Budget Statement (Hansard, 9 April 2003)

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

It is half a century since a Budget has been presented with Britain engaged in large-scale military conflict. On 10 April 1951, the then Chancellor told the House of Commons that, heavy as the burdens may seem at times, they were small set against the cause, which is great, and the courage of our armed forces, which is even greater. And even as we look forward to the end of the conflict in Iraq, my first Budget decision is to ensure proper provision for our military, for our domestic security and for international development and reconstruction.

I can confirm that I have set aside £3 billion in a special reserve available to the Ministry of Defence, so that our troops continue to be properly equipped and given the resources that they deserve and have a right to expect.

I believe that the whole House will wish to join me in expressing our gratitude and support to our armed forces for the zeal, bravery and resilience with which they carry out their duties and for their outstanding achievements.

And I believe that we owe a debt of gratitude to the strong leadership in a difficult time of our Prime Minister.

At home, our responsibility is to safeguard our communities from terrorist threats and here our resolve again is absolute. It is therefore right also to set aside in this Budget an extra £330 million for additional domestic counter-terrorism measures. The Home Secretary will therefore take forward measures to improve detection work at our ports and enhance our response to a range of terrorist threats. The House of Commons will again be united in taking every step to preserve and protect the security of the people of this United Kingdom.

Looking forward, there are three long-term challenges to which the international community must rise and which will require additional financial support: reconstruction in Iraq; a lasting middle east peace settlement; and, a new and urgent effort, going beyond debt relief, to combat the injustice and instability caused by world poverty.

To contribute to the United Nations appeal and to carry out humanitarian work in Iraq, for which we owe special thanks to the Red Cross and international aid organisations, the Government will contribute £240 million, including, for the United Nations, $100 million. And to back up the UN and the work of reconstruction and development, I will today set aside an additional $100 million.

272 Just as it is right for Britain and America to lead action in Iraq, it is now right for Britain and America to lead action against the hopelessness of poverty in the poorest countries. This Saturday in Washington, at the G7 and then International Monetary Fund and World Bank meetings, Britain will—with all-party support for which I am grateful—table our plan for a $50 billion a year international finance facility to fund primary education for the 115 million children without it, and to fund health care and life-saving drugs to tackle AIDS, malaria and tuberculosis at prices that poor countries can afford.

I believe that the whole House will also support our proposal to overhaul the European Union aid budget and redirect EU aid so that instead of 60 per cent bypassing the poorest countries, more European aid will be targeted at reducing world poverty by half by 2015. It is now time for the world's richest countries in word and in deed to fulfil their obligations to the world's poorest.

I will report today that Britain—even in difficult world conditions—is able to meet our military and security costs abroad and at home, to meet the costs of building peace, and to do so while maintaining in full our record investment in schools, hospitals, transport and policing and providing new help in this Budget today also for British business, industry and commerce.

And, Mr. Deputy Speaker, as the major economies look forward to the opportunity, if the right decisions are taken, for a global upturn, Britain starts from the foundation of low inflation: the lowest inflation for 30 years; the lowest interest rates for 40 years; the highest levels of employment in our history; and I can report today that Britain has now experienced the longest period of sustained economic growth and the longest period of growth in living standards in half a century.

I can tell the House that—unlike America, Japan and Germany—the British economy has grown uninterrupted, free of recession, in every single quarter over the past six years.

Having reformed the economy since 1997, the Budget marks the next stage; it is to achieve, in our time, a more flexible, more enterprising, full employment Britain: a Britain of economic strength and social justice.

Because our economy will have to be better equipped for the global upturn, this Budget's detailed economic reforms will seek, for each region and nation, greater flexibility in capital markets, in product markets and thus prices for goods and services; greater flexibility in our housing and planning, in mortgages and in labour markets.

Britain is closer than we have been for three decades to full employment and so today, with social security, housing benefit and employment reforms, I will announce, to encourage greater flexibility and fairness, this Budget will advance our goal of full employment in every region and nation of the United Kingdom.

Because it is a Britain of economic strength and social justice we seek, we now plan—paid for by the national insurance tax rise—by 2008, 80,000 more nurses than 1997 and 25,000 more doctors, and this Budget will further reform and secure public services and the NHS we believe in: free at the point of need.

And as the first Government for three decades with clear goals to reduce poverty among children and the elderly, the House will want to know that in this Budget 273 I will introduce a new guarantee with immediate effect for every new-born child in this country and a new guarantee with immediate effect for every pensioner in this country.

Let me first give the detail of the economic outlook. I can report that inflation has averaged 2.3 per cent in the last year, is expected to be at 2¾ per cent. in the fourth quarter of this year and will be 2½ per cent. next year, for every one of the following years.

Before Bank of England independence, the pre-1997 inflation target was 2½ per cent. or less but market expectations of UK inflation five, 10 and 20 years ahead were around 4½ per cent., almost double the target.

Today in 2003 because of the success of the monetary regime we introduced in 1997—and I pay tribute to the retiring Governor of the Bank of England, Sir Edward George, and the Monetary Policy Committee—we have a symmetric inflation target of 2½ per cent. and on a five, 10 and 20 year perspective the markets expect inflation to be exactly that—2½per cent.

And it is because since 1997 the monetary policy and the Bank of England have established credibility that, in a particularly uncertain period for the global economy, monetary policy has been able, supported by fiscal policy, to steer a course between deflation and inflation: cautious about domestic risks, including affordable pay settlements and the housing market; and vigilant to global risks in equities, in trade and in investment.

And it is for these reasons that while under the old regime, 30-year British interest rates were higher than those of Germany and America—in 1997, nearly 8 per cent. compared with 7 per cent. in the USA and 6½ per cent. in Germany—our hard-won stability now means that these long-term British interest rates—at just 4.7 per cent.—are today below those of Germany, below those of the euro area and below those of America.

So British monetary and fiscal policy has been able to respond to the world downturn and keep the British economy stable and growing. And it is that steady economic leadership, vigilant to risk, resolute in our commitment to stability, that is essential for a post-conflict world economy that while still fragile has the potential for renewed growth.

I am required to set the inflation target in each Budget.

In 1997, I spoke of the case over time for moving to a new domestic measure of inflation.

The advantages of the current indicator of inflation—RPIX—is that it is known, well understood and has served us well.

The advantages, however, of the internationally recognised index of consumer prices—HICP—is that it is in line with best international practice and is used by every other G7 nation but Japan, and by our neighbours in Europe.

So there is a case in principle for adopting for Britain this index of consumer prices and the Treasury will continue to examine the detailed implications of such a change.

Today, I am reaffirming our symmetrical inflation target based on the current RPIX measure. Our target for the financial year will be 2½ per cent.

274 I can now report that, since the last Budget, there are 253,000 more jobs in the UK. In the last quarter of 2002 alone, 150,000 new jobs were created. There are now 1.5 million more people in work than in 1997. Unemployment in Germany, France and Italy is around 9 per cent., in the euro area as a whole it is 9 per cent. In Britain, it is 5 per cent. British unemployment today is lower than in the euro area, Japan and America together for the first time for nearly 50 years.

Over the same period that a total of 3 million jobs were lost in America, employment has risen in Britain by ½ million, and the number of unemployed claiming benefit has fallen below 1 million for the first time since 1974.

So of all the major global economies Britain is now alone in combining inflation with the lowest unemployment for a generation.

In recent months, the oil price has fluctuated between $23 and $33 per barrel.

Among the continuing risks is, as everyone knows, the volatility of global equity markets, which have come down, though there have been sharp movements in recent days. Even in the world downturn of the early 1990s, world trade continued to grow at nearly 5 per cent. a year. But world trade grew by just 0.1 per cent. in 2001, and while it recovered to 4 per cent. growth in the first half of 2002, it slowed again to just 1.7 per cent. in the second half of the year. And so I understand the concerns and the difficulties of manufacturers and exporters, and all those trading across the world.

That is why—in the interests of Britain, Europe and the poorest countries—the world trade talks, now stalled on agriculture, pharmaceuticals and services, should be moved forward with urgency.

We now know that in 2001 and 2002 economic growth in Germany has averaged 0.4 per cent; in Japan 0.4 per cent; the euro area 1.1 per cent.; America, taking the two years together, just 1.4 per cent. And here in Britain, with growth in 2001 of 2.1 per cent. and then, in 2002, 1.8 per cent., we have averaged 2 per cent.—higher therefore than America; much higher than Japan; much higher than the euro area.

Looking forward, the largest repercussions for the British economy arise from the further fall in growth prospects for the euro area to around 1 per cent. in 2003.

German growth, expected at the time of the pre-Budget report to be 1.3 per cent. in 2003, is now expected to be just 0.4 per cent. Here in Britain, I now expect that growth this year will be 2 to 2½per cent.—double the euro area and Japan, and about the same level as America.

So, just as the record shows that, in 2001 and 2002, Britain, with north America, outperformed the rest of the G7 industrialised countries and were the fastest growing economies, so, again, with all the risks, we are expected, with north America, to be the fastest growing G7 economies in 2003.

In the previous two world downturns, in both the early 1980s and in the early 1990s, the British economy was in recession and output contracted for five whole quarters in a row—but this time in a world downturn, it has grown in every single quarter. Employment, which fell by 1.3 million in the early 80s and 1.6 million in the early 90s downturn, this time has not fallen but risen by 275 ½ million. Inflation, which rose to 20 per cent. in the 80s downturn and 10 per cent. in the early 90s, has this time averaged just 2.3 per cent. Interest rates, which peaked at 16 per cent. in the 80s downturn and at 15 per cent. in the 90s downturn, are today 3.75 per cent. And mortgage rates, which rose to 15 per cent. in both the early 80s and early 90s, are under 5 per cent today.

So, unlike the early downturns of the 1980s and 1990s, when others were in charge and when Britain was first into the downturn and suffered most and longest, I can report to the House that this time, on growth, employment, inflation, interest rates—and also for debt and deficits, where I remind the House in 1993 borrowing peaked at 8 per cent. in today's money, £83 billion of borrowing in just one year—this time Britain, even amidst global uncertainty, is not only doing better than in the past but also doing better when we make the comparison with these other countries.

Fixed investment, which has fallen, just as business investment has fallen round the world—and is in the euro area still falling—is expected to grow in Britain this year by 4¼ to 4¾4 per cent.—with business investment moving up from the second half—and then 4¾ to 5¼ per cent. next year.

Manufacturing output, which has fallen in every major industrialised country in the last year, with difficulties for the whole sector, is expected to grow in Britain by ¼ per cent. to ¾ per cent. this year, and then 2¼ to ¾ per cent. next year.

With the housing market and consumer spending now moderating, we expect domestic demand to grow by 3 to 3½ per cent. this year and in 2004.

Risks remain and are real, but with inflation and interest rates low, with fiscal policy in Britain supporting monetary policy, and with the world—particularly America—poised to make what we believe will be a steady recovery over the course of this year and next, we expect British growth overall to rise in both 2004 and 2005 by 3 to 3½ per cent. as the economy returns to trend.

Private consumption as a whole is expected to grow by ¾ to 3 per cent. this year and by 2½ to 2¾ per cent. next year; building on six years from 1997 in which the typical British household has each year seen an average 3½ per cent. real terms rise in their income.

Throughout the post-war period, Britain has faced a productivity gap with our competitors and in particular now a substantial gap with the USA.

The latest productivity figures from the independent Office for National Statistics, and now updated from the census of 2001, are published in full in today's Budget report.

The most recent data show that the productivity gap per head with Germany has narrowed to just 4 per cent.; with France that gap is 16 per cent. but has fallen significantly, and the productivity gap with Japan has been eliminated with Britain now 7 per cent. higher.

But despite the progress made, Britain and the rest of Europe still have a productivity gap—between 20 and 30 per cent.—with the US and so, with rates of corporation tax, small business tax and capital gains tax already among the lowest of the major economies, our Budget reforms will learn from American innovation, 276 competition and enterprise and that is why we will introduce new flexibilities in our economy; reforms that will be important for our future prospects in Europe.

Two thirds of the productivity gap with America is due to the poorer quantity and quality of innovation. So it is a priority to raise research and development from today's 1.9 per cent. of GDP toward America's 2.8 per cent.

Having launched the successful R and D tax credits last year, we are, following representations from the CBI and others, announcing improvements today in the credits' scope and value and that we will consult with business to improve the definition of qualifying research to ensure that it keeps pace with technological developments. Because two thirds of the R and D credit is paid to manufacturing, this is of special help to manufacturers in our regions.

To back up our extra £1.25 billion investment in science itself—not least the £40 million over two years we are investing as a world leader in stem cell research—I have asked the Inland Revenue to report on further help for already tax exempt research and technology organisations so that Britain, with these changes, can lead the world in new discoveries, and then new industries and jobs.

One third of overall productivity gains comes from new entrants to markets: start-up and then growing businesses whose dynamism transforms commerce, challenges existing businesses to do better, and when we have flexibility increases our competitiveness.

For small firms that are looking for capital of between £250,000 and £1 million, there is evidence of an equity gap that prevents them from realising their full growth potential. Small business investment companies backed by Government incentives now make almost 60 per cent. of all venture capital investments in American small business—and they helped finance the early growth of now large companies such as Intel, Apple and FedEx.

To match this success I am publishing proposals for the creation of British small business investment companies—and these will be private sector vehicles to inject new capital into small and medium-sized firms.

Because of the importance I attach to creating the best environment for investment, even when under pressure to meet the costs of war and reconstruction, I will today back up the cut to 19p in small business tax by funding three tax reliefs and incentives that will help companies in industrial and in rural areas make the most of the opportunities of the upturn.

By raising the qualifying threshold for small and medium-sized businesses to the maximum possible under EU law—that is £20 million—a total of 3.7 million businesses will be eligible for 40 per cent. investment allowances. A total of more than 3 million businesses will now also qualify for 100 per cent. allowances for investment in IT, which I am extending for a further year to April 2004.

Sectors that include 400,000 firms will now be eligible to borrow from the reformed small firms loan guarantee scheme, including catering, retail and vehicle repairs.

Each of our constituencies has thousands of small businesses, self-employed and sole traders—indeed, there is an average of 5,000 per constituency.

277 From tomorrow, firms with turnovers of £56,000 or less will not have to register for VAT—and that is the most generous VAT threshold in Europe. From tomorrow we will also abolish automatic fines for late payment of VAT for 200,000 more small businesses. In 2000, we released 150,000 companies with turnovers under £1 million from burdensome audit requirements and, subject to a consultative review this summer, we propose to release many thousands more.

Ten years ago it took 28 regulations and certificates to form a business in Britain. Even today in mainland Europe it takes around four weeks and an average £600. Today, in a Britain more flexible, it takes just one week and only £20. And to cut costs further and enhance that flexibility, from tomorrow, 650,000 firms will no longer have to account for every VAT transaction and can now opt for automatic flat-rate VAT payments, cutting out unnecessary paperwork.

Next month the Home Secretary will designate, for reform or abolition, 40 additional regulations and procedures, making a total of over 500 regulations and procedures—500 introduced by previous Governments—that are now identified for reform or abolition.

Where we find local enforcement of regulations uneven and unpredictable, we will consider using our reserve power to introduce statutory codes of enforcement practice and we have invited the CBI, Institute of Directors and others to second their experts to join us to remove unnecessary regulations starting with construction, transport and environmental services.

To meet concerns raised by business, I can announce that the Information Commissioner will produce revised and simplified guidance on the Data Protection Act 1998; the national statistician will review exempting more firms from statistical requirements; and new procedures will make it easier and simpler from this year for small firms to compete for Government contracts.

Because flexibility at a UK level should be matched by flexibility in Europe, we are proposing that Europe's competition authorities proactively investigate barriers to competition, starting with financial services; and we have now agreed to submit to the EU jobs review our employment strategy that could help Europe's 15 million unemployed. Britain does lead in job creation, in tax credits that make work pay, and this week—learning from Europe—we have introduced new maternity rights and the first ever paternity pay; and in striking the balance between dynamism and social standards, our position is that no change to European regulations, like the working time directive, should risk British job creation.

To break down the trade barriers between Europe and the USA, and to build a stronger transatlantic economic partnership, we will propose to the Commission and to the US Government liberalisation in services and the faster removal of tariffs between our countries.

I have examined rates of corporation tax, small business corporation tax and capital gains tax, and I propose to freeze them. On air passenger duty, I propose 278 to freeze rates. On insurance premium tax, I propose to freeze rates. On the climate change levy, I propose to freeze rates.

I propose, from Monday, the annual inflation rise of 1p on a pint of beer, 4p on a bottle of wine. I will freeze duties on cider and sparkling wine. Because past Governments set higher taxes on the alcohol content of spirits than on beer and wine, I will for the sixth Budget in a row, freeze all spirits duties—that is the longest freeze in duty for 50 years and it will benefit whisky producers in all parts of the United Kingdom.

I turn now to bingo. I will abolish the bingo tax on 4 August, just as I have abolished direct taxes on the pools and on betting on horse racing. The tax on bingo players' stakes and the tax on bingo prizes will be replaced in the same way as the tax on betting and the pools. So I can tell the House it will be a gross tax on company profits for bingo at one and five—15 per cent.

I have also to make a decision on fuel duties. Owing to the recent high and volatile level of oil prices as a result of military conflict in Iraq, I have decided to defer the 1.28p a litre annual revalorisation of fuel duties until six months from now—1 October—and I will legislate to this effect. And if the current international uncertainties and volatility remain, I will not proceed with the change at all.

I will also freeze vehicle excise duty rates for lorries and for motor cycles and raise excise duty rates from 1 May on cars and vans only by the normal inflation rise of £5. But to encourage the development of the least polluting cars I will offer a new rate, £110 lower than the standard rate for a licence.

Bioethanol fuel reduces air pollution and greenhouse gas emissions substantially. To encourage its development I can announce that when the industry is ready on 1 January 2005, we will reduce bioethanol duty by 20p per litre.

Enhanced capital allowances designed to encourage energy-saving technologies are set out in detail by the Inland Revenue today.

In January this year we abolished royalty payments from the North sea. I can now announce that from 1 January next year, and for all contracts completed from today, we will abolish petroleum revenue tax on new tariffing business in the North sea.

My decision on cigarettes is, for public health reasons, to go ahead with a rise—the annual inflation rise of 8p per packet of 20.

Last year I raised the exemption for inheritance tax to £250,000. I propose now to raise the exemption to £255,000. Ninety-five per cent. of estates will pay no tax.

All income tax rates and tax allowances will remain as set out in last year's Budget and the pre-Budget report.

The Inland Revenue's discussion document on residence and domicile is published today.

I want to say something about the housing market. I can now report that since 1997 an additional 1.1 million British families have become homeowners for the first time—home ownership, benefiting from the lowest mortgage rates for 40 years, is rising in all parts of the UK to 70 per cent of all households. It is the highest level in our history, and it is higher now than in America and Europe.

279 But while most mortgages elsewhere are fixed rate, most UK mortgages—64 per cent. of new mortgages—are at short-term variable rates with most of the rest fixed for just one to five years. And with housing demand at historically high levels, housing supply has remained low. And this has contributed not just to, over 30 years, a greater growth in house prices, three times that of Europe, but to the volatility and inflexibility of the housing market—an issue on which we will publish a background study as part of the Treasury's five tests assessment on the euro.

Most stop-go problems that Britain has suffered in the last 50 years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market.

Housing finance needs to become more certain and planning more flexible. I have asked David Miles, professor of finance at Imperial College, to examine the case for, and how, Britain can develop a market for long-term fixed-rate mortgages—something that is important to the UK in or out of the euro, and certainly more important in a single currency area.

The Deputy Prime Minister and I are asking Kate Barker, formerly of the CBI, to examine and report on how we can reduce barriers to increased housing supply. Backing up his decision to double public investment in new homes and in the renovation of housing estates, the Deputy Prime Minister is announcing today that he will intervene where planning authorities fail to prepare proper plans or deliver an adequate supply of new housing; if necessary call in proposed major housing developments; and consider the case for binding local plans to increase certainty and ensure the stability of the housing market.

I will freeze stamp duty on homes and business property purchases.

As a result of tax avoidance, only half of all commercial property transactions—worth £10 billion a year—are paying the stamp duty owed.

As I announced in the last Budget, the Finance Bill will introduce new tax avoidance powers to close these loopholes.

In addition, because tax avoidance and distortions could take the form of leasing, the Finance Bill will make provision to restructure the stamp duty currently paid on the rental value of all new leases, at a proposed rate of 1 per cent.—four times lower than the usual stamp duty rate on which we consulted.

To provide time for further consultation with business and commerce on how to promote a more level playing field between leases and transfers, I propose to trigger this reform only on 1 December. I will do so only if, after consultation with the industry, there is no effective alternative for tackling avoidance. If I have to trigger the change, I will increase the exemption from stamp duty for commercial property from £60,000 to £150,000, and exempt leases up to £150,000. Therefore, in any event, there will be no duty on 60 per cent. of commercial rental contracts.

We are also reforming the tax treatment of home purchases funded by alternative mortgage products, including Islamic mortgages, where, in the past, home buyers have been charged stamp duty twice.

280 Anti-avoidance measures on VAT fraud, share-based remuneration, loan relationships and derivative contracts are set out in detail by the Inland Revenue today.

I now turn to policies that will benefit specifically the economies of our regions and the nations of the United Kingdom.

Past civil service relocation reviews have included the Fleming review, and, more recently, the Hardman review, which led to more than 10,000 civil service jobs transferred out of London. The Deputy Prime Minister and I propose now that we examine not only the civil service but non-departmental bodies and other public services with the aim of achieving best value for money.

Successful relocation out of London by private sector companies suggests that public sector jobs transferred to regions and nations could exceed 20,000, to the benefit of the whole country.

Today, therefore, we are asking Departments to submit updated work force development plans and asking Sir Michael Lyons of Birmingham university to advise with a view to decisions on relocation by the next spending review.

The more each of the UK's regions, and Scotland, Wales and Northern Ireland, enter into global competition, the more we must encourage and help them harness their distinctive strengths, overcome economic weaknesses and, with a modern, locally led regional policy, rise to the challenge of making their skills, innovation and enterprise world-class.

To meet the needs of manufacturers investing in our regions, who now receive two thirds of both the R and D tax credit and permanent capital allowances, regional venture capital funds are now investing £270 million in high-growth businesses.

While business research and development in the south-east is £450 per head, it is just £50 per head in the north-east, and small business creation rates in the poorest areas are unacceptably low at one sixth of the most prosperous.

The Secretary of State for Trade and Industry is therefore asking Sir Tom McKillop of AstraZeneca to advise on the extension of regional science and industry councils. We will devolve more responsibility for small business services and training to the regions. In partnership with the banks, we are offering a new online service to give small business advice on training. In addition, today, we are adding to the incentives for small business creation in the 2,000 places in the UK with the most deprivation, which we have designated enterprise areas: to speed up development, fast-track planning approval; to cut the cost of property purchases, stamp duty is abolished; to cut the cost of initial investment, access to the Phoenix fund with the prospect of enhanced capital allowances; to cut the cost of risk capital, community investment tax relief; and to encourage entrepreneurship, enterprise advisers for local schools.

In the past, the more new business local authorities have encouraged, the more rateable income has flowed to the Treasury with no benefit to them. We will therefore legislate to ensure that from April 2005 local authorities and central Government share the receipts that result from new business creation to the benefit of local citizens.

281 The modern route—indeed, I believe, the only route—to full employment for all regions and nations is to combine flexibility with fairness.

Six years of reform have moved Britain to a new system in which, instead of just signing on for benefit at a local social security office, the first requirement is signing up at a Jobcentre for active job search and help with training, and 2 million people have benefited from the new deal.

Some parts of our country, however, still have twice the unemployment of others and, too often, national rules in employment policy do not encourage local initiative and innovation. It is therefore time to give local Jobcentres discretionary powers, so that, in ways that are targeted, distinctive and flexible, they can fill local vacancies, help the long-term unemployed respond to local employment and skill needs, in industries from tourism and the rural economy to IT and manufacturing, and develop their local plan for their area for full employment. In place of Whitehall-controlled ring-fencing, the Secretary of State for Work and Pensions is announcing local discretion to award grants for training, travel to interviews, and direct cash support to bridge the transition to work. There will be new powers to provide intensive job preparation courses and early entry into the new deal. In addition, drawing on a new ethnic minorities fund, Jobcentre staff will be able to tackle the particular barriers facing those who too often miss out on jobs. In return for local discretion, a new performance regime will accord higher rewards to top managers with provision to change the management of the worst performing.

Too often, unemployed men and women say that when they lose housing benefit, working is not worth while. Therefore, the Secretary of State for Work and Pensions is also announcing today that, from next April, men and women taking up jobs will no longer be required to submit a new claim for housing benefit but simply inform local housing benefit offices, and until benefits are recalculated they will continue to be paid the out-of-work rate.

In addition to requiring the long-term unemployed in 40 areas of the UK to take jobs on offer, we now propose: for those unemployed for 13 weeks, widening the area of job search to within one and a half hours of home and a new six-week period of weekly rather than fortnightly signing on; for all unemployed, an increase in the number of job applications and other requirements in return for benefit; and for the partners of benefit claimants, work-focused interviews and help to support the search for a job.

Some of the hardest to help into work are young offenders, 70 per cent. of whom reoffend.

The Home Secretary and the Minister for Work are therefore now considering how we can apply nationwide, under the leadership of Sir John Parker of Transco, the successful Reading training for work programme. We will offer young offenders training and work while in prison and, with good behaviour, a job when they are released: a programme with a 78 per cent. success rate so far. We will be tough on the causes of crime and tough on crime.

282 One million disabled men and women desperately want jobs. As a first step for men and women on incapacity benefit who wish to work, there will be an extra £19 a week as we raise the guaranteed minimum income to £194.

Welfare to work is only the first stage, however. Just as in past years we have helped people move from unemployment to employment, the next challenge—the new agenda—is to help people move from low-skilled work to higher-skilled work.

Because nobody wishes Britain to compete on the basis of low pay but on high skills, the right to education to 16 must be complemented by the right to lifelong learning: a classic case of social justice building economic strength.

While it is in the national economic interest that every adult has the basic NVQ2 qualifications, 8 million adults in Britain today do not have them.

The radical way forward that we propose is that, in return for employers giving staff time off for basic training, Government will contribute towards training and wage costs, and employees themselves can then move up the skills ladder.

The Education Secretary is therefore doubling the already successful employer training pilots, naming a further six areas of Britain today at a total overall cost of £170 million.

We will also review, for 16 to 17-year-olds, training, pay and employment needs, including the case for 16 and 17-year-olds having a minimum wage, and today the modern apprenticeship taskforce meets for the first time as apprenticeships, once withering away, are to rise to 320,000 by 2006.

Moving beyond the old voluntarism of the past in this national effort for skills, everyone—government, employers, employees and trade unions has a responsibility and a part to play, and we will extend the trade union learning fund by £3 million extra in 2005.

Expanding the skills that we need requires not only new investment and training but a modern approach to the economic and social benefits of legal immigration, so important to the past success of the US economy and now to ours.

UK work permits have risen from 47,000 to 140,000, and so the Home Secretary will now expand the highly skilled migrant programme and introduce measures for younger applicants and partners; he will encourage foreign nationals graduating in maths, science and engineering in the UK to seek a career in the UK; and he will expand the work permit scheme for industries like construction which face skills shortages.

While meeting the challenge of combating illegal immigration, we are supporting legal immigration which contributes to economic strength and social justice.

There are 200,000 more lone parents in work than in 1997. Lone parent employment has risen to 54 per cent as we advance to our 2010 goal of 70 per cent of lone parents in work. Following the report submitted yesterday by BT chief executive Ben Verwaayen and published yesterday, employers—starting in London with BT and including, initially, Glasgow, Liverpool, Manchester, Leeds and Newcastle— will provide for lone parents work preparation courses, and offer flexible terms backed up by help with childcare.

283 And for lone parents who voluntarily attend regular work-focused interviews and undertake job search, we will offer an extra £20 a week to cover job search costs, rising to—and topping up wages for a year—£40 extra a week when they move into work.

While the minimum wage today is £147 for a 35-hour week, tax credits raise the minimum family income for a lone parent with two children to £276 even after tax—almost twice as much as the minimum wage. And tax credits are the modern route to eradicating poverty by making work pay.

For lone parents who want work, but want to work part-time, we will now do more with a new housing benefit disregard. For lone parents on a typical rent of £50 a week, part time work will pay £213 a week—more than £10 an hour—making them far better off working part time than not working at all. Last month, we showed our confidence in the future by announcing a rise in the minimum wage for this year and next. And with the new tax credit system in place, a couple, both earning, with two children, now have their tax bill cancelled out until their income, including child benefit, is just under £20,000 a year. The same couple with three children will have their tax bill effectively cut to zero until their total income including child benefit is £22,500. That same couple, with help for typical child care costs, will have their tax cancelled out until they earn just under £30,000.

Our reforms in the tax system guarantee that work pays. And whichever part of the country you live in, and even if you change to a job which pays less, for low earners, for every £10 lost in pay, up to £7 is made up through the new system.

With this national framework for fairness set in place, I can tell the House that the British economy is now better placed to recognise local and regional conditions in pay, such as the extra costs for retention and recruitment that arise in London and the south-east, especially for the low-paid. In future, therefore, we plan regional price indexes showing differences in regional inflation rates; remits for pay review bodies and for public sector workers, including the civil service, will include a stronger local and regional dimension; and with the new housing benefit pathfinder scheme offering a flat rate in the private rented sector based on location and household circumstances, it makes sense not only to roll out this pilot nation wide but to develop a similar flat rate housing benefit system in the social sector. In these ways, we will make housing benefit work more effectively, more sensitively and more fairly in each area of the country, removing the barriers to work.

So the flexibility that I propose—in employment, in pay, in the liberalisation of capital, labour and product markets, flexibilities important for competitiveness in the global economy and our engagement in Europe—is not bought at the cost of fairness for families but is underwritten by policies for full employment, tackling poverty through tax credits, and more investment in public services.

And these are measures that combine the flexibility, too often undervalued in Europe, that is essential for enterprise with the fairness, too often undervalued in the USA, that is essential for social cohesion: it makes Britain a leader for those who see enterprise and fairness advancing together.

284 It is because from 1997 we took decisions to freeze spending; to cut debt; to use the spectrum auction to repay even more debt; and it is because we have cut unemployment and debt interest payments that we have been able to raise public expenditure on health, education and our anti-poverty programmes. We have been able to meet the additional commitments on employment, industry and support for families that I am announcing today. And yet at every stage of the economic cycle and including in the cautious case we have been able to meet all our fiscal rules.

Let me provide the detailed figures.

Figures for our current Budget for last year, 2002–03, and for the five years to 2007–08 are minus 12 billion, minus 8 billion, minus 1 billion, plus 2 billion, plus 6 billion and plus 9 billion.

So we meet our golden rule over the cycle. We will not only achieve a balance—[Interruption.] That is the golden rule over the cycle. We will not only achieve a balance but achieve an estimated surplus at £32 billion, showing that it is right and prudent to borrow at this, the right time in the economic cycle. And adjusted for the cycle we meet the golden rule this year and we meet it every year to 2006.

Our second rule—the sustainable investment rule—is that debt should be kept below 40 per cent of national income. Debt this year is actually rising to 42 per cent in France, 46 per cent in the USA—[Interruption.] The wrong country, Mr. Deputy Speaker. It is rising to 49 per cent in Germany, 55 per cent in the euro area, 76 per cent in Japan, but I can tell the House that in Britain debt this year and in future years will be at 32.2, 32.7, 33.2, 33.5 and 33.8 per cent, comfortably meeting our sustainable investment rule, doing so over the cycle and in every year.

We are within the Maastricht criteria on deficits and debt and, as planned, I will present the Government's statement on the assessment on the euro by the first week of June.

The House will have before it all 18 of our background studies as well as our assessment of the five economic tests.

It is because of the tough decisions that have led to the low debt that I have just described that I can, in the financial year which has just ended, make the full £3 billion allocation to the costs of military action in Iraq, contribute to humanitarian aid and improved national security at home, and with borrowing at £24 billions, 2.3 per cent of GDP, still have a debt ratio this year as low as 30.9 per cent, the lowest debt GDP ratio of all our major competitors. And we have not been, and will not be, diverted from increasing investment in our health and public services at a faster rate than in any post-war period.

Indeed, compared with a deficit of 8 per cent. of GDP 10 years ago, and an average of 6 per cent over the early nineties, the figures for net borrowing for this year and future years are just 2.5, 2.1, 1.9, 1.7 and 1.6 per cent.

Net borrowing for this year and future years is therefore £27 billion, £24 billion, £23 billion, £22 billion and £22 billion.

Cyclically adjusted net borrowing, which is forecast this year at 2.5 per cent in America, higher at 2.6 per cent in France, 2.3 per cent in Germany, and 7 per cent in 285 Japan, is in Britain just 1.7 per cent last year and this year, and in future years 1.5, 1.5, 1.7, 1.7 and 1.6 per cent of GDP.

With these figures showing that we meet both fiscal rules comfortably, I can therefore confirm to the House all the decisions of our spending review: by 2006 over £1 billion more a year for housing; £5 billion more a year for transport; £15 billion a year more for education; £40 billion more a year by 2008 for health; in total, by 2006, £61 billion more a year for public services. And at the same time, I can build in extra caution for future years by prudently setting aside new resources in the reserve margin for annually managed expenditure, showing that Britain can combine economic stability and rising employment with faster rising investment in hospitals and schools than in all other major countries—Britain showing that economic strength and social justice can advance together.

As we now plan the coming spending review, I want to make announcements about the next steps forward that we propose to take. Both economic strength and social justice are advanced when parents can balance work and family life and are able to make real and effective choices. So we have asked the spending review to examine the future of child care and family-friendly policies, and I propose a dialogue with family and parent groups and voluntary associations. For the first time from this month, 5 million families with incomes below £58,000 a year will receive the new child tax credit, with most receiving £26.45 for the first child, rising to £54 a week for the poorest. This is the best and fairest support for our nation's children in our nation's history and, together with record investment in our schools, the best investment in our nation's future.

We are on track to meet our 2004 target for a 25 per cent. reduction in child poverty. And for the next Budget and the next spending review, I have asked for a report on both the public service and welfare reforms we need to reach our goal of a 50 per cent. cut in child poverty by 2010, on the road to abolishing child poverty in a generation. In preparing the coming spending review, we also propose that work be taken forward with Britain's charitable, voluntary and community organisations, so that they can play a fuller part in renewing the social fabric of our local communities. The review will also encompass challenges too long neglected: helping children at risk, led by the Chief Secretary; and also tackling domestic violence, on which the Home Secretary will issue a consultation document shortly.

The pre-Budget report announced our support in principle for the creation of a gap year volunteer corps, supporting financially low income school leavers who give a year of their time to community service. I can announce that, so strong is the interest from the voluntary sector, the Home Secretary is announcing that the first pilot for the new volunteer corps will start next month. To back up free entry to the main national museums and galleries which has raised admissions by 70 per cent., with 5 million more visitors, I now propose to review the incentives, reliefs and exemptions available to help national and regional museums and galleries to 286 make acquisitions of works of art and culture, which should not be lost to the nation but, instead, should be accessible to the people of Britain.

The Secretary of State for Work and Pensions will report on the consultation on the pensions review and our proposed tax reforms shortly. The next spending review will also seek to maximise regional and local discretion in service delivery, matching national standards with local performance standards, reduced ring fencing, greater transparency, more timely performance data—overall greater freedoms and flexibilities for local authorities and other education, health, and social service providers.

The modernisation of the welfare state is not just about improving income and services, but about ensuring that all have a stake in the wealth of the nation. A child trust fund, established for each child at birth, endowed during their childhood years and available at age 18—to which Britain as a nation contributes—expresses our shared belief that in our country every child should have the best possible start in life. So I can tell the House that for every child born from today, we will establish in their name a child trust fund. Seven hundred thousand children are born every year, and we will fund from this year and every year in future, for each new-born child, an initial endowment of at least £250—£500 for the poorest one third of children—a reform which is progressive and universal, benefiting every child and with more to those who need help most. And we will report shortly on the proposal that during primary and secondary school years, each child receive additional payments into their child trust fund. Parents and grandparents will also be able to contribute to the fund.

The child trust fund symbolises the difference between those who believe in modernising the welfare state and those who wish it to wither away. At age 18, on the basis of historic rates of return, the child trust fund will accumulate assets that will enable all young people to have more of the choices that were once available only to some. This shows what we mean by putting power, wealth and opportunity in the hands of the many and not the few. So that every child in the same class at school will, in future, have a trust fund, I will align the payments to school years and backdate these initial endowments to September last year, so that every child born since September 2002 will have their own child trust fund.

Our country faces a great challenge—to overcome inequalities of income and wealth and to build a Britain that is not just a property owning democracy but a wealth-owning, asset-owning democracy open to all. And today's announcement is the foundation on which the Government will build in future Budgets and spending reviews. None of this would be possible if we listened to representations to cut public spending by 20 per cent.

There is no section of our society who have contributed more to our national health service and who now depend on it more than Britain's elderly. We have always believed in a national health service free at the point of need. It is a commitment to which this Government, while in power, will hold steadfast. But there is an unfairness which undermines that commitment and which has unfortunately existed since 1948 when the NHS was first created. Thousands of 287 pensioners in hospitals are effectively charged a payment, with, from six weeks, cash deducted from their weekly pension to pay for meals and accommodation. It is a hotel charge imposed on one of the most vulnerable groups in society. For everyone else in our country, other than those on pensions and benefits, hospital care is entirely free of charge. It is therefore wrong that the elderly, who have saved all their working lives for their retirement through their national insurance contributions, should now suffer the reduction of their pension entitlement to pay for hospital care. So for pensioners, even if they stay in hospital for up to a whole year, I am today announcing that we will abolish this charge. The charge will be abolished with immediate effect for pensioners going into hospital from today. To those opposite who have advocated vouchers, fees, or new health charges for medical services or basic accommodation, this is the Government's answer: we have not only rejected those charges but are abolishing hospital accommodation charges, not just for pensioners, but for all who have charges imposed on them through the social security system.

I have one further announcement to make. Starting next month, we will be writing to every pensioner in Britain, telling them that from October all single pensioners with income below £139 a week and all pensioner couples with total income below £203 a week—that is, the millions of pensioners in our country who have modest savings and modest works pensions—stand to benefit from our new pension credit. In total, in the typical constituency of hon. Members, 7,000 pensioners. Many couples will benefit by £20 a week, and many single pensioners by up to £15 a week. The average additional payment will be £7 a week extra for single pensioners on the credit, and £9 extra a week for couples on the credit.

At the age of 80, pensioners receive an addition of just 25p a week to cover the costs that getting older involves. At just 25p extra per week, it has rightly been criticised as inadequate, and I have had many representations from MPs on all sides of the House. To double or 288 quadruple such a small allowance would not be a sufficient recognition of the needs of the very elderly over 80, or of the contribution that they have made to the life of our country and its success. The winter fuel payment of £200 has not, I regret, been supported by all parties in this House. But I hope that there will now be all-party support for my proposal that for every household where a pensioner reaches the age of 80, or is over 80, we will add to the winter allowance of £200 an extra payment of £100—a total of £300 that will be paid each and every year to almost 2 million elderly men and women over 80.

A Budget meeting our responsibilities abroad and at home; steadfast for stability, enterprise and full employment; tackling inequality; building an NHS free at the point of need. A Britain of economic strength and social justice. I commend this Budget to the House.