[Relevant documents: The Third Report of Session 1997–98 from the Social Security Committee, on Tax and Benefits: Pre-Budget Report (HC 423), and the First Report of Session 1997–98 from the Environmental Audit Committee, on the Pre-Budget Report (HC 547).]
Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that, at the end of the Chancellor's speech, copies of the Budget resolutions will be available to hon. Members in the Vote Office.
Introduction
3.31 pm
Only once in a generation is the tax system fundamentally reformed. The Budget I bring before the House and the country today begins the task not just of modernising taxation but of modernising the entire tax and benefits system of our country. We do this to encourage enterprise; to reward work; to support families; to advance the ambitions not just of the few but of the many.
For decades, under Governments of both parties, the great economic strengths of our country have been undermined by deep-seated structural weaknesses—instability, under-investment, unemployment. So behind the detailed measures of this Budget is the conviction that we must break for good from the conflicts and the dogmas that have held us back and have for too long failed our country. We must build a national economic purpose around new ambitions for Britain. First, stability. We must break from our history of stop-go and the false trade offs between unemployment and inflation. The new ambition for our country is long-term economic strength and stability based on an unshakeable commitment to prudent monetary and fiscal rules. Secondly, enterprise. Instead of punishing success by high taxation or offering the incentive of low taxation to only a few, the new ambition is a tax system that ensures that work always pays, that encourages skills and that rewards enterprise and entrepreneurship throughout the whole economy. Thirdly, welfare reform. The new ambition for Britain is a modern welfare state that, instead of trapping people in poverty, provides opportunity for all. And fourthly, strong public services. Instead of simply defending unreformed public services, or denigrating them simply for being public, the new ambition is to have modern schools and hospitals in an environment where investment and reform go hand in hand. So this will be a new Labour Budget that demonstrates that a modern Government with new ambition for Britain can advance both enterprise and fairness and can advance them together—that, by rewarding work and rewarding work at every level, everyone and not just one section of society succeeds. It is a Budget to advance the ambition of all.
Stability And Prudence
First, stability. By spring last year, with consumer demand already rising by 5 per cent. and the money supply by 11 per cent., but industrial production by only 1½ per cent., the economy was exhibiting the same symptoms of instability from policy error that produced the boom-bust economy of the late 1980s.
To avoid a lurch backwards towards the conditions that led to interest rates as high as 15 per cent. in the late 1980s, the Government, and then the Bank of England, took action to ensure stability. And I followed this tightening of monetary policy by putting in place a tough five-year deficit reduction plan.
Last November, I was able to report that I was more optimistic that the economy was on course to get back on track for sustainable growth. That remains my view. But I also warned that there were risks ahead—on the one hand, the effects on the world economy of turbulence in Asian financial markets, and on the other, the domestic risk that an unaffordable rise in wage inflation would lead to higher interest rates and slower growth. Those risks remain.
A deteriorating situation in Asia has forced all Governments to revise downwards their forecasts for growth. And while this Government have contributed to swift international action, continuing uncertainties require continuing vigilance.
Similar vigilance is also required at home in the face of inflationary pressures. In the past few months, wage settlements have risen, even in the manufacturing sector where I fully recognise that a strong pound makes life difficult for exporters. Our aim is a stable and competitive pound over the medium term and I know that exporters agree with me that we must avoid any return to stop-go. It would not be right to sacrifice long-term goals in the face of short-term pressures.
No-one should be in any doubt about this Government's, and the Bank of England's, determination to meet our inflation target. I can now report that because of the action already taken, inflation, which when we came to power was heading well above our target and towards 4 per cent, is now forecast to peak at 3 per cent. this year and be at our target of 2½ per cent. next year.
It is because we have established a sound long-term framework and the expectation of low inflation that long-term interest rates have come down substantially from over 7½ per cent. just before the election to below 6 per cent. now, the lowest rate for 33 years.
Growth this year and next will depend crucially on what happens to wage inflation over the coming year. It would be the worst of short-termism to pay ourselves more today at the cost of higher interest rates, fewer jobs and slower growth tomorrow. All of us must therefore show greater responsibility.
If our welfare reforms can be complemented by responsibility across the economy, we could achieve two and a half per cent. growth this year. But if wage bargaining proceeds in the same short-termist way as in the past, then growth this year could slow to 2 per cent.
Similarly, growth could be between one and three quarter per cent. and two and one quarter per cent. next year and, as the economy returns to its sustainable path, growth could be between two and a quarter and two and three quarters per cent. in the year 2000.
Stability also requires a commitment to prudence in fiscal policy. The Chancellor is above all the guardian of the people's money. Last year, spending exceeded revenues by £23 billion under the previous Government and when we came into power we inherited not only a cyclical deficit, but a substantial structural deficit in excess of 2 per cent. of national income. Immediate action was required to secure long-term deficit reduction.
The five-year deficit reduction plan that I put in place last July is not only on track, but is being achieved more quickly than expected. A substantial fiscal tightening has been achieved this year, with borrowing coming down by more than £17 billion, over 2 per cent. of national income. Because at this stage of the cycle it is important to come down on the side of caution, my Budget will lock in this fiscal tightening for 1998–99.
Therefore, even if we exclude the windfall tax revenues, borrowing—which the previous Government had planned at £19 billion for this year—is now expected to be £5 billion, a fall from 3 per cent. of national income last year, under the previous Government, to around a half per cent. this year, comfortably within the Maastricht criteria.
On the same basis, borrowing is expected to fall to just under £4 billion in 1998–99. By 2000, the Budget is forecast to be in balance.
But our fiscal objectives are more long term: to meet the golden rule—that over the cycle Government revenues will cover consumption—and to keep debt at a prudent and stable level. Previous Governments have made the mistake, most recently in the late 1980s, of claiming that they had solved our deficit problem when all they had was a short-term surplus. Surpluses in 1988 and 1989 collapsed into a deficit approaching £50 billion in just four years—the biggest deficit in our history. What was claimed to be the end of one crisis turned out to be only the beginning of the next.
We are determined to avoid such mistakes. To balance the Budget for one or two years and then let it run out of control in the years that follow is simply to fail those who depend on public services being sustained year in, year out. So this, more than ever, is the wrong time to be complacent or in any way to compromise our commitment to long-term fiscal stability.
Just as we locked in our commitment to sound money through the Bank of England, it is now time to lock in a framework which guarantees sound finances. Our code of fiscal stability will place a duty on this Government, and every future Government, to report to Parliament on a consistent basis and provide full explanatory information on how they are meeting the fiscal rules that they have set. Stability and prudence are merely the preconditions for success—the platform from which success can be built. It is time now to show similar ambition and determination in the pursuit of long-term increases in productivity.
Enterprise
For years, as a nation our capacity to consume has not been matched by our capacity to produce. And it is because we have had insufficient capacity to sustain anything other than low long-term rates of growth that our upturns have been too short and too fragile, and our downturns too deep and too destructive. But with a platform of stability in place and with lower long-term interest rates, 1 believe we are now in a position to establish, for the first time for decades, a virtuous circle of low inflation, high investment and a higher level of sustainable growth.
Over the next few years we must seize this opportunity by challenging ourselves to lift our productivity in each and every industry towards the levels of the world's best. I want us to be as determined to raise productivity as we have been tough-minded about the need for stability.
Breaking free from old ideas of state control on the one hand and crude laissez faire on the other, our new ambition for Britain must be to encourage enterprise and entrepreneurship, to boost education and skills and, as our Competition Bill will ensure, to open markets to competition and new opportunities—in other words to implement for our country a medium-term strategy for growth.
First then, our proposals to help businesses invest and grow. To encourage long-term investment, today we will put in place the company taxation reform that we started last year, by abolishing one tax in its entirety.
From April next year, companies will no longer have to pay advance corporation tax. A new instalments system of payment for larger companies' corporation tax will be introduced. In the last Budget we reduced the main rate of corporation tax by 2p to 31p. In this Budget we reduce it further by another 1p to 30p from April 1999. This is the lowest main rate of corporation tax of any major industrialised country and the lowest rate in the history of corporation tax in Britain. When it is finally in place companies will pay over £1.5 billion less in corporation taxes each year.
The lower and fairer tax regime to encourage investment that business has wanted for years is now in place under a Labour Government. It will contribute to making Britain the best place in the industrialised world in which to invest.
Businesses need to plan for the long term, so today I make a commitment that for the rest of this Parliament corporation tax will be at 30p or less.
Stability is important, not least in our North sea oil industry, where planning horizons are long. Next month we will publish a consultative document on the future of the North sea fiscal regime.
In the new economy, however, jobs will come not simply from a small number of large businesses, but from a large number of small and growing businesses. Today we will make five changes that will help small business: we will cut the costs of investing; we will cut the burden of red tape; we will promote research and innovation; we will increase the rewards for doing well; and we will cut tax.
First, following the consultation on our corporate tax proposals, 1 will exempt medium-sized as well as small companies from paying corporation tax by instalments. Taken together with the abolition of advance corporation tax, that will improve the cash flow for small and medium-sized companies paying dividends by about £1 billion.
But I want to do more; 85 per cent. of taxpaying companies in our country—350,000 companies—are covered by the small companies' rate of tax. In the last Budget, I cut the small companies' tax rate from 23p to 21p. I have now decided to go further. From April next year small companies' tax will be cut again to 20p, and we will keep the rate at that level or below not just for a year, but for the Parliament.
We are cutting not only the tax rate, but the costs of investing. For 12 months from July, first year capital allowances for small and medium-sized businesses will be set at 40 per cent., continuing our commitment to boosting long-term investment.
I want to make it easier and cheaper for small businesses also to take on their first employees, but setting up payroll systems costs those businesses money and time, so from April next year the Inland Revenue will offer businesses help in setting up their payroll systems, and will do so on a nationwide basis.
For too long the great scientific advances of British universities have gone on to become the manufacturing successes not of Britain, but of rival countries. To help turn British inventions into success for British businesses, 1 am announcing today plans for a new £50 million venture capital fund open to all universities—a new university challenge fund that will invest today in the innovative businesses that will create wealth and jobs in our country tomorrow.
Encouraging greater research and development investment is also crucial to higher productivity, so the Government are today publishing a consultative document indicating a determination to help businesses to achieve greater research and development.
Our venture capital industry is proportionately much smaller than that in America. By merging the enterprise investment scheme and capital gains tax reinvestment relief, 1 am now able to provide more generous, more efficient and better targeted help to encourage the venture capital industry in Britain. I propose a 50 per cent. rise in tax reliefs. From now on investors will be able to secure income tax reliefs for investment up to £150,000 a year.
We must do more to increase the quantity and quality of long-term investment. The capital gains tax regime that we inherited rewards the short-term speculator as much as the committed long-term investor. It is time also for a fundamental reform of capital gains tax.
In a low inflation environment a complex system of indexation is no longer necessary. Indexation will continue until April 1998 and will then be frozen. The annual exempt amount will rise in line with prices. Following extensive consultation, 1 have decided to phase out complex allowances, and instead I will introduce a new structure of capital gains tax which will explicitly reward long-term investment, and which is based on a downward taper and lower tax rates.
The short-term rate of capital gains tax will remain at 40p. For investors holding non-business assets, who invest long-term for 10 years, the rate of capital gains tax will fall from 40p to 24p in the pound. For those who build businesses or stake their own hard-earned money in them, the long-term rate will be reduced even more from 40p to 10p in the pound—the lowest rate ever achieved.
So with a 30p main rate of corporation tax, a 20p rate for small business tax, and a 10p long-term rate of capital gains tax, this Government today send a clear signal of support for enterprise to those who invest in the United Kingdom. My message to business is: "When you are ready to start out, start up, start investing or start hiring, this Government are on your side".
When half the population have only £200 or less in savings, there is broad agreement that we must do more to encourage savings by everyone. There is broad agreement also that an easy-to-access individual savings account, available over the counter in supermarkets and post offices as well as from banks, building societies and financial services providers, can encourage the savings habit among many more people.
I can now report the conclusions from our consultation on the individual savings account. First, the individual savings account will, as promised, offer complete freedom to move cash in and out, and so savers know their cash will always be accessible when they need it. Secondly, in response to suggestions from prospective providers, the cash holding for the first year of the new product will be raised to £3,000. Thirdly, the individual savings account will receive a 10-year guarantee that savings of up to £5,000 a year can be invested with all existing tax reliefs.
Fourthly, even when new TESSAs and contributions to PEPs cease next year, the entirety of capital accumulated in them will be able to continue, with all the accumulated gains, to enjoy tax reliefs. There is no retrospective element. Whatever accumulated capital there is will remain entirely free of tax, so existing PEP holders will be able to keep their accumulated savings free of capital gains tax and, at the same time, they will be able to save an additional, tax-free £5,000 each year in the new individual savings account.
Work
Just as the modern tax system should encourage investment, so too the tax and benefit system should reflect the value we place upon the responsibilities and rewards of work. For far too long in our country, too many men and women have found themselves working harder and longer, and have still been unable to lift themselves out of poverty into even modest prosperity. For too long, we have done too little to help those who work hard to advance up the ladder of opportunity from lower income into middle income jobs and upwards. The cap on aspirations in Britain must now be lifted.
While Budgets in the 1980s acknowledged the need for incentives, the incentives given to the few ignored the even greater problem of disincentives for the many. So it is time to reward the efforts of those who want to work their way up. First, there is welfare reform through welfare to work. The new deal is the most ambitious programme of employment opportunities our country has seen. From 6 April, every young person unemployed for more than six months will have the offer of work or training. From now on, no young person in Britain will be without opportunity.
It is now time to take two further steps that broaden the scope and ambition of the new deal—steps that will open up new opportunities to long-term unemployed adults in our country. From June, every one of the 225,000 men and women who have been unemployed for two years or more can benefit from a £75 a week employers' subsidy which, for them, will be a passport to work. But the Government are determined to do more, and we will offer—initially to 70,000 men and women—an individual service of expert help and advice to find work. In this way, we will take another step forward in tackling long-term unemployment in our country.
Past employment programmes have helped men but often ignored employment opportunities for women. From this year, the new deal will be extended to thousands of women previously denied chances of work, and it will do so in three ways.
First, for a quarter of a million women, who are partners of unemployed men, we will offer expert and personalised help to find work through pilot programmes to be launched in every region of Britain, paid for from the windfall tax.
Secondly, my right hon. Friend the Secretary of State for Social Security will announce next week the personal help that will now be available on a national basis for all lone parents who want to work and whose children are at school. And we will implement a 12-week linking rule so that they do not risk losing benefits as a result of a brief period in work.
Thirdly, partners of the unemployed under 25 without children, who are not allowed to register as unemployed, will now be given exactly the same opportunities for training and work that others under 25 now enjoy.
With these proposals, equality of employment opportunity for women in our country is now far closer to becoming a reality. Unemployment blights not just individuals' lives, but whole communities. So we need a new deal for communities which recognises that the answer to social exclusion is economic opportunity. Working with the new social exclusion unit, my right hon. Friend the Deputy Prime Minister and other Ministers will announce a series of pathfinder projects that will put employment at the centre of initiatives to improve education, health and other services in our poorest communities.
But there is one group of young people who are the most excluded and most discouraged: young people who find themselves homeless. These vulnerable young people do not just need homes: they need jobs. So I want help to be linked to training and preparing them for jobs. Today, to help finance the advice available to the most disadvantaged young people and to create a nationwide network of mentors ready and willing to help advise and motivate young people who could get back to work, £50 million from the windfall fund is being allocated.
And we must do more. Today, while many are unemployed, extensive skill shortages are holding back our economy. I can also announce extra help in this Budget to promote investment in skills and lifelong learning.
But our priority must be to provide training in areas such as computers and the high technology skills, not least to help prepare for the millennium. Over £100 million extra will be allocated in the coming year to tackle the skills gaps in Britain. My right hon. Friend the Secretary of State for Education and Employment will announce details of this new skills initiative for our country. Our review of post-16 benefits and maintenance will continue along the lines that we have already set down.
Having provided new opportunities for work, it is now time to create a modern tax system that will help create jobs and reward work. So I want to announce today a tax reform to cut the costs of hiring at the wage levels where most new jobs are created. I want to make it easier for companies that are prepared to take on young people looking for a first step on the ladder of employment opportunity, and to take on men and women who want to return to work.
The tax and benefit task force headed by Martin Taylor, chief executive of Barclays, will publish its full report this afternoon. I am sure that the whole House will join me in thanking him for the work that he has done. One of his central recommendations—on which he has already consulted employers—is for a simpler, fairer and more employment-friendly national insurance system; one that makes it easier for employers to hire new employees, and one that also cuts the costs and red tape associated with the two separate and unaligned systems of income tax and national insurance.
Martin Taylor's proposal is radically to restructure employers' national insurance on a revenue neutral basis, which for business as a whole will involve no additional cost, and to set a rate of employer's national insurance of 12.2 per cent, but only after the first £81 of wages.
I have accepted the proposals. From next year, the Government will abolish the distorting entry fee for employers' national insurance. We will also abolish the multiplicity of separate national insurance rates. We will therefore cut the cost of hiring lower-paid employees. Employers will pay no national insurance on any employee earning less than the starting point of the personal tax allowance—£81 a week. The right to benefit for all employees earning between £64 and £81 a week will be upheld in all the changes we make.
With these changes, we are cutting the costs to business of employing 13 million of our lower and middle-income employees. We are taking up to 1 million of the lowest-paid employees out of employers' tax altogether and we are cutting the cost of hiring someone on half average earnings by more than £250 a year.
The Taylor report also recommends similar changes to national insurance contributions for the self-employed. This and other matters will be discussed and examined after the Green Paper on welfare reform is published next week by my right hon. Friend the Minister for Welfare Reform.
Employers and employees will also benefit from a further institutional reform: the establishment of a single organisation to deal with both income tax and national insurance. My right hon. Friend the Secretary of State for Social Security and I have agreed that the Contributions Agency will be transferred to the Inland Revenue with effect from April 1999. We are a Government who do not simply talk about cutting the costs of red tape and bureaucracy, but take the decisive action necessary to achieve it.
Welfare to work is stage 1 of the reform of the welfare state. Today's Budget moves us into stage 2—ensuring that work pays more than benefits and raising the rewards from work.
When it is right for the economy, I will introduce a 10p starting rate of income tax, but today I announce a tax cut for hundreds of thousands of working families on low income and we will do it through the introduction of a new working families tax credit.
Under the present system of family credit there is, quite simply, a ceiling on aspirations for women and men wanting to work their way up. In Britain today there are nearly three quarters of a million working families who are held back by marginal tax rates in excess of 70 per cent. There are nearly half a million working families, with children, whose pay is so low that they receive in-work benefits and yet still are required to pay income tax.
From October 1999, the working families tax credit will not only be a tax cut for hundreds of thousands of working men and women with children, but will abolish the grotesque distortion where some low-paid employees have had to pay back more than £1 for every extra £1 they earn.
Instead of the state paying out benefit through the social security system to working families on lower incomes, in future they will receive cash directly through the tax system. Families will be able to choose to whom the credit is paid—either directly or through the pay packet.
By tackling the unemployment trap and increasing the help available to families, the working families tax credit ensures that work will always pay more than benefits and by tackling the poverty trap—through cutting the rate at which help is withdrawn as incomes rise, the working families tax credit ensures that the more you earn, the more you take home.
I say to those who can work: this is our new deal. Your responsibility is to seek work. My guarantee is that if you work, work will pay. Let me spell out in hard cash the difference that that guarantee will make.
For families with children where someone works full-time there is now a guaranteed income of at least £180 a week, and to the same working families there is a second guarantee: that no income tax at all will be paid on earnings below £220 a week.
The Government inherited a tax system whereby a family with two children paid tax even when they earned only 25 per cent. of average earnings. Under our proposals they will have no income tax bill until they earn over 50 per cent. of average earnings.
It is a transformation in the rewards for work in our country, and, because, in future, work will pay, those with an offer of work can have no excuse for staying at home on benefits.
I said in the last Budget that, in the new Britain, everyone had a contribution to make. Now, with these new guarantees for working families, we can also say that, in the new Britain, for millions more people, we will make work pay.
I have one further tax and benefit integration to announce. For decades, thousands of disabled people have been denied a basic right—the right to work—and the tax and benefit system is one of the barriers that have denied them opportunity.
As a Government, we will never compel to work disabled men and women who cannot work, and for those who want to work we will systematically remove the obstacles that, at present, prevent them from achieving their potential.
So, alongside the working families tax credit, the Government will introduce a new tax credit for disabled people in work, paid through the wage packet, and a new 12-month linking rule to improve the incentives for those on long-term benefits to take a job. Together, these measures will ensure higher rewards for disabled men and women if they choose to enter work, making work pay.
Today, I also want to make one further change that sends a signal to every employee in the country about the importance that the Government attach to work and fair rewards from work for men and women on lower incomes, middle incomes and upper incomes, right up the income scale.
We said at the election that we would not raise the basic or top rate of income tax, and we will keep this promise, not just for one year, but for the Parliament. But I am abolishing the perverse entry fee that every employee pays to be part of the national insurance system and, in doing so, I am cutting national insurance for every employee in the country.
Further reforms will also ensure that no one pays national insurance for the first £81 of their weekly earnings. All employees earning between £64 and £81 will have their right to benefits protected.
So, from next April, 20 million employees in Britain will benefit by paying £1.28 a week, or £66 a year, less in national insurance. This is not just a tax cut for lower-income Britain, it is a tax cut for middle-income Britain; a tax cut for everyone in work.
Our reforms—the merging of the Contributions Agency and the Inland Revenue, the radical restructuring of employers' national insurance contributions and the changes that I have announced in employees' national insurance—are the biggest change in the structure of national insurance for a generation.
I have one further change that will make thousands of men and women better off, and in particular make a difference to family incomes.
For too many parents, the cost of child care has meant that parents either cannot afford to work or find themselves paying out most of their wages on the cost of child care. So we will introduce a new child care tax credit as part of the working families tax credit, and put high quality child care within the reach of people who have never been able to afford it. For spending on child care of up to £100 a week for the first child and £150 for two or more children, the tax credit will cover up to as much as 70 per cent. of the cost.
The rules that we draw up, which will be reviewed after two years of experience, will be designed to ensure that parents have access to high quality child care: child minders, day nurseries and out-of-school clubs. That is a change that today makes a reality of choice for hard-working families previously denied it. Child care will from now on be affordable for the many and not just the few.
Supporting Families And Children
Families are the bedrock of a stable and healthy society, and, in a fast-changing economy—with its uncertainties and vulnerabilities—families, now more than ever, need the security of support when bringing up children.
"Family values" means that we value families—all families. So our economic policy must not only encourage a stable and healthy society based on mutual rights and responsibilities, but directly support families as they bring up children. That is not just for the 4 million children growing up in poverty in Britain today, but for every child who should have the best opportunities.
The system of child and, indeed, family, support which the Government have inherited is confused in its aims and contradictory in its impact, and it must now be reformed
on the basis of clear objectives. The starting point in 1998 is exactly the same as stated by the Beveridge report in 1944:
"that nothing should be done to remove from parents the responsibility of maintaining their children and that it is in the national interest to help parents to discharge that responsibility properly."
We implement those objectives in a changed economy where parents try to strike the right balance between paid work and family responsibilities. In that new context, we must do more to encourage family-friendly employment that will help children and their parents. That is why, as part of the social chapter, we shall legislate to guarantee unpaid parental leave, and I am pleased to confirm that the Confederation of British Industry and others support that endeavour.
Giving children the best start in life requires good schools, good health services, good child care, good public services as well as cash help. This country invests some £10 billion a year in a wide range of services for young children. For the first time, a broad-based review of how we can integrate the whole range of services involved in the support and care of young children and their families is being carried out, and proposals will be announced with our spending review in the summer.
Giving a child the best start in life takes more than money, but it cannot be done without money. Child benefit remains the fairest and most efficient and cost-effective way of recognising the extra costs and responsibilities borne by all parents. Raising it allows us to do more for mothers who choose to be at home, working at home bringing up children. To underline the view that child benefit is society's support for, and investment in, the upbringing of children, child benefit should and will remain universal where it is already universal, and it should be paid, as now, directly to the mother. Thus, future support for children will be built around universal child benefit and I am convinced of the case for raising its level.
After careful examination, I believe that we should make three complementary changes. First, we all know that circumstances dictate that some families will need more help than others. The case for additional support for children in poorer families is strong, but that support should be on the basis of the identifiable needs of children, not on whether there happens to be one parent rather than two. There is no case for a one-parent benefit and we shall not return to that. Additional support should be provided on the basis not of family structure but of family need.
Secondly, our benefits system provides less help for children when families need it most—in the early years. Low-income families on benefit, in or out of work, receive £8 a week less for a child under 11 than for a child over 11. That distinction does not reflect some of the high costs of the early years and takes no account of the costs to mothers of staying at home when their children are young, or of the extra costs of child care if mothers work, so it is time to do more for children under the age of 11.
To achieve our goals, we must look more broadly at the current approach to children and families in the tax system. The state pays a tax allowance to married couples, but pays exactly the same amount at exactly the same rate to unmarried couples with children, whether or not they have ever been married. The state pays exactly the same amount at the same rate as married couple's allowance to single parents. Indeed, the state pays the same amount for up to a year to couples who separate or divorce, and does so whether they have children or not. Such is the confusion of the current system that if a married couple with children splits up, both man and woman can each receive the equivalent of a full married couple's allowance for up to a year. Thus, separated, they can receive up to twice the allowance of a married couple.
The only way to make sense of that chaotic system is to make our primary aim that of supporting families through supporting children. That is why, from next year, we propose to raise child benefit by reducing those allowances, now paid at 15 per cent., to 10 per cent. The change will not affect elderly taxpayers, whose extra allowances will be protected.
I have therefore decided that, from next April, for the first child, child benefit will be raised by more than 20 per cent.—a £2.50 a week rise in child benefit, in addition to the normal uprating for inflation. The £130 a year rise is the biggest increase we have seen in child benefit. These changes will be fully reflected in the family premium for income support. It is the right thing to do to support and strengthen families in our country, and, from November this year, for those on family credit and income support, child support for under-11s will be raised by an additional £2.50 a week, so that the needs of Britain's youngest and poorest children are properly recognised.
With these measures, we can give every child a better start, and I believe that, in future years, we can and should do even more. For those who want child benefit raised, the question undoubtedly arises whether it should be taxed for those at the top of the income scale. It must be right in principle that if child benefit is raised, there is a case for higher rate taxpayers paying tax on it. Modernisation of the welfare state makes possible more investment in the children of our country, and following the children's review, we shall bring forward detailed recommendations for reform.
I have one further announcement: for hundreds of thousands of men and women, care within the family extends beyond caring for children to caring for disabled or elderly relatives, so valuing families means valuing carers—spouses, grandparents, and all the carers who contribute to the family. As a first step to recognising the importance of carers within the family, I can today announce that I am ending an injustice that the previous Government tolerated. The tax allowance that has been available only to men with children whose wives are incapacitated will be extended to mothers with dependent children and incapacitated husbands. Because of the importance that I attach to ending this unfairness, I will backdate this additional help to April 1997.
I now turn to the environment. The Kyoto summit was a landmark for international agreements on the environment, and the work of my right hon. Friend the Deputy Prime Minister in securing agreement has been widely applauded. Having signed up to an 8 per cent. reduction in European Union carbon emissions, we are determined to play our part—nationally and internationally—in meeting those targets. In those important policy decisions, which affect generations ahead, there will be proper information, proper consultation and full openness in government.
I can confirm, first, that VAT on the installation of energy-saving materials funded under certain Government grant schemes will be cut from 17.5 to 5 per cent. That will help to insulate 40,000 more homes a year, and we are pursuing with our European partners a wider relief.
There has been increasing pressure, not least from businesses, for measures that encourage greater energy efficiency in industry. I am grateful to Sir Cohn Marshall, the chairman of British Airways and, until July, president of the CBI, for agreeing to head a Government review into economic instruments to improve the industrial and commercial use of energy. It will include a study of whether new economic instruments, such as an industrial energy tax and/or other market mechanisms, should be introduced to help to curb industrial emissions, and, if so, how that will be done.
Concern for the environment is, of course, not limited to the use of energy. Last year, we commissioned work on the environmental costs of the quarrying of aggregates, and on the options for dealing with water pollution. Detailed results will be published in the near future by my right hon. Friend the Minister for the Environment. We already know that we need to do more to reduce the amount of waste going to landfill, so I shall raise the standard rate on active waste from £7 to £10 per tonne from 1 April 1999. Consistent with our environmental objectives, from October next year I am exempting from landfill tax the inert waste used in the restoration of sites.
Road transport is the fastest growing source of carbon emission, so we need a more balanced transport policy. The Government therefore propose to make two major environment-led changes to long-term transport policy.
The quality and quantity of public transport must be improved. I am pleased to announce that, over the coming three years, as a result of this Budget, a total of over £500 million additional money will be invested in public transport. My right hon. Friend the Deputy Prime Minister will announce details later this week.
I can announce today a £50 million a year rural transport fund. Three quarters of rural parishes and communities have no bus service. Our aim must be to extend the range of transport services throughout the country. The fund will invite applications from rural communities that want to improve their local transport services. As an added incentive, I shall increase the rebate on fuel paid to bus operators to help to keep bus fares down.
The Government recognise that, for many people, especially in isolated areas, car ownership is not a choice but a necessity, so I now want to rebalance car taxation so that it falls less on car ownership. I want to make the change in an environmentally sensitive way.
From January next year, I am cutting the licence fee for lorries and buses with clean engines by up to £500. But I also want to make a major reform of the licence fee for cars. From next year, I plan to reduce the licence fee for cars with the lowest emissions. For the cleanest and the smallest cars, I plan to cut the licence fee by £50.
As we make the preparations for this long-term environmental change, for this year I propose, at a cost of £145 million, to freeze the licence fee for all vehicles. To encourage lower emissions, the costs of converting company cars to road fuel gases will, from now on, be disregarded for income tax purposes. At the same time, I am increasing the scale charges for fuel provided by an employer, which will cost the typical company car user around £1 a week. The duty on road fuel gases will be frozen, increasing the incentive to use those cleaner fuels.
The previous Government introduced a road fuel escalator, the principle of which we supported. They set it at 5 per cent., and since July it has been 6 per cent. There is agreement that only with the use of an escalator can emission levels be reduced by 2010 towards our environmental commitments.
As a result of the escalator, road fuel tax will rise by 4.4p a litre for unleaded petrol and for ultra-low sulphur diesel. As is normal, that change will take effect on Budget day at 6 pm. To encourage all diesel users to switch to cleaner fuels, ordinary diesel will increase by 1p more than that. These increases will reduce carbon emissions by 1.7 million tonnes of carbon.
Of course, the price of petrol will also be affected by movements in oil prices. The oil price has fallen by 25 per cent. in the past six months: a benefit enjoyed by oil companies which has yet to be passed on to consumers, especially consumers in rural areas, who already pay higher fuel prices, which is something the Office of Fair Trading is already investigating.
Whatever the short-term changes in oil prices, however, the Government have a duty to take a long-term and consistent view of the environmental impact of emissions, and that is what we have done. Today we are publishing in the Red Book an environmental assessment of our proposals.
Section 7: Other Tax Measures
I said that we would maintain the basic and top rates of tax for this Parliament. As is usual, we will increase all income tax allowances, income limits and tax thresholds in line with inflation.
I turn now to this year's Budget decision on mortgage tax relief. I can tell the House that I have decided in this Budget not to make any further change in the rate, or to make any change to stamp duty on property below £250,000. For property sales above £250,000, stamp duty will be raised to 2 per cent. from next Tuesday, and to 3 per cent. on property sales above half a million pounds—a change which leaves 98 per cent. of house transactions unaffected.
I also had a decision to make on inheritance tax. Many have put to me the case this year for freezing or even lowering the threshold. I have decided to do neither of those things. This year, I will raise the threshold for inheritance tax by £8,000. Under this Government, there will be no inheritance tax to pay on estates below £223,000: 97 per cent. of estates will not have to pay inheritance tax. Rules on inheritance tax concerning chattels will, however, be tightened to ensure proper access.
I also want to improve access to our nation's museums and galleries. I have therefore decided that extra money will be made available to help museums and galleries that do not currently charge for admission, to maintain free admission in the coming year.
As promised in the last Budget, 1 will raise revenue over the next three years by closing a number of loopholes left by the last Government, including those relating to offshore trusts. The measures that we shall take to deal with such loopholes will raise a total of £1.5 billion over three years. Next month, we will publish and consult on draft legislation for a general anti-avoidance rule for direct taxes.
From 1 January next year, alcohol duties will be uprated in the normal way, by 1p on a pint of beer and 4p on a bottle of wine. For a bottle of spirits, the duty will be frozen at its current level. I shall be taking action to clamp down on smuggling and fraud.
On tobacco, in line with the commitment that I announced last year, the excise duty will rise by 5 per cent. above inflation. From 1 December, the tax on a packet of 20 cigarettes will rise by just over 20p. Details of those duty changes, together with details of changes to certain gambling duties, are published this afternoon.
I have had many Budget representations, including many widely publicised campaigns, pressing for new tax reliefs. I have decided that there is a case for one new tax relief, for giving. I want British citizens to be able to contribute more to poverty relief and education through charitable work in the developing countries. For every £100 that a British citizen donates, the Government—under the proposals that I have announced today—will contribute up to £40.
I want the millennium to be remembered, not just nationally but internationally, for the redemption of debt and the reduction of world poverty. This new tax relief will allow individuals to make their contribution to the reduction of world poverty.
Public Spending
I said that this would be a Budget based on prudence for a purpose and that guides us also in our approach to public spending. When we came into government, we said that, while we undertook a strategic review of future spending priorities, we would work within a two-year ceiling on departmental spending.
The comprehensive spending review—the results of which we will announce this summer—will shape our public spending priorities into the next millennium, but, as a result of the work of my right hon. Friend the Chief Secretary to the Treasury, and as a result also of departmental willingness to root out waste and, this year, to reallocate resources to our priorities, we have already achieved more than some people expected: £400 million to help pensioners with fuel bills; £1.5 billion already to patient care in the health service; £3 billion to employment opportunity; and more than £2 billion to education.
Because of our disciplined approach this year, we are able to carry over extra money from this year to next. I have already said that public transport will receive an additional £500 million over the next three years. Ours is prudence for a purpose: to meet the people's priorities. We are determined to improve education all round, so I am allocating for the coming year to education an additional £250 million. That makes a total additional commitment to education since we came to power—above what the previous Government proposed—of £2.5 billion. I can also tell the House that my right hon. Friend the Secretary of State for Health and his colleagues in Scotland, Wales and Northern Ireland will make announcements this week.
The extra money that I announced last July for the national health service comes on stream in the health service from next month and I have decided that additional allocation to health of £1.2 billion for the coming year should today be increased by a further 40 per cent.—another £500 million to £1.7 billion. That takes the total additional investment that this Government have provided for the NHS in our first 10 months to £2 billion. The NHS is safe in this Government's hands.
Because we will always be prudent, I am allocating £500 million to add to the reserve in 1998–99. It is because of our prudence that we are able to meet our manifesto commitments, to reduce the deficit and to invest more in transport, education and the NHS.
The ambitions of the British people are again the ambitions of the British Government, so this is a Budget which, by its measures, advances both enterprise and fairness. We have cut corporation tax, small business corporation tax and national insurance for every employee in the country, and we have raised child benefit for every family. This is a new Labour Budget which has set new ambitions for Britain, so that, for millions, ambitions can become achievements, and I commend it to the House.
Provisional Collection Of Taxes
Motion made, and Question,
put forthwith, pursuant to Standing Order No. 51 (Ways and Means Motions), and agreed to.That, pursuant to section 5 of the Provisional Collection of Taxes Act 1968, provisional statutory effect shall be given to the following motions:—(a) Sparkling wine, made-wine and cider (rates of duty) (motion No. 3); (b) Hydrocarbon oil (rates of duties and rebates) (motion No. 8); (c) Hydrocarbon oil (ultra low sulphur diesel) (motion No. 9); (d) Hydrocarbon oil (mixing of heavy oil) (motion No. 10); (e) Amusement machine licence duty (rates of duty) (motion No. 13).—[Mr. Gordon Brown.a]
I now call the Chancellor of the Exchequer to move the motion entitled "Amendment of the law". It is on that motion that the debate will take place today and on succeeding days. The remaining motions will not be put until the end of the Budget debate next week, and they will then be decided without debate.