HC Deb 28 November 1995 vol 267 cc1071-3

Finally, I turn to my proposals for income tax payers. In the post-war era, when Britain went into comparative economic decline, Britain had high rates of taxation on income. Those rates damaged the economy and stifled prosperity. We had a tax policy that was based on envy.

When this Government came to power, the basic rate was 33 per cent. The top rate on earnings was 83 per cent. Rates on so-called unearned income were as high as 98 per cent. There was nothing fair about taxation before we started to make it fairer. During the past 16 years, we have cut the basic rate by around one quarter to 25 per cent. and abolished all rates of income tax above 40 per cent.

But the income tax burden is about more than just tax rates. Tax allowances matter as well. I propose to increase allowances for married couples and people receiving related allowances by £70, in line with indexation. It is a myth that the tax system penalises marriage and that single people are better off than married couples within the British taxation system. Any young couple contemplating living together and starting a family will pay less tax by getting married.

As the economy continues to grow and create jobs, more people, as they return to work, will find themselves earning more than the tax threshold. I believe that we should relieve as many of the lower-paid as possible from the burden of income tax. I therefore propose to increase the basic personal allowance by £240—that is £100 more than indexation. That will provide an incentive to work to those at the bottom of the income scale. More than 200,000 people will be kept out of tax, compared with indexation of allowances.

People who do not consider themselves rich now find that their incomes may bring them into the top rate of tax. That has a lot to do with the growth of the economy over 16 years and the growth in personal incomes. I do not want more people to be taken into the 40 per cent. band next year. I therefore propose to raise the higher rate threshold by £1,200—that is £200 more than indexation.

But in the longer term, of course, we have a clear and achievable goal for income tax—moving to a basic rate of 20 per cent. as soon as we can. This year, I can move much faster towards that goal. I propose to increase the 20 per cent. band by a further £700—that is £500 more than indexation. That will bring an extra 1 million people into that band. That means that around a quarter of all taxpayers—that is, over 6 million people—will pay tax on their income at just 20 per cent.

There were many who doubted the credibility of our goal of a 20p basic rate when we first set it out in 1992. We are now making big strides towards achieving it. Some people are even having to resort to trying to outbid us, I discovered in recent debates. But widening the lower rate band is not the only route to 20p. I want to make progress on another front. I therefore also propose to reduce the rate of tax on all savings income for all basic rate taxpayers to just 20 per cent. That will apply to the tax deducted from interest on bank and building society accounts, for example, and it is equivalent to an increase in interest rates for savings income. Around 14 million savers will gain from that tax reduction and they will see the income from their savings increase. As a result of that measure, people will gain an extra £5 from every £100 they receive in interest from their building society account.

Many of those who benefit will be pensioners, who will gain £75 a year on average. Some could stand to gain £500 a year or more. So, again, those who have earned and saved will be able to keep more of their own money and benefit more from their own money; and the measure is another and decisive step to a 20 per cent. basic rate for all income.

I propose to reduce the small companies rate of corporation tax to 24 per cent. The reason I am able to reduce the small companies rate of corporation tax is that the small companies rate has for many years been pegged to the basic rate of income tax. My final proposal in this Budget is therefore to reduce the basic rate of income tax by one penny to 24p in the pound. [Interruption.] It is no good laughing. That was the shortest smile, on the face of the hon. Member for Dunfermline, East (Mr. Brown), that I have seen even from him in a very long time, because these three steps—widening the 20p band, a 20p tax rate for savings income and a penny off the basic rate—move us much closer to a 20 per cent. base rate of tax for all income. We have a clear commitment—[Interruption.]

Mr. Deputy Speaker

Order. The House should listen to the Chancellor.

Mr. Clarke

We have a clear commitment to the 20p basic rate. We believe in it and we can achieve it. As a result of the measures in this Budget, a married couple with only one earner on average earnings with two children will pay £190 less tax, but overall, their real take-home pay after tax will rise by around £450 next year. They will be £700 a year better off than they were at the time of the last election, and that is extra money for families to spend as they wish.

My Budgets of the past two years have kept us on the course that we said we would follow. We have cut taxes, we are cutting taxes and, when we can afford it and when it is in the interests of the economy, we will cut taxes again. Good economics is good politics.

This Budget puts Britain on course to be the enterprise centre of Europe; a Britain that creates more jobs and more wealth in which all can share because business can flourish here in a secure climate of low borrowing, low taxation, deregulation and free trade. That is why this Budget controls overall public spending while shifting more money towards schools, towards hospitals and towards the police. That is why this Budget keeps Government borrowing on a downward path and that is why this Budget cuts taxes. I have achieved that hat trick—controlling spending, downward borrowing and cutting taxes—only because the Government have followed a consistent economic policy.

Only we, in this House, have clear objectives and we know how to achieve them. We are aiming at borrowing falling to zero; public spending below 40 per cent. of national income; inflation below 2½ per cent; and a 20 per cent. basic rate of income tax. This Budget puts us on a path to meet all those goals and I commend it to the House.