Budget Statement (Hansard, 2 July 1997)

§ The Chancellor of the Exchequer (Mr. Gordon Brown)

The Budget that I lay before the House today represents more than simply an allocation of resources and an accounting of revenues. Behind the numbers and statistics, the central purpose of the 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 every one of us.

The impact of the global market in goods and services, and of rapidly advancing technology, is now being felt in every home and community in our country. New products, services and opportunities challenge us to change; old skills, jobs and 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 an historic opportunity. The dynamic economies of the future will be those that unlock the talent of all their people, and our nation's creativity, adaptability and 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 that we need to make Britain a strong economic power in the 21st century.

To achieve that, however, we must address the four weaknesses that have held us back for too long and for too many years: instability; under-investment; unemployment; and waste of talent. In this Budget, I shall address each of those 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 that means a commitment to stability in our relationships 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 setting the inflation target, and the Bank of England setting interest rates to meet that target. That reform signified our determination to break from the short-termism of the past and to establish long-term confidence. In this Budget, I shall match those measures for long-term monetary stability with measures to promote long-term fiscal stability.

The Chancellor is first and foremost the guardian of the public finances—the people's money. During the 1990s, however, the national debt has doubled. This year alone, the taxpayer will pay out debt interest payments of £25 billion—more on debt than we spend on schools.

Public finances must be sustainable over the long term. If they are not, the poor, the elderly and those on fixed incomes who depend most on public services will suffer 304 most. Therefore, 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. To implement those rules, I am announcing today a five-year deficit reduction plan. Those rules and that plan will ensure an 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 on coming to office, the Government invited independent scrutiny by the National Audit Office of key assumptions in the public finance forecasts. That 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 in the country 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. 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 will 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, and also by a clear assessment of the state of the economy. I now turn to that.

We have seen a rapid growth of consumer spending of nearly 4 per cent. over the past 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 4½ per cent. a year. The rate of broad money growth has been around 10 per cent. for a year. Those 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 the pattern could be repeated. In similar circumstances, some of my predecessors have ignored the 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 305 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 that interest rate increases were necessary, and events since then have confirmed that it was the correct judgment. 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 past 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. Nevertheless, 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, therefore, is 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 £5½ billion this year and £4¾ 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 national income will grow by 3¼ per cent. this year and 2½ per cent. next year before returning to its trend rate.

Consumer spending, which is expected to increase by 4½ 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 two years, is forecast to rise strongly this year and next, so increasing investment as a share of our national income.

Finally, inflation is expected to remain at 2½ per cent. this year, the Government's target, rising slightly to 2¾ per cent. next year as a result of the failure by the previous Government to take early action to control inflation, before returning to 2½ per cent in 1999.

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

A prudent estimate of the current trend rate of growth is only 2¼ per cent., so raising the long-term growth rate of our economy is our major challenge. That is why the announcements that follow represent a new kind of Budget for higher growth—one whose main priorities are to invest for the long term, particularly in skills, to modernise the welfare state and to maximise opportunity for all—the modern route to economic success.

While previous Budgets used to be about dividing up today's wealth, this and future Budgets will thus concentrate on laying the foundations for tomorrow's wealth, and it is to far-reaching measures that will raise the quantity and quality of investment that I now turn.

306 Since 1980, the United Kingdom has invested a lower share of national income than most other industrialised countries, and national income per worker has been lower, too. For every £100 invested per worker in the United Kingdom, Germany has invested more than £140, the United States and France around £150, and Japan more than £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 saves 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 and 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 previous Government's proposal to phase out tax relief on employee pension contributions.

This point in the recovery is, however, 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. The changes in corporation tax are directed to the same long-term objective.

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 United Kingdom. This means that we shall have the lowest corporation tax rate of any of our major competitors—Germany, France, America or Japan—and we shall have it under a Labour Government. This is a long-term commitment which 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 apply from April 1997. 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. That cannot be the best way of encouraging investment for the long term, as was acknowledged by the previous 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. The previous Government cut tax credits paid to funds and companies, so with immediate effect I propose to abolish tax credits paid to pension funds and companies.

In all the consequential changes I will make, I have been, and I will be, fair. For PEP holders, for individuals who do not pay tax and for charities, tax credits will continue to be paid until April 1999. By that time, the introduction of the individual savings accounts will ensure 307 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 that they receive and that will remain the position, and we shall ensure that higher-rate taxpayers will pay no more than they do now on their dividends.

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 shall 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.

For some time, charities have been pressing for a review of their tax treatment. 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 gain, like others, from the longer-term benefit to their shareholdings that higher company investment and profits will bring.

In future, new jobs are more 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 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.

In the past, investment incentives were introduced during recessions, when companies are least able to consider new investment. 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. That will apply to both companies and unincorporated businesses. It means that if a firm invests within the next 12 months, it will be able to set off against tax not a quarter of its investment as hitherto, but a half.

More than 3½ million businesses will be eligible for that 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 now moves forward with one of the most favourable tax regimes for small businesses of any country. This Government will support the small businesses of Britain.

Britain is increasingly leading the world in those industries that most obviously depend on the skills and talents of their workers, such as communications, design, 308 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 our 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. That is a three-year measure at a cost of £30 million, and it should boost not only the number of British films, but the British economy by increasing our exports.

In the new economy, in which capital, inventions and 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 have 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 21st 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 which are 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. So it is time for the welfare state to put opportunity back into people's hands.

First, everyone in need of work should have the opportunity to work. Secondly, we must ensure that work pays. Thirdly, 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 to 25 who is unemployed for more than six months will be offered a first step on the employment ladder. Tomorrow, my right hon. Friend the Secretary of State for Education and Employment will detail the four options, all involving 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, the chance of full-time education or training.

With those 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 the work that they do in the community by taking on a young person. I will make it possible for every Member of the House to act as an ambassador for this venture, 309 encouraging young people in their constituencies, consulting local businesses and bringing them together to play their part in this new deal for young people.

There are 350,000 adults who have been out of work for two years or longer. So 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. Many of those unemployed who lack skills are debarred by the 16-hour rule from obtaining them. For this group—the unskilled—the 16-hour rule will now be relaxed, so that when the long-term unemployed sign on for benefit, they will now sign up for work or training.

That programme of £3.5 billion—which includes an unallocated reserve of £500 million—will provide money during a full Parliament. It will be the main item funded from the windfall tax on the excess profits of the privatised utilities, the details of which I shall give the House shortly.

But in this Budget I will address also the needs of two other important groups in our society—lone parents and those in receipt of incapacity and disability benefits who, as a matter of principle, should 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 that any Government have introduced for advice, training, and day and after-school child care to support lone parents.

Currently, lone parents receive little encouragement to seek work before their youngest child is 16. Under the programme that I am announcing today, when their 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 right hon. Friend the Secretary of State for Social Security will explain to the House the full details of how that new radical programme will be introduced.

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

First, we shall increase the supply of child care in our country and make it more accessible. In addition, as part of the new deal for young people, we shall 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 child care assistants. We shall make child care more affordable as well. 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 child care costs disregarded in calculating in-work benefits. Every lone parent on family credit with children 12 years old or younger will be able to receive help.

310 Lottery money will be available for after-school clubs, and as we replace the wasteful and chaotic system of nursery vouchers, we shall be able to offer reliable access to nursery places for every four-year-old in Britain. With those measures, which bring both child care and employment within the reach of many more parents, we have taken the first step towards a national child care strategy for the United Kingdom.

In 1997, no one in our society who wants to do some work should be excluded from the right to work because of disability or incapacity. So, as a final element of our welfare-to-work strategy, we shall bring forward proposals to help those who are disabled or on incapacity benefit, and who want training or work. To fund that programme and other measures, I have set aside £200 million from the windfall fund.

Taken together, those comprehensive and ambitious initiatives mean that from now on, no section of society—and no one—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.

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 canstreamline and modernise the tax and benefit system to help employment opportunities and work incentives, and to 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—as, 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 that in-work benefits act as a genuine top-up for low-paid workers rather than a subsidy for low-paying employers.

I have therefore 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 in America.

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

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 his or her working life. It is our intention to introduce individual learning accounts, and to increase the staying-on rates at schools and colleges, we shall complete our review of educational finance and maintenance for 16 to 18-year-olds to ensure that 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, the new university for industry that we propose can, from the 1990s onwards, through satellite, cable and interactive technologies, bring lifelong learning direct to millions in their homes as well as workplaces.

I have therefore allocated from the welfare-to-work budget £5 million to start up the public-private partnership that will fund the university for industry. By those 311 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 modern world.

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 that a society wishes to promote and deter. Today, I shall start to put those principles into practice by demonstrating our commitment to the environment. As the statement of environmental principles set out by the Financial Secretary to the Treasury, my hon. Friend the Member for Bristol, South (Dawn Primarolo)—published 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—involves 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 those 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. In line with the environmental objectives that I have set out, road fuel duties will increase by an extra 1 per cent. every year over and above the annual 5 per cent. real rate of increase established by the previous Government. Petrol will go up by the equivalent of 4p a litre from 6 pm 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 per cent. 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 December 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. While that review is under way, inflation-only rises for alcohol will take effect from January.

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, value added tax and pay-as-you-earn. Changes to insurance premium tax to block an abuse relating to lone-term health insurance will take effect from 1 October. I also propose to modernise the rules governing transfer pricing and controlled foreign companies. The details of those changes will be available at the end of my speech. In total, those initial measures to tackle tax avoidance will bring in a cumulative total of £1.7 billion over four years.

312 A Government committed to the proper funding of public services will not tolerate the avoidance of taxation, and we will be relentless in our war against tax avoidance. I have 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 the Revenue to consider a general anti-avoidance rule.

The principle of fairness in taxation will guide all my Budget decisions. I can announce today that at this, the first opportunity, the Government will honour their pledge to cut value-added tax on fuel and power. To help to pay for that, we will withdraw tax relief for private medical insurance for the over-60s. It costs £140 million a year, and it 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—5 per cent.—on 1 September, well in advance of winter fuel bills.

I now come to other taxes. In this Budget, I have no changes to make to income tax at either the basic or the top rate. I will not extend VAT to children's clothes, food, books, newspapers or public transport fares; nor will I, during this Parliament. This is a Government who keep their promises on tax.

To cut fuel bills further, I intend to make a further tax cut. The gas levy imposed by the previous Government has pushed prices for domestic consumers higher than they would otherwise be, so from next April we are reducing the gas levy to zero. Eighteen and a half million domestic customers will benefit from the change: their gas bills should fall by about 2 per cent. on average. As a result of those two changes—including the reduction in VAT on fuel, and other price cuts—I expect gas prices to fall in real terms by 5½ 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 pensioners should be in a position in which, 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 in the home energy efficiency scheme, and voluntary organisations, will be encouraged to take on young people to insulate the homes of pensioners. That will give jobs and skills to our young people; it will help and protect our elderly; it will improve our environment; and it will tackle fuel poverty.

Poorly insulated housing is but one of the most conspicuous failures of housing policies over the past 20 years. Even more serious is the inadequate provision of low-cost rented accommodation throughout our country. It has led to overcrowding, the costly and wasteful use of bed-and-breakfast accommodation and, in some cases, homelessness.

The Government have a commitment to decent housing at affordable rents because we believe that overcrowding and homelessness on the scale that 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.

313 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.

For most people, the acquisition of a house is the biggest single investment that they will make. Home owners 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 home owners. 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 that 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 1½ 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 approved by the House.

Secondly, continuing the reforms begun by the previous Government, who 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, when the failure to take early action guaranteed worse problems later on. I believe that these measures will help to secure what we all want: a more balanced recovery.

Our reform of the welfare state—with 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 that I have struck a fair balance between recognising the position of the utilities today and their undervaluation 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 four 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 314 £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 judgment 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 that shall be the case. It will be a one-off tax payable in two instalments. The first instalment will he paid on 1 December 1997, the second a year later. Full details of how the windfall tax will apply and the companies that will pay it will be set out in an Inland Revenue press release, which will available at the conclusion of the statement.

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

In January this year, I announced that 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 that 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 are now redistributing those savings to the long-term priorities of this Government, not the previous one. So the figures that I can now give for my deficit reduction plan exclude windfall tax revenues.

Borrowing was projected in the previous Budget to be £19¼ billion this year, but it is now set to be £13¼ billion, and borrowing that was projected to be £12¼ billion next year is now set to be £5¼ billion. So our deficit reduction plan ensures that borrowing, which was £22¼ billion last year, is now set to fall to £5½ billion next year.

Beyond those years, I am publishing a range of projections based on different assumptions for spending. In every case, for the next three years we meet the golden rule—we see debt falling as a proportion of national income and, because of our discipline and measures that we have taken, we go below the borrowing projections of the previous Government. 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 the public finances.

The comprehensive spending review will determine overall priorities for the early decades of the next century. In the case of the national health service, the first stage of our cuts in bureaucracy is being implemented this year. 315 By next spring, the first conclusions from the strategic review of London hospitals will be implemented and we will act to improve the organisation of services, including merging national health service trusts. By dismantling the inefficient internal market, we shall no longer have to spend money promoting competition and servicing innumerable short-term contracts and the administration that goes with them, all at the expense of patient care. That will now change.

Because we have reinvigorated the private finance initiative, we shall shortly announce a new hospital building programme across the country. We shall also act to recoup in full the cost of treating road traffic accidents from insurance companies. That, like the action that we are taking against prescription fraud, shows our determination to ensure that NHS resources are focused on front-line patient care.

In normal circumstances, the £5 billion reserve for 1998–99 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 there will be no Budget until next spring. I propose that the majority of the reserve be retained for contingencies that may arise in the coming year. But now that the long-term changes are under way, I want the NHS also to be able to plan for the year ahead. I want it 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 secured.

The long-term plans that we have agreed mean that we are now sure that the money will go where it is needed—direct to patient care. So 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 to the people of this country for a real-terms increase in resources. Health spending will now rise by 5 per cent.—2¼ per cent. in real terms—the same as our projection for the trend growth rate of the economy as a whole. The public rightly want to see more money put into the NHS, but they want the money to go directly to patient care. So this money is being granted on the firm agreement that the administrative reforms that we propose for the health service will be fully implemented and that front-line patient care will benefit.

Education is our country's priority. It holds the key to our future. The Government must be satisfied that resources in education are going direct to learning in our classrooms. My right hon. Friend the Secretary of State for Education and Employment and, Ministers in Scotland, Northern Ireland and Wales, will bring forward proposals so that every school can meet standards for results and discipline. We will ensure that schools and local education authorities meet targets for raising standards in their areas. They must demonstrate that money is being spent on 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 next year, and specifically for use in schools, an additional £1 billion for education. The details will be announced by the Secretaries of State for Education and Employment, for Scotland, for Wales and for Northern Ireland.

Traditionally, these announcements of revenue and allocations would complete a Budget, but I have one more announcement to make. The windfall tax will finance our 316 measures 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 that our welfare-to-work programme must now address start in our schools. We cannot run a first-rate economy on the basis of second-rate education. 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 21st century in classrooms built in the 19th. 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 21st-century economy, they must themselves become schools that are fit to learn in and equipped for the 21st century. By encouraging schools to engage in public-private partnerships, any public investment that 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 modern equipment and computers that they need. I have therefore decided to allocate cash from the remaining proceeds of the windfall tax for an immediate programme of capital investment to equip our schools with the infrastructure, technology and the bright modern classrooms that they need.

My hon. Friend the Paymaster General and Education and Employment Ministers will invite schools to submit plans showing how they propose to upgrade, modernise and become schools fit for the 21st century. The details will be announced in due course. I therefore propose to make available £1.3 billion over the course of this Parliament, representing a capital investment that averages almost £150 for every pupil in this country.

Taken together with the extra year-to-year expenditure that I have just announced, this Budget allocates £2.3 billion in new resources for our schools. With that 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.

The measures that I have announced today for stability, for investment, for employment opportunity for all and for education 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. It is a Budget that equips Britain for the future—meeting the people's priorities. It is a people's Budget for Britain's future. I commend it to the House and to the country.