Budget Statement (Hansard, 17 April 2002)

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

Five years ago, this Government's first Budget set out long-term objectives and far-reaching reforms to achieve economic stability and higher employment. And today I can report that, in the last year, Britain has experienced the lowest inflation and the lowest interest rates for 40 years; for the first time for half a century, unemployment in Britain is lower than in America, lower than in Japan and lower than in the rest of Europe; and in the year just ended, Britain had the highest growth of any of our major competitors.

And just as in 1997, we had the strength to set a course, not just for a year, but for a Parliament, so too in this Budget—the first of the Parliament—our task is to address, through reform, three major long-term challenges: the challenge of enterprise, with new incentives to raise investment and to reward entrepreneurship; the challenge of family prosperity for all, with a new child tax credit paid to mothers for all families with incomes up to £58,000; the challenge of renewing our public services, with, for a reformed NHS, a secure long-term financial foundation.

And with those whose priority is fairness recognising the need for enterprise, and those whose priority is enterprise accepting the need for fairness with strong public services, I believe that, just as Britain built in the last Parliament a national consensus for stability and employment, Britain can in this Parliament build a consensus that we should advance enterprise and fairness, and do so together.

I turn first to the economic outlook.

From growth in 2000 of 3½ per cent., the G7 economies as a whole grew by just I per cent. in 2001.

World trade, which grew by 12 per cent. in 2000, failed to grow at all in 2001. Manufacturing output fell across the world, falling by 3.6 per cent. in the G7 countries, 4.3 per cent. in America, 7.6 per cent. in Japan and in Britain by 2.3 per cent: it was a decline all round that started in the American information technology and electronics sector, mirrored in Britain by a 45 per cent. fall in semiconductors output and a 54 per cent. fall in telecommunications.

Last autumn, in the wake of 11 September, the world saw a fall in business confidence, declining markets and volatile oil prices—major and simultaneous challenges to the stability and continued growth of the British economy.

In the past, when the world faced a downturn, it was Britain that usually entered weaker and suffered longer with higher unemployment—successive Governments unable to sustain economic growth because they were constrained by already high inflation and high borrowing.

578 This time, however, from a platform of low inflation and fiscal discipline, both delivered through a new monetary and fiscal framework, we have been able to steer a steady course of stability. The Bank of England has been able to adjust policy at the right time and in the right way, last year cutting interest rates seven times. Supported by a fiscal policy, we have, despite the difficulties, been able to safeguard both stability and growth.

At the last Budget, we forecast that growth in 2001 would be within a range of 2¼ to 2¾ per cent., and we based our public finance projections on 2¼ per cent. I can tell the House that, while Germany grew by only 0.6 per cent., America by 1.2 per cent., the euro area by 1.5 per cent. and Japan contracted by 0.5 per cent., Britain grew by 2.2 per cent.

I have written today to the Governor of the Bank of England stating that, in 2002, we will continue to pursue a symmetrical inflation target of 2.5 per cent.—a target that, because it takes deflation as seriously as inflation, is not only pro-stability but also pro-growth. Monetary policy will continue to be backed by a sound and long-term approach to fiscal policy. Nothing that we do or propose in this Budget will undermine that platform of stability.

At the time of the pre-Budget report, we drew attention to the downside risks to world recovery, not just from the possibility of further terrorist incidents and instability in the oil price, which has since December ranged from $17 to $27 per barrel, but from the durability of the US recovery. I said then that, while it was important to remain vigilant, we were cautiously optimistic.

Increasingly, independent forecasters now expect the world economy to grow faster—the United States to grow by 2.6 per cent., the euro area by 1.3 per cent., Japan to contract by more than 1 per cent., but the G7 to grow by 1.6 per cent. overall. We hold to the cautious optimism of our forecast of November—that, while meeting our inflation target, Britain will achieve growth from 2 to 2½ per cent. this year, rising in 2003 to growth of 3 to 3½ per cent., with growth in 2004 from 2½ to 3 per cent.

Over the last few years, independent forecasters have revised upwards the trend rate of growth of the British economy, with the majority suggesting a range of 2.5 to 2.8 per cent. The International Monetary Fund's forecast is at the upper end of this range. The Treasury now estimates trend growth at 2¾ per cent. but, as before, we will continue to base our public finance forecasts on a more cautious assumption for economic growth-2½ per cent., which the National Audit Office has audited as "reasonable and cautious".

While the British economy has been stable, it can and must be stronger, its growth not only sustained but more balanced. In the last year, as world trade fell, consumer spending and public investment supported growth in the British economy. Now, as world trade turns around and industrial production rises, our forecasts show consumer spending returning closer to trend as we achieve more balanced growth.

We expect in 2002 world trade to grow by 2¼ per cent., and in 2003 by 8½ per cent. UK manufacturing output returned to growth in February and, while global risks remain, we expect further rises in the coming months. Business investment is expected to follow, with growth in investment rising in 2003 to between 5½ and 6¼ per cent.

579 I now turn to the public finances. Our fiscal rules are set not for a year or even two years, but for the entire economic cycle. And because from 1997 we tightened fiscal policy by 4.5 per cent. of national income, we have been able to reduce debt well below 40 per cent., not just in one year but across the economic cycle.

Thus, while the pre-Budget report showed that tax receipts were £7 billion less last year—and £10 billion less this year—than forecast because of the global economic downturn, the underlying state of our public finances remains strong.

In the year to last April, we repaid £37 billion of debt. In 1997, net debt was 44 per cent. of British national income. Last year, it was down to 30.4 per cent.—in contrast to 41 per cent. in the US, 53 per cent. in the euro area and nearly 60 per cent. in Japan.

As we approach the decisions of this Budget, Britain's debt has been reduced to the lowest level of national income in the G7 countries and the lowest of all our major European competitors. Debt interest payments were running at £29 billion a year when we came to power, with more money paid on debt interest than was spent on all our schools. I can now report that debt interest, which fell to £26 billion in 2000, fell again to £22 billion in 2001 and we expect it to fall again this year to £21 billion—just 2 per cent. of our national income.

So, just as we paid off more debt in one year than all previous Governments paid off in all the previous half century, so this year debt interest payments will take less of our national income than at any time in nearly a century—since the beginning of the first world war.

In the early 1990s, imprudent assumptions about debt and related mistakes in fiscal policy contributed to the boom and bust that did so much damage. So today I propose to reinforce our commitment to stability and sustainable public finances by committing, now and for the future, to publish figures for core debt, prudently adjusting debt for the effects of the economic cycle.

Our approach since 1997 also includes cautious assumptions about equity prices, oil prices, unemployment and VAT receipts. And while some have suggested that, having established a prudent approach in the last Parliament, we no longer need to plan on the same rigorous basis for this Parliament, I can tell the House that, in the coming spending review, we will maintain our cautious assumptions and meet our rules, even on the cautious case.

Indeed, today, we will do more than that.

In the interests of fiscal discipline, I will not only maintain our cautious rules and lock in the tight fiscal stance this year and over the next two years that we set out in the pre-Budget Report, but I will go further and implement—compared with the pre-Budget report—a small tightening of the fiscal stance over the next two years.

After all the measures that I will announce today, the current budget, which was £10.6 billion in surplus last year, is projected to be in surplus this year by £3 billion, and in future years by £7 billion, £9 billion, £7 billion and £9 billion.

Net public borrowing was £1.3 billion last financial year and is projected to be £11 billion this year and, in successive years, £13 billion, £13 billion, £17 billion and 580 £18 billion, as we borrow to invest well within our sustainable investment rule—that debt be at or below 40 per cent. of national income over the cycle.

Debt, which was 30.4 per cent. of national income last year, is projected to be 30.2 per cent. this year, and, in the following financial years, 30.4 per cent., 30.4 per cent., 30.7 per cent. and 31 per cent.

All my budget and public spending decisions will be made within this framework of fiscal discipline.

By keeping a steady and firm hand on our public finances, and by keeping debt and debt interest payments low, we continue to free up more resources for our public services.

And after all the Budget measures that I will announce today, I am able to meet our fiscal rules even on the cautious case and set a new public spending envelope for the years up to 2006, while being able to release an extra £4 billion for public spending next year.

Precise allocations for departmental expenditure limits will be made in the forthcoming spending review, but as we make provision for increases in public spending, we will set three conditions. First, money must be matched with modernisation that will lead to results. Secondly, just as sustained economic growth demands responsibility in setting private sector pay, so a sustained commitment to better public services demands responsibility in setting public sector pay. And thirdly, at all times—now and in the future—we will never compromise our commitment to meet our fiscal rules and disciplines.

The monetary and fiscal figures that I am publishing today also show that we are well within the Maastricht criteria for the euro and, as the House knows, the Treasury is undertaking the preliminary and technical work necessary to allow our assessment of the economic tests.

Our first long-term challenge is, through higher productivity and investment and a stronger national consensus on the importance of enterprise, to build a more prosperous Britain.

Now, as we press ahead with the supply-side reforms to remove barriers to growth—the new competition policy, the new approach to physical planning policy, new rules for work permits, our education reforms—my focus in this Budget is on two further sets of measures that encourage higher levels of innovation and investment, and that help small and growing businesses.

Over recent years, British business investment levels have risen significantly, from just over 10 per cent. of national income to nearly 14 per cent.

And to encourage higher levels of investment we have, in past Budgets, cut corporation tax from 33p to 30p, the lowest in our history.

In this Budget—specifically to help British manufacturers invest in the technologies of the future—I have decided, following consultation, that we will legislate, for large companies, for a new volume-based research and development tax credit. That rate will be set at 25 per cent., and it is a £400 million boost to innovation and research in Britain and to modern manufacturing in our country.

To continue to build a modern corporation tax regime for British firms, operating as they are in a global economy, I will exempt companies from corporation tax on the gain from the sale of substantial shareholdings, 581 benefiting businesses by £150 million a year. I will modernise the tax treatment of intellectual property, giving further long-term savings to business of £200 million a year.

The UK's current treatment of branch capital means that some profitable foreign companies operating in the UK pay little or no tax on their profits here. So from 1 January, at a revenue gain of £350 million in its first full financial year, I will bring the treatment of capital for UK branches of foreign companies into line with international practice by applying similar corporation tax rules as America, Germany, France and most other major countries.

Small businesses account for half the economy's output and for 55 per cent. of all jobs in the private sector—over 10 million jobs in all. And the small firms of today can be the big firms of the future.

We want to see a more enterprising Britain where, in every region, more small businesses are starting up and where you can work your way up a ladder of opportunity—from employment to self-employment, from micro-business to growing business—with Government on businesses' side, as firms hire for the first time, as they invest, as they seek equity, as they export and as they grow.

A sound economy and low inflation provide the stability that people need to start a new enterprise. This Budget seeks to build from this a culture of entrepreneurship in every community.

In 1997, we cut the small companies tax rate from 23p to 21p. And then in 1998 we cut it again to 20p, and introduced a starting rate of 10p.

I propose in this, the first Budget of the new Parliament, to go further. The small companies tax rate will be cut yet again—from 20p to 19p. And I propose to do this with immediate effect, for this tax year 2002–03.

And to send out the strongest signal about the importance that we attach to small businesses and the creation of wealth I propose to reduce the 10p starting rate of corporation tax—also with immediate effect—from lop to zero.

Small companies with taxable profits of less than £10,000 will pay no corporation tax.

With the starting rate of tax cut from 10p to zero and the small companies rate down from 23p in 1997 to 19p, this is now the most favourable corporation tax regime for small companies in any of the advanced industrial countries.

The Finance Bill will match this by legislating for a cut in capital gains tax, from this April, to 20 per cent. for business assets held for one year or more.

And for business assets held for more than two years, capital gains tax will be cut to 10 per cent.

In 1997, all transactions were subject to a 40p rate. From this year, three quarters of taxpayers with business assets will pay only a 10p rate, rewarding entrepreneurship and giving Britain overall a capital gains tax regime that is more favourable to enterprise than that of the United States.

Small firms have scarce resources and, having cut corporation and capital gains tax, I now propose to reform the administration of valued added tax for small businesses to abolish a set of regulations.

582 I start by removing, for thousands of small businesses, the burdensome requirement that has been in place since 1973 when VAT was introduced of having to record the VAT charged on each individual purchase and sale.

So, with immediate effect and for a total of half a million small businesses with turnovers of less than £100,000 a year, I am introducing a new flat-rate calculation for VAT payments. Rather than them filling in forms, we will introduce a flat-rate calculation that will save a typical small business hours of administration every year.

I can announce that, from next April, I plan to extend this scheme further to include almost half VAT-registered firms: in total 700,000 small firms with turnovers of up to £150,000 will be able to save time and form filling by making flat-rate VAT payments.

My second measure concerns automatic fines imposed by Customs and Excise. They are a source of grievance because they are often applied regardless of circumstances. So, for the same 700,000 small businesses, we will abolish automatic fines for late payment.

Thirdly, importers incur £175 million a year in unnecessary costs because they have to make up-front payment of VAT on goods imported into Britain even before they sell them to customers.

To cut those compliance costs and improve cash flow for businesses, I propose a new system—on the detail of which I will consult—under which we will allow approved companies to defer paying VAT on imports until they submit their VAT return.

Fourthly, automatic relief from VAT on bad debts is a persistent request from the small-business community, and until now no Government have responded. When a business has to account for VAT on a sale to another company but that company does not pay up, VAT recovery has proved difficult. It is costly, and it is time-consuming. I therefore propose a new rule for bad debt relief to give businesses an automatic entitlement to recover the VAT after six months.

Fifthly, I will offer small companies direct help with administration of their tax and payroll. The Carter report recognised the strong long-term case for small firms bringing their payroll systems online, and the equally strong case for cash help to enable them to do so. So we will set aside £40 million in the first year, and £110 million in the two subsequent years—£420 million in all—to give direct cash help to small firms going online, as we move in stages over the next eight years to universal e-filing.

Last month, we accepted the Competition Commission's recommendations for more competition in banking services—and, in the interim, for free banking services or interest paid on current accounts to small businesses—but we can do more to help not just the start-up firm but the hard-working family business, by creating a level playing field in every respect.

Thousands of employers are unable to recruit the skilled staff they need because training is so poor. Employees, employers and the Government must each accept their responsibilities, and we will finance pilot projects where, in return for Government's providing free access to training courses and support for wage costs, participating firms give staff time off to gain new skills. I can today respond to joint work by the CBI and the TUC 583 by announcing an additional £30 million so that more small businesses in our country can now reach "investor in people" standards.

Small businesses are the motor for future growth everywhere, but nowhere more than in high unemployment areas where, starting in our schools curriculum, we must do more to ensure that an enterprise culture can flourish. By supporting new business activities for people and places that prosperity has so far passed by, we will advance enterprise and fairness together. So in 2,000 designated enterprise neighbourhoods we will supplement the small business tax cuts I have just announced with two further tax cuts.

In the pre-Budget report, I implemented the first stage of stamp-duty relief in 2,000 of our high-unemployment areas: the abolition of stamp duty on all home and business property transactions up to £150,000. Now, for commercial transactions, I will seek state aid approval to abolish this limit—and, therefore, stamp duty in these areas—altogether.

And from this month, to match our other measures to regenerate local high streets and urban estates—the 5 per cent. VAT that we have for residential conversions, the 100 per cent. first-year tax allowances for converting vacant space above shops into flats, and the accelerated 150 per cent. tax relief for cleaning up land that is contaminated—we will introduce a new community investment tax credit backed up by a community development venture capital fund that will provide an additional £40 million to invest in our most deprived areas.

There is also no necessary conflict between growing the economy and protecting the environment. There is a huge potential for British firms, small and large, to capture new world markets by investing in environmentally friendly technologies and creating new businesses and jobs as a result. We now propose a series of new incentives for businesses investing in energy efficiency. I can announce that, to boost the use of combined heat and power in all areas of the country, we will exempt all electricity produced by this technology from the climate change levy. Electricity generation from coal methane offers new employment opportunities as well as environmental gains, and this summer it will be exempted also.

I can now extend capital allowances for further investment in green technologies at an enhanced rate of 100 per cent. that will strengthen, not weaken, our economy as we meet our Kyoto targets and make Britain a leader in this vast new global market that is emerging for green technologies. To encourage more environmentally friendly fuels I will, from next year, introduce a fuel duty incentive for sulphur-free fuel. Having already cut fuel duty for projects on hydrogen, biogas and methanol, I am now inviting British business to come forward with further proposals for pilots that would encourage new fuels in our country, and which we would support with fuel duty cuts and exemptions.

I am also announcing a cut of £55 in the licence fee for the least polluting vans, cuts of £30 for the least polluting cars, and cuts of up to £35 for motor cycles. Hauliers from overseas should pay their fair share towards the cost of using our roads, and I propose to go ahead with a road 584 user charge for lorries that is distance-based, with offsetting tax cuts for the UK haulage industry. The Financial Secretary will consult with the industry on the precise details of the scheme.

North sea oil is vital to Britain. For North sea oil, my aim is to deliver a tax regime that promotes long-term investment while giving a fair return to the British people, so the Finance Bill will legislate for two changes. To raise revenues, I will introduce a supplementary charge at a rate of 10 per cent. on North sea oil profits. At the same time, to support new investment, I will raise first year capital allowances from 25 per cent. to a full 100 per cent. and, subject to consultation, we will set a date for abolishing in its entirety the royalty on North sea oil, so we can create a stable long-term framework into the next Parliament for the next stage of the development of the North sea.

While in each Budget I have proposed the abolition of one tax, in this Budget—in addition to abolishing North sea royalties—I propose for consideration extending the successful betting and pools tax regime to bingo, to tax only the profits and not the players, so that I can abolish the tax paid by millions of bingo players in this country.

To encourage one group of small businesses, the nation's small breweries—often village pubs, some two centuries old—I have decided that the duty paid on their own beer will be halved. This is a cut equal to 14p off each pint, to be implemented for village pubs and small breweries by this summer—in time for the World cup. It will also be available in Scotland, Wales and Northern Ireland.

From 28 April, premium package coolers which contain spirits not wine will be taxed not as low-alcohol wines, but as they should always have been, at the same rate as spirits.

To ensure fairness for taxpayers and businesses, we will act to close tax loopholes and be vigilant against tax avoidance. I have decided to act, with immediate effect, on the avoidance of stamp duty on property, to put an end to three artificial schemes for VAT avoidance, and I am reviewing the complex rules on residence and domicile.

At the very core of creating a more enterprising and fairer Britain is our policy of moving people from welfare into work, and this morning's unemployment figures confirm that, since 1997, there are now 1.5 million more people in work in our country, giving Britain the best unemployment figures for 25 years. In the mid-1980s, 350,000 young people aged 18 to 24 had been unemployed for more than a year. Today, the figure is just 4,700.

Having weathered the world downturn of the last year, Britain is moving closer to our goal of full employment than for a generation. The Secretary of State for Work and Pensions and I are agreed that we must not relax, but accelerate our efforts in pursuit of that goal.

Starting two weeks from now, in six, and by December in 20, of Britain's high-unemployment areas, the introduction of the StepUp scheme will oblige the long-term unemployed to accept a guaranteed job which will offer, instead of the dole, secure waged employment. I can announce also that we will, in London and selected cities, match this new regime by introducing mandatory work preparation courses for the long-term unemployed.

Many who have come on to the unemployment register recently have a history of not being able to hold down jobs, so starting in pilot areas, unemployed people who 585 are recurrently in and out of work will now come within the same rights and responsibilities of the new deal. In return for new obligations, there will be new opportunities to ensure that work will pay significantly more than benefits.

Building on the increase in the minimum wage from October, working families with children will now have a guaranteed minimum income of £237 a week, more than £6 an hour for a 35-hour week—£97 more than income support, and substantially more even when all benefits are taken into account.

Lone parents working 16 hours will be guaranteed £179 a week, as well as help with child care. Working full-time, they will be guaranteed £237 a week, making work pay £70 a week more than income support.

The Secretary of State for Work and Pensions will shortly announce the details of a national campaign jointly with employers, lone parent organisations and Jobcentre Plus to make single parents aware of the jobs on offer, the higher income now possible and the child care help available, backed up by a new mentoring scheme for lone parents. A single person with a disability moving into work of 35 hours will be guaranteed £194 a week, £22 a week more than today.

I want also to announce the details of the next reform to make work pay: to extend the benefits of the working families tax credit, currently received by 1.3 million families in this country, 450,000 more than received family credit.

For the first time, single persons and couples aged 25 or over without children will be eligible for in-work support that makes jobs pay. We know the problems that particularly those over 50 face not just in getting work but in the doubts they express about whether it is worth their while working. The working tax credit now tackles this problem. Couples with wages of less than £280 a week, or £14,000 a year, and single persons with wages of less than £200 a week, or £10,500 a year, stand to gain from the new credit.

For a couple with no children, full-time work will pay not just the minimum rate of £130 a week under the minimum wage but £53 more than that at £183 a week. For a single person, work will pay at least £154 a week. So, in return for the responsibility to take up the opportunities that are available, the working tax credit now fulfils our promise that we will make work pay.

I turn now to pensions. Last November, the Secretary of State for Work and Pensions and I set out the new financial measures to ensure pensioners have dignity in retirement. No matter what the rate of current inflation, the basic state pension will increase by at least £100 a year every year, and this year it is rising by even more than that: £3 a week for single pensioners, £4.80 for couples.

From next year, 5 million pensioners stand to gain in addition from the pension credit by on average £400 a year more per household: that is £8 a week extra. For the poorest single pensioner, extra help will guarantee a minimum income of £98.15 this year and at least £100 next year.

For pensioners who have occupational pensions, small earnings or savings and who pay tax, I am also able to do more with my announcements today. The age-related personal allowance will be raised in 2003–04 far faster 586 than inflation. An elderly taxpayer will be able to set the first £6,610 of their income against tax, and the first £6,740 for those aged 75 or more. As a result of this rise in personal allowance, 170,000 pensioners will no longer be liable to pay income tax. As we maintain the free television licences for all pensioners aged 75 and over, the winter fuel allowance will be paid this year at £200 and in every year of this Parliament. With the minimum income guarantee, the new pension credit and the new pensioner tax allowances, the average pensioner household is now £1,150 better off even after inflation than in 1997.

Following this period when we have been so powerfully reminded of the enduring contribution of public service by our older generation, we are determined to give more opportunities for community service, especially among young people. Later this year, the Home Secretary and I will publish a joint discussion document on fiscal and other changes we can make to promote volunteering and community service.

Gift aid now provides a 28 per cent. addition to every donation by taxpayers to recognised charities, and that is designed to encourage more giving. I can announce that taxpayers will be able to carry back tax relief on their donations to the previous year and, from 2004, taxpayers filing a return will be able to direct the Inland Revenue, which will send any refund to a charity of the taxpayer's choice.

Amateur sports clubs are the mainstay of local sports in our country and they are the pride of every strong community. The Secretary of State for Culture, Media and Sport and I are determined to do all we can to support sport throughout the whole country, so, backdated to 1 April this year, there will be new tax reliefs, the details of which are published today, to enable amateur sports clubs to reduce tax bills to gain additional benefit from donations that are made by local supporters. To boost local sports further, we will match that tax relief with an extra £20 million for renovation and improvement of local sports club facilities.

This Budget is about building a Britain of greater enterprise and greater fairness, and nothing is more important to an enterprising, fairer Britain than that, through education and through support for the family, we invest in the potential of every single child in our country.

A family friendly tax and benefit system should be founded, as Beveridge wrote in his 1942 report, on the principles that nothing should be done to remove from parents the responsibility of maintaining their children, and that it is in the national interest to help all parents to discharge their responsibility properly. But for years there was no recognition in the tax system even of the existence of children or of the sheer costs of bringing them up, and our tax and benefit system had ceased to reflect our values.

This Budget applies the Beveridge principles to the realities and needs of modern family life. Today, many families rely on two incomes and most women work. Some of the greatest pressures that parents face were almost unknown to Beveridge's time: the loss of income because one parent ceases employment and is at home or works part-time after the birth of a child, and the costs of child care when the mother goes out to work.

A tax and benefit system that puts families first in the modern world would recognise not just the family as the bedrock of society and the rights and responsibilities of 587 parents, but the very real pressures that parents face right up the income scale. It would materially help them balance the needs of work and family, and it would be generous enough to ensure for each child a good start in life.

To create a truly family friendly tax system, we must integrate tax and benefits. Instead of the old argument between those who favoured only universal benefits and those who supported narrow means-testing, our reform ensures one seamless system that supports all families through universal child benefit, recognises the costs of raising children that middle-income as well as lower-income families face, and gives most to those who need it most—those on the lowest incomes.

I have decided that, in line with universal child benefit, all of this support will be paid to the main carer, normally the mother—the best way to support families, to get money directly to the children and to tackle child poverty. To support that, I will make one of the biggest single investments in children and families since the welfare state was formed in the 1940s.

I propose £2.5 billion of extra support for families—a family tax cut that will help nearly 6 million families. As a result, the direct tax burden on a family on average earnings with two children will be below 20 per cent.—lower than it was in any previous year since 1979. I can now give the details.

Because the tax system should recognise all the everyday pressures on middle as well as lower-income families when bringing up children, the new child credit will be available right up the income scale for families with incomes of £58,000 or below, and for the first year of a child's life, families earning up to £66,000 will receive some help.

With our maternity reforms, including the rise in maternity benefits to £100 in April 2003 and the extension of maternity pay to 28 weeks, families will receive up to £2,000 extra to help cover the costs of the first year of a child's life. Because the test is now overall family income, the income of one-earner families is treated in the same way as two-earner families, and 90 per cent. of families will benefit from the new system.

In recognising the pressures on families, I have decided on additional help for child care as part of the new system. To deal with a particular grievance of parents who work irregular hours or have disabled children, I have decided that support for child care costs should include help with approved child care in one's own home. Under the new tax credit system, a family on £35,000 a year with two children could receive child care help of as much as £50 a week.

In return for that, we will also do everything to ensure parental responsibilities to children are met. Where there are lone parents under 18 who cannot live with their family, the policy is that, instead of independent tenancies, they will have supported housing that combines accommodation with counselling and help with child care. In the minority of cases where a parenting order has to be imposed, checks will be made to ensure that, as well as proper supervision, parents are meeting their children's basic practical needs. With these changes, I can now set a rate for the new child credit which, introduced in April next year, will give proper recognition of the costs of raising a child.

588 For all families with overall incomes of £50,000 or less, the child tax credit with child benefit will be £1,400 a year—or £26.50 a week—for the first child. This compares to just £11.05 in 1997. For those in the £50,000 to £58,000 range, minimum support is £800 a year, maximum support is £1,400.

Our changes will mean that, from next April, mothers who wish to leave work and be with their children at home, but have found it financially difficult to do so will now find it financially easier. For single-earner families, more help is now available and for those on incomes between £43,000 and £58,000 help is now available for the first time—an essential part of a more family friendly tax and benefit system.

And for 2 million of the poorest families in this country, child support—which was just £28 a week in 1997—will now be £54.25. That is for the first child, and it is a near doubling of support since then. Support for a two-child family will be £92.75. And because the child credit must ensure that the poorest families share in rising prosperity, our policy will be to raise these child rates at least in line with earnings for the rest of the Parliament.

As we pursue our goals, all families will receive more support for bringing up their children. Families who need it most will receive most help when it is most needed. This is a policy for fairness to families throughout our country.

I turn now to our public services. With debt and debt interest payments down, it has been possible, even with lower than expected corporate revenues, to maintain our three-year spending plans for hospitals, schools, transport and public services, and to respond to the challenges of foot and mouth in rural areas and, since 11 September, to meet the challenges at home and abroad while still meeting our fiscal rules and disciplines.

Since 11 September, we have made provision of £50 million for domestic security responsibilities and, over the last year, £950 million for defence. We will continue to meet our responsibilities internationally and to the armed services of this country. In the last year, an additional £120 million has been allocated for the work that the Secretary of State for International Development does in providing emergency aid.

This summer we will set spending plans for every Department until 2006 and, in the coming spending review, education will receive the priority to deliver further substantial improvements, not just in our schools but also in our universities and colleges. Having raised the share of education in our national income during the last Parliament, we are pledged to increase significantly the share of national income devoted to education over the course of this Parliament.

In advance of the announcements in the spending review, the Secretary of State for Education and Skills is announcing today that, for this year, additional payments for investment will be made direct to every school in the country and every head teacher. For a typical school, total direct payments to secondary head teachers will rise from £98,000 last year to £114,000 this year. And payments to a typical primary school will rise from £33,700 last year to £39,300 this year—money that can be spent on the school's priorities, by the school and by the head teacher and the staff themselves.

Overall levels of crime have fallen in the last five years, according to both the police recorded crime statistics and the British crime survey. But there is a serious problem 589 with levels of street crime and associated offences of violence. No kind of crime, and no level of crime, is acceptable. And it is not acceptable that repeat offenders are continually bailed or, when convicted, not given appropriate sentences through lack of prison places and secure accommodation for juveniles.

For street crime, policing and counter-terrorism, £100 million more has been drawn down from the criminal justice reserve, and another £180 million on top of that is being allocated this year, including £110 million extra from the reserve.

I now turn to the NHS. The fundamental long-term choice that our generation must make is whether the national consensus that existed for the last half century for an NHS freely accessible to all is to be renewed for the years ahead. What we decide will not only determine the condition of our public services but define the character of our country.

The report by Derek Wanless states that the NHS needs, in support of reform and modernisation, a long-term sustainable financial framework, and it sets out the financial needs for the next two decades, starting with a five-year period of high and sustained growth and, once we have tackled decades of underinvestment, moving to lower rates of growth—4.4 to 5.6 per cent, then in the next five years 2.8 to 4 per cent., and then in the final five years 2.4 to 3.5 per cent. a year in real terms—for the three five-year periods after 2008.

The NHS 10-year reform plan proposed the local devolution of power and, in time, 75 per cent. of NHS budgets, to primary care trusts; new national standards for treating cancer, heart and other diseases; a modern system for evaluating new drugs; a commission for health improvement, reporting on performance; proposed new contracts for consultants, family doctors and an agenda for change for nurses and other staff; and in partnership with the private sector, 71 major hospital developments are either completed or are now being planned and built.

Reform and investment will bring booked appointments also for operations and are reducing maximum waiting times in stages from 18 months, then to 15, then to 12 and then six and three months. I said at the time of the pre-Budget report that the pre-condition of new resources was reform. And, in furtherance of the NHS plan, my right hon. Friend the Secretary of State for Health will announce tomorrow for England the following: new financial incentives for hospital performance; greater freedom for high-performing hospitals and trusts; powers and resources devolved to front-line staff in primary care trusts; reform of social services care for the elderly; and a series of measures increasing choice for patients.

In order to make sure that money invested yields the best results, for the first time in the history of the NHS the Health Secretary will enshrine in statute independent audit, independent inspection, and independent scrutiny of patient complaints—with a duty to account and report to the public on money spent and standards achieved.

In considering reforms I have also considered the hypothecation of revenues to the NHS. But I have concluded that it would make the public services subject to the ups and downs of the economic cycle and unpredictable changes in revenues. And it might achieve the opposite of what its supporters and the NHS needs: a sound long-term and sustainable stream of funding.

590 It is right, however, to show where money is spent and the results achieved. In future an annual report to Parliament, prepared by the new independent auditor, will account for the money allocated to the NHS, where it has been spent and what the results of the expenditure have been. This will be accompanied by local reports stating, for each local community, the link between money spent and results attained.

Everybody agrees—indeed, there is an all-party consensus—that in the years to come we, as a nation, will have to spend more on health care and the question is not whether we have to pay more but how we pay more. While we believe that the best provision is through general taxation, the alternatives are social insurance, private insurance, or charging where people would still pay but pay directly. There is no free way of increasing health service spending and the question for Britain today is whether a case has been made for moving to paying through social insurance, private insurance or charging.

The Budget and the review's documents published today contain very detailed information on alternative systems of financing: funding by private insurance where, in the case of the USA, family premiums average around £100 a week and are set to rise next year on average by £13 a week, and because of its cost it is a system that insures only some of the people for some of their care; funding by social insurance whose narrower base for contributions means—in France, for example—the typical employer pays £60 a week: and charging for clinical services which also means patients paying rising bills for individual operations and treatments—basing our health care system on medical charges would, in my view, mean the sick paying more for being sick.

There is another consideration as we look to the long term. With advanced technology and life-saving drugs, the cost of treating one individual falling ill can today run into tens of thousands, sometimes hundreds of thousands, of pounds. Because none of us knows when costs could overwhelm our family budgets—if we had to pay privately—we seek to pool risks and, more than ever, it is important to have health coverage with the minimum of ifs, buts and small print, and exclusions from that insurance.

So it is the Government's view not just that the NHS system of funding is the most equitable, but that a reformed NHS, by offering the most comprehensive insurance policy to meet the rising costs of medical advances, can give British people the greater security they want. Although meeting the challenges and costs of future health care does cost money, it is my hope that we can renew a shared national consensus around an NHS freely accessible at the point of need, paid for from taxation, not for its own sake but for the purpose of delivering for British people a better public service. It is therefore my duty to set out what we, as a nation, need to pay in tax to fund, for the long term, the health service that we want.

Since 1997, by cutting debt, unemployment and waste, I have transferred £7 billion a year to the NHS and public services and I can announce that, in the year 2002–03, I am able to transfer on top of that an additional £1 billion through cutting debt and unemployment.

Prudent management and economic stability and growth have also made it possible to spend an additional £5 billion more each year on the NHS. Rising costs of technology and rising expectations mean that, if we are to 591 put the NHS on a sustainable foundation for the long term, we as a nation will need to invest more than that. I know that as Chancellor I have not just to assure the British people that everything has been done to ensure prudent finances, but to ensure proper value for money, and to show that any tax paid is linked to the benefits received, and that it is fair.

Having agreed NHS reforms, including a new audit system that will link the money paid to benefits received, and having also resolved after deliberation to exempt the elderly and vulnerable, I have decided that, for the year 2003–04, there will be a freeze of the non-pensioner income tax personal allowance and national insurance thresholds at £4,615.

From April next year, there will be an additional 1 per cent. national insurance contribution from employers, employees and the self-employed on all earnings above £4,615. All other national insurance and income tax allowances will be indexed in line with inflation. Save for this 1 per cent. contribution, the ceiling of £30,420 remains in place and will be indexed in line with inflation to £30,940. But I believe it is right that when everyone—employees and employers—benefits from the insurance provided by the national health service, everyone who can should make a fair contribution.

The two tax changes that I have announced will mean that a full-time earner on median income of £21,400 a year—£410 a week—will pay £3.70 a week: those on higher incomes will pay more, those on lower income less. Those on 150 per cent. of median income£32,100—will pay £5.75 a week. Those on 50 per cent. of median income—that is, £10,700—will pay £1.65 a week.

Employers will contribute a similar amount per employee. Families with children will pay less than that because of the introduction at a cost of £2.5 billion of the child tax credit. For single-earner families from £35,000 to £50,000, currently excluded from the maximum children's tax credit, the 1 per cent. on national insurance will be reduced, or more than eliminated, because they as families with children receive up to £10 a week extra. After taking national insurance increases into account, a single-earner family on £21,400 with two children will be £3.90 a week better off. Taking national insurance and the child tax credit together, half of Britain's families with children will be better off as a result of the tax and benefit changes in the Budget.

To budget effectively for our long-term spending plans, including our major commitments to the NHS, I have also to make major decisions about other taxes. I have to make this year's decision on duties on beer, spirits and wine: I have decided to freeze them. My decision on cigarettes is, for public health reasons, to go ahead with the annual inflation increase at a cost of 6p per packet of 20.

Today all estates below £242,000 are not subject to inheritance tax. From today I am exempting all estates below £250,000, and 96 per cent. of estates will pay no tax.

I have also to make a decision for this year for fuel duties. I said in the 2000 pre-Budget report that I would respond to rises in oil prices and, given the high and volatile oil price, I have decided to freeze fuel duties this year.

I have also to make a decision on licences for cars, vans and lorries, and I will freeze them too.

592 The overall effect of the tax and other decisions I have made today is to raise net revenues by £6.1 billion in 2003–04, £7.6 billion in 2004–05 and £8.3 billion in 2005–06.

I am now able to set the envelope for public spending commitments for the years to 2006. I propose to raise current public spending from £390 billion this year to £420 billion next year, to £444 billion in 2004–05 and £471 billion in 2005–06.

I propose to raise our historically low levels of net public investment, which were at only 0.6 per cent. of national income in 1997, to 2 per cent. by 2005–06.

Because of the modernisation programme we have agreed in health and social services, I am able to announce that resources will follow reform. Social services have been, for too long, a neglected part of the caring services, and to finance better care for the elderly and to reduce pressures on the NHS, I propose to raise the rate of real-terms growth of social services to 6 per cent. a year.

Details will be given tomorrow on this and other changes by the Secretary of State for Health. Separate announcements will come for Scotland, Wales and Northern Ireland.

In the last 20 years real-terms rises in UK health spending have averaged 3.6 per cent. a year. I propose to raise UK national health spending by twice as much every year, on average by 7.4 per cent. in real terms each year—an annual cash rise to the NHS of 10 per cent.

But to put our health service on a secure long-term and sustainable footing, and to give the NHS the long-term security it needs, I propose—within our rules—not just a three-year financial settlement but a five-year settlement.

With year-on-year rises, UK health spending will grow from this year from £65.4 billion to £72.1 billion, to £79.3 billion, to £87.2 billion, to £95.9 billion, and then to £105.6 billion in 2007–08—even after inflation, a 43 per cent. rise over five years, and, since 1997, a real-terms doubling in national health service spending.

With the scale of long-term reform to be advanced tomorrow by the Secretary of State for Health matching the scale of long-term investment agreed today, we now have the best chance in a generation to secure our NHS, not just for a year or two but for the long term.

UK health spending will rise from 6.7 per cent. of national income in 1997 and 7.7 per cent. this year to 8.7 per cent. by 2005–06 and to 9.4 per cent. by 2007–08—rises year on year well into the next Parliament.

I have always said that our prudence was for a purpose. Last year we invested £2,370 for the average household in the NHS. By 2007–08 we will be investing £4,060 per household—after inflation, a 48 per cent. real-terms increase.

We have made our choice. This is a Budget to make our NHS the best insurance policy in the world. The NHS is a British ideal, free at the point of need, for everyone, in every part of Britain. Fairness and enterprise together.

I commend this Budget to the House.