Lords amendments agreed to.

3.31 pm

This year's Budget is a Budget for the recovery. As usual, I shall begin with the current economic situation and prospects. I shall then deal with monetary policy and public finances. Finally, I will present my tax proposals. The Financial Statement and Budget Report, together with a number of press releases filling out the details of my proposals, will be available from the Vote Office as soon as I have sat down.

I turn first to international developments. Nineteen ninety one saw the weakest growth in the major seven economies in a decade, while industrial production in the G7 actually fell. This brought a sharp slowdown in the growth of world trade, which was exacerbated by the dramatic events in the former Soviet Union.

In the United States recovery was generally expected in the second half of last year. But, despite low interest rates, the upturn failed to appear towards the end of 1991. High levels of debt have made firms and households very cautious about spending, while banks have been reluctant to increase their lending.

In Japan there have been similar problems, and growth has slowed sharply. In the year to January, industrial production actually fell by 4 per cent.

The slowdown in world growth has been accompanied by lower inflation in nearly all the major economies. G7 inflation fell from over 5 per cent. at the beginning of last year to about 3 per cent. now.

But economic developments in continental Europe have been dominated by events in Germany. Over-rapid expansion of domestic demand, following reunification, led to a rise in German inflation. The German authorities responded by increasing interest rates and Germany has now moved into recession. As a consequence, other European economies are experiencing high real interest rates and weak domestic demand.

But falling inflation, and the cuts in interest rates that have already taken place in north America and Japan, will in time lead to a pick-up in confidence and demand. And as the underlying level of German inflation abates, I expect to see reductions in European interest rates.

Gross domestic product in the seven major economies is projected to grow by about 11/2 per cent. in 1992, and world trade by about 4 per cent. We can expect more rapid growth in later years as the recovery gains momentum.

Some have argued that delayed recovery in the United States, and the slowdowns in Japan and Europe, are not just a cyclical phenomenon of the kind we have seen before, but herald something much more serious. It would be irresponsible for anyone in my position simply to ignore such claims. But I do not believe that they are well founded. I believe that Governments have learned the lessons of the past. Above all, they recognise that nothing could be more damaging to the world economy than a relapse into protectionism of the sort that we saw in the 1930s.

Indeed, a crucial challenge for Governments is not merely to preserve the world trading order, but to extend it. Unfortunately, not all our Community partners see this as clearly as we in Britain do. But narrow sectional interests must not be allowed to prevent the current GATT negotiations from reaching a rapid and successful conclusion. The prosperity of the world in the decades ahead rests squarely on the freedom to trade.

The most significant development in the British economy over the past year has been the sharp and sustained reduction in inflation. Retail price inflation has fallen to around 4 per cent., close to the German level, while underlying producer price inflation is at its lowest level for a generation.

Average earnings, too, are rising at the lowest rate for 25 years, suggesting that, after a decade of supply-side reform, the British labour market is operating far more effectively than before. This augurs well for employment prospects in the longer term. But, as elsewhere in the world, activity and demand in Britain have been weak. The rapid increase in demand in the late 1980s, fuelled by a sharp fall in saving and large increases in indebtedness, made a period of adjustment inevitable. Companies and households that borrowed extensively have reined in spending and repaid debt in response to higher interest rates.

Following a substantial reduction in interest rates, there were clear signs of renewed growth in the late summer and early autumn of last year—not just in confidence surveys, but also in the figures for retail sales and economic activity more generally. But, as in the United States, the recovery here was not sustained.

The effect on the British economy of recent world developments, and particularly those in the United States, cannot simply be measured by the adverse consequences for British exports. British firms have factories and offices abroad—indeed, our investment in the United States is higher than that of any other country. Conditions in one country can and do affect business confidence elsewhere. So unexpected weakness in the rest of the world has taken its toll on confidence in Britain, discouraging investment and stockbuilding. Over the year as a whole, GDP fell by nearly 2½ per cent., ½per cent. more than my forecast of a year ago.

Most independent forecasters agree that 1992 will see the resumption of economic growth. The recovery is expected to start slowly, but to gather pace. I expect growth in the year to the second half of 1992 to be almost 2 per cent. The level of GDP for this year as a whole should be about 1 per cent. higher than last.

As inflation in Britain has fallen, so too have interest rates; and that has put money in the pockets of mortgage payers. Indeed, a typical family with a £30,000 mortgage is now more than 15 per cent. better off in real terms than in October 1990—nearly £30 a week. That represents a considerable stock of pent-up spending power, which will in time feed through to stronger consumer spending.

Output will also be boosted by stronger export growth as the world economy recovers. Our share of world trade in manufactures rose in 1991 for the third successive year, despite the world slowdown, and I expect further gains in the future as lower inflation leads to improved competitiveness.

The current account deficit for last year was about £4½ billion, ¾per cent. of GDP. As domestic demand recovers, the deficit is likely to widen a little this year. At 1 per cent. of GDP for the year as a whole, it will be easily financeable.

Even with a resumption of growth, unemployment is likely to go on rising for some time. But while the increase will moderate over the months ahead, a sustained reduction in unemployment over the longer term will depend crucially on our success in keeping inflation down, and the prospects for that are better than at any time in recent economic history.

I expect retail price inflation to fall decisively below 4 per cent. by the end of the year and to be close to 3 per cent. by the middle of 1993. Producer price inflation will be even lower, down to 2 per cent. by the end of this year and to 1½ per cent. by the middle of 1993.

A whole generation has grown up to accept inflation as an unalterable fact of life. But we are now making steady progress towards price stability—an environment in which the decisions of businesses and consumers are no longer distorted by the expectation of a general upward movement in prices. Inflation has been the scourge of our economy for decades, and its defeat, not just here but elsewhere in Europe, will represent a tremendous achievement, bringing enormous benefits to British businesses and families. There are those who would put this at risk by seeking to pump up demand, but I am not prepared to take steps which would call into question the Government's determination to match or better the inflation performance of our Community partners.

And even if it were thought desirable, it is not remotely feasible for Governments to try to target the level of demand month by month or quarter by quarter. Having made such progress in getting inflation down, it would be tragic now to throw it all away with an ill-judged or ill-timed attempt to kick-start demand.

The challenge before us is not to provide some artificial short-term stimulus to the economy. It is to continue the supply-side reforms of the 1980s. Low tax and light government have produced an economic environment which spurs competition and rewards enterprise. Our job now is to build on them to help people and businesses make the most of recovery. And that will be the theme of my Budget today.

Between 1979 and the end of 1990, the number of businesses rose by almost a third. Even during the recession capital spending on plant and machinery has remained higher as a proportion of GDP than at any point in the 1970s. As a result we have seen exceptional growth in manufacturing productivity—faster than in any other G7 country in the 1980s. Industrial relations have been transformed. Fewer days were lost to industrial action in 1991 than in any year since records began a century ago.

The confidence of foreign investors in Britain's renewed economic strength is demonstrated by our continued high share of inward investment. Almost half of the direct investment in the European Community from the United States and Japan comes to the United Kingdom. Those investors recognise that Britain, with its low taxes, good industrial relations and stable currency, is the right place to come to exploit the opportunities of the single European market.

Whether or not the United Kingdom decides to participate in a move to a single European currency, we will be among those who meet the strict conditions required for entry. The Government believe that these conditions provide a valuable framework for setting policy in the medium term.

And that means that monetary policy is primarily directed at the maintenance of sterling's parity within the exchange rate mechanism. In due course we shall move to the narrow band of the ERM, at the current central rate of 2.95 DM.

Since ERM entry was announced in October 1990, sterling has remained within its permitted ERM bands, while interest rates have been reduced by 41 per cent. The differential between United Kingdom and German interest rates is now at its lowest for a decade.

In common with all the major countries within the ERM, I shall set a domestic monetary target. M0, the narrow measure of money, has stayed comfortably within the range I set in the last Budget. For the year ahead I propose to continue the target range for narrow money of 0 to 4 per cent. This is consistent with a further fall in inflation combined with a recovery in output. I shall continue to watch closely other indicators of monetary conditions, including broad money and asset prices.

I turn now to the public sector finances. The slowdown in the world economy over the last year has led to larger budget deficits in most industrial countries. Tax revenues and spending on some social security programmes largely depend upon the level of economic activity. So, in a recession, tax receipts are lower while social security spending rises.

But, thanks to my predecessors, we in Britain have the great advantage of having a ratio of Government debt to GDP that is very low by both historical and international standards. Indeed, the general Government debt burden is lower in the United Kingdom than in any other European Community country bar Luxembourg. That means that a rise in borrowing in response to cyclical pressures will not jeopardise the Government's firm commitment to sound finance.

The objective of fiscal policy remains to balance the budget over the medium term. In a recession borrowing will tend to rise. But there is nothing wrong with that, providing that the underlying position is sound and the budget moves back towards balance as the economy recovers. Indeed, it makes good economic sense to allow the level of Government borrowing to vary in this way over the business cycle.

For the year ending on 1 April, I expect a PSBR of a little under £14 billion, or 2¼ per cent. of GDP. The rise in the forecast since the autumn statement is due for the most part to the impact of weaker activity on revenues rather than to higher public spending. Indeed, planned public expenditure this year is likely to be a little below the level that I set in last year's Budget.

Since the full impact of the recession, on both tax revenues and public expenditure, feeds through only with a time lag, the PSBR will increase further in 1992–93. Taking account of the measures that I am announcing today, my forecast implies a PSBR next year of some 4½ per cent. of GDP, about £28 billion.

As I have said, the increased borrowing requirement reflects the delayed impact of weaker activity over the last year. Even so, I expect it to be rather lower than that of Germany, and less than half the level seen in Britain following the recession in the mid-1970s. The ratio of Government debt to GDP will rise slightly next year. But our debt burden will remain very low by international standards. As the economy recovers, and growth gathers pace, the PSBR will move back towards balance, and the debt burden will resume its downward trend.

During 1991–92 the borrowing requirement has been fully funded, and that policy will continue over the year ahead. An increased amount will be funded through national savings. A new product, a guaranteed growth bond designed to appeal to taxpayers, will be launched in the summer.

The prosperity of this country does not stem from government but from the enterprise and initiative of the British people and of British business. A recurrent theme of the Budgets delivered by my distinguished predecessors has been the desire to create a framework in which economic decisions are taken on their own merits, and not in response to distortions created by the tax system. In continuing that tradition today, my Budget will ensure that recovery is not based on some short-term boost from Government but on the decisions taken by the private sector.

The proposals that I shall be presenting today should be seen in the context of the benefits that business will receive from the measures I announced last year. In my last Budget, I cut the main rate of corporation tax by a full two percentage points, to 33 per cent., for profits earned in the 1991 financial year. That has given Britain a lower rate of corporation tax than any of our major competitors, and I propose to leave it unchanged for the year ahead.

Because corporation tax is paid in arrears, companies will feel the full impact of last year's cut only in the coming year. Combined with the other corporation tax measures that I announced last year, it will benefit businesses by some £1 billion in 1992–93.

In my autumn statement I announced substantial increases in public sector investment. In the financial year beginning 1 April investment in roads and public transport will be £5 billion, and capital spending on the national health service will be more than £2 billion. Next year, public sector asset creation—in other words, total investment spending by the public sector—will amount to nearly £30 billion.

Over the last decade, this Government have fully demonstrated their commitment to investment in our public infrastructure. It would be wholly wrong to allow the impact of the recession on the fiscal deficit to lead to cuts in our long-term investment programmes, as occurred in the 1970s. But it would be equally wrong to expect public investment or an ever-expanding public sector to lead the recovery. The recovery will be sustainable only if it is led by the private sector. Investment does not take place in a vacuum. Good quality private-sector investment will come not from artificial subsidies or incentives but in response to consumer demand.

One suggestion that has been put to me is that I should raise first year capital allowances. I have considered this proposition very carefully. I would be as concerned as anyone if I thought that the corporation tax system introduced in 1984 was acting as a drag on profitable investment. But, on average, the current tax rules allow capital investment to be written off more quickly than economic depreciation would imply. In current circumstances, any general increase in capital allowances would primarily benefit large and profitable businesses. Moreover, given the way that the corporation tax system works, those benefits would not flow through into companies' cash flow until the year after next.

The evidence suggests that the cost of higher capital allowances to the Exchequer would be several times greater than the resulting increase in investment over the next few years. I have therefore concluded that, whatever its superficial attractions, an increase in capital allowances would not be a sensible use of the resources available.

There is a far better way to help business this year. I have decided to bring forward proposals that will be of early benefit to some 900,000 non-domestic properties, large and small, throughout the United Kingdom.

Business in England and Wales has gained much from the introduction of the uniform business rate in 1990. During the 1980s, when business rates were set by local authorities, poundages in England rose on average by over 37 per cent. more than inflation. Under the new system, rate poundages are capped in real terms.

In some cases, however, the changes in bills have been substantial, and many businesses have faced a difficult adjustment. That is why, when we introduced the uniform business rate, the Government eased the transition by phasing in the losses of those who faced large changes in their bills. But I am well aware that many of the businesses which face large increases next year have also been hard hit by the recession. I have therefore decided that their burdens should not be compounded by real increases in business rates.

The Government propose to amend the transitional arrangements already enacted for next year's business rates in England and Wales to ensure that no business property will face a real increase in rates next year. The bills for properties protected by the transitional arrangements will increase by no more than the rate of inflation, like those for other properties—500,000 business properties in England and Wales will benefit at a cost to the Exchequer of £320 million in 1992–93. The present statutory limits on real annual increases in rate bills will apply again from 1993–94. Since such increases will be from a lower base, there will be a further cost of £220 million in that year.

The present rules mean that new occupiers are not eligible for transitional relief. As the property market has weakened, this has made it more difficult for businesses to move. I therefore propose to allow businesses occupying new premises after midnight tonight to inherit the transitional protection available to the previous occupier, at a further cost of about £25 million. This should help to increase mobility and unlock the property market.

But it would be wrong to concentrate help only on those businesses who lose from the new arrangements. While the transitional arrangements have postponed losses for some companies, they have also delayed the gains for those who did worst out of the old system. I believe that businesses should see the full benefits more rapidly. I therefore propose to accelerate their gains.

From 1993–94 onwards, I propose that all businesses gaining from the 990 reforms should be allowed to have their gains in full. So, by then, no business will be paying higher business rates than it should be doing under the new system.

In the coming year, I propose that the maximum reductions in the rate bills of the gainers should be raised to 22 per cent. in real terms for large properties, and to 27 per cent. for small properties. Those limits are nine percentage points higher than in the current year: 150,000 business properties in England and Wales will benefit at a revenue cost of £85 million in 1992–93.

These changes will not reduce the income of local authorities. Subject to Parliament's approval, the Government will pay extra money into the non-domestic rates pool to make good the shortfall in business rates revenue. These payments will not add to public expenditure.

The Government will introduce special legislation as soon as practicable to implement these proposals. In the meantime, local authorities should send out bills and collect business rates in accordance with the existing legislation and regulations. Business rate bills on properties in transition will be cut, and adjustment made for earlier higher levels of payment, when Parliament has approved the legislation and local authorities can send out new lower bills.

The proposals that I have outlined will apply to business properties in England and Wales, reducing the total business rates bill next year by 3¼ per cent. Scotland and Northern Ireland each have different arrangements for business rates. The Government propose that their total rates bills next year should likewise be reduced by 3¼ per cent. My right hon. Friends the Secretaries of State for Scotland and for Northern Ireland will be announcing the details.

These measures will bring significant and early benefit to many thousands of businesses throughout the United Kingdom. The revenue cost will be £480 million in 1992–93 and £590 million in 1993–94 but will fall away rapidly in subsequent years.

My proposals on the UBR will be of particular benefit to small businesses—the lifeblood of a modern economy. Small businesses have been at the heart of the supply-side revolution in this country over the last decade. The result has been a new economic dynamism, with increased competition and a more flexible labour market.

Inevitably, taxation and regulation bear most heavily on small firms, so I have considered carefully what measures I can take to ease that burden, and in particular to ease the cash flow of small businesses. Last year, I raised the VAT registration threshold by some 40 per cent. This year, I propose to increase the threshold in line with inflation, to £36,600. One hundred and thirty-five thousand traders—one third of all those eligible—now use the cash accounting scheme for VAT, which allows small firms to delay their VAT payments until they themselves have been paid. I can now announce that the rules will be relaxed to allow traders owing less than £5,000 to Customs to use cash accounting. I hope that this will encourage many more traders to take advantage of this excellent scheme.

My decision last year to allow small employers to pay income tax and national insurance deducted at source on a quarterly rather than monthly basis was widely welcomed by small employers. I propose to raise the qualifying limit to £450 a month. That will mean that nearly ¾ million employers will be able to make payments quarterly rather than monthly.

But one problem arouses more anger in the small business community than any other. I have every sympathy for small companies which find that their larger debtors are deliberately delaying payment to boost their own cash flow. Such practices are wholly deplorable; and, while there is no easy solution, my right hon. Friends and I have looked hard at what the Government can do to help. I have a number of proposals to announce.

First, the Government propose to require larger companies to state in their annual report and accounts how quickly they pay. Second, my noble and learned Friend the Lord Chancellor will be proposing simpler procedures in small claims and debt recovery cases.

Third, I want to see the Government's good record on the payment of bills extended to firms which win Government contracts. From next month, those successfully negotiating a contract with a Government Department will be required to include clauses in their own contracts with subcontractors which provide for the prompt payment of bills, ordinarily within 30 days of receiving a valid invoice. I believe that Government have set a good example, and I hope that large companies will follow.

For businesses facing cash flow difficulties, value added tax penalties can be the last straw. It has been put to me on many occasions that the VAT penalty regime is too strict. The serious misdeclaration penalty is catching too many minor mistakes. This must stop. In future, Customs will not normally charge penalties on underdeclarations of tax of up to £2,000. That will take over three quarters of cases out of the penalty regime, although the largest mistakes will still be penalised.

Last year I reduced the rate of penalty from 30 per cent. to 20 per cent. I now propose to cut it further, to 15 per cent. But there are other aspects of the regime which require more consideration, and Customs are issuing today a further consultation document on the options for longer-term reform.

I believe that the highest rates of default surcharge levied on traders who submit late VAT returns or payments cannot be justified. I therefore propose to reduce the maximum rate from 30 per cent. to 20 per cent. These measures, taken together, will reduce the penalties businesses might otherwise have had to pay Customs by £35 million next year.

One of the other complaints I have heard most frequently over the years is that it is unjust that taxpayers cannot be awarded costs when they appeal before the special commissioners. I now propose to introduce a measure which would give the Lord Chancellor power to make new rules about the hearing of appeals, including the powers to award costs where either party has acted wholly unreasonably.

I have one final change to announce which will be of substantial benefit, particularly to small family businesses. I propose to take most family businesses out of inheritance tax altogether. This will cost £10 million in 1992–93, and £25 million in 1993–94. Relief from inheritance tax for interests in unincorporated businesses, for shareholdings greater than 25 per cent. in unquoted companies, and for working farmers will be increased from 50 per cent. to 100 per cent.

Shares dealt on the unlisted securities market, which are generally less liquid than shares with a full stock market quotation, will from today be treated like unquoted shares. That means that shareholdings of over 25 per cent. will also generally be free from inheritance tax.

For shareholdings of 25 per cent. or less in unquoted companies, and for agricultural landlords, the rate of relief will rise from 30 per cent. to 50 per cent. relief will also extend to smaller shareholdings in USM companies and to controlling shareholdings in quoted companies.

Inheritance and capital are no longer a privilege of the wealthy few. Ordinary families want to be able to pass on the wealth that they have built up over their lives to their children without an excessive proportion being taken by tax. Over the years to come I shall continue to look for ways of lightening the burden of inheritance tax. This year I propose to raise the threshold for inheritance tax by more than inflation, to £150,000. This will cost about £10 million in 1992–93. I intend to raise the threshold for capital gains tax in line with inflation, to £5,800.

Taken together, the measures that I am proposing on business rates, on VAT and on inheritance tax will be of very substantial benefit to British business as a whole and to small business in particular in the year ahead.

Over the past year I have received many representations about surplus advance corporation tax. ACT is paid by companies when they pay dividends. It serves two purposes: first, to discharge the shareholders' basic rate income tax liability; and, second, as a payment towards the company's own corporation tax liability. But some companies paying dividends out of foreign profits taxed abroad find that they are now paying more ACT than they can set against United Kingdom tax.

That is a significant problem for those affected. But it is also highly complex, and huge amounts of revenue are potentially at stake. A satisfactory and lasting solution will need to address the ways in which different national systems of corporation tax interact. This is currently the subject of a review sponsored by the European Commission, and it is clearly an issue to which the Government will have to return.

Its importance is of course increased by the abolition, from 1 January 1993, of fiscal frontiers within the European Community. That will give British business access to the largest home market in the world. But it will also necessitate a number of technical changes to our VAT and excise systems. As I announced last October, one consequence of the single market is that businesses which import from other European Community countries will pay VAT on those imports later than they do now, giving some 90,000 businesses a welcome cash-flow benefit.

This change will add substantially to the PSBR in 1992–93. I therefore announced last year that, from this autumn, the largest VAT payers—those who paid over £2 million in VAT in 1990–91—would be required to submit VAT returns monthly rather than quarterly as now. It has been put very forcefully to me that the requirement for monthly returns would place an undue administrative burden on the businesses concerned. I have listened carefully to these representations, and I now intend to take steps to allay the concerns raised by those affected.

I have asked Customs to implement a system of monthly payments on account for these large businesses, but I propose to allow them to continue to submit returns quarterly. This will avoid the requirement to fill in VAT returns every month, while still offsetting the cost to the Exchequer of postponed accounting for imports. Compared to my original proposal for monthly returns, payments on account will cost the Exchequer some £200 million in 1992–93, with a corresponding benefit again to the businesses concerned. I will introduce legislation to establish the basis for these new arrangements.

I also propose to introduce legislation to prevent the business tax rules from being manipulated to secure an unjustifiable tax deferment when rent is paid between connected persons. The manipulation which has already occurred has involved tax of some hundreds of millions of pounds. This loophole will be closed immediately.

I have one change to make to the business expansion scheme. It has been put to me that the BES could play a valuable part in helping to ease the problem of mortgage repossessions. At present companies can use the BES to acquire empty repossessed houses, but there are complications if the houses are still occupied. I propose to make it easier for the BES to be used for mortgage rescue schemes where owner-occupiers in difficulties wish to stay in their homes as assured tenants. This will add to the impact of the measures I announced in December to help the housing market.

But I have also looked closely at the entire rationale behind the business expansion scheme, which is an exceptionally generous tax relief. When my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) introduced it in 1983, the venture capital industry was in its infancy, and there was concern that the investment needs of small firms were not well understood and provided for.

The BES has been extremely successful. Over £2 billion has been raised and invested in qualifying schemes of all kinds. And Britain now has a venture capital industry the equal of that anywhere in the world, outside the United States. But the provisions of the business expansion scheme have become ever more complex; and nowadays only a small part of the total invested goes to small businesses.

As my right hon. Friend the Member for Blaby (Mr. Lawson) made clear when they were introduced, the BES provisions for assured tenancies were intended to expire at the end of 1993. I have decided that it is unnecessary to continue the business expansion scheme beyond that date, not only for assured tenancies, but for other investments as well. BES will therefore come to an end on 31 December 1993. As I have said, it has fulfilled a useful purpose. But its removal will significantly improve the neutrality of the tax system; and some 45 pages of complex legislation will be removed from the statute book.

As a result of my announcement today, there is likely to be some acceleration in investment, which will be welcome. In the long run there will be substantial savings, perhaps £130 million a year.

Last year, I made it clear that I was concerned about the position of the British film industry and that I would consider carefully any further proposals that the industry brought forward. I have done so. Although a special tax regime already exists, the industry has long argued that the provisions for writing off expenditure do not fully take account of their special circumstances, and in particular of the cash flow problems that may be caused by the sometimes lengthy gap between the completion of a film and its release. I propose two measures to alleviate the position.

First, relief for pre-production expenditure will be available as it is incurred; and, second, production expenditure will be available for write-off at a fixed rate of one third each year, on a straight-line basis, starting immediately on the completion of the film. This will have a cost of about £5 million in the first year, and around £15 million in 1993–94.

The motor industry is and will remain at the very heart of British manufacturing.

Facing a sharp fall in domestic demand over the last year, the industry responded in exactly the right way, by switching production to exports, which rose by 20 per cent. in 1991. The fall in domestic sales should not be allowed to obscure this growing strength, which should make Britain a net exporter of cars by 1996 for the first time since 1974.

None the less, I recognise that the last year has been a difficult one, and the measures I am proposing today will help the industry, while building on and continuing the reform of the taxation of cars that I and my predecessors have introduced.

Before the 1988 Budget, the car scale charges—the income tax charge on those who have the benefit of a company car—were too low. Since then, we have moved much closer to realistic levels. I propose this year to increase the scale charges only in line with inflation. Otherwise, the real value of the tax payable would actually fall.

But there are still aspects of the car scale charges which are both arbitrary and unfair. For most cars the tax payable is determined not by reference to the value of the car but rather by the car's engine size. As the Monopolies and Mergers Commission has pointed out, this causes distortions. It also discriminates against diesel cars. The unfairness in the current system may have been acceptable when the tax charge was only a fraction of the true value to the user, but that is no longer the case.

We need a system that better measures the value of the benefit. That means basing the tax charge on the price of the car, not its engine size. I therefore propose to introduce price-based scales as soon as practicable. The Inland Revenue will be publishing a consultative document in the summer on the details and timing of such a move.

The car fuel scales, which measure the taxable benefit of free private fuel provided by the employer, have remained frozen since 1987. I propose to increase the scale for free petrol by 4·5 per cent. But at the moment we apply the same charge to diesel as to petrol, even though the cash value of free diesel is less.

That means the fuel scales are too high for diesel cars, so I propose to introduce a new, and significantly lower, scale for diesel, bringing the tax charge closer into line with the value of the benefit received.

While the income tax treatment of cars has until recent years been much too generous, in other ways cars have been the subject of discriminatory tax treatment. I have some changes to announce that will reduce that discrimination, and provide a boost for all businesses buying cars and for the car industry itself.

First, companies that offered their employees the alternative of cash or a car have found themselves liable to pay VAT on the salary forgone by those who chose the car. That is clearly nonsensical. I shall be laying an order to make clear beyond doubt that, from 1 April, a VAT charge will no longer be imposed in these so-called salary sacrifice cases.

Second, the capital allowances available for business cars are currently restricted for cars costing more than £8,000. That limit is now unrealistically low and I propose to increase it to £12,000, enabling full capital allowances to be given on most business cars. This measure will cost £50 million in 1993–94, building up to £220 milion when the change has its maximum effect. But the revenue cost in the long term will be small.

At present, most taxi and car hire firms and driving schools cannot recover the VAT they pay on their cars even though their cars are their business. I propose to end this anomaly from 1 August, at a cost of £50 million in 1992–93.

Those measures will go some way towards improving the neutrality of the tax system as its affects cars purchased by businesses. But I have one further measure to announce, which will affect all those buying new cars.

In 1973, car tax was introduced, to make up the difference between VAT and the former purchase tax. It has remained unchanged, at 10 per cent. of the wholesale price, ever since. This tax distorts consumer spending, and car manufacturers have long complained that our taxes on new cars are higher than those of other main European producers.

This Government have always sought to reduce distortions in the tax system, and I therefore propose to reduce car tax by half, to 5 per cent., from midnight tonight. That will directly reduce the tax burden on all new cars. I trust that car dealers will respond by passing the full benefit of this reduction—about £400 on a typical family car—to the buyer. The halving of car tax will cost about £635 million in 1992–93, and £765 million in the following year.

I turn now to excise duties. Last year I raised the duties on alcohol in line with inflation, and I propose to do the same this year. From 6 pm tonight, this will mean an increase in the tax on a typical pint of beer of just over 1p, just under 5p on a bottle of wine and 28p on a bottle of spirits. I also propose to raise the duty on unleaded petrol and on diesel in line with inflation.

On leaded petrol, I propose a rather larger increase, of 7½ per cent., taking the tax differential between leaded and unleaded petrol to over 5p a litre. That will continue our long-standing and successful policy of encouraging motorists to move away from leaded petrol, which now represents little more than half the market.

I propose to increase vehicle excise duty on cars, taxis and light vans by £10, and to freeze it again this year for lorries.

I propose to raise the duty on tobacco by about 10 per cent.—roughly the same real increase as last year. That will add 13p to the price of a packet of 20 cigarettes. The duties on other tobacco products will also rise by about 10 per cent., apart from that on pipe tobacco, which will rise only in line with inflation. Benjamin Franklin once remarked that nothing was certain except death and taxes, but for some people the latter may help to delay the former. As for the irreconcilables—among whom I count myself—I have one minor compensation: I propose to abolish from 1 January 1993 the duty charged on matches and mechanical lighters.

I also have a change to announce on betting duty, with consequences for the racing industry. I propose to cut the rate of betting duty by one quarter of 1 per cent., reducing the tax take by £15 million in 1992–93. My right hon. Friend the Secretary of State for the Home Department will be announcing later today his determination of the horse race betting levy, and he will be making proposals to ensure that the greater part of that reduction will be channelled to the horse racing industry. That is an important part of the measure, and I shall review the cut in betting duty next year.

A proportion of the reduction, of course, will be attributable to betting on greyhound racing. I hope that voluntary arrangements can be found to direct some of that money to help the greyhound racing industry, and my right hon. Friend will be exploring the possibilities with interested parties.

I should also tell right hon. and hon. Members quite clearly what I am not proposing. I know that there is particular concern about the European Commission's proposals on the taxation of alcohol. But let me make it clear: I will not accept any deal in Brussels that would ride roughshod over the interests of the British cider industry. Nor will I accept a deal that would allow member states to continue to levy no excise duty on wine which they make but which forces them to put up duties on spirits which we make.

Over the past 13 years, we have introduced a number of measures directed at encouraging charitable giving. We introduced the payroll giving scheme. We have extended and widened value added tax reliefs—and my right hon. Friend the Prime Minister, when he was Chancellor, introduced the gift aid scheme.

Gift aid allows tax relief on one-off donations of £600 or more. It has been a considerable success. Charities have received nearly £200 million in income under the scheme. I propose that from 1 July 1992 the minimum gift should be reduced to £400—the figure proposed by the Council for Charitable Support and the Charities Tax Reform Group. I shall not go further, because I know that some charities are concerned that to do so might reduce the attraction of regular giving through charitable covenants.

But I propose some changes to the arrangements for tax relief on charitable covenants, intended to reduce administration costs for charities and to help them to maintain a steady and reliable flow of income. And I propose a number of minor improvements to the VAT reliefs available to charities and for aids to the disabled.

Savings are a passport to personal independence and security; the very foundation of a property-owning democracy. That is why, over the last decade, the Government have set out to lighten the burden of taxation on saving.

We have reduced the basic and higher rates of income tax, and abolished the investment income surcharge. We have stopped taxing the savings of non-taxpayers. And we have extended savings incentives to the mass of ordinary tax-paying savers by introducing tax-exempt special savings accounts—TESSAs—which allow people to invest up to £9,000 over five years in a bank or building society account.

We have also introduced new and popular incentives to invest in shares. In 1986 we introduced personal equity plans to enhance the attraction of investment in shares by making the income and capital gains from them free of tax. Today, I want to improve PEPs still further by removing the £3,000 limit on the amount that can be invested in unit or investment trusts. I propose that from April people should he able to invest up to the full £6,000 a year in qualifying investment and unit trusts. This new opportunity—which will cost £10 million in 1993–94—will provide further encouragement to PEPs, and help to small savers.

We do not see the returns to savings as "unearned income", to be taxed more heavily than earned income. On the contrary, we will continue to lighten the burden of tax on savings, and to broaden the range of investments which receive savings incentives.

No one has benefited more from our encouragement of savings than pensioners. In the 1980s, most pensioners saw their real incomes rise sharply, as inflation fell and the value of occupational pensions rose. On average, pensioners' real incomes increased by more than a third between 1979 and 1988. More than half of pensioners now have a second pension; and pensioners have seen their income from saving double since 1979.

I propose that the income tax allowances for the over-65s—both the personal allowances and the married couple's allowances—should increase in line with inflation. The income limit for the age-related allowances will also increase in line with inflation.

Increases in the age allowances can, of course, benefit only those pensioners who pay tax. But this year I also want to help the less fortunate pensioners—those whose savings have been eroded over the years by inflation; those who have only modest occupational pensions; and those who retired too early to take advantage of the growth of SERPS.

Last October, my right hon. Friend the Secretary of State for Social Security announced that the income support rates for pensioners would be increased this April by at least 7 per cent.; and there were extra increases for disabled pensioners and the over-80s.

I now propose a further increase in income support rates, of £2 for single pensioners and £3 for pensioner couples. When this comes into effect, in October, all pensioners on income support will be at least £5·75 a week better off than they are now, and some will be as much as £10·70 a week better off. In total, some 5 million people will benefit. And it will bring the real increase in spending on benefits for poorer pensioners since 1989 to more than £700 million.

The cost—some £145 million in 1992–93 and £305 million in the following year—will be financed from within the existing public expenditure plans.

Turning now to income tax more generally, I do not propose this year to increase the basic rate limit, the level of taxable income above which people begin to pay higher rate tax. Compared with indexation, this will save £180 million in 1992–93 and £290 million the following year.

Nor do I propose any increase in the married couple's allowance for couples under 65 or the allowances that are linked to it. But I do have one significant change to announce. The introduction of independent taxation in 1990 brought privacy and independence to married women by ending the rule that a wife's income was assumed to be her husband's. This change was widely welcomed. However, it did not eliminate completely the discriminatory features of the old system.

At present, the husband receives the benefit of the married couple's allowance unless his income is too low to make use of it. That means that the husband's tax allowances are almost always greater than those of his wife. It also means that couples where the wife is a higher rate taxpayer and the husband is not pay more tax than couples where the husband is the higher rate taxpayer. That cannot be right. It is hardly surprising that the MCA has been described by some as the male chauvinist allowance.

I propose to change this system. From 1993–94, couples will have a choice. If they take no action, the husband will continue to receive the MCA as now. They will be able to decide that the wife should receive the whole allowance, or that they should split it; or the wife will be able to claim half at her own request. This measure will have only a small effect on revenue—£10 million in 1993–94—but it will make the tax system much fairer to married women.

The Government have cut the basic rate of income tax by 8p since we took office in 1979, to 25p. And, as the House knows, we are committed to reducing the basic rate to 20p as and when it is prudent to do so. I reaffirm that commitment today.

For the year ahead, I propose that the personal allowance should be uprated only in line with inflation. It will rise from £3,295 to £3,445. But having reflected carefully on the priorities for this year's Budget, I have decided that for the year ahead it is right to leave the basic rate at 25p in the pound.

I believe that it is possible, desirable and, indeed, prudent to take a substantial step this year towards our goal of a 20p basic rate for all taxpayers. It is neither necessary nor desirable that anyone earning more than their personal allowances should start paying income tax at a rate of 25 per cent. With national insurance contributions on top, that means that the Government take a third of every extra £1 earned even from the low paid. In my view, that is simply too much; and I believe that we can and should reduce that burden.

So I propose this year to cut the rate of income tax by 5p, to 20p, for the first £2,000 of taxable income. That will benefit every taxpayer in the country, but it will be of proportionately greater benefit to those on low incomes. It represents a decisive first step towards the Government's objective of a 20p basic rate.

In the next Parliament, we will gradually move closer to that goal. We will be able to do that in two possible ways: either by extending the width of the 20p band so that it covers increasing numbers of basic rate taxpayers, or by reducing the basic rate itself.

Next year, nearly 4 million people on low incomes will already be paying tax only at the 20p rate. Their income tax bill will be cut by a fifth. That will improve their work incentives and make it more worth while for those not currently in work to take lower paid jobs.

Nearly 25 million people—every taxpayer in the country—will see their starting rate of tax reduced to 20p. Combined with the indexation of the personal allowance, that will reduce taxes for the large majority of taxpayers by at least £2·64 a week.

Mortgage interest tax relief at source will continue to be given at 25 per cent. for everybody, irrespective of whether they are a non-taxpayer, a 20p taxpayer, a basic rate taxpayer, or a higher rate taxpayer. But those in the 20p band will only be liable for tax at 20 per cent. on their savings.

The new 20p band will cost £1·8 billion in 1992–93 and £2·3 billion in the following year, broadly equivalent to the cost of a penny off the basic rate. But, in comparison with a penny off the basic rate, the 20p band will be of particular benefit to those on the lowest incomes. Indeed, about three-quarters of the cost will go to taxpayers earning less than average male earnings.

I now turn to the question of value added tax. I have a very important announcement to make, to which I hope the whole House will listen carefully. I have no need, no proposals and no plans either to raise or to extend the scope of VAT.

The total impact of the taxation proposals I have put forward today, taken together with measures announced since my last Budget, will reduce the burden of taxation by around £1·5 billion, equivalent to ¼ per cent. of GDP, in the next financial year.

The Budget I have presented today is a Budget for the recovery. It maintains the policies that have slashed inflation and reduced interest rates. And it includes measures that will help businesses, large and small, up and down the country.

But it is also a Budget that cuts taxes for every taxpayer in the country, a Budget which marks another significant step in our constant drive to leave individuals and families with more of what they earn. Over the past decade our belief in low taxation has brought unparalleled growth in the living standards of the British people. My Budget today continues that process, and I commend it to the House.

Motion made, and Question,

That, pursuant to section 5 of the Provisional Collection of Taxes Act 1968, provisional statutory effect shall be given to the following motions:—

(a) Spirits (motion No. 2);

(b) Beer (motion No. 3);

(c) Wine and made-wine (motion No. 4);

(d) Cider (motion No. 5);

(e) Tobacco products (rates) (motion No. 6);

(f) Hydrocarbon oil (motion No. 8);

(g) Vehicles excise duty (rates: cars etc.) (motion No. 9);

(h) Vehicles excise duty (rates: tricycles) (motion No. 10);

(i) Value added tax (penalty for serious misdeclaration etc.) (motion No. 18);

(j) Car tax (rates) (motion No. 20).—[Mr. Norman Lamont.]

put forthwith, pursuant to Standing Order No. 50 (Ways and Means Motions), and agreed to.

Motion made, and Question proposed,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but this Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—

(a) for zero-rating or exempting any supply;

(b) for refunding any amount of tax;

(c) for varying the rate of that tax otherwise than in relation to all supplies and importations; or

(d) for relief other than relief applying to goods of whatever description or services of whatever description.—[Mr. Norman Lamont.]

[Relevant document: European Community Document No. 10212/91 and COR2, the Commission's Annual Economic Report 1991–92.]

4.42 pm

5.10 pm

5.16 pm

5.22 pm

5.30 pm

5.45 pm