Budget Statement (Hansard, 7 March 2001)

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

Since we came into government, our first duty has been to secure economic stability. In 1997, with inflation rising, a £28 billion deficit and a national debt that had doubled, the British economy was once again at risk of repeating the old all too familiar pattern of inflation followed by recession.

There were many who opposed our decision to make the Bank of England independent, others who opposed the tough controls on borrowing and spending, and many also who opposed our new fiscal rules and disciplines. There were some in this House who predicted that our policies would bring recession.

I can report to the House today that, because of the choices Britain made, our country now has the lowest inflation for 30 years, the lowest long-term interest rates for 35 years, mortgages now averaging £1,200 lower than under the last Government, more people in work than ever before, and the lowest unemployment since 1975.

It is a new-won and hard-won stability, which Britain must not take for granted but which we must entrench—and, because there is still much to do, the stability built in the first years will be our foundation for building opportunity and prosperity for all in the years to come.

We know as a nation that, after a generation of under-investment in both industry and our public services, the ambitions that we have for our country—high productivity and full employment, education opportunity for all and an end to child poverty, a modern NHS and modernised public services—can only be realised if we make the choice to invest for the long term.

So this is the challenge for the Budget and for the future: by our tax and fiscal decisions, to secure rising levels of business investment and rewards for entrepreneurship; and for all hard-working British families, who deserve the best hospitals, schools and public services, decade after decade of past neglect and decline replaced by year after year of rising and sustained investment and modernisation. Our greatest long-term investment is in children. I have looked back at a century and more of past Budgets which have had one common feature: the needs of children in the tax system go almost unrecognised, and the needs of women were barely mentioned. And when the story of Britain is of families struggling to do the best by their children, to balance work and family life, and all the daily pressures they face, it is right that we have a Budget that puts families first.

So this is my Budget judgment instead of the old short-termism of looking only a year or a month ahead, we lock in stability for the long term and, by striking the 296 right balance between long-term investments and affordable tax cuts, we not only boost enterprise and savings, but meet the needs of not just some but all Britain's families.

Let me turn to the economic background and forecasts. Between 1979 and 1997, inflation averaged 6.2 per cent. Since 1997, it has averaged less than half as much—2.4 per cent. In the last year, I can report that inflation has averaged 2.1 per cent—it is the lowest annual inflation since 1963.

Interest rates from 1979 averaged 10 per cent. Since 1997, they have averaged 6 per cent. and have remained stable over the last year, the longest period of consistently low interest rates since the 1960s. Long-term interest rates—now around 5 per cent.—are for the first time since the 1960s as low as those in Germany and as low as those in America. Mortgage rates, which averaged 11 per cent. between 1979 and 1997, are now down to 6¾ per cent. or less.

Growth from 1979 averaged 2 per cent. Since 1997, it has averaged 2.7 per cent., and in the last year I can now also report to the House that the economy has grown at 3 per cent. exactly. I can also report that manufacturing—despite the euro-sterling exchange rate—grew last year by 1.6 per cent. Manufacturing productivity grew by 4.4 per cent., manufacturing exports by 11.8 per cent, and it is to the credit of thousands of British companies that overall British exports grew by 7.4 per cent. And business investment has grown this year by 2 per cent. as we lock in a higher level of investment as a share of our economy, over 14 per cent., higher than at any time in 40 years.

The faster the speed of international flows today on the financial markets, the greater the need for international and national vigilance if stability is to be achieved and sustained. And it is precisely because we have taken the time to get the fundamentals right and hold to a steady course that we are better placed to cope with the uncertainties in the world economy this year.

With the United States today experiencing a necessary slowing and Japan barely growing, the growth rate in the world's major economies this year is expected to halve, while the world still faces volatile oil prices.

But because Britain's economy remains stable, our Treasury forecast is that this year, Britain's growth will be within a sustainable range of 2¼ to 2¾ per cent., and while elsewhere business investment is falling, I can inform the House that we are raising this year's forecast for business investment in Britain, which will rise by between 2½ and 3 per cent., continuing at an all-time high of 14 per cent. of national income, with total investment growing by between 5½ and 5¾ per cent. this year.

The Treasury forecast is that consumer demand will grow by 3¼ to 3½ per cent., manufacturing will grow by 1¾ to 2 per cent., and exports will grow between 5½ and 5¾ per cent. Inflation is forecast to be 2¼ per cent. this time next year, and on target at 2½ per cent. at the end of next year.

In the Budget, the Chancellor must confirm the inflation target for the coming year. With inflation forecast to be 2½ per cent. next year, imposing a lower inflation target—as some have suggested—would mean upward pressure on interest rates and would risk lower growth and higher unemployment. So I can confirm that because stability will guide our approach, the inflation target will remain at 2½ per cent.

297 And my Budget will meet each of our fiscal rules. Let me set out the detailed figures for the House. In the last Budget, I forecast a current surplus for this financial year, 2000–01, at £14 billion. I now forecast that the surplus will be £23 billion, and in successive years the current surpluses are projected to be 17, 15, 8, 9 and 9. Over the economic cycle, even on the most cautious of cases, we will meet our first fiscal rule: we will balance the current budget.

After a doubling of national debt in the early 1990s, the ratio of net debt to national income had, by 1997, risen to 44 per cent. Our second fiscal rule—that debt should be at a sustainable level, below 40 per cent. of national income—has led us since 1997 to cut the ratio of debt from 44 per cent. to 42, to 40, then 37, to what I can report for this financial year—31.8 per cent.

From the unacceptable level of debt we inherited—44 per cent. of national income—I now forecast debt in the coming year will fall to 30.3 per cent. and in the following years I project 29.6, 29.7, 29.9 and 30 per cent. successively—meeting our second fiscal rule and thus putting Britain in a far stronger position to deal with the ups and downs of the economic cycle.

Net borrowing, forecast to be in surplus this financial year at £6½ billion, now yields a surplus of £16.4 billion. As we invest according to our plans, the projections for future years are 6, minus 1, minus 10, minus 11 and minus 12. In every one of the next five years, adjusting for the economic cycle, we have locked in the tight fiscal stance we set out in both the pre-Budget report and the last Budget.

Because of this, and because of the spectrum cash proceeds, we are able to repay debt. Last year we repaid £9 billion. I can tell the House that this year the net cash debt repayment will be £34 billion. This is more debt repaid by one British Government in one year than all the total debt repaid by all the previous British Governments of the last 50 years.

So debt interest payments next year are £1½ billion lower than forecast in the pre-Budget report, and very substantially lower than expected in last year's Budget. In total, because of the Government's prudence, debt interest payments in the coming year will be £3½ billion lower than this year, releasing resources for our priorities.

In 1997, Britain spent more on debt interest payments than all the money it spent on our schools. In 2001–02, we will be spending £10 billion a year more on schools than on debt interest. And since 1997, lower unemployment has reduced social security costs by £4 billion a year, again releasing resources for public services.

Whereas from 1979 to 1997, 42p of every extra pound spent went to debt and social security, now the figure is only 16p, and that leaves more than 80p in every pound of additional spending to go direct to front-line public services.

So, because we have cut debt and cut unemployment—and achieved higher growth and earnings—we are also able to achieve what has eluded Governments for many years: to lock in a fiscal tightening, to meet all the fiscal rules, and then, within this prudent and cautious framework, to have extra resources available in this Budget to invest, in a balanced way, in Britain's future.

298 It is a balanced approach around which we will seek to build a consensus within the country in the coming years that, within a stable framework, the right kind of public investments and targeted tax cuts are both essential engines to drive forward our social and economic ambitions for Britain

To achieve our first ambition—to secure the fastest productivity growth of our competitors over the next decade—business investment must rise even further, and today I am proposing further reforms needed to promote competition, innovation and entrepreneurship.

Competition at home is necessary for competitiveness both at home and abroad. Yesterday, the Competition Commission published its provisional findings on the banks and small businesses. The Office of Fair Trading is today publishing its report on the reform of the professions. Later in the week, the Secretary of State for Trade and Industry will announce his proposals for reform and for detailed further consultation.

Institutional investors are today responsible for assets of £1½ trillion. To promote long-term investment in our country and to protect investors, I have accepted the recommendations of the Myners report. We will abolish the minimum funding requirement; through tax and regulatory reform we will make it easier for life insurers and pension funds to invest in venture capital; and we will ensure both a strengthened role for pension fund trustees and a clearer duty on fund managers to promote beneficiaries' interests. I support the challenge to the industry that Mr. Myners has laid down and his proposal that we should be prepared to legislate as necessary to achieve the improvements that he prescribes.

And so that we secure for Britain's companies the true competitive benefits of the single market, on Monday we will submit to European Finance Ministers our proposals on capital and product market reform for the Stockholm summit, and for the Spanish presidency of 2002 a White Paper on economic reform in Europe will also be published.

And just as I will set out later our vision for the future of the tax system for work and for families, our vision for the future of the tax system for companies, large and small, is that by combining a wide and stable tax base with low and stable rates and a constant commitment to international competitiveness, we will encourage innovation, investment and entrepreneurship.

Building on our reduction of corporation tax from 33p to 30p, I propose a further modernisation of the corporation tax system to meet the needs of a more knowledge-based economy. After further consultation with business, I propose to introduce a new tax relief for intellectual property and for goodwill. We will also consult in detail on relieving tax when companies sell substantial shareholdings. And from next month I will abolish the withholding tax not only on international bonds but also on payments of interest and royalties between companies in the UK—all steps that are designed to create the best business environment in the world.

Enhanced capital allowances since 1997 and new tax credits to encourage investment and innovation have already saved business £1 billion, £⅓ billion for manufacturing. It is now time for the next tax incentive to back manufacturing and innovation. Today we issue proposals and will consult on the best way to extend a research and development tax credit to the larger companies.

299 And we will legislate a new and special tax credit that will help British companies contribute to the relief of disease round the world, an incentive to accelerate research on AIDS, TB, malaria and ether diseases that each year kill 8 million people, including 3 million children in our poorest countries—deaths that in many cases are avoidable, diseases that in many places are preventable. We have a capacity to help and we have a moral duty to act.

Subject to a commitment by the pharmaceutical companies to invest in and deliver new drugs and vaccines in ways that truly meet the needs of the poor and sick, my right hon. Friend the Secretary of State for International Development and I are prepared to extend this new tax credit even further. And Britain is prepared to take a lead in establishing a new purchase fund tot global health that will not only develop life-saving drugs but make existing drugs more widely available.

As we consider the next steps for taxation in the North sea, our approach will be guided not by short-term factors but by the need for a regime that raises a fair share of revenue and promotes long-term investment in the North sea.

For farming—an industry essential to Britain, which today faces immediate and long-standing difficulties—the Government, over and above their statutory obligations, have made available agri-compensation money worth £150 million. And I can confirm that my right hon. Friend the Minister of Agriculture, Fisheries and Food is taking steps to advance agrimoney and other payments as quickly as possible.

Last year, I cut the long-term capital gains tax rate for business assets from 40p to 10p I can now go even further. For employees in all types of companies, including venture capital and non-trading companies, the long-term capital gains tax rate will no longer be 40p but lop.

Growing companies offering share options will benefit from today's extension of the enterprise management incentive scheme that we created. I have decided to double to £3 million the share options that benefit from tax relief, and in qualifying companies I will extend the right to benefit from these share options to all employees.

Since 1997, the number of small businesses in our country has grown by 170,000, as we have cut small company tax from 23p to 20p, with a new starting rate of just 10p in the pound—an overall cut in the typical small company tax bill of nearly 25 per cent.

We now propose a new regime to simplify VAT for small businesses, and this will be of direct help to up to half a million companies. For firms with a turnover of up to £54,000, VAT will not be charged at all—more of business income not subject to VAT in Britain than anywhere else in Europe.

For firms with a turnover of up to £100,000, we propose a simpler and lower flat rate which after consultation we will implement next year. For firms with a turnover of up to £600,000 we will consult on a simplified VAT payments scheme.

And I now propose not just to simplify VAT, but to simplify small business corporation tax as well. Last year, we exempted small businesses from the costly obligation to submit audited accounts, thus cutting red tape and small businesses' costs by an estimated £220 million. The next 300 step is an even more radical proposal: we will make the annual company accounts the basis for calculating tax, and that will cut more red tape and cut business costs once again.

On Friday the Deputy Prime Minister and I will announce new financial flexibilities so that regional development agencies can fulfil their strategic role in delivering high productivity and, for every region of our country, balanced economic growth.

Our rising prosperity still leaves too many people and places behind. Nor will they catch up if we rely on the old failed policies of the past—either paying out more and more unemployment benefits without the necessary investment in the areas, or paying out untargeted property subsidies without real job creation.

I see our inner cities and our older industrial communities not as no-go areas for new enterprise but as places of untapped potential, where there are young people with dynamism looking for work, and markets waiting to develop and grow.

Across Britain, whether in new towns, traditional inner cities or former coal, textile and steel communities, the way forward for regeneration is to harness both new public and private investment and new fiscal incentives to extend the opportunities for enterprise from some of the country to all of the country.

To speed up regeneration, I now propose, after our pre-Budget consultation, a total of six tax cuts targeted on enterprise at a cost over the next five years of £1 billion. To make the first stages of buying property and bringing land back into use tax-free, in designated areas stamp duty will be abolished. To bring disused properties back into use, we will cut VAT on residential property conversions from 17½ per cent. to 5 per cent.

For cleaning up contaminated land, there will be an accelerated tax relief set at 150 per cent., and consultation will take place on a further corporation tax relief for firms investing in the new urban regeneration companies. To help revitalise our high streets, we will provide 100 per cent. first year capital allowances for bringing empty flats over shops back into the residential market.

To cut the cost of small business borrowing in these areas, we will introduce a new community investment tax credit and we will now create the first community development venture capital fund, which is a partnership between Government, the financial institutions and the charitable sector, for which the chairman of our review, Sir Ronald Cohen, proposes a capitalisation of £40 million. To cut the costs of start-ups, the Small Business Service will offer one-stop support and up to £2,000 worth of advice and help for any start-up company drawing up a business plan, making it easier than ever in these areas to start and sustain a business.

In both urban and rural areas, our churches are essential features of our community life and are at the heart of our rich heritage as a nation. To help preserve that heritage and to cut the costs of saving and repairing our listed church buildings, we will introduce for repairs started after 1 April a new grant, which is the equivalent of a VAT reduction from 17½ per cent. to 5 per cent.—a reform long sought after by congregations across the country.

At the centre of our communities are also thousands of non-profit sports clubs, and we will now consider the best way for the tax system to give them further support and to recognise their contribution to community life.

301 The Government's policy is for free museums, and I can announce that we will change the law on VAT to make that possible. The Secretary of State for Culture, Media and Sport will set out the full details of this change.

The film industry tax incentive was introduced in 1997, and is contributing to the unprecedented success now enjoyed by independent British films. This will be extended, at a cost of £50 million a year, until 2005.

Our ambition for Britain is full employment—employment opportunity for all. I can report to the House that, one and a half years early and at a half of the planned cost, we have exceeded our goal: not 250,000, but 270,000 young people have now moved from welfare to work. In total, 1,100,000 more men and women are in work than four years ago, we have the lowest long-term unemployment since 1979, the lowest youth unemployment since 1975 and the highest employment ever among women—and there are today 1 million vacancies spread across the country.

But there is still more to do. The demands of the new economy mean that we are likely to need 2,500,000 more employees at degree or higher degree levels, and overall more workers requiring higher skills and qualifications to fill new and higher paid jobs. So at the heart of our approach is that Government must meet their responsibilities, providing incentives for work and training, companies must meet their responsibilities to upgrade skills in the workplace, and people must take up their own responsibilities to work and to prepare for the jobs of the future.

We have already made major changes to reward work—the new deal, the working families tax credit and the 10p income tax rate. Now we have decided that following on stage one of the new deal—when long-term youth unemployment has fallen by 80 per cent.—it is time for stage two, designed to link those who need jobs to the jobs that need skills.

Next week the Secretaries of State for Education and Employment and for Social Security and I will publish detailed plans to get the hard to employ back into work, to promote employer-led sector initiatives under which the unemployed learn key skills, and to improve training in the workplace. The starting point is the "employment first" principle. In the past, the unemployed signed on for benefit before they looked for work. Now, before receiving benefit, the employment first principle means that they will first have to be interviewed about job opportunities and the steps that they are ready to take to get back into work.

For the hard to employ, those still left behind, we are proposing from 1 April, at a cost of £200 million a year, a new regime built around more intensive coaching and stronger sanctions for the over-25s.

For 30,000 benefit claimants who have been drug addicts, a new three-year budget of £40 million will mean that they can receive the mentoring and training that they need—but to get on to the programme they will first have to get off drugs.

Next, to link the unemployed without skills to the jobs that require skills, we will announce separate initiatives to fill job vacancies in the IT industry, construction, hotels, retail and financial services. As a result of the spending 302 review, the Secretary of State for Education and Employment has now allocated over £1 billion so that modern apprenticeships—only 75,000 in 1997, over 220,000 today—will rise to 320,000, as we discharge our duty to invest in the skills of the next generation.

Already with the new deal, lone parent employment has increased by 100,000, on the road to our goal of 70 per cent. employment for lone parents. From next month, at a total cost of £100 million, we will enhance the choices on offer to include not only full-time and part-time jobs and training, but the offer of self-employment, in all cases accompanied by help for child care. In return, the Government have decided that from next year all lone parents on income support, including parents with children under five, will be required to undertake interviews about work choices at regular intervals.

In the new economy people already in work constantly need to improve their skills. As the Employment Secretary has rightly said, Britain cannot succeed when up to 30 per cent. of our existing employees do not have the basic level 2 qualifications. Here, too, employers, employees and Government all have a role to play. For our part we are prepared to examine radical new options. To back up the tax relief that we offer for employee training, we are prepared to consider how best we can help employers meet their responsibilities, including the case for a new tax credit.

If we are to reach our long-term goal of full employment, we must also do more to reward work. Our vision of the future of the tax system for work is of one which, by integrating low starting rates of tax and targeted tax credits, makes work pay, brings more people into work and moves us lo that goal of full employment.

This Government introduced the first ever national minimum wage and it is this Government who have raised the minimum wage, as of October this year, from £3.70 to £4.10 an hour, and then, subject to economic conditions, next year to £4.20.

Today I can go further and announce that for all families on the working families tax credit, there will be a rise from June this year of £5 a week. This takes the hourly minimum rate for those on the working families tax credit not just to £4.10, but to £6.40 an hour. When we first announced the working families tax credit, the minimum family income for full-time work was £180 a week. This year, the minimum will be £225 a week, or £11,700 a year.

And as part of our programme to ensure new disability rights, I can announce that in addition to the new guaranteed minimum income for a severely disabled person of £142 a week, for those in full-time work the disabled person's tax credit will be raised from June this year by £5 a week, and that will guarantee a minimum family income of £250.

To help parents into work, I have also decided to pay working families more towards the costs of childcare. In addition to the childcare places being created for 1 million children, the child care tax credit will, from June, pay up to 70 per cent. of child care costs, up to—instead of £100, as now—£135 a week for one child, and—instead of £150, as now—up to £200 a week for two or more children, another step in our plan to place affordable child care within the reach of all working families who need it.

I turn to other measures that will help hard-working families.

303 I can announce that for the coming financial year we will freeze all rates of car vehicle excise duty. Having completed our consultation on new duly rates, I will now move ahead with the proposal to extend the £55 reduction on the standard licence fee from all cars up to 1200 cc to all cars up to and including 1.5 litres. This will include, for example, Escorts, Astras, Micras and Rover Metros—in total, an extra 5 million cars. The reduction, to be implemented in July, will be backdated to November last year. In total, 9 million cars up to 1.5 litres will pay licence fees of £55 less.

From this month also for all newly purchased cars, a new four-band vehicle excise duty rewards the most environmentally friendly vehicles, and 70 per cent. of all new cars will now enjoy a reduced licence fee.

Since last November, lorry owners have already received rebates for up to half of this year's licence fee, at a total of £220 million. Following our pre-Budget consultation and at a cost next year of £300 million, I will sweep aside the 100 separate lorry licence rates. We will consolidate them into seven rate bands. They will be linked to environmental standards and set in consultation with the industry, and we will cut the rates to match the lowest in Europe. For those lorries used most for international haulage, the fee reduction will mean savings on the old rate of between £1,500 and £2,100 a year. Around 115,000 vehicles will save over £1,000 on their licence fee.

Next month, we will also abolish vehicle excise duty for all tractors.

Transport spending is set to rise by 20 per cent. a year over the next three years, as we take forward our 10-year plan of £180 billion public and private investment.

In November 1999, I announced the Government's new approach to the fuel escalator. It was first introduced by the previous Government in 1993, and by 2010 it will have secured a reduction in carbon dioxide pollution of 1 million to 2½ million tonnes. As I stated in the pre-Budget report, this year we will riot proceed with the annual inflation rise in petrol tax dial has been the norm on Budget day.

After consultation on the pre-Budget report, I am able to confirm the further changes. In addition to the 1p cut in ultra-low sulphur petrol duty last October, the duty on ultra-low sulphur petrol will be further cut by 2p a litre. To make sure all motorists can benefit from this 2p cut, I will extend it to unleaded petrol until 14 June, by which time the industry says ultra-low sulphur petrol will be 100 per cent. available. The 2p cut for both ultra-low sulphur petrol and unleaded petrol will take effect at 6 pm this evening.

Lead replacement petrol duty will also be cut—by a further 2p per litre. And because it is light to maintain the proper balance in the tax treatment of petrol and diesel, I propose to match the cut in low sulphur petrol with a cut in excise duties in ultra-low sulphur diesel for all diesel users of 3p a litre, to take effect front 6 pm this evening as well.

The pre-Budget report launched the green fuel challenge. Industry was invited to submit plans for new, more environmentally friendly fuels. I can announce that duty will be cut radically on alternative fuels—a further 6p per kilogram duty cut on road fuel gases with effect from 6 pm tonight, and from next April, a 20 per cent. 304 duty cut on bio-diesel. To allow the new industry to plan ahead, duty on road fuel gases will be frozen in real terms until 2004.

We cannot achieve the Kyoto targets, and our own goal of cutting carbon dioxide emissions by 20 per cent., without the climate change levy which, with April's simultaneous cut in employers' national insurance, brings no additional revenues to Government but will cut carbon emissions by 5 million tonnes by 2010.

To reward businesses investing in energy-saving improvements, the Government will publish this month the list of technologies that will now qualify for 100 per cent. tax relief, and later this year we will launch a green technology challenge, again offering 100 per cent. tax relief to companies investing in the next generation of environmental technologies.

As previously announced, the landfill tax will rise from £11 per tonne to £12 per tonne.

I turn now to the other excise duties. Last year. I froze duties on spirits. This year, an inflation rise would push the price of whisky up by 11p a bottle. Because of the competitive position of the industry, I will this year continue to freeze duty on whisky and on all spirits. And this year I propose to go even further: I will freeze duty on wine and on beer.

Beyond the normal inflation rise of 6p, I will not go ahead with any real-terms rise in cigarette taxes.

Following our consultation with the betting and gaming industry over the impact of Internet trading, I have decided from 1 January to abolish betting duty, which has been in existence ever since betting shops were legalised.

I have now agreed that the tax on bookmakers' gross profits will be 15 per cent., which the leading bookmakers have agreed not to pass on to their customers. So by 1 January, no one will have to pay a tax on their bets.

For inheritance tax, I propose to raise the allowance, so that no tax will be charged on estates up to almost £¼ million—a threshold of £242,000. Ninety-six per cent. of estates will pay no tax.

I now turn to tax and benefit policy for families. A policy that puts families first in the tax and benefit system insists—as the Beveridge report said in 1942—that nothing should be done to remove from parents the responsibility of maintaining their children, but it is in the national interest to help parents discharge their responsibilities properly. Our vision of the future of the tax system for families with children is to support all families, to give most help at the time they need it most, and to give more help to the families who need it most. So, freed of poverty, every child has the best start in life. And consistent with our support for independent taxation of individual income, our vision for the integration of the tax and benefit system for families is that support should be based on family income, which is the basis of the new integrated child credit.

By 1997, support for children had fallen in real terms by 6 per cent. since 1979, as child benefit was often frozen; there was no recognition at all of the needs of children in the tax system. As a result, families with children had incomes that were 30 per cent. lower on average than families without children, and child poverty had trebled.

305 So first, we made radical improvements in child benefit, which is paid to all 7.5 million families with children. Child benefit in 1997 was only £11.05 a week, or £575 a year. From April this year, child benefit will be £15.50 a week—£806 a year.

Of course, we realise that £15.50 is too small a recognition of family needs for most families, and it is totally wrong that the tax system contains no allowance for the needs and costs of bringing up children. So, in addition to child benefit, and on top of it, the new children's tax credit is being introduced on 6 April and, after consultation, I have decided that the new children's tax credit will be paid not at £8.50 a week—or £442 a year—as was originally proposed, but at £10 a week: £520 a year. For families on average earnings, this is worth more than a 2½ per cent. cut in the basic rate of income tax.

With the children's tax credit, 5 million families who received only £11 a week for the first child in 1997 will now receive up to £25.50 a week: an increase from £575 a year to £1,320 per family. With this major change in the tax system, financial support for families with children has never been higher. We know also that the greatest help should be there when children are youngest—the time when family income tends to fall as family costs rise.

We can do more to help mothers and fathers balance work and family responsibilities. Indeed, we want to make it easier for mothers to make the choice to stay at home after the child is born, and for much longer than previously. I can announce that, following the maternity review set up in last year's Budget under the Secretary of State for Trade and Industry, working with the Ministers for Women, maternity pay, which is £60, will be increased in successive stages to £75 next year and, the year after that, to £100—as big a rise in two years as over the previous 40 years.

We will also legislate so that, at the same time as the £100 is introduced, the statutory obligation to maternity pay will be raised from 18 weeks to 26 weeks. At a cost of £30 million, I will extend the help small and medium-sized employers receive for administering the scheme. Parents who adopt will for the first time receive similar benefits. We will introduce two weeks' paid paternity leave, set at the same level of £100, paid for by the Government, with further details of this and other measures to be announced by the Secretary of State for Trade and Industry.

For the first year of a child's life, I propose a further innovation. From April next year, for families with new-born children, the children's tax credit will be set at an even higher level and paid up the income scale to all households where the main earner earns up to £50,000 a year. I propose to set this children's credit at over £1,000 a year, worth £20 a week, and I will ensure that this £1,000 baby credit will be continued, and it will be paid to the mother when the new integrated child credit comes in, in 2003. So, to summarise these changes: families receiving the higher children's credit and maternity pay will be up to £2,240 better off.

Our ambition for Britain is that every child has the best start in life. When we came into power, with one third of children in poverty, we had to take action. While child 306 benefit starts at £15.50 for all families, the maximum rate of support for children will go as high as £51 a week, a rise of £23 a week since 1997. The income support child credit will be raised by £1.50 a week, and the sure start maternity grant will be set at £500. This will help to take more than 1.2 million children out of poverty in this Parliament as we work to cut child poverty by half, on the road to its abolition.

For the sake of every family in the country we must and will do more to fight drugs. For too long, in too many communities, we have fought a war against drugs which drugs have, unfortunately, won, so I have a further spending announcement. Next week, the Home Secretary, working with the Minister for the Cabinet Office, will announce a new three-year budget of over £200 million. To every one of the country's 350 partnerships against crime and disorder, in every area of the country, direct payments averaging £½million to up to £1 million pounds will be made straight to police commanders and anti-drugs leaders. Similar funds will be available for Scotland, Wales and. Northern Ireland.

The war against drugs will never be won by Government alone, but can only be won neighbourhood by neighbourhood across the country, so further resources will also be announced to support a new anti-drugs campaign involving prominent figures from the world of business and sports to mobilise communities against drugs.

I come to the next set of Budget judgments.

Our success in cutting debt and unemployment and rising economic growth have permitted us—while locking in our tough fiscal stand—to release £4 billion a year more for our priorities. And after the decisions already announced I can still go further.

The Government could choose to pay off more debt—but we have already paid off £34 billion this year.

We could choose to repeat the pattern of Budgets at this stage of previous Parliaments, and make tax cuts that are unaffordable in the long term.

But it is right to choose the prudent course for Britain.

Let me tell the House what the Government have decided.

For savers, as I announced in November, the Government are extending the tax reliefs for individual savings accounts. Nine million new accounts were opened in the first year; £48 billion has now been saved through them. Because of the higher number of ISAs, tax reliefs for savers will by 2006 exceed projected tax relief for PEPs and TESSAs by £800 million. Tax incentives for savings will total £3 billion. We wish to see more ISAs and we want more tax-free savings, so for the next five years up to £7,000 A year of savings can generate income and capital gains that will both be tax free.

In this Budget I want to do more to cut tax for all savers, including pensioners. For pensioners we have already announced that from April we will raise pensions well above inflation—indeed, above earnings—by £5 a week for single pensioners and £8 for couples, and next year by £3 and £4.80.

We will retain the winter allowance and the free TV licence for the over-75s that we introduced, and we will retain the Christmas bonus. Detailed announcements will be made in this year's uprating statement on social security.

307 Since November, we have been consulting on our new pension credit. It will be introduced in 2003. Pensioner couples with incomes below £200 and single pensioners with incomes below £135 a week—many millions of pensioners in our country—will receive the new pension credit, which will reward rather than penalise their saving. It will rise in line with earnings every year and in this way, it will give recipients more than even the earnings link in the basic state pension would have given them.

In this Budget I have decided that from 2003, when the pension credit is introduced, pensioners' tax allowances will also be linked not just to prices but to earnings. And I will do more on tax for savers, pensioners and working families.

To achieve our goal of full employment, I have previously cut the basic rate of income tax and I have introduced a lop tax rate. For national insurance we announced and legislated in 1999 upper and lower earnings limits of £575 a week and £87 a week respectively for the coming year, taking 300,000 men and women out of tax altogether, in all amounting to a national insurance cut of £590 million in this coming year.

To reward savers, pensioners and hard-working families, my aim now and in the next Parliament is to ensure that more of savers', pensioners' and working people's incomes, now taxed at the 22p rate, should be taxed at the lower lop rate.

And I propose to make a start today with a £1 billion a year tax cut: instead of the first £1,500 of taxable income at 10p rather than 22p, the first £1,880 of taxable income of every taxpayer in the country will be taxed from this year at the lower 10p rate This is a measure that will benefit 25 million taxpayers.

And cutting income tax by extending the lop band shows our intention for the next Parliament too: that all those who work hard and save for their retirement will find that more of their income that is taxed at 22p today should be taxed at the lower 10p rate. Seven and a half million pensioners will now pay no tax, or tax at just the 10p rate—70 per cent. of all pensioners in the country.

Taking into account the direct tax and benefit changes, and the changes coming in this year, households will be on average £240 a year—over £4 a week—better off after inflation.

With the new children's tax credit now paid from April, the direct tax burden for the average family falls from 21 per cent. in 1997 to 18 per cent., the lowest level for 30 years.

I said that our long-term goals are full employment, high productivity, strong public services, tackling child poverty and opportunity for all. Now, having made this tax cut for work, pensioners and savings, and having locked in our fiscal tightening, our economic strength allows us to release over the next three years a further £2 billion in total.

There is a choice. I have had representations from some for billions in further tax cuts. But our priority has been and is Britain's public services. So we will not cut investment, but we will raise it. We will increase spending not by 3.4 per cent. a year, as we planned, by 2003–04, but by 3.7 per cent. a year.

Let me give the detailed figures for the benefit of the House. To cut spending growth from 3.7 per cent. a year to 2½ per cent. a year, as has been proposed, 308 would mean, if started now, annual cuts rising above £16 billion a year by 2003–04; and, even if started next April, cuts of £10.1 billion a year by 2003–04.

So I have rejected this course for Britain, not only because deep cuts would move us away from our long-term goals and put hospitals and schools at risk, but also because Britain must not repeat the short-termist mistakes of the 1980s—unfunded, unaffordable tax cuts, higher interest rates, cuts in necessary investment, with no fiscal rules. We will not return to boom and bust.

Within our cautious fiscal rules, education spending is already set to rise by 5.2 per cent. a year even after inflation. I now propose to increase substantially the sum of current and capital money paid to every school, and directly to every teacher, to allow them to make their own decisions as head teachers, as they meet the nation's educational targets.

Head teachers of every primary school will receive not £10,000, as planned, but £13,000. The larger primary schools will receive not £50,000 but £63,000. The head teacher of each secondary school will receive, for the smaller schools, not—as planned—£57,000 but £68,000, and for the larger schools a payment of not £92,000 but £115,000. And these payments will be made not just for one year, but for every year through to 2004. In total, £200 million extra each year for the next three years.

As a result of our spending review, cash spending on the NHS is rising by 50 per cent. over five years. Today we add to that. There is a strong case for extra capital investment, new scanners and renovating old Nightingale wards. And there is a strong case for money going direct to each hospital trust, and a case also for more primary care money going direct to local GP surgeries.

I am not, however, able to give £100,000 to each of the 200 acute hospital trusts. Instead, from April, for work on Nightingale wards and for new investment, acute hospital trusts will receive, as a result of this Budget, every year for the next three years, extra money of between £ ½ million and £1 million a year direct to the trust. Further announcements, including cash for GP trusts, will follow, as will allocations by the Scottish and Welsh Administrations.

So I have one final announcement. The Secretary of State for Health wishes to recruit an extra 20,000 more nurses by 2004. Next week he will announce three-year allocations from a new £135 million fund for recruitment of front-line staff. And next week also, the Secretary of State for Education and Employment will announce his three-year allocations from a new £200 million fund we are setting up today for retention and for recruitment of extra teachers.

In total, over the next three years £1 billion more to our hospitals and £1 billion more to our schools—money that we could not provide if we made irresponsible tax cuts.

Mr. Deputy Speaker, we have made our choice: more investment, not less; stability the foundation; tax cuts we can afford; schools and hospitals first. I commend this Budget to the House.