Pre-Budget Report

This is my 10th and latest pre-Budget report and, under this Government, the 10th consecutive year of economic growth. I can report not only the longest period of sustained growth in our history, but that, of all the major economies—America, France, Germany and Japan—Britain has enjoyed the longest post-war period of continuous and sustained growth. The Treasury forecast is that growth—sustained under this Government for a record 38 quarters—will continue into its 39th and 40th quarters and beyond. Ten years ago, Britain was seventh out of seven in the G7, bottom of the G7 league for national income per head. In the last two years, Britain has been second only to the United States. In no other decade has Britain’s personal wealth—up 60 per cent. since 1997—grown so fast. The pre-Budget report drives forward the great economic mission of our time—to meet the global challenge and unleash the potential of all British people, so that the British economy out-performs our competitors and delivers security, prosperity and fairness to all. Let me report: growth in quarter one of 0.7 per cent.; in quarter two of 0.7 per cent., and in quarter three of 0.7 per cent. The forecast for 2006 was annual growth of between 2 and 2½ per cent. I can report that growth this year will surpass that figure and is expected to be 2¾ per cent., and will rise to between 2¾ and 3¼ per cent. next year. Business investment is up 5¾ per cent., exports are up 6 per cent. and investment overall is up 6 per cent. Despite contending with global imbalances, exchange rate uncertainties, stalled trade talks and high commodity prices, Britain’s investment-led and export-led growth is forecast to continue in 2007, and investment and exports are forecast to rise by 5 per cent. or more. By mid-2007, we expect inflation to be at its 2 per cent. target and to remain at target in 2008. Britain uniquely continues to combine recession-free growth with the longest period—a decade—of simultaneous employment growth and productivity growth. Productivity, which, in the last economic cycle up to 1997 grew by 1.9 per cent., is averaging since 1997 2.4 per cent. From 1997 to—and including—this year, our productivity per worker has moved 3 per cent. ahead of Germany and 11 per cent. ahead of Japan. We have halved the gap with France and we are the only G7 country to narrow the gap with the United States. As productivity continues to rise, this year alone there are 200,000 more men and women in employment—[Interruption.] In contrast to 3 million unemployed under the previous Government, there are now 2½ million more jobs in Britain and the highest ever number of men and women in work in our country, and employment is higher since 1997 in every region and nation of the United Kingdom. The Secretary of State for Work and Pensions is today strengthening the new deal, with further measures to bring lone parents and the unemployed into jobs, but there is already a higher proportion of the working-age population in employment in Britain than in America, Japan, Germany, France or the whole euro area. I can report also that the number of people with tax-free savings accounts, ISAs, is now exceeding 16 million, in contrast to just 9 million under the old system of TESSAs and PEPs, and I can confirm that the tax-free advantages of individual savings accounts will continue beyond 2010 and they will be made permanent. In line with independent forecasters, we have decided to maintain trend growth at 2.75 per cent. while basing our public finances, audited by the NAO as cautious and reasonable, on a rate of 2.5 per cent. As I will show when I give all the fiscal figures in detail, Britain will meet both its fiscal rules in this economic cycle and the next. So we build for the future from the fundamentals of a recession-free decade of stability and growth with low inflation, and this is the strongest foundation from which to address the great challenges ahead. Let me summarise: Asia is already out-producing Europe. China alone is manufacturing half the world’s computers, half the worlds clothes, and more than half the world’s digital electronics and, this Christmas, more than 75 per cent. of children’s toys. But in the next 10 years, the competitive challenge is even more profound. Once responsible for just one eighth of the world’s growth, China and India will soon capture almost half. And increasingly they are competing not just on low cost, but on high skills. Every year, Britain adds 75,000 engineers and computer scientists, while India and China add half a million. Annually, Britain turns out a quarter of a million graduates; India and China 4 million. Economies like ours have no choice but to out-innovate and out-perform competitors by the excellence of our science and education, the quality of infrastructure and environment, the flexibility of our economy, and our levels of creativity and entrepreneurship. Just as in the last decade, by planning long term, we created a new and enduring British framework for long-term economic stability, the task is to think long term again for the coming decade and to create a new British framework for innovation and investment—a British strategy to make the next stage of globalisation work for the British people. A shared finding of each review we have published in the past few days is that the investments that Britain must make can be achieved only in a new era of shared responsibility and of long-term partnerships between the public and private sectors. If the focus of our first decade was to replace or repair old hospitals, old schools and old housing—that is the catch-up investment that we had to do—the new priority is world-leading investments that will move Britain sustainably ahead of our competitors: the road and rail networks, the affordable housing, the advanced medicine and science and the schools and colleges of the future. We in Britain now have a long-term choice to make—whether to commit to the essential investments that these reports recommend. First, I shall deal with science and innovation. Twenty-five years ago, the market value of our top companies was no more than the value of their physical assets. Today, the market value of Britain’s top companies is five times their physical assets, demonstrating the economic power of knowledge, ideas and innovation. The next challenge for Britain is to match strength in basic research with success all round in transforming knowledge into successful products and new jobs. So, having consulted on the way forward for university research in the UK, we are today detailing a new system for assessment and funding. As a first step, universities will have access to £60 million a year directed to applied research with commercial potential. We are determined that Britain should be a world-class location for future medical research, including stem cells. To ensure that Britain leads the world in developing new treatments and drugs, we will bring together the research capability of our universities, institutes and pharmaceutical companies with the unique resources of the research facilities of the NHS. I can confirm that, with a pooled budget of over £1 billion a year and a new fast-track procedure for priority research, the president of the Academy of Medical Sciences, Professor John Bell, will lead this new drive to identify for Britain the most useful and fruitful areas for potential medical breakthroughs. British science can also do more to eradicate poverty and disease around the world, so today the International Development Secretary is establishing a new partnership with the research councils and charities, including the Wellcome Trust and the Gates Foundation, so that we can maximise the contribution of British inventors, scientists and researchers to the urgent global task of attacking poverty. Because the future success of our creative and knowledge-based industries also depends on Britain having a robust intellectual property regime, the Secretary of State for Trade and Industry is announcing today that he will tighten the penalties for copying and piracy while giving individuals new rights for personal use, and he will introduce a new fast-track protection for small companies to safeguard their trademarks. Since 1997, the number of films made in Britain has increased by 50 per cent. To encourage an even more vibrant British film industry, I am confirming that 1 January will be the date to introduce new film tax reliefs. I am also addressing avoidance and the rules governing managed service companies. The best way to make globalisation work for the British people is to combine open markets, free trade and flexibility with investment in people and fairness to people. The minimum wage is now £5.35 per hour, but to be effective we must ensure that British workers and good British companies are not undercut by illegal rates. In January, we will raise the penalties for persistent illegality, and to raise the standards of enforcement I am announcing a 50 per cent. increase to £9 million in the budget to monitor and police the minimum wage. In the past 10 years, over 1 million more adults have gained literacy and numeracy qualifications, and the British work force now has 3 million more men and women with skills. The Leitch report says that instead of today’s 6 million unskilled workers, the 2020 economy will need only half a million unskilled workers. Instead of 9 million high-skilled workers and graduates today, we will need 14 million. I want British workers to gain the skills for those higher-paid jobs of the future. Our aim is that by 2020: 90 per cent of adults reach at least the equivalent of 5 GCSEs, achieving in just over one decade what no other country has managed until now; that by reforming underperforming colleges we will double from 2 million to 4 million the number of adults achieving A-level equivalent skills; and that we ensure that our economy has 5 million more men and women with high-level professional and graduate skills. Our objectives cannot be achieved either by Government alone or by business alone. So the review assesses that, after 2010, a new statutory entitlement to skills training may be required. But there is an urgent need to make progress now and by consensus, so the Secretary of State for Education and Skills is today appointing the former director general of the CBI, Sir Digby Jones, to advance an agenda of employees taking more responsibility to train; employers taking more responsibility to offer time off, with, in return, more say over what training is provided; and the Government taking more responsibility to reform and invest in training provision at work, in colleges and online. To meet the skills needs of the future, we must also encourage young people, who too often lose out, to stay on and study for qualifications and go to university and college. Around education maintenance allowances, we are introducing an earn-to-learn programme for people to gain graduate qualifications while still working part-time; new summer school universities; work experience and coaching to motivate young people to stay on in education after 16; and an extension of the support to 16 and 17-year-olds who are not in education or employment, to help them into training and then into work. We will consult on £2,000 bursaries for looked-after children to encourage them to go to university. We will also consult on a new path for entry to university, in which students volunteer in return for a reduction in tuition fees. To ensure that every child and young person has the best start in life—[Interruption.] I thought that there was common cause on this. We must address the causes and roots of child poverty. In April, child benefits paid to the poorest child, which were only £28 a week in 1997, will rise to £64 a week. These tax credits are the main vehicle that has ensured that, since 1997, 2 million children have been taken out of absolute poverty and almost 1 million children out of relative poverty. Now that the healthy start scheme offers half a million pregnant mothers and families with young children up to £5.60 a week extra for nutrition, it is time to do more. I have received powerful representations that in the last months of pregnancy, when nutrition is most important, and in the first weeks after birth, the extra costs borne by parents could be better recognised if we did more to help through the universal benefit—child benefit—which is paid to all. Maternity grants are available to low-income mothers from the 29th week of pregnancy. Help should be available to all mothers expecting a child, so child benefit will be paid on that basis to every mother—additional child benefit that now recognises the important role, at this critical moment, that child benefit can play. We are also publishing today the interim report of the third-sector review and an action plan for third-sector involvement in public services. We propose more stability in funding for the third sector, the voluntary community and charitable organisations upon which so many communities depend, particularly small local organisations. I can announce that in the spending review the norm will not be one-year funding for third-sector organisations, but offering them three-year funding. Community ownership of assets can provide local communities with a financial and social stake in their own areas, so we are also announcing a £30 million fund to encourage local authorities and the third sector to work together to expand community ownership of community assets. Reviews on children and disability, issues of social care and local regeneration will report next year. With 100,000 Olympic volunteers already, my right hon. Friend the Secretary of State for Culture, Media and Sport and my hon. Friend the Parliamentary Secretary, Cabinet Office—the Minister responsible for the third sector—will now consult on the next stage: how young people can do more to volunteer in the run-up to the 2012 Olympics. The same partnership of responsible individuals, companies and Governments is vital to meeting the environmental challenge. I have said that we should use market mechanisms and incentives to work towards global carbon trading. Since the Stern review, I can report that 31 countries in the European Union and the European Free Trade Association have now signed up to emissions trading as a first step towards that global framework, and we are bringing together the major financial institutions because our aim is to make London the world’s leading centre for carbon trading. On the development of biofuels, Britain has now signed a partnership agreement with Brazil, Mozambique and South Africa. On the preservation of rain forests, we are working with Latin American and Asian countries. On clean coal, we are working with China and India. Today, Norway and Britain are together launching the first feasibility study for a new infrastructure for carbon capture and storage under the North sea. My right hon. Friend the Secretary of State for Trade and Industry will be appointing engineers ahead of a decision to be made next year on the first carbon capture demonstration plan for the United Kingdom. It is time, also, to set a long-term framework for curbing the carbon emissions from houses, which constitute 30 per cent. of all emissions. Next week my right hon. Friend the Secretary of State for Communities and Local Government and my hon. Friend the Minister for Housing and Planning will set out plans to ensure that within 10 years every new home will be a zero-carbon home, and we will be the first country ever to make that commitment. To accelerate the building of zero-carbon homes, for a time-limited period the vast majority of new zero-carbon homes will be exempted from stamp duty. For existing homes, I will consult on a new facility to undertake energy audits and offer low loans that would in time, because of low energy bills, pay for themselves. Through greater energy efficiency, our aim is to reduce emissions and to eliminate fuel poverty. In addition to the basic pension rising from next April by 3.6 per cent. and the winter allowance of £200—£300 for the over-80s—the pension credit minimum guarantee will rise by £5 a week for a single person and £7.65 a week for couples. With grants of £300 to £4,000—through the Warm Front programme, which I extended last year—we are providing not only insulation, but free central heating for low-income pensioners and extra support towards central heating in all other pensioner households. By the end of 2008, we will have insulated an additional 2.7 million homes, but in the coming year we will extend Warm Front and, community by community, we will make it possible for 300,000 pensioner and other households, the ones most vulnerable to fuel poverty, to have free insulation and free central heating. I turn to the framework for transport, which is responsible for 30 per cent. of all carbon emissions, the aviation sector accounting for a fifth of those. Currently, aircraft emissions are not part of the EU emissions trading scheme, and nor is aviation fuel taxed. While we continue to work internationally to seek a global agreement on reducing aircraft emissions, each country must take action domestically. From 1 February, we will double air passenger duty. For most journeys—over 75 per cent. of them—duty will rise from £5 to £10, securing extra resources in the coming spending round for our priorities, such as public transport and the environment. A priority for vehicles—responsible for 25 per cent. of emissions—is to promote cleaner fuels through fiscal incentives. Today, I am extending the 20p per litre discount to include the next generation of biodiesel, and we will offer that discount to all new innovative fuels as they develop. I am also consulting, prior to a Budget decision, on extending the current 40p per litre duty discount for biogas and on the level of tax discounts for company cars that use high-blend biofuels. I am relieving small biofuel producers of requirements to register or submit returns. While I will go ahead with an inflation rise in fuel duty from midnight tonight of 1.25p per litre, I will not restore the fuel duty escalator and I have rejected a real terms increase in fuel duty. I can also announce that, to incentivise the use of cleaner fuels in trains in the same way as we do for cars, the tax rate for piloting rebated fuels mixed with biofuels will be reduced from 53p to 8p. For greater energy efficiency in public procurement, we are publishing new guidelines to ensure that the £125 billion we invest each year is spent both well and in a sustainable way, and as a first step we will pilot school designs that achieve a level of excellence in carbon reduction. Tackling climate change is an opportunity for Britain to create thousands of new jobs. Our new institute to investigate new environmental technologies will start with a budget of £550 million, and I can also confirm that there will be a second enterprise capital fund focused on innovative green technologies. The theme of both the Eddington review on transport and the Barker review on planning is that we must systematically modernise and improve Britain’s road, rail, housing and civic infrastructure, which was run down in the ’70s, ’80s and early ’90s. We must invest in a sustainable infrastructure that will contribute to the future prosperity of the country. Just as we made monetary policy independent of Government—then financial services policy, and then competition policy and much of industry policy—it is time to adopt the same approach for planning. We will now consult on the proposal that in future, while Ministers will set policy guidelines, strategic decisions on location and planning permission for major infrastructure projects will be made outside of day-to-day political control and instead by an independent planning body. As we move forward our risk-based approach to local and national regulation, we are setting new incentives that will cut the numbers of local authority inspections. After consultation with, and support from, business, we will now implement a new approach offering early rulings on business tax, time limits for decisions by the Inland Revenue and a better approach to managing risk. As we consult on, and then implement, the Barker and Eddington recommendations, we are today also designating new brownfield sites that will raise the number of new homes on surplus land to 130,000, and we are doubling within four years to 160,000 the number of families who will be able to become homeowners for the first time through shared equity under our investments. Properly equipping ourselves for the economic and social challenges ahead requires a long-term commitment of new investment supporting reform and modernisation. Our capacity to finance that modernisation depends on the strength of our fiscal position, on our ability to release resources for priorities, and on the choices we as a country are prepared to make. On the fiscal position, I am today publishing a document on Britain’s long-term public finances. Its detail shows that even after taking into account our new commitments on pensions, the country’s public finances are on a sound and sustainable basis for the long term, and they are stronger than other countries. Before I give this year’s fiscal figures, I can confirm that to fund operations in Afghanistan, Iraq and other international obligations, the Secretary of State for Defence has been allocated an additional £600 million, and I want to pay tribute to our armed forces and security services for their contribution to the country. I can also announce an additional £84 million directed to intelligence and counter-terrorism. Our budget for security, which was just £1 billion in 2001, will now be more than £2 billion for 2007-08. Our two fiscal rules for the economic cycle are the golden rule that current spending is paid for by tax revenues, and the sustainable investment rule that with debt at a prudent level we can invest in education, the NHS, infrastructure and other essential priorities. Those rules are demanding, and no other major economy—neither America, nor Japan, nor the euro area—currently meets them. However, I can report that, even after the new commitments I am announcing in this report, our current deficit falls from £15 billion to £8 billion and then to £1 billion, and then we record a surplus in successive years to 2011 of £4 billion, £7 billion, £10 billion and £14 billion. Therefore, with an overall surplus in this economic cycle of £8 billion, we meet the golden rule and are already on course to meet it in the next cycle. Let us compare that with the two economic cycles under the previous Government. In their first economic cycle the rule was missed by a margin of £140 billion, and in the cycle of 1986-97 they missed it by £240 billion. The strength of our fiscal position is that over the economic cycle, and for the first time for four decades no borrowing is necessary to cover current spending. I now turn to our second rule, the sustainable investment rule. It is a rule that has been especially challenging for Britain because we have had to catch up after decades of underinvestment in our infrastructure. However, even after doubling capital investment in education, transport and the NHS, we meet our second rule. Debt is 47 per cent. of national income in America; it is 55 per cent. in the euro area; it is 65 per cent. in the European Union as a whole; and it is 90 per cent. in Japan—but it is 37.5 per cent. in the UK. Net debt levels will in future years be 38.2 per cent. and 38.6 per cent., and then 38.7 per cent. and 38.5 per cent. Total net borrowing, which under the last Government went as high as 7.8 per cent of gross domestic product—the equivalent today of £100 billion of borrowing—will fall from £37 billion this year to £31 billion, £27 billion, and then in successive years to £26 billion, £24 billion and £22 billion. So borrowing will fall from 2.3 per cent. of national income next year to 1.3 per cent. by 2011. With overall deficits and debt lower than those of our competitors and lower than in recent decades, Britain is meeting both of our fiscal rules in this cycle and the next. Within that strong and sustainable fiscal position, we are well placed to make decisions and to meet our long-term priorities for public services and for investment. To do so and to get the most resources to the front line, I am requiring every Department to re-examine each of their assets; granting new powers to the Office of Government Commerce, including tighter rules on fees; removing old financial barriers to the disposal of surplus Government assets; and, based on a register to be published in January, we will also identify additional assets that can be sold. Already, share sales— including Westinghouse and other assets—will raise this year and next an additional £7 billion, and over the spending review periods we will raise a further £30 billion from sales of land and buildings. Following the Varney report, we can release £400 million by cutting Government call centre operating costs by 25 per cent. to free-up resources for the front line. I can also confirm real term reductions of 5 per cent. a year in the budgets of Her Majesty’s Revenue and Customs, the Department for Work and Pensions, the Cabinet Office and the Treasury, and of 3½ per cent. a year in the Department for Constitutional Affairs. I can announce that for the years to 2011 I have reached agreement with Secretaries of State for net efficiency savings in their overall budgets of 3 per cent. a year and for cuts in their administration budgets of 5 per cent. a year. Taken together with other measures, that releases an additional £26 billion by 2011 for our priorities such as education, the NHS, policing and security. As recently as the mid-1990s, 75 per cent. of all new public spending went to debt interest and social security benefits, mainly to pay for unemployment. Today, it is down to less than 20 per cent., and the purpose of all these savings is to ensure that front-line services will have the resources that they need. So, up against the global challenge, and with fiscal rules that allow us to borrow for sustainable investment, we should not postpone, nor should we avoid, essential new investments that this country must make in infrastructure and education. One choice for Britain would be to adopt a balanced budget policy, but to achieve that by cutting back on essential investment in schools and infrastructure would in my view weaken us for the global challenges ahead. I have also considered representations for a third fiscal rule, but that would require us to cut spending by £28 billion this year alone. That is a choice for Britain that I reject, because—[Hon. Members: ““Hear, hear.””] It would deny us investment in education, health, infrastructure and vital priorities, and leave Britain ill-prepared and ill-equipped for the future. Instead, I can confirm that capital investment in education, which was only £1.5 billion in 1997, will be £8.3 billion next year, and we will set out long-term plans for investment to rise even further. I can also confirm that investment in transport, just £4 billion in 1997, will be £9.6 billion next year, and in the spending review we will set out an updated 10-year spending plan. Investment in housing, just £2 billion in 1997, will be nearly £8 billion next year, with sustained investment through into the next spending round. I can also announce that the spending review for the years to 2011 will be based on planned capital investment in our country in infrastructure, education and vital priorities, rising from £39 billion last year to £60 billion in 2011. Let me give details of the investment that we will make over the five years ahead: next year, £48 billion, rising in 2008 to £51 billion, then to £54 billion, then to £57 billion and then to £60 billion, showing our commitment to modern roads and rail, to modern schools and science, and to new housing, hospitals and the renewal of communities. That is a change from the age of disinvestment under the previous Government. The single most important investment that we can make is in education, and today I can start implementing the recommendations that have been put to us on skills. In 1997, there were 80,000 apprentices; today, in England alone there are 250,000, half of whom are now in manufacturing, construction and technology. I can announce that in the years to 2020, the number of apprenticeships will rise to 500,000. I can also announce that under the ““Train to Gain”” programme, we will increase the number of adults learning basic workplace skills from 100,000 this year to 350,000 a year by 2011, giving adults, as well as young people, the opportunity to better themselves. It is even more important that the next generation do not lose out or fall behind on the basic skills that they will need to succeed in the global economy. So the Secretary of State for Education and Skills is also announcing today that the ““Every Child a Reader”” programme, which already has the best results in literacy, will be extended nationwide year by year. All boys and girls who are already, at the age of six, falling behind in reading will be offered special catch-up tuition. In secondary schools, where the learning gap between boys and girls is greatest, there will be new funds for extra support for mentoring, small group tutoring and personalised learning. Since 2001, all children at the ages of one, two and three have received books to encourage them to read. I can announce today that all children starting primary school at five, and as they move to secondary school at 11, will receive books free of charge. In total, 3 million books will go direct to children to lift the reading standards of young people in our country. I have also become convinced that, for Britain to rise to the global challenge, we should commit now to year-by-year improvements in investments in schools and educational establishments. It is right that we now make a spending settlement right through to 2011 that covers all capital investment in education. Separate announcements will be made for Scotland, Wales and Northern Ireland. To ensure that all 21,000 schools and educational institutions are fit for 21st-century challenges, I can announce that educational investment in our schools, colleges and university buildings and facilities, which stood at just £1.5 billion in 1997, will by 2010 be £10.2 billion for education alone. The investments in education that we will make are £8.3 billion next year, £8.6 billion in 2008, and £9 billion in 2009, rising to £10 billion in 2010. In the next four years, that is a cumulative investment in education alone of £36 billion, matching by 2010 state school capital investment per pupil to private schools, as year by year we close the gap. Our goal is 12,000 new or completely refurbished schools—half of all primary schools and 90 per cent. of all secondary schools—benefiting 4 million children a year; in addition, 100 colleges rebuilt, serving 1 million students; and in total, 3,500 new children’s centres, built for nearly 3 million boys and girls in every constituency of the country. Every one of our constituencies is benefiting from the biggest programme of educational investment ever, in support of our decision to prepare for the global economy as the most educated nation in the world. For next year, I can go beyond the announcement that I made in the Budget on spending per pupil. In striking the right balance between tax, spending and borrowing, I am able to meet both our fiscal rules and to release additional resources for the coming year. I propose to increase the cash that we give to every school and every head teacher, to be used in the way that local schools think best. The typical primary school received £39,000 this year in direct payments. For April next year, I propose that that be £50,000 for every primary school. The typical secondary school received £150,000. For April next year, I propose that it be £200,000. That is the equivalent of £200 for every pupil, paid three months from now direct to the school—money I could use for tax cuts, but I say, invest in education first; money that could not be invested if we had a third fiscal rule. Stability is our foundation, education our No. 1 priority—education first now and into the future. I commend this statement to the House.