Pre-Budget Report

HC Deb 10 December 2003 vol 415 cc1061-87 12.31 pm

The Chancellor of the Exchequer (Mr. Gordon Brown)

When in 1997 we made the Bank of England independent, we also froze spending for two years, cut the national debt and imposed the responsibilities of the new deal—hard choices made to restore, as the central objective of British economic policy, the goal of high and stable levels of growth and employment

Today, I can report to the House that British inflation has been at its lowest for 30 years; interest rates are their lowest since 1955; this Christmas, there are more people in work in Britain than at any time in our history; and economic growth in this country is now strengthening. While America, Japan and half the euro area have suffered recessions, the British economy has—uniquely—grown uninterrupted, free of recession, in every single quarter in every single year since 1997. Now is the time for this stable and growing economy to seize the opportunities of the emerging world recovery.

So, with the same strength to take the right long-term decisions for Britain that have guided us through the world downturn, this pre-Budget report sets out the further tough choices that we have to make: first, decisions to lock in our hard-won stability and to fund our additional obligations to the war against terrorism and Iraq; secondly, long-term choices that step up the pace of economic reform to strengthen Britain's enterprise culture, British science and the flexibility of the British economy; and thirdly, even as we come through a world downturn and because we believe that enterprise and fairness can advance only if they advance together, an additional £1 billion a year investment in Britain's children to advance our goal that not just some but all Britain's children have the best possible start in life and that no child is left behind

First, the world economy. While the USA and Japan have been recovering during 2003, growth in our biggest trading area—the eurozone—is expected to be just 0.5 per cent. In Italy, growth is 0.4 per cent.; in France, 0.2 per cent.; and in Germany, zero. But I can report that in Britain growth this year is now expected to be 2.1 per cent., meeting our Budget forecast

When I made our Budget forecast, the Opposition said it was not just incautious and wrong but "a deliberate misrepresentation" of Britain's economic prospects and not to meet it destroyed credibility. I can report to the House that not only have we met our forecast, but cumulatively since 2000 Britain's economic growth has actually been stronger than Japan, the euro area and the USA.

I can tell the House now that Britain has enjoyed the longest period of peacetime growth since records first began in 1870—130 years ago. So, Mr. Speaker, let me share this with the House: my sleepless nights have not been due to the economy nor to the Opposition. I can also tell the House that, looking forward, we expect British growth next year to increase by between 3 to 3.5 per cent. and in 2005 to increase again by 3 to 3.5 per cent.

In a world downturn, Britain has achieved growth with low inflation and with high employment. I can report that since 1997 inflation in Britain has averaged 2.3 per cent., and that the number of jobs created in our economy now exceeds 1.7 million. Unemployment in America is 6 per cent.; in Germany, Italy and the euro area it is 9 per cent.; in France it is 10 per cent.; in Britain it is just 5 per cent. For the first time in 50 years, British unemployment is lower than that of every one of our major competitors—the euro area, Japan and America.

Even with long-term unemployment cut by 80 per cent. and youth unemployment by 75 per cent., I have read pre-Budget representations that this Government's new deal is said to be an expensive failure and should be abolished. Today, in the pre-Budget report we are setting out the evidence showing that without the new deal, youth unemployment would be twice as high; without the new deal, half the lone parents who have moved into work would not have done so; and without the new deal, unemployed men would be 20 per cent. less likely to get a job. So the challenge of this pre-Budget report is not to abolish the new deal—now, with 2 million people helped, the most successful employment programme in our history—but to strengthen its role in removing for ever the scourge of long-term unemployment in this country

We remain vigilant in regard to both inflation and the continuing risks from global imbalances, an uneven world recovery and geopolitical uncertainties. I also understand the continuing concerns of manufacturers and exporters. It is therefore urgent that world trade talks be resumed

As we achieve more balanced economic growth, fixed investment is growing this year by 2¼ per cent., with growth forecast at 6 to 6½ per cent. next year. Business investment, which was expected at Budget time to fall, is actually rising by three quarters of a per cent. this year, with 3 to 3½ per cent. growth forecast for 2004. The latest manufacturing and industrial production figures show a 1 per cent. growth in just one month, and manufacturing output—which has fallen in both North America and Europe—is expected to grow here by one quarter of a per cent. this year, and then by around 2 per cent. in both 2004 and 2005.

With the housing market and consumer spending growth now—as we forecast—moderating, we expect domestic demand and private consumption to grow by 2½ per cent. this year and in the following two years, building on six years from 1997 in which British households have averaged real rises in income above 3 per cent. a year. With—since 1997–1 million more home owners in Britain, rising household debt has been matched by rising household wealth and lower interest payments.

Because this Government will never take stability for granted, I have announcements designed to entrench that stability. First, the credibility that has come from Bank of England independence and the tough decisions to cut inflation have made possible a proactive, forward-looking approach to interest rates, cutting aggressively at the right time for the economy and, as the economy now strengthens, locking in long-term stability.

The symmetrical inflation target enables the Bank to be both pro-stability and pro-growth. The long-term credibility of our symmetrical target will be enhanced—as the independent Office for National Statistics reports in its paper published today—by adoption of the internationally recognised measure of inflation, the harmonised consumer prices index. It is more reliable because, taking account of spending by all consumers, this consumer prices index gives a better measure than the old RPIX measure of spending patterns. It is more precise because, as in America and the euro area, it takes better account of consumers substituting cheaper for more expensive goods. I have therefore written to the Governor of the Bank of England this morning confirming my announcement earlier this year, and confirming that from today the operational measure for inflation will be this consumer prices index, and I am setting the new inflation target at 2 per cent.

I can confirm that pensions, benefits and index-linked gilts will continue to be calculated on exactly the same basis as now. As before, the target will be symmetrical. Should the rate of inflation diverge from the 2 per cent. target by more than 1 per cent. on either side, our open letter system will be triggered. And because discipline in pay setting is essential in both private and public sectors, I have also written today to the public sector pay review bodies, informing them that our inflation target is 2 per cent.

When, in 1997, we also broke from the old annual spending rounds by setting fiscal rules over the cycle and fixed three-year spending settlements, and then paid off more debt in one year than all the debt paid off across all the 50 years since 1945, debt interest payments were reduced to just 2 per cent. of national income—lower than at any time since 1915. Those long-term decisions that we made for stability have enabled fiscal policy during this world downturn to support monetary policy, and therefore to maintain economic growth. This Government will ensure that for the long term, debt levels will remain low and sustainable. In each pre-Budget statement, we will report not just on the medium-term fiscal position, but on the long-term position. Today's report shows that while in Germany, France and the euro area state spending on pensions will rise towards 15 per cent. of GDP by 2050, Britain's figure of 5 per cent. means—I the report—that the UK public finances are sustainable in the long term…the UK is in a strong position relative to other countries to face the challenges ahead". I have to tell the House that to revert to the pre-1980 position—an earnings link with pensions—would, by the end of the period, raise deficits by 3 per cent. a year just to cover this one item, with the long-term sustainability of the public finances undermined. Instead, this Government will proceed on a prudent and sustainable basis.

Essential also for long-term stability is a flexible housing market, and I welcome the interim reports this week of the Miles review on the market for mortgages and of the Barker review into barriers to housing supply. Kate Barker highlights Britain's weak private rented sector, so I will now consult, before the Budget, on a new incentive to encourage the creation in Britain of real estate investment trusts.

With flexibility central to meeting the euro's five economic tests, I am today also publishing our first report on labour, capital and product markets; and as promised in June, the draft euro referendum Bill is published today.

Since 1997, Britain has created over 100,000 more businesses; there are 170,000 more self-employed. But more enterprising though we are, Britain still lags behind American rates of business creation and success. And just as we took hard decisions that led to a British consensus on stability, I want to build in Britain an even deeper-lasting British consensus: a shared national economic purpose that, building on our historic strengths—Britain's scientific genius, British creativity, Britain's global reach and Britain's stability—means that we become, in this era of globalisation, one of the world's most enterprising, flexible and successful economies.

I want Britain to be the best location for science and for research and development, so I can announce a widening of the successful R and D credit that will include the direct costs of software and power. As the Government examine the Lambert and Sainsbury reviews, and put forward our reforms in the structure and funding of higher education to promote excellence and opportunity for all, the Budget will consider even further improvements, including for research and technology organisations. We will, in addition, consider the right incentives to support one of our great British creative industries: British film. A flourishing British venture capital industry is vital to growth. I will also consult on raising the annual limit for venture capital trusts and enterprise investment schemes to £200,000, and on increasing for two years income tax relief for VCT investments to 40 per cent. We will extend tax relief for the cost of managing investments from investment companies to trading companies.

Small firms in Britain seeking investments of up to £2 million still face an equity gap, so following, again, the model of American small business investment companies, we will create a new framework of incentives for small business investment. We will therefore launch the first round of a new British fund for enterprise capital. To encourage new companies to enter the North sea, I will enhance the tax relief for their costs of exploration. Manufacturers and firms with turnovers up to £22 million will benefit from 40 per cent. capital allowances, which will be worth, over three years, nearly £400 million to manufacturing and industry.

So that British manufacturers and British workers do not lose out from European rules unfairly applied to British firms, the Secretary of State for Trade and Industry and I have asked Mr. Alan Wood of the Engineering Employers Federation and Siemens UK to review how procurement rules are practised in Europe and to make recommendations.

I can announce the following deregulations. Firms applying international accounting standards will not have to submit a second and separate set of accounts to the Inland Revenue. For firms with turnovers below £5.6 million, there will now be no independent audit requirement. I will extend the flat rate VAT scheme whereby firms simply pay a percentage of total turnover, lowering the VAT charged by up to 3 per cent., and for first year start-up businesses by up to 4 per cent. In total, the Government are announcing today 147 regulations for reform or removal. Because half of regulations emanate from Europe, the coming Irish, Dutch, British and Luxembourg presidencies are proposing a joint initiative to drive forward deregulation as we seek more flexible capital, product and labour markets—not just in Britain, but across Europe.

Our goal is full employment for every region and nation of the United Kingdom, and we are closer than ever to achieving it. While the first stage of Britain's new deal was to move people from welfare into jobs, the next stage is to help people move from low-skilled work into higher-skilled work. I want to announce today that the windfall tax reserve, which was previously allocated for job creation, will now be reallocated to a new deal for skills.

To extend employer training pilots to a third of the country—from 14,000 up to 80,000 employees, most of whom have left school early and have no qualifications—we will provide £190 million in the corning year for time off and for skills training. To further that new deal for skills, everyone on jobseeker's allowance will be assessed for their skills and, starting with pilots for the long-term unemployed, they will attend a mandatory skills course.

Overall, that provides a second chance for adults—either in or out of work and without basic skills—to learn, whether through further education, work-based learning, distance learning or trade union learning. Today, further to boost such skills training, we are publishing a paper on the tax treatment of subscriptions and fees for professional bodies.

Alongside the Allsopp report on regional statistics, which is published today, the Secretary of State for Work and Pensions and I are also publishing today for the first time the full employment plans for each region of the country. For 2,000 enterprise areas, which cover high unemployment communities in a total of 417 constituencies, I can announce that, in addition to fast-track planning and abolishing stamp duty, there will—subject to state aid approval—be first-year 100 per cent. investment allowances to renovate vacant commercial premises.

I can also confirm that, as a result of the Lyons review, we will relocate out of London and the south-east 20,000 civil service jobs—to the benefit of the regions and nations of the UK. Local authorities which successfully promote small business creation should be rewarded for doing so. The Deputy Prime Minister and I propose that any additional business rate income should be shared with local authorities. Although I will consult further before the Budget, we expect local authorities to be eligible, as a result, for an additional £150 million in 2005, £300 million in 2006, rising to £450 million a year for local authorities.

Budget 2002 announced reliefs on income and donations for local amateur sports clubs. The importance of sport to our communities and to our whole country has been demonstrated most powerfully as the England rugby world cup triumph is enthusiastically celebrated all across the United Kingdom. I know that the whole House will want to congratulate the team on their success and also encourage the next generation of sportsmen and women.

There are 100,000 amateur sports clubs in Britain, which deserve greater support. Under our proposals, becoming a community amateur sports club will now bring an entitlement to 80 per cent. rates relief, which is worth between £1,000 and £3,000 a year for a typical club. By doubling today the thresholds at which community clubs are exempt from corporation tax to a new rate of £50,000, the vast majority will be exempted from such tax altogether. In partnership with the sports governing bodies, we will now do more to ensure that all sports clubs—roughly, over 100 in each of our constituencies—can share in the considerable financial benefits as they promote sports throughout their communities.

The Home Secretary—who will announce tomorrow the details of our £125 million fund for voluntary and community organisations—the Secretary of State for Culture, Media and Sport and I will report in the Budget on what more we can do in Britain to encourage and help all those prepared to volunteer in school sports and local sports, as well as in community service and mentoring. At the same time, we will also review the Inland Revenue's treatment of football supporters' trusts.

I have two announcements on whisky and spirits. While tobacco fraud, VAT fraud and oils fraud are now in decline, recent trends suggest that despite the freeze in spirits duties for six Budgets, an estimated one bottle in every six of spirits sold in this country is evading duty, so I will now make provision to implement in the next Finance Bill the Rogues report recommendation that we stamp spirits bottles. If, after discussion with the industry, there is still no workable alternative proposed, we will legislate. If we have to impose stamping, the Economic Secretary will discuss with the industry the most cost-effective scheme and I will then consider extending the freeze on the duty on whisky and all spirits, not just for one year but for every year of this Parliament—[Laughter.] And I drink water.

I propose also to consult on a new framework for the tax treatment of green fuels: that we make a commitment to prior announcements, three years ahead, of incentives to increase usage and thus promote investment in new fuel-efficient technologies. The Budget will announce the way forward on that measure and it will also introduce incentives for rebated low-sulphur fuel and gas oils. We will also consult on recycling revenues from landfill tax; extending eligibility for the 80 per cent. reduction from the climate change levy; and, subject to new industrywide commitments on the environment, extending in Northern Ireland until 2012 an 80 per cent. discount on the aggregates levy.

Also published today are measures extending our VAT compliance strategy and closing loopholes that involve trusts, seafarers foreign earnings deductions and tax paid on the personal income of owner-managers of small companies.

Our pension proposals, published also in detail today, include a single set of rules that set the tax-free lump sum at 25 per cent. of the value of an individual's pension fund; more flexible annuity rules; and provision for older workers to draw occupational pensions earlier. Because consultation on the proposed single lifetime tax allowance for pension savings has revealed contrasting interpretations of its impact, I am asking the National Audit Office to provide, by Budget time, an independent evaluation of the numbers affected. Our aim is to secure a broad-based national consensus on the way forward. If a decision is made to proceed, the measures will be introduced in April 2005; otherwise, the current regime will remain in place.

I come to the coming spending round. In advance of the independent Gershon review of efficiency, the Chief Secretary has written today to all Departments asking them to bring forward their proposals for reform and cost savings in the areas of transaction services, back office services and procurement—where we propose a new Whitehall framework. With modernisation and reform the condition of future spending settlements, the Treasury will in return—for public service agreements—abolish the input and process targets, and we will abolish service delivery agreements entirely. And while local performance standards and local publication of performance data will progressively replace the national targets, the Deputy Prime Minister and I are agreed that, having already set aside for English local authorities next year an additional £3.3 billion, the Government will be prepared to use capping powers where appropriate and necessary to ensure next year reasonable levels of council tax.

I turn now to the public finances. I reported to the House last week on our resolve to ensure that our armed forces are properly supported in all they do. The whole House will wish to thank them for the service they give in peace and in war. I can also reaffirm that we will meet all our international development responsibilities in Iraq and for the war against poverty in Africa and around the world.

To date, the money spent or set aside for the war against terror, including in Afghanistan and for our action in Iraq, is £5.5 billion. I can tell the House that for Iraq £2 billion has been carried forward into the special reserve for 2003–04; and I believe it prudent and right today to set aside a further £500 million for this year, and an extra £300 million for next year—raising our allocations for the war against terrorism and for action in Iraq to £6.3 billion in total.

So, having taken account of those new provisions for Iraq and elsewhere, and the cost of incentives that I have announced for enterprise and other measures to equip Britain to take advantage of the opportunities of the global upturn, our current budget figures for 2003–04, and for the years to 2008, are, in billions: minus 19, minus 8, minus 5, zero, plus 4 and plus 8.

Our first rule is the golden rule that over the cycle we balance the current budget. Having accumulated surpluses at the start of the economic cycle at 2.1 per cent. of national income in 1999, 2.1 per cent. in 2000 and 0.9 per cent. in 2001, we not only meet our first fiscal rule—the golden rule—that we balance the budget, but even on cautious assumptions we have an average annual surplus over the whole cycle of around 0.2 per cent. of gross domestic product, meeting our first rule in this cycle by a margin of £14 billion; and even on the cautious case, moving back to balance by the end of the forecast period.

Our second rule—the sustainable investment rule—is that net debt will be below 40 per cent. of national income. I can tell the House that debt this year is actually rising to 42 per cent. of national income in France, 50 per cent. in Germany, just under 50 per cent. in America and 80 per cent. in Japan. But in Britain, debt in this year and future years will be well below 40 per cent.—at 32.8, 33.8, 34.6, 35.1, 35.4, and 35.5 per cent.—meeting our second rule by a margin of £60 billion, and doing so over the cycle and in every single year.

With both rules met, it is right and prudent that—as in America, Japan, France and Germany—we borrow at this, the right time of the economic cycle. Net borrowing adjusted for the economic cycle, which is forecast this year at 3.5 per cent. of national income in Germany, 3.9 per cent. in France, 4.5 per cent. in America and 6.9 per cent. in Japan, is in Britain 2.4 per cent. this year, and in future years it will be 2, 2.2, 2, 1.9 and 1.7 per cent. of national income.

Adjusted for the cycle, our deficit, as I state in our annual convergence report submitted today to the European Union, is and remains—unlike the deficits of those G7 colleagues—below 3 per cent. of GDP and below it in every single year. In each year, before adjusting for the cycle, British borrowing is also substantially below the G7 average and it is falling to just half the level of America.

Let me give the House, in detail, the comparative figures. This year, net borrowing is for France 4.2 per cent. of national income; in Germany it is 4.2; in the USA it is 4.9; and in Japan it is 7.4.—but for Britain it is 3.4 per cent. Next year, net borrowing in France is 3.8 per cent. of national income; in Germany 3.9; in America 5.1; and in Japan 6.8 per cent. In Britain, it is just 2.6 per cent. And in 2005, while for France borrowing is 3.6 per cent. of national income; in Germany 3.4; in America 4.9; and in Japan 6.9; in Britain it is just 2.4 per cent.

So compared with a British deficit reported by the Conservative party 10 years ago of 8 per cent., and an average of 6 per cent. over the early 1990s, net borrowing this year and future years to 2008–9, as a percentage of GDP, is 3.4, 2.6, 2.4, 2.1, 1.9, falling to 1.7 per cent.—with, for this and future years, the cash figures 37 billion, 31 billion, 30 billion, 27 billion, 27 billion and 24 billion—so we are able to meet all our commitments in Iraq and at home; maintain the lowest level of debt in the G7; still announce a deficit that, in each and every year, is substantially below that of America, Japan, Germany and France, meeting all our fiscal rules; and move forward with the spending plans we have set out:£15 billion pounds more a year for education, £59 billion more a year for public services and, by 2008, £41 billion more for health, allowing us to employ, in total, 25,000 more doctors, 20,000 more teachers, 80,000 more nurses and 90,000 classroom assistants, as we invest in and reform our public services.

It is sustained economic growth, built on the foundation of long-term stability and on low debt, that has underpinned our investment plans and makes them affordable for now and the future. And so I can now make two further announcements. The first is on children's benefits—and here I should declare an interest. Nothing is more important to the future of our whole country than the best schooling, services and financial support, ensuring for every child the chance to develop their potential to the full.

For mothers and fathers struggling to balance work and family responsibilities, help with child care costs—once available to just 47,000 parents in 1997—is now available to almost 300,000. But today it is time to begin to face up to a long-standing grievance: that financial help for approved child care be offered not just to some families but be available right up the income scale to working families facing child care costs.

So in advance of other decisions that I make in the spending review, I can announce as a first step that for every employee, whatever their income level, employers will be able—as long as the offer is made to every employee—to provide free of both employee national insurance and income tax and free of employer national insurance £50 a week for approved child care.

I can also announce that we will respond to two other long-standing concerns: help with child care costs will now be available when approved child care is provided in the child's own home; and, after consultation, we will widen the definition and therefore the number of approved child carers for whom the £50 a week or tax credits can be offered. We now expect child care places to double from 750,000 in 1997 to 1.5 million by 2006, helping over 2.2 million children in our country.

In April, for the first time our country will pass a milestone in opportunity for our children: a nursery place guaranteed to every three and four-year-old—six months ahead of our planned schedule. But we know also that the most formative years are from the cradle to the nursery school. So for 500 communities in Britain, the Minister for Children will fund school-parent links so that long before schooling begins infants are introduced to early learning and books, and support is on offer in this way to parents. Building from and including Sure Start, neighbourhood nurseries and early excellence centres, I can confirm that over the next five years there will be 1,000 children's centres—children's centres that can become, for parents as well as children, as much a focus of community life as the local school, the local place of worship and the local park. Our goal is a children's centre for every community: this generation meeting its obligations to the next.

We will be judged not just by what we do for services, but by what we do for child benefits. So building upon the new child tax credit—at a cost of £1 billion a year—we will increase, from April, the child element not just by inflation or earnings, but by 13 per cent. an extra payment to be paid to 7 million children of £180 a year, an extra £3.50 a week. And because every child should be born into a world of opportunity, not condemned to poverty, maximum help for the first child—worth just £27 a week in 1997—will rise in April to £58 and, for two children, from just £44 a week in 1997, to £100 a week.

Before housing costs, a two-child family on half average earnings will now be better off than in 1997 by £75 a week—£1 billion more a year to meet, on this basis, our goal for 2004 to reduce child poverty by a quarter, as step by step, we halve child poverty by 2010 and eradicate it in a generation.

I have one final announcement. I stated earlier that, starting in April 2005, local authorities promoting enterprise can receive from central Government £150 million a year extra, rising to £450 million a year. But from April 2004 also, I am now able to do more for local council tax payers: to allocate across the United Kingdom, free of ring-fencing, for local authorities as they set their budgets, an additional £406 million—in England, £340 million extra—making the total available to English local authorities £3.6 billion more next year than this year: cash to meet the needs and concerns of council tax payers.

Economic stability, enterprise and fairness and the strength to make the best long-term decisions for Britain—I commend this pre-Budget report to the House.

Mr. Oliver Letwin (West Dorset) (Con)

I draw attention to the interests that are still listed under my name but are now outdated.

It is always a pleasure to listen to the Chancellor on these occasions, and it was genuinely interesting to hear what he had to say, for example, about the housing market and child care, which we shall all study in detail. But why is it that, so often, some of the most interesting bits of the Chancellor's pre-Budget reports never make it into his speeches? Why did he not tell us that table A5 on page 190 shows that the savings ratio has halved? Why, I wonder, did he not choose to tell us anything about the tax receipt figures or about the public spending figures in the report? Does he think that those figures are less important than stamping whisky bottles? We have learned that, with this Chancellor, one needs to look at the small print. I very much doubt, though, that even the small print will say that private sector employment fell last year, that we had a record trade deficit in the last three months or that household debt is now only slightly below our entire annual GDP.

The Chancellor has congratulated himself, with characteristic modesty, on the state of the economy and on meeting his growth forecast—it is indeed a remarkable event when the Chancellor meets one of his own forecasts—but the great question is, if the economy is doing so well, why is he borrowing so much? At the time of the last election, the Chancellor said that he would borrow £10 billion this year. Since then, in a series of reports, he has raised that projection to £15 billion, £24 billion and £27 billion. Today, he has finally admitted that he will have to borrow £37 billion this year. We will have to see whether that forecast proves any more accurate than its inaccurate predecessors.

The Chancellor will have been warned about families who borrow a huge amount on their credit cards, but he is doing the same on the nation's credit card. Why is he doing all this borrowing? Is it because, as the Chancellor is fond of saying, there has been a world economic downturn? No, it cannot be, because the borrowing of £120 billion, which he has just announced, between 2002 and 2006 is taking place after the worst of the downturn, against the background of world economy upturn.

The Chancellor cannot blame the rest of the world for his own borrowing, so what reason is there for the borrowing? Is it because he is not taxing enough? The pre-Budget report tells us that the Government are taking about 50 per cent. more in tax than in 1997. The Prime Minister's promise not to increase tax at all has not stopped the Chancellor raising the equivalent of £16,500 from every household in Britain. We have had 60 stealth taxes: taxes on jobs; taxes on families; taxes on homes; taxes on pensions; taxes on savings; taxes on drivers; taxes on businesses; and of course—the biggest stealth tax of them all—a huge rise in council tax. I grant that his tax revenues have not kept pace with his overoptimistic forecasts, but that is just about the only thing that they have not kept pace with.

The real explanation for the Chancellor's borrowing is not that he has been shy about raising taxes—it is the Chancellor's spending. The Chancellor is spending more than £50 million an hour. The saddest thing about the taxes that people are paying now, and the saddest thing about the taxes they will have to pay later to repay the Chancellor's borrowing, is that there is very little sign that all that spending is delivering improvements on the scale that everyone wants to see.

In the past seven years, the Chancellor has allowed spending on Whitehall bureaucracy to grow by almost 50 per cent. That is £6.7 billion a year of additional spending on administration. By the time of the next election, the right hon. Gentleman's open-wallet policy on bureaucracy will have cost the equivalent of about £1,500 in extra tax for each household in Britain. Even he knows that he has a problem. That is why he today, and his spin doctors all week, have been busy making noises about his so-called efficiency review, which is intended to cut back on the extra bureaucracy that he has created.

There is an even more serious problem, however. As my right hon. Friend the Leader of the Opposition has repeatedly told the House, the Chancellor is taxing and spending and failing. We have been promised reform of the public services for years but the reform simply has not happened. Why do the latest official figures show that since 1997 spending by the Government on goods and services has risen by 59 per cent. while outputs have risen by only 14 per cent? Why has 37 per cent. more spending on the NHS produced only 5 per cent. more hospital treatments? Why has the Chancellor been hiring managers in the NHS at three times the rate at which he has been hiring doctors and nurses? Why is inflation in the public sector running five times as fast as inflation in the household sector? Does the Chancellor really think that those figures represent value for money?

The Chancellor should have used this statement to announce a new direction for public services, with choice and responsibility transferred from bureaucrats in Whitehall to parents, patients and professionals. Instead, he has been proceeding on the basis that the only answer to failing public services is more bureaucracy, more targets, more plans, more performance monitoring and more taxes, and when that fails, borrowing today and more taxes tomorrow—except, of course, on amateur sports clubs.

The Chancellor's best defence against the accusation that he has taxed, spent and failed is that he has counterbalanced that with success in monetary policy. The Chancellor has built his reputation on the framework for monetary policy that he put in place in 1997. I have congratulated him on that in the past, and I do so again today. But I hope—[Interruption.]

Mr. Speaker

Order. Hon. Members must allow the right hon. Gentleman to be heard. The Chancellor was heard, and the right hon. Gentleman must be heard.

Mr. Letwin

I hope, however, that the Chancellor is not putting that well-deserved reputation at risk by the way in which, and the time at which, he is changing the inflation index, which is at the heart of that framework. He did not explain satisfactorily why he is changing the index now, when he knows that the harmonised index is likely to change in the near future to include housing costs. I hope that he is not doing that as part of his compromise deal with the Prime Minister on the euro—he needs that deal more than ever, now that he is breaching the Maastricht guidelines on borrowing. I hope that he is not doing it to make rises in council tax less visible. Council tax rises forced on councils by the Chancellor and by the manipulations of the Deputy Prime Minister are causing havoc. Council tax rises are the least acceptable face of the Chancellor's strategy for taxing Britain. What does the Chancellor do about it? He tells us today that he is proposing to use capping, which the Labour party derided when in opposition, and just in case that does not work he is imposing an index of inflation that includes no reference to council tax rises.

Can the Chancellor tell us what other implications the change in the index will have? He says that pensions, benefits and gilts will continue to be uprated in the same way as now. I suspect that those words were carefully chosen. What about tax allowances? What about indirect taxes? What about tax credits? I hope very much for all our sakes that the monetary framework will remain robust. It is not only the Chancellor's reputation that relies on that. Both the prosperity of the country and our own ambitious plans for public sector reform depend on a stable anti-inflationary environment.

But micro-economic policy—the policy that sets the framework for the economic decisions of individuals and businesses—matters, too. The Chancellor has talked today about savings and pensions. I note that he has not talked about his £5 billion a year raid on pension funds—or about the Prime Minister's explanation that that was fine because the stock market was in such good shape. I note that he has not talked either about the fact that his vast expansion of means-testing is making more than 50 per cent. of pensioners—and will in due course make more than 75 per cent. of pensioners—dependent on means-tested benefits. I note that he did not mention that a newly retired couple in rented accommodation now need to have saved more than £180,000 to avoid losing between 40p and 85p in the pound in reduced benefits at some time during their retirement. I note that he did not link this misguided, means-tested approach to the fact that the savings ratio has halved. I note that he did not tell us why his forecasts about the number of people who will be affected by his new cap on pensions differ so markedly from independent forecasts. I note, in short, that he did not tell us very much at all about how he is going to make good the damage that he has done to the culture of individual and family saving in Britain. If we are to avoid more and more people becoming more and more dependent on Government handouts in retirement, that culture of saving needs to be rebuilt.

What about the Chancellor's policies announced today for British industry? When the Chancellor addressed the Labour party conference this autumn—in a speech that the Prime Minister will remember—the Chancellor said that he would be using the pre-Budget report to promote "modern manufacturing strength". We will certainly want to look carefully at the measures that the pre-Budget report contains for manufacturers. But the Chancellor has made that kind of promise before. He told another Labour conference in 1995 that he would implement an industrial policy so that our manufacturing industries can grow again". Since then—or more precisely since the Government came to power—700,000 manufacturing jobs have been lost. The present Chancellor is the longest-serving Chancellor since Lloyd George, and his policies have seen Britain lose 300 manufacturing jobs for every day that he has kept his job in the Treasury.

One of the keys to manufacturing strength is productivity, which the Chancellor used to call a fundamental yardstick of economic performance". So can the Chancellor tell us why it is that productivity has, on average, grown half as quickly in the six years for which he has been at the Treasury as it was growing in the six years immediately before? Has the Chancellor heard the British Chambers of Commerce say: British business has a clear consensus on how the Government could improve productivity in the UK: simplify tax and regulation"? Why does the director general of the CBI say: It is clearly the case that the UK has become a more difficult place to do business than it was five years ago"? The Chancellor uses set-piece occasions such as today's to tell us that he wants to simplify tax and regulation, but his actions contradict his words. If his announcements today were reality rather than rhetoric, why did he impose a fiendishly complex change in stamp duty land tax nine days ago? Why is he imposing 15 new regulations every working day? He has today announced that he will consider abolishing 147 regulations this year. Marvellous! At his present rate of regulating, it will take him 10 days to add that many back on to the burdens borne by business. As the Prime Minister would say, the Chancellor's ambitions are not ignoble. I believe the Chancellor when he says that he wants to improve public services, and I believe him when he says that he wants to improve the prospects for British business. But the sad truth is that his ambitions are not being fulfilled—at least so far as public policy is concerned. That is because, for all his talk of reform, he is—as his neighbour the Prime Minister knows—the biggest single obstacle to reform in Whitehall.

In this pre-Budget report, we should have had announcements on public service reform. Instead, we have unreformed public services from an unreformed Chancellor, who has taxed and spent and failed. The taxpayer is paying now for the Chancellor's spending and will pay more later for his borrowing—but the money is not buying anything like the services that it should be buying, because the Chancellor has placed his faith in a bureaucracy which, instead of exercising effective control, is itself out of control.

In this pre-Budget report we should have had serious measures to reduce the regulatory burden on British business. Instead, business is paying now and is set to continue paying in lost productivity and lost competitiveness as a result of the Chancellor's suffocating blanket of stealth taxes and red tape.

The people of Britain do not want the Government to borrow more on their behalf or to tax them more later to repay that borrowing. What the people of Britain want, and what our families, our pensioners and our businesses want is the prospect of some relief from the ever-increasing burden of tax and regulation. Instead, what this pre-Budget report offers them is the prospect of paying now and paying more later.

Mr. Brown

I have just found the answer to my sleepless nights. Just as I will not take advice from a shadow Chancellor who supported a Government during the last world downturn who ran 15 per cent. interest rates, 10 per cent. inflation, lost 2 million manufacturing jobs, and had 1.5 million people in negative equity, neither will I take advice from the shadow Chancellor and his party on levels of borrowing. For 16 of the 18 years of Conservative Government, they were in deficit; for 11 of those 18 years, the deficit was above 3 per cent; in the Conservative years under the Major Government, the deficit was 6 per cent.; and it rose to 8 per cent.—the equivalent of £80 billion at Today's prices—for two years in 1992 and 1993. Yet the shadow Chancellor has the audacity to try to lecture Labour Members about borrowing.

When borrowing is actually lower than it is in Germany, in France, in Japan and in America, why is the right hon. Gentleman so obsessed about the borrowing figures? There is one reason and one reason only:it is because, as he said in The Daily Telegraph yesterday, his aim is to cut spending. He is on record—he will not be allowed to forget this, because this is something that is at the centre of the pre-Budget report-as calling for a cut in public spending to 35 per cent. of national income, which is an £80 billion cut. The leader of the Conservative party is on record as saying that he wants to cut public spending to 35 per cent. of GDP. Perhaps an even more significant figure—the chairman of the Conservative party, Lord Saatchi—is on record as wanting to go back to the 1950s and to cut public spending to 30 per cent. I have to ask the Conservatives how many hospitals and schools and how many nurses and teachers will be lost.

The shadow Chancellor is wrong on savings. The savings ratio was lower under the Conservative Government in the 1980s. He is wrong on central administration. The costs of central administration were 4.9 per cent. of national income when we came to power; they are now 4.3 per cent. and they are falling to 4.1 per cent. We will take no lectures about the cost of bureaucracy from the party that gave us the poll tax, BSE and many other bureaucratic nightmares that we had to deal with when we came into government.

When the records are looked at, it will be found that the shadow Chancellor and his party have been wrong on every issue of economic policy. Let us remember that they opposed Bank of England independence, they opposed the minimum wage, they opposed the new deal, they opposed our symmetrical inflation target and they opposed our fiscal rules. Today, they are opposing an economic policy that has given us the best growth for the past three years of all the G7 countries and a level of public investment in services that has been surpassed by no one in the last 50 years. At the same time, we are dealing with the problems of investment and reform, and he seems to have forgotten the announcements that I made about reforms in the spending review coming up. The Conservative party was 18 years in government; it is going to be 18 years in opposition.

Dr. Vincent Cable (Twickenham) (LD)

I am happy to start by acknowledging that, in some key respects, the Chancellor has a very good story to tell. We have low inflation and low unemployment and we have had steady growth and a respectable level of public debt.

I am afraid, however, that in other respects the statement showed the Chancellor at his worst. He trailed a long stream of complex new tax gimmicks, adding to an already over-complicated tax system. I notice that he spoke even more rapidly than usual when he got to the very dodgy numbers on the Budget. The fact is that there are a lot of red faces in the Treasury about the red ink on the Budget. The number that he has come up with today—a £37 billion deficit for the current financial year—is £10 billion more than he expected a year ago.

How does the Chancellor reconcile his optimism on the golden rule with the assessment of the independent and highly respected national institute that estimated a few days ago that there is a 50:50 probability that he is going to break the golden rule over the cycle, to which he attached so much importance? Can he confirm the story in Today's edition of The Times that he has already written a letter to the European Commission explaining that he will have to break the Maastricht rule for the current financial year?

Is not the problem that, whereas the Government have established—they should be given credit for this—a secure and stable framework for monetary policy, that credibility does not exist in fiscal policy? The reason for that is that the Chancellor decides what assumptions he wants the auditors, the National Audit Office, to investigate. Why will he not throw the Government books open to a completely independent outside assessment?

It is clear from what the Chancellor said that the main reason for the widening deficit is a shortfall in taxation. He made no attempt to explain that. Will he try to explain why the shortfall is so large?

On the spending side, the Chancellor is quite right that the main problem is the Iraq war. On the figures that he gave today, which I understood to be a revised figure of £3.8 billion, is it not the case that the money will run out next September if the cost continues at the current rate of £200 million a month? Is not the brutal truth about this war that the activity that the Government embarked upon with the full support of the Conservative party has resulted in a situation in which British taxpayers will continue to have to pay large sums? Is there not truth in the adage that there is no such thing as a free war?

I have accepted, and I do accept, that there are positive elements in Government economic policy, but will the Chancellor be equally candid in accepting some of the failings? One of the failings is a serious imbalance in the British economy. Why, for example, did the right hon. Gentleman not say a single word about the trade deficit and the balance of payments? Would he not acknowledge that there is potentially a serious problem as a result of spiralling consumer debt and the possibility that that may result in a sharp downturn in spending? Does he not accept the Bank of England's analysis that the housing market is over-valued and could well deflate? Has the Treasury done any serious risk analysis of what could happen if such scenarios evolve? Will he publish it if it has?

In conclusion, may I ask another question? The Chancellor has built a reputation not just for competent economic management but for a genuine concern for social justice—probably rather more so than his next-door neighbour. However, can he explain why he now presides over a tax system in which the poorest 20 per cent. of the population pay 42 per cent. of their income in tax but the richest 20 per cent. pay only 44 per cent. of their income in tax? That is why the Liberal Democrats are making proposals not to raise tax, but to create a fairer tax system by lifting the burden of tax, particularly council tax on pensioners, and by asking the best-off people in society to pay a little more.

Before the Chancellor recites the lists from the Prime Minister about Liberal Democrat spending commitments, which the Prime Minister seems to have raided from conference resolutions going back to the days of Campbell-Bannerman, may I ask the Chancellor to face a straightforward question? Why is it unfair and damaging to the economy to have a 50 per cent. tax rate on earnings of more than £100,000—on the earnings of the likes of Lord Sainsbury, Steve Norris and even the Prime Minister—when it is perfectly reasonable, according to the Government, to have a 50 per cent. marginal tax rate on a graduate teacher who, under the Government's proposals, would pay the top rate of tax and another 10 per cent. in top-up fees. It is precisely the Government's lack of sensitivity to injustices and unfairnesses of that kind that is leading to so many of their supporters deserting them.

Mr. Brown

I have great respect for the new shadow Chancellor representing the Liberal party, and especially for the policies on social justice and the other items that he took with him when he moved from the Labour party to the Liberal party and in which he still believes.

Let me deal with the hon. Gentleman's individual points. As I said in my statement, we have submitted our report to the Commission today with a letter to the commissioner saying that, in our view, we meet a prudent interpretation of the stability and growth pact. We believe that a prudent interpretation is one that takes into account a cyclical adjustment of the borrowing.

On Iraq, we have set aside £2.5 billion this year and that is a very considerable amount of public spending to make possible the action that is taken at both a humanitarian and military level in Iraq.

On balance of payments, the hon. Gentleman should look at the figures that were published this morning that show a position that is better than people had expected. We do not have the balance of payments deficit that the Conservatives had in the 1980s.

As far as debt is concerned, I have had this debate with the hon. Gentleman across the Floor of the House. Although it is true that house price debt is at a high level, mortgage interest payments as a share of income are at a far lower level than in the early 1990s. In fact, they are half what they were in the early 1990s

As far as poverty is concerned—I think that our parties share a common approach on social justice and we want to ensure that more children are taken out of poverty—the hon. Gentleman must examine the tax system that we have developed. Although the top rate is 40 per cent., the bottom rate is minus 200 per cent. because the system is based on tax and benefit integration. That is exactly the sort of tax credit system that the Conservative party used to support and it is not too dissimilar from the earned income tax credit system in the United States of America. It allows us to pay people money from the Inland Revenue, especially for children, if their incomes are very low. I put it to the hon. Gentleman that the number of families with marginal deductions above 70 per cent. has been reduced under this Government and, indeed, we ended the situation in which people had marginal deduction rates of more than 100 per cent., which applied when we came to power.

The problem that the Liberals have when advocating their tax policies is that whatever they do with their 50 per cent. rate, they would find a spending gap of about £10 billion to £14 billion. That is why the former Liberal Democrat shadow Chancellor, who was replaced only a few months ago—he was probably replaced for saying this—said that simply proposing further spending and tax rises at this stage of the Parliament is unrealistic". The Liberals then announced another 40 spending commitments and sacked their shadow Chancellor.

Mr. John McFall (Dumbarton) (Lab/Co-op)

May I commend the Chancellor for his focus on a sound economic framework and especially on low inflation rates, low interest rates and high employment? I especially commend him for his vision of this country's future with the announcement of full employment strategies and children's centres for every community. Too many adults and children in this country are still left behind, so we must urgently undertake such initiatives. Will he assure me that the initiatives will become a reality in every community and that they will be up and running in a year?

May I address the Chancellor as the chairman of the all-party scotch whisky group and tell him that there is already dismay in the Scottish whisky industry about the stamping of bottles? It is a £2 billion industry that is crucial to manufacturing, so may I have an assurance that he will work with me and the industry to ensure the unanimous introduction of the initiative? As chairman of the all-party group, I could then ensure that, on his sleepless nights, the Chancellor can get his tipple.

Mr. Brown

There will be 1,000 children's centres by 2008, which will include Sure Start centres that will be converted into children's centres. I believe that most constituencies in the country will have a children's centre as a result of that. My hon. Friend will want to work with the Minister for Children, who is developing the proposals, to ensure that his constituencies and others may benefit.

I am pleased that my hon. Friend is here to speak up for the Scottish whisky industry because the former leader of the Scottish National party has now disappeared from the Chamber.

Mr. Michael Weir (Angus) (SNP)

I am still here.

Mr. Brown

I look forward to the intervention.

I put it to the House that if one in six bottles of spirits are escaping duty, it is incumbent on a Government who have taken action on cigarette and other smuggling to take action on that. If the industry can come up with a better proposal to deal with the problem, we will consider it, but if it cannot come up with a better way to stop the erosion of duty we shall legislate for the stamping proposal in the next Finance Bill. If we have to do that, I shall work with the industry and the Economic Secretary will consult the industry on the most cost-effective scheme. At the same time, we would freeze duty on whisky and spirits for the whole Parliament. We understand the industry's difficulties, but it must work with us to eliminate such loss of revenue, which is completely unacceptable and based not on accident or avoidance, but simple fraud.

Sir Peter Tapsell (Louth and Horncastle) (Con)

As someone who has denounced the growth and stability pact from the day that it was announced, may I congratulate the Chancellor on rather belatedly reaching the same conclusion, which permeated all his rather contemptuously worded comparisons of the international performance of other countries? May we take it from those statistics that France and Germany can be regarded as free to repudiate and break all their treaty obligations to other countries in the European Union from now on?

Mr. Brown

If the hon. Gentleman is saying that the stability pact should reflect the economic cycle, deal differently with countries with low debt than those with high debt, and take account of the needs of investment in our economy, I agree with him entirely—we have advanced that view to the European Union. If he is inviting me to take his advice on every possible occasion, I should remind him that he objected to Bank of England independence. He said that it will make the efficient …management of the economy more difficult, lead to higher levels of unemployment than are necessary and diminish the …prestige of the Bank of England".—[Official Report, 11 November 1997; Vol. 300, c. 763.] I think that he was wrong.

Mr. Martin O'Neill (Ochil) (Lab)

I congratulate my right hon. Friend on yet another successful report. I especially welcome what he proposes to do to help small businesses to bridge the investment gap at the same time as offering assistance for bridging the skills gap, which we know is vital for many of our businesses and people. How have circumstances changed on the stamping of whisky bottles? The Treasury rejected that proposal as irrelevant and an undue burden on the industry 18 months ago. Has there been a dramatic change of circumstances or is the measure the Treasury's last card in the pack?

Mr. Brown

New information on trends in the fraudulent evasion of duty on whisky and spirits shows that one in six bottles are evading duty. No Government can or should ignore that and I am sure that my hon. Friend agrees that we have to take action. We did not want to implement the measure when it was proposed in the Rogues report because we did not want to create additional demand on the industry or Customs and Excise. However, evidence shows that one in six bottles are subject to such fraud and we propose that stamping is the best way to deal with the problem, although I am equally happy to listen to alternative proposals from the industry. I repeat that if the measure is introduced, it will be our aim to introduce it cost-effectively. We would work with the industry to achieve that and consult on freezing whisky and spirit duty as well. We would not have wished to take such action, but if my hon. Friend looks at the evidence he will see that it will be necessary unless an alternative course to guarantee the end of such widespread evasion of duty is found.

Mr. Michael Fallon (Sevenoaks) (Con)

Given that the rise in education spending that was announced last month was premised on a 2.3 per cent. rise in teachers' pay, will the Chancellor confirm that the new 2 per cent. pay guideline that he is giving to the teachers review body today means that teachers' pay rises will be cut to pay for the mismanagement of the public finances?

Mr. Brown

I thought that the hon. Gentleman was against pay policy working in such a way. I told the House that I was informing the pay review bodies for the first time that the new inflation target is 2 per cent., as he would expect me to do. It is for the bodies to make recommendations and negotiations will take place in other areas to resolve pay. One of the interesting features of the past few months has been the fact that expected rises in average earnings have not happened in the way that was perhaps forecast in the Budget, so average earnings in the economy remain generally low. With low inflation, there is no need for inflationary pay settlements.

Mr. Tam Dalyell (Linlithgow) (Lab)

Has it occurred to the Treasury that with the £2.5 billion that the Chancellor has set aside for Iraq, it could get half a dozen Scottish Parliament buildings? What figure has been set aside for Iraq next year—2004?

Mr. Brown

The additional figure that I announced today is £300 million. There is money in the special reserve and I shall write to my hon. Friend about the full amounts involved.

Mrs. Gillian Shephard (South-West Norfolk) (Con)

Will the Chancellor give further details of his proposals for green fuels? When he talks about green fuels, is he referring to biofuels, and does he think that his measures will enable the Government to meet their own targets on reducing CO₂, emissions and creating a sustainable energy policy for the UK?

Mr. Brown

Although I have not read the right hon. Lady's book, I appreciate her work on pursuing green fuels and a better environment. We intend to work towards those targets. The measure that I announced today is a new form of consultation and preparation for the industry, and we are talking about biofuels. The aim is to ensure that there is such advance notice of any change and any incentives for the use of a particular type of fuel that the industry is able to respond and the full benefit goes to both the environment and the consumer very soon after the introduction. I think that the right hon. Lady will agree that when such initiatives were taken in the past, insufficient time was given to prepare the industry so that it could make available the types of fuel that were being given the incentives, and consumers did not always get the deal that they expected. What I propose is a form of consultation, and I or my hon. Friend the Economic Secretary will be happy to talk to the right hon. Lady about the details.

Ms Sally Keeble (Northampton, North) (Lab)

I welcome my right hon. Friend's statement, particularly the commitment to stability, which is the single most important benefit that the Government can provide to my constituents. I especially welcome the new deal for skills, because a skills shortage is the biggest barrier to growth in my constituency. Will he confirm, first, that there will be no glass ceilings—or, indeed, floors—in the new deal for skills, so that people can get access to skills training across the spectrum; and, secondly, that steps will be taken to ensure that everyone has access to skills training, particularly the large number of working women in my constituency?

Mr. Brown

My hon. Friend takes a huge interest in these matters. It is our intention to give people, whether they are in work or out of work, the opportunity to get the skills necessary for them to succeed and for us to succeed in the new global economy. The courses offered go right up the skills grades, but, equally, our priority is to reach the 5 million adults who do not have reading skills and the 7 million or 8 million adults who lack numeracy skills to ensure that they have the skills necessary in a modern economy. Although the employer training pilots extend to a number of different skills and the university for industry offers courses that go right up the skills ladder, we must deal with the big problem that too many of our citizens lack the skills necessary for them to get jobs. I hope that my hon. Friend agrees that the priority in money terms should be on the adult skills programme. However, a range of courses is now rapidly becoming available, including trade union learning courses—I applaud the trade unions for their efforts to improve skills learning in this country—and we wish to expand them in years to come.

Mr. Elfyn Llwyd (Meirionnydd Nant Conwy) (PC)

First, I congratulate the Chancellor on the child care provisions and help for small businesses that he has announced, and on the relocation of jobs from the south-east, for which we have been pressing for some time. In support of some of his arguments, the Chancellor referred to the Office for National Statistics report. The ONS forecast for Wales is that gross value added per capita will fall to 74.9 per cent. by 2010. It was 88 per cent. in 1998. The Government's target for Wales is 90 per cent. Which announcement today will help to close that gap?

Mr. Brown

The main feature of the Welsh economy on which I thought the hon. Gentleman would congratulate the Government is the big rise in employment that has occurred in the past few months. I believe that 100,000 more people are in employment in Wales than were when we came into power. [Interruption.] The hon. Gentleman is saying that more employment is not relevant to a country's economic growth—

Mr. Llwyd

The right hon. Gentleman is not answering the question.

Mr. Brown

We get economic growth by creating employment and opportunities. If the Welsh nationalists do not realise that, they are not fit to go before the electorate.

Mr. George Mudie (Leeds, East) (Lab)

One of most important and ambitious Government targets is to abolish child poverty. The Chancellor's announcements on child care are extremely important because they will allow families to take significant steps to increase their income, and his breathtaking increase in child benefits will significantly help us to meet our target. Those measures, combined with the child bonds that we are to debate on Monday, ask the House to congratulate the Chancellor on the steps that he has taken. At risk of being impertinent, does he feel that those steps will allow us to meet our target early?

Mr. Brown

The first target is for 2004, which is not far away. With the extra £1 billion that we are spending, we are determined to take thousands of people out of poverty, before housing costs are taken into account. The real tragedy of the past 20 years in our country is that for 18 of them—from 1979 to 1997—child and family poverty was allowed to increase, so little was done about it, and such an uncaring attitude towards it was taken. Our proposals are not only for wealth, through the Child Trust Funds Bill that my hon. Friend the Financial Secretary will introduce on Monday, but for child benefits, with an additional £3.50 a week from April for 7 million children—not all children—in low and middle-income households in this country. It was possible for us to argue that, during a world downturn, it was too difficult for us to make that additional investment, but I am pleased that there is support from all parties other than the Conservative party, and I hope that, in time, the Conservatives will come to support taking the action that is necessary to reduce child poverty. I hope also that 10,000 children in every constituency in this country will benefit from the change and that it will prove to be a means by which we reduce child poverty. I would like a consensus in the House and in the country on the fact that the best investment for the future that we can make is an investment in our children. I believe that that is what the country wants us to do.

Mr. Edward Leigh (Gainsborough) (Con)

The Finance Act 1998 allows for the Treasury to invite the Comptroller and Auditor General to report on the assumptions underlying the fiscal projections. The trouble is that the Comptroller and Auditor General can report only on the specific assumptions, not on the projections that result from their application. Would not it be a fairer, more transparent and better system if the Chancellor gave the Comptroller and Auditor General full freedom and independence to specify which assumptions he should audit? When will the Chancellor give the Comptroller and Auditor General that freedom?

Mr. Brown

It is interesting that the hon. Gentleman proposes that new direction in both fiscal policy and the organisation of the public finances. Before Labour came to power in 1997, there was no transparency in the system. The assumptions that we are having audited include the unemployment assumption. When they were in power, the Conservatives put in any figure, which is one of the reasons why the public finances got out of control. In addition, they assumed indirect as well as direct cost savings from spend-to-save schemes and figures were put into the documents that had no basis in fact. We have introduced a series of audited assumptions—we have them audited by the National Audit Office—which include unemployment, revenues from VAT, and the trend rate of growth. I think that the hon. Gentleman should applaud us for having a far more open and transparent system of decision making. Perhaps it is time he got his party to get up to date with some of these things.

I applaud the Chairman of the Public Accounts Committee on one thing: he is a known supporter of the new deal and has said that it reduces youth unemployment. I hope that he will persuade his Front-Bench colleagues to abandon their policy of abolishing the new deal.

Mr. Barry Gardiner (Brent, North) (Lab)

The Chancellor has rightly identified the scourge of child poverty and spoke in his report of the reliefs that he has extended for community amateur sports clubs. In the run-up to the Budget, will he investigate the possibility of giving employers incentives to run schemes similar to the ones that he has considered for children, so that the employers of workers who are able to benefit from gyms and exercise in the workplace, perhaps during the lunch break, can benefit from incentives? Obesity in adults as well as in children is also a scourge of this nation.

Mr. Brown

This is in danger of becoming a very expensive afternoon. It is difficult to calculate the cost of accepting my hon. Friend's representations. However, I agree that we must do more in respect of preventive health programmes. The lottery providing money for fitness centres was a good thing to do. As the discussion document on the next 10 years that the Government produced a few days ago said, we shall consider how to encourage and incentivise people to improve their personal health, because doing so results in less pressure on the national health service.

Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)

As much oil and gas remains to be exploited under the North sea as we have extracted to date. If those oil and gas resources are exploited, they provide vital revenue to the Chancellor, but if they remain under the sea, that revenue is forgone. Many jobs in my constituency depend on investment in the North sea, as do 240,000 jobs throughout the country. How does the right hon. Gentleman plan in the Budget to encourage greater exploration and appraisal, to ensure that we maximise the benefit that we get from our North sea oil and gas?

Mr. Brown

I agree that the investment incentives in the North sea for all companies have increased as a result of the changes that we made only last year. Equally, I think that the hon. Gentleman will applaud the fact that we have made new arrangements with the Norwegian Government so that gas from the Norwegian sector can be properly dealt with in the British sector and create jobs in Britain for the British economy. The hon. Gentleman is right that many fields in the North sea are not fully exploited. New companies must be attracted, perhaps with different technologies, to enable them to release oil resources for Britain's economy and the betterment, through tax revenues, of our society. That is why we propose to provide an incentive towards the costs of exploration for new companies that have not hitherto operated in the North sea, but which either have the technology or are developing it, enabling us to get at difficult reservoirs of oil in the North sea. The hon. Gentleman has a big constituency and economic interest in this issue, so I hope he will welcome the final detailed proposals in the Budget.

Alan Howarth (Newport, East) (Lab)

My right hon. Friend fairly drew attention to the striking contrast between the healthy and sustainable growth of the UK economy and the torpor of the eurozone economies. When does he anticipate that the European economic affairs Commissioner will announce his conversion to my right hon. Friend's sensible interpretation of the stability and growth pact, and does he agree that the persistence of slow growth in the eurozone contributes significantly to structural imbalances in the global economy and the associated perils?

Mr. Brown

My right hon. Friend has always taken a big interest in these matters. Once Europe looks at what it needs to do to face up to the challenges of the global economy, not only will the stability and growth pact changes that we have proposed be more acceptable to people but, at the same time, economic reform in Europe will move further and faster. A new social dimension that takes into account the need to get people back to work—there are 14 million unemployed—will also be taken up, and we will not have proposals such as those introduced in the past few months on VAT and corporate tax harmonisation. I therefore agree that we need to do more in a European economic strategy to get growth, and I believe that many of my Finance Minister colleagues in Europe accept that. I believe that when the Irish presidency starts in January further proposals on economic reform will be introduced.

Mr. Andrew Mitchell (Sutton Coldfield) (Con)

Will the Chancellor of the Exchequer help us all out by confirming, notwithstanding the more than 60 tax increases made during his time as Chancellor and rocketing levels of council tax, that he is still planning to borrow from the markets over the next three years nearly £100 billion?

Mr. Brown

The hon. Gentleman's opening remark is contentious. If he looked at what he called 60 tax rises, he would see that many of them are tax avoidance measures. Is he telling me that he would not support measures to deal with tax evasion and tax avoidance in this country? Are the Conservatives saying that they would never have introduced many of the measures among those 60 increases? As for borrowing, I am not going to take any lectures from the Conservative party about that. It borrowed the equivalent of £80 billion and raised the national debt to 44 per cent. of GDP. It took a Labour Government to come in and sort out the problem.

Lynne Jones (Birmingham, Selly Oak) (Lab)

Given the historically low level of net public sector debt under my right hon. Friend's chancellorship, but also the congestion on our roads and the associated break in economic growth and the shortage of affordable housing and the misery that that causes, would it not be prudent for him to budget for substantial and sustained investment in our transport infrastructure and council housing, the most efficient form of affordable housing? Is not an increase in the supply of council housing, which could be made available to economically active families of modest means, the best way of combating the stigmatisation of council housing, which was referred to in Kate Barker's report?

Mr. Brown

If my hon. Friend looks at the detail of the pre-Budget report she will find that in the past few years, and until 2006, we have been doubling public investment, doubling investment in housing and doubling key transport investments. The Government are prepared to make the necessary investment and, in the case of the national health service, ask people to pay a higher rate of national insurance so that we can do so. Those are the right decisions for the future of the country. That is the difference between the Government, who will make those investments, and the Conservatives, who have a policy of cutting public expenditure to 35 per cent. of national income and would make an £80 billion cut in public expenditure. They should be ashamed of themselves.

Mr. Nick Gibb (Bognor Regis and Littlehampton) (Con)

Table C4 of the Red Book shows net debt for 2003–04 of £27 billion. The Chancellor has now announced that that figure should read £37 billion—£10 billion higher. The rest of the five-year projections are £7 billion, £7 billion, £5 billion and £2 billion higher, making a total of £31 billion higher. Can the Chancellor explain why those figures have been revised upwards by so much in just nine months, and what would they be if they included all the private finance initiative liabilities?

Mr. Brown

First, on the PFI liabilities, we do exactly the same as the previous Conservative Government in assessing public-private partnerships and the responsibilities for off-balance sheet borrowing. If the Conservatives are now telling me that they regard every PFI project as an on-balance sheet project and that in their plan to cut public expenditure to 35 per cent. of GDP they want to cut out every PFI project as well, they are announcing a new policy today. As for the figures mentioned by the hon. Gentleman, I shall look at them. He mentioned net debt, but I think that he was talking about net borrowing. The figures for net borrowing are exactly as I announced in the pre-Budget report to the House this afternoon. There are detailed figures, both on the numbers and percentage of national income, and he should agree that while debt in other countries is rising to 50 per cent. and even to 80 per cent. in Japan, our debt is roughly a third of GDP, rising to, I think, 35.5 per cent. at the end of the cycle in 2008.

We have the best record on debt of the G7 countries, because we made difficult decisions, which the Conservative party would not have made, to reduce debt when we came to power and use the spectrum sale, which it would have used for other purposes, to cut debt further. That is why we have low debt interest payments, and why our record of economic management is very different from the failures of the Conservative years, for which the Opposition should still be apologising to the country.

Mr. George Foulkes (Carrick, Cumnock and Doon Valley) (Lab/Co-op)

The Chancellor's measures for children will be welcomed as much by grandparents as by parents. However, will he confirm that all the measures, including the children's centres, apply as much to Scotland and Wales as to England? If not, will he have discussions with the devolved Administrations to ensure that they do?

Mr. Brown

All the measures on children's benefits apply to the whole United Kingdom, so the £3.50 rise is for 7 million of 12 million children in this country, and will mean £180 per child, whether in Scotland, Wales, Northern Ireland or England. As for the measures on children's centres, that is a matter for the devolved Administration in Scotland, but my right hon. Friend will notice that at the end of my statement I announced £400 million more for UK public spending and £340 million for England. There is an element for Scotland. Wales and Northern Ireland. The Scottish Executive will decide how Scotland's money will be spent, but I know that it wants to invest in children's services. As for tax relief on child care, national insurance and income tax would no longer be paid on that £50 by the employer or the employee, and the measure will be applicable to the whole United Kingdom.

Mr. Quentin Davies (Grantham and Stamford) (Con)

The Chancellor congratulated himself this afternoon because, while the cost of pay-as-you-go national pension schemes on the continent have, in some cases, reached 15 per cent. of GDP, the equivalent figure here is 5 per cent. However, that 5 per cent. is another characteristically bogus Labour statistic, and the Chancellor must know—he certainly ought to—that it makes no provision at all for the cost of the pension credit, housing benefit and other benefits, the burden of which is growing a great deal, as more pensioners become increasingly dependent on means-tested benefits. Will he tell us what the real figure for the state's liability for pensions is? It certainly is not 5 per cent. Am I not right in thinking that it is about 10 per cent.?

Mr. Brown

The hon. Gentleman, not for the first time, is totally wrong. Pension expenditure and pension credit expenditure are included in the 5 per cent. figure that I announced. He is wrong to allege that we deliberately excluded pension credit expenditure from it and that we are misleading anybody about this. He should know that if one links pensions to earnings, one has a bill to pay not just in this Parliament or the next Parliament, but right across the board. That is why it is appropriate to count the exact cost of meeting that bill not just in one Parliament, but right across to 2050. If the hon. Gentleman looks at the figures—perhaps he has not done so—he will find that there are deficits that arise from that, which are of the order of 3 per cent. of national income for that one item alone.

That may be why the shadow Secretary of State for Work and Pensions said that "many campaigning pensioners would like to see the earnings link restored…it is not affordable and would not be well targeted…It is a wild and uncosted policy, so it is a dangerous intervention to support it." Those are the words of the shadow Secretary of State for Work and Pensions about the pensions policy of his party. It is interesting to note that the shadow Chancellor says that he does not have a clue how it can be funded. The Conservative party should go back to the drawing board.

Mr. Andy Reed (Loughborough) (Lab/Co-op)

I am sure that many Labour Members, in particular, welcome the stability in the investment in public services. As my right hon. Friend knows, I have a keen interest in sport and as a rugby player still every Saturday afternoon, and it gave me almost as much pleasure hearing a Scot congratulating the England team as it did being in Trafalgar square on Monday.

On the extension of community amateur sports clubs, although it is important that that tax relief is included, will my right hon. Friend take representations between now and the Budget on increasing the amount of Exchequer funding for sport? We have seen the effect of improving sport at national level, but we need to do that at community level. By supporting community amateur sports clubs throughout the country, we can make a real difference to obesity and the nation's future.

Mr. Brown

I said that this was turning out to be an expensive afternoon. My hon. Friend should be praised for all the work that he has done. It is in no small measure due to his efforts and the efforts of his colleagues in the all-party group on sports, which considers these issues, that the 80 per cent. rate relief has now been given to community amateur sports clubs. I am able to announce today the corporate tax exemptions that will enable more sports clubs to have greater resources to devote to sports and to the community.

I was lucky enough to meet many members of the England team at No. 10 Downing street earlier this week. The Leader of the Opposition was there as well. He seemed to come in the front door, not the back door. From talking to Clive Woodward, the coach who deserves so much praise for his leadership and recognition for what he has done, it is clear that he wishes to see the rebuilding of sports at an amateur and community level. There is enormous good will in the country for what my hon. Friend is recommending. In the course of the spending review, we will look at what we can do for school sports and community sports. I hope he will agree that we have made a good start today by providing better help for 100,000 sports clubs. That, as I said, is probably 100 sports clubs in each of our constituencies.

Several hon. Membersrose—

Madam Deputy Speaker (Sylvia Heal)

Order. We must move on to the next statement.