an effect on growth right across the world, and independent forecasters expect growth next year in America, the euro area and Japan to fall to 2 and 2½ per cent. In those circumstances, it is right that we, too, are cautious. So my forecast for growth next year is also 2 to 2½ per cent. [Interruption.] But because of the strength of our economy, our commitment to openness and liberalised trade across the world—[Interruption.] ... It is because of the strength of our economy and our commitment to openness and liberalised trade across the world, and our flexibility and dynamism here at home, that my forecast for growth in 2009 and 2010 is 2½ to 3 per cent., in line with the economy's trend rate of growth and in line with the Budget forecast. We can afford sustained investment in our priorities only because of our two fiscal rules that ensure sound public finances. I can report that last year, borrowing was 2.3 per cent. of national income—£4 billion less than forecast. I can also report that debt was 36.7 per cent., also less than forecast. Over the past 10 years of this economic cycle, borrowing and debt in Britain have been lower than in Japan, the euro area, America and the Organisation for Economic Co-operation and Development area as a whole. I can tell the House that we are meeting our first fiscal rule with the current budget and surplus over the cycle. In the previous economic cycle, from 1986 to 1997, that rule was missed, with a deficit of £240 billion. But over this cycle, with a current budget deficit last year lower than forecast, we have a surplus of £18 billion and we are therefore meeting our first fiscal rule. Even taking into account the impact of what is happening in the financial markets, we have a current balance going forward of minus £8 billion this year, then minus £4 billion, then surpluses of £3 billion, £9 billion, £14 billion and £20 billion by 2012-13. So we will meet our rule in the next cycle. We will also meet our second rule that net debt should be at a sustainable level. In America, debt is 44 per cent. It is 49 per cent. across the euro area, 86 per cent. in Japan and 94 per cent. in Italy. The figures in Britain are 37.6 per cent. this year and then 38.4 per cent., 38.8 per cent., 38.9 per cent., 38.8 per cent., and 38.6 per cent. in 2012, so meeting our second fiscal rule. Debt interest was 3½ per cent. of national income in 1997. Next year, it is expected to be just 2 per cent. That low debt allows more investment in front-line services. Net borrowing is forecast to fall from 2.7 per cent. this year to 1.3 per cent. in 2012, compared with a peak in 1993 of almost 8 per cent.—the equivalent of £110 billion today. The measures that I am taking in this pre-Budget report allow fiscal policy to support the economy while ensuring that the fiscal rules are met. As a result, net borrowing is forecast to fall from £38 billion this year to £23 billion in 2012. In this cycle and the next we are meeting both our fiscal rules: borrowing not for current consumption, but for investment in Britain's priorities. As the Prime Minister made clear in the Budget earlier this year, this spending review is tighter for many Departments—all the more reason to identify increased efficiencies and savings. The spending review has identified substantial savings that can be made by Departments. Building on the £20 billion already achieved, Departments will save a further £30 billion by 2010. That is money available for reinvestment in public services. In addition to that, asset sales in four years' time will have reached £36 billion, reducing debt and releasing further resources. Departmental plans will be published, setting out in detail how these savings will be achieved. We are also seeing the rewards that can come from a successful economy and record levels of employment. Just under a decade and a half ago, as much as three quarters of all new public spending was spent on debt and social security costs. The figure for this spending review will be a third of that. Today I can announce that, because unemployment continues to fall, we will spend £400 million less than forecast in each year of the spending review on the costs of economic failure. Those three elements—a strong economy, sound public finances and efficiencies—make possible the investment that I can announce today. Departmental spending will rise from £345 billion this year to £397 billion in 2010. Departmental spending is published today; investment will be matched by reform and clear objectives, set out in new public service agreements, which we are also publishing today. Let me now turn to our proposals. The foremost duty of any Government is protecting our country. The whole House will want to join me in acknowledging the dedication and courage of our armed forces in action overseas, including in Iraq and Afghanistan. To support our armed forces and all that they do, I am today allocating an additional £400 million for operations this year. That is on top of the increase in the defence budget to £37 billion by 2010 that will provide over £500 million-worth of investment for improvements in accommodation for members of the armed forces and their families. In the mid-1990s, defence spending was cut by 20 per cent. This settlement is the longest period of rising investment in the defence of our country for almost 30 years. Matching our commitment to international security with international diplomacy, we will increase the Foreign Office budget, including spending £460 million in 2010 on the British Council, the BBC World Service and the launch of the BBC Farsi and Arabic TV channels. The terrorist attacks in July 2005 and the attacks since remind us all of the constant threat to our security here in Britain, and of the critical importance of our police and security services. Since 2001, spending on security and intelligence has more than doubled to £2½ billion a year. I can now announce a new single budget that brings together the work of the police, the security services and all parts of the Government responsible for addressing the threat from terrorism. The budget for the intelligence agencies will continue its historic real-terms growth since 2001, with real growth over this period of 9.6 per cent. a year. I can announce that the single budget will rise every year over the next three years—a rise of £1 billion in total, to £3½ billion a year in three years' time. That is a trebling in cash terms in a single decade. It also includes £700 million over the next three years for the Home Office for its work in combating the terrorist threat. Overall, I am allocating additional resources to the Home Office and Ministry of Justice that will now rise to £20 billion by 2010, as we guarantee neighbourhood policing in every community, build 9,500 extra prison places and finance over £400 million in technology to strengthen our border security. Our ability to compete and succeed in the global age will depend on our competitiveness and continuing investment in our economy. Britain's future success will depend on investment not just in physical capital but in skills, innovation and intellectual property. I am publishing today a new analysis which shows that Britain could now be investing as much in those areas as the United States of America. That means that almost £250 billion a year—up to a quarter of today's income—is being invested in the priorities essential for securing tomorrow's prosperity. Lord Sainsbury's science review reported last week, and I can confirm that investment in science and university research will rise to over £6 billion a year in three years' time. That will help to ensure that British research and industry are brought closer together to develop the new products and services that the world wants to buy. Britain has more Nobel prize winners than any country outside the US. Yesterday, another prize was awarded for medical research, and that is testament to Britain's continued scientific success, which is recognised across the world. So that more British medical discovery can be translated into new health drugs, treatments and preventions, I can today announce that I am funding in full the recommendations of Sir David Cooksey's review. We will expand the single fund for health research to £1.7 billion by 2010. In the past, we paid a heavy price as a country for failing to invest when it was necessary, particularly in transport. We are putting that right and will double investment. By 2010, it will rise to £14½ billion a year, providing extra money for strategic road schemes such as the widening of the M1 and M6, and £1.3 billion a year for improving local and regional transport across the country. In addition, we will double the amount that we spend over the next two years on upgrading the national rail network, ahead of a further £15 billion for railways over the following five years. This also provides for the construction of Crossrail, which will be the largest transport project since the channel tunnel and essential for the competitiveness of not just the City of London but the whole country. However, because transport requires investment year after year and decade after decade, I am extending to 2018 the long-term funding guideline of annual growth of 2¼ per cent. above inflation. That is possible only because of our commitment and ability to fund those long-term improvements. I am also today publishing proposals to give local authorities the power to set a business rate supplement for investment and local economic development, so that with their support they can provide opportunities for business expansion. Making Britain one of the best places in the world to do business also demands a modern tax regime based on three clear principles: that our system is competitive, simple and fair. I confirm that the main rate of corporation tax will be cut by 2p to 28p next year. That is the lowest in the G7. Working with business, we need to do more. I am announcing three reviews proposing simplification to the tax system that will let 3 million self-employed people pay their tax and national insurance contributions more easily and 500,000 businesses reduce their paperwork by removing a separate payroll. Taken together with other measures that I am proposing today, that will save British business up to £100 million a year. The capital gains tax regime here has continued to encourage investment and enterprise. I now propose reforms to make the system more straightforward and sustainable; to ensure that it sets consistent incentives for investment and enterprise; and to ensure that it remains internationally competitive. The new code of conduct for private equity firms drawn up by Sir David Walker will be published next month and will set out much needed steps for increased transparency and disclosure. I can tell the House that the changes that I propose to capital gains tax also, taken together with the tax loopholes that I am closing, will ensure that those working in private equity pay a fairer share. So from April next year I will withdraw the capital gains tax taper relief and in its place there will be just one rate of 18 per cent.—one of the most competitive single rates of any major economy. I am also proposing measures to combat income shifting, vehicle excise duty evasion, and to tackle the exploitation of national insurance exemptions. I believe that it is right that everyone who lives and works here should pay their fair share. I therefore propose to close a number of loopholes which have allowed some people to avoid taxes that everyone else has to pay. Non-domiciled taxpayers already pay about £4 billion on their earnings. Any proposal for change has to be fair, workable and affordable. I can tell the House that I have examined proposals to impose a flat-rate annual charge of £25,000 on 150,000 non-domiciled taxpayers, which it is claimed would raise £3½ billion. There are in fact only 115,000 registered non-domiciles. I can tell the House, too, that if the charge of £25,000 were imposed, only an estimated 15,000 of those would earn sufficient money abroad to make it worth while to maintain non-domiciled status. As a result, the combined effect of people paying this charge or changing their tax status would be revenue not of £3.5 billion but of only £650 million a year at most—a shortfall of more than £2 billion. In addition to that, such a charge could discourage men and women—doctors and nurses, business men and women—from coming to this country in the short term. Such men and women do pay tax on their earnings here, and do contribute to the country's wealth, and we do not want to turn them away. So I will now consult with a view to early legislation on an alternative route. As a first step, we will introduce a charge after seven years, then a higher rate after 10. We will prevent people claiming that they are out of the country when they are actually here, from disguising income as capital and from claiming in effect two allowances; and for completeness we will introduce a flat-rate charge for everyone. Those measures will raise an average of £650 million. The two great challenges for this generation are the need to tackle climate change and poverty across the world. So alongside the pre-Budget report I am publishing the next stage of the implementation of the Stern review, setting out how Britain is meeting its environmental obligations. We are the only country to have met our Kyoto obligations. We have reduced our greenhouse gas emissions by almost a fifth since 1990. Next month, when the climate change Bill comes before the House, we will become the first country to introduce legislation on binding carbon targets. I am today increasing the budget for the Department for Environment, Food and Rural Affairs to £4 billion in three years' time to help us tackle climate change and protect the countryside. I can confirm that that includes provision of £800 million a year by 2010 for flood defences. We now need to move further and faster on the next stage of the European emissions trading scheme. As part of that, we propose to increase significantly the use of the auctioning of carbon allowances, as we move further towards a low-carbon future. Today I am also publishing an interim report by Professor Julia King, which shows that, by choosing the most efficient cars on the market today, drivers can cut emissions and their fuel bills by up to a quarter, and that with new technology and cleaner power we could cut carbon emissions from cars by up to 80 per cent. I will bring forward proposals in the Budget, after Professor King's final report, on ways to encourage the next generation of cleaner cars and incentives for people to buy them. Air travel accounts for a growing share of carbon emissions, so it is right that aircraft emissions should be part of the EU emissions trading scheme. I also propose that aviation makes a greater contribution in respect of its environmental impact. For that to be as environmentally effective as possible, I intend from 2009 to levy the duty not on individual passengers but on flights, to encourage greater and more efficient use of planes. I can also announce a new environmental transformation fund, and that fund will have a three-year budget of £1.2 billion, which will provide investment in new energy technologies here at home and resources to meet our obligation to support poverty reduction in the poorest countries through environmental protection. I believe that it is to the lasting shame of this country that, in the 1980s and 1990s, aid to developing countries from Britain fell by almost a quarter. In 1997, we devoted just £2 billion—a quarter of 1 per cent. of our national income—to development aid. That figure today is over £5 billion, and today I can announce that overseas aid will rise again to £9 billion by 2010. In doing so, we will meet our commitment to double multilateral and bilateral aid to Africa from 2004 to 2010. That puts us on course to meet our European commitment of 0.5 per cent. of national income devoted to development aid by 2010; and then to meet our commitment to achieve, for the first time, the United Nations goal of 0.7 per cent by 2013. I can tell the House that we will meet all our international obligations to developing countries in full. In the 20 years up to 1997, child poverty in Britain doubled. Since then, we have lifted 600,000 children out of poverty. Two and a half million more people are in employment. We believe that helping people into work is the best way of cutting child poverty and providing opportunity, which is why we shall continue to support the new deal. For the first time in 30 years, the number of people on incapacity benefit is falling, with almost 100,000 people taken off the incapacity benefit roll in the past two years. The roll-out of pathways to work will bring together the public, private and voluntary sectors to help more people into work. I can confirm that, with 300,000 more lone parents in employment compared with 10 years ago, we can help even more lone parents by extending the top-up that they receive for the first 12 months that they spend back in work. In addition, I can also announce today further measures to take more children out of poverty. First, I am doubling the amount of child maintenance that a family can receive without affecting their family benefits to £20 a week next year and then £40 a week in 2010. Secondly, I am increasing the child tax credit by a total of £175 a year from next April, with a further increase in 2010, so that, for families on low incomes, children's benefits and tax credits will be worth at least £3,500 a year for the first child. Taken together, those measures will lift a further 100,000 children out of poverty. Next year's rise in the basic state pension and other benefits will be announced later this month, but the pension credit for older people with just a small pension of their own will rise from next April by £5 a week and £260 a year for a single person and by £7.65 a week and £397 a year for a couple. That guarantees every person over the age of 60 at least £6,450 a year. We will bring forward the start date for flat-rating the state second pension to 2009. I can announce that direct funding for social care will increase to £1.4 billion by 2010. That will help to provide new homes for older people and help people with disabilities to live independently in the community, as well as offering more services for carers. I can also announce an extra £200 million next year to deliver on our commitment to every pensioner and disabled person in England—guaranteed free off-peak national bus travel. Today, home ownership is at 70 per cent.—that is nearly 2 million more than 10 years ago—but we need to do more; we need to ensure that there are homes for people to buy. Last year the number of homes increased by 185,000. That is the largest increase for nearly 20 years. Planning reforms that are coming before the House will help the building of more homes in an economically and environmentally sustainable way, as we provide additional investment to increase the level of house building to 240,000 a year by 2016. In total, that is an extra 3 million new homes between now and 2020. I can announce that we will also spend over £4 billion over the next three years to help people living in poor quality housing to make renovations to their homes, so that by 2010, some 1.9 million of the poorest children and 1.7 million pensioners will have benefited. As we build more homes, we need to ensure that properties are not left unrented, unsold or unavailable for people to live in. I am introducing measures today that will help to bring empty residential properties back on to the market. Buying a home is probably the biggest investment that people make in their lives. Fixed-rate mortgages can offer more certainty. I want to see more fixed-rate mortgages not for just two years but for 10 years or even longer. I will bring forward proposals at the Budget on reforms to help lenders to ensure that more people can fix their mortgages as a matter of routine, if it is right for them. As we prepare plans for more home building, for eco towns and for shared equity, we will also consider how else we can increase the supply of housing to help first-time buyers to enter the market. Grants to local authorities for local services in England will increase to £26 billion by 2010. We have provided sufficient resources to ensure that local authorities can keep council tax rises substantially below 5 per cent. The budget for the Department for Culture, Media and Sport will increase to £2.2 billion in three years' time. That guarantees an inflation increase for the arts, free access to museums and galleries, and extra sport, so that every child and young person can take part in sport for five hours a week. It will also deliver the cultural Olympiad in the run-up to London 2012. I can also set out the total settlements for the devolved Administrations in Scotland, Wales and Northern Ireland, giving them their full entitlement. In Scotland the figure will rise to £30 billion in 2010; in Wales it will rise to £16 billion; and in Northern Ireland it will rise to £10 billion. That, of course, is in addition to spending in Scotland, Wales and Northern Ireland on matters that are not devolved, such as spending on defence, tax credits and pensions, which benefit all parts of the United Kingdom. I now come to my final decisions. In respect of capital gains tax, there is currently transferability between spouses, to recognise the fact that capital assets are built up jointly over a lifetime. In inheritance tax, there is currently 100 per cent. spouse relief over a lifetime, but there is no transferability of allowances. I want to ensure that husbands and wives can benefit from each other's unused inheritance tax exemptions, so I will raise the total amount of inheritance for married couples on which no tax is paid, and this will apply to civil partnerships, too. I can announce that, from today, the combined tax-free allowance for their estates will not be the current £300,000, but up to £600,000. By 2010, the combined tax-free allowance for couples will rise to £700,000. And I can do more: to ensure that people who have already lost their husband or wife will also benefit, I will backdate that indefinitely for every widow or widower. Those changes mean certainty for up to 12 million married couples, with an allowance of up to £600,000, rising to £700,000, and the same entitlement for 3 million widows and widowers. That allowance is worth more than the value of 97 per cent. of homes in this country. In future years, we will take both house prices and inflation into account when setting inheritance tax thresholds. I now have a further choice to make. As a result of our economic management, I can meet both our fiscal rules and invest more—£2 billion in 2010, in addition to the sum proposed at the Budget. If I was to raise the inheritance tax threshold to £1 million, it would cost a further £2 billion. I found that, under that proposal, £1 billion would go to estates worth more than £950,000—the top 1 per cent.—only. Instead, I decided to go ahead with raising the inheritance tax exemption to £700,000 for married couples and civil partnerships, and invest the additional £2 billion in health and education. Let us now have a debate about what is affordable and what is fair in the future of inheritance tax. I welcome that debate. In this statement, I have managed to raise the arts and culture budget; to give the go-ahead for Crossrail; to meet our international obligations on overseas aid; and to double the budget for social housing and expand owner-occupation. I can now announce that the final figures for education will be higher than originally proposed. I hope that all parties will support and match these new plans when I explain where the additional money is going. The Budget proposed that investment in education and skills will rise to £74 billion in 2010, increasing education spending as a share of national income rising from 4.5 per cent. 10 years ago to 5.6 per cent. now. Today, I can announce, in addition, further investment, providing a £250 million fund to ensure that all children at school are ready to learn and benefit from personalised support. I can also do more for the national health service. Over the next three years, the money we spend will rise again by more than its historic rate: on average, by 4 per cent. above inflation. This new investment will allow us to ensure a maximum wait of 18 weeks from referral to hospital, increased access to GP services and cleaner hospitals. With the additional £2 billion I have available, I can now announce that investment in health in England will rise from £90 billion this year to a total of £110 billion in 2010. I could have spent that £2 billion on an inheritance tax reduction for the few wealthiest estates. Instead, I am able to raise the inheritance tax allowance and invest more in schools and hospitals for the British people. That means, in education, helping to build a new primary school in every local area by 2010. In health, when added to its budget, this will deliver 20 new hospitals, 140 new walk-in centres open seven days a week, and 100 new GP practices. We aim to ensure a regular check-up for every adult in the NHS, saving lives and improving the quality of patient care across the country. We propose not unaffordable tax cuts that deprive public services of the money they need, but an affordable tax cut and improved investment in health and education, founded on economic stability. I commend this statement to the House.