MAIN POINTS

The economy is now recovering strongly, Growth is now forecast to be 4 per cent in 1994 and underlying inflation is at its lowest level for 27 years. Unemployment has fallen for nine consecutive months, and is over 450,000 below its peak. The Budget is designed to ensure that the improvements in the public finances announced in 1993 are delivered and to introduce further structural reforms to make the economy work better. This will help to ensure sustainable growth in the medium term with permanently low inflation.

The Budget:

• ensures that Government borrowing returns to balance by the end of the decade. The 1993 Budgets put public finances on a sound basis enabling the economic recovery to be sustained. This Budget takes further steps to reduce public borrowing from Pounds 34 1/2 billion, 5 per cent of national output, this year and projects a small surplus by the end of the decade.

• restrains public spending while directing resources to the Government's priorities. Public spending plans have been cut by Pounds 24 billion over the next three years. Much of the reduction is possible because inflation is so low but the cuts go beyond that and spending will be lower in real terms than planned in last year's Budget. Total spending is now set to fall from 44 per cent to 41 per cent of national output over the next three years.

• helps employment prospects for lower paid families and the unemployed. There is a new package of measures to help people back to work, including more help through family credit and housing benefit and schemes such as Community Action, Jobfinder's Grants, Workwise and 1-2-1 have been extended. There are also measures to make it cheaper for employers to take on new staff

• helps businesses by a range of measures to encourage investment, improve business prospects and reduce the burden of regulations. A scheme of transitional relief for business rates, costing over Pounds 600 million in 1995-96, will be introduced.

THE BUDGET MEASURES

The Chancellor announced a number of measures to improve the prospect for jobs and investment and strengthen the long term performance of the economy.

To help people back to work:

• family credit will be increased for people in full time work;

• payments of housing benefit and family credit will be speeded up for people taking jobs;

• there will be a pilot study in which family credit will be paid to people without children;

• schemes to help the unemployed back to work will be extended: Community Action, Jobfinder's Grants, Workwise, 1-2-1, etc;

To make it cheaper to take on new staff:

• employers' national insurance contributions will not have to be paid for the first year of employment for someone who has been unemployed for two years;

• there will be a reduction in employer's national insurance contributions of 0.6 percent for workers earning below Pounds 205 a week.

Promoting investment in growing firms:

• a new Venture Capital Trust Scheme will be introduced;

• the tax reliefs for the Enterprise Investment Scheme will be enhanced.

Helping businesses:

• a new transitional scheme for business rates will be introduced at a cost of over Pounds 600 million in 1995-96;

• for exporters ECGD average medium and long term premiums will be reduced by around 10 per cent and the limit on cover for important developing country markets is increased by Pounds 300 million in 1997-98;

• the threshold below which employers can pay Pay As You Earn and national insurance contributions quarterly rather than monthly will be raised from Pounds 450 to Pounds 600;

• the Government will consult on annual VAT accounting and a simplified VAT scheme for small firms.

Promoting investment:

• the Private Finance Initiative is gathering speed. Private finance contracts involving Pounds 5 billion of capital investment are expected to be let in 1995.

Promoting personal savings:

• holders of Tax Exempt Special Savings Accounts (TESSAs) will be able to deposit up to Pounds 9,000 capital from a mature account in a new account;

• Personal Equity Plans (PEPs) will be extended to cover corporate bonds.

  TAX MEASURES

  The tax changes in the Budget cost some Pounds 1 billion in 1995-96, but do not have a significant affect on revenues in the medium term. little overall change in revenues raised. Tax measures introduced in the last two Budgets in 1993 are maintained. This Budget is designed to:

  • maintain the current tax base and close tax loopholes;

  • support health and environmental objectives.

  Personal taxes:

  • the main personal tax allowance and income tax thresholds will be increased in line with prices;

  • personal tax allowances for people aged 65 and over will be increased by Pounds 430;

  • the lower rate tax band will be widened by Pounds 200 to Pounds 3,200.

  Taxes on spending:

  • road fuel duties will be increased by 5 per cent in real terms, putting a litre of petrol up by 2 1/2p and a litre of diesel by around 3p. Tobacco duties will be increased by 3 per cent in real terms, putting up a packet of 20 cigarettes by 10p;

  • taxes on wines, spirits, cider and beer will be left unchanged;

  • vehicle excise duty on cars rises by Pounds 5 to Pounds 135.

  Closing tax loopholes:

  • a number of artificial schemes for avoiding tax will be stopped.

  PUBLIC SPENDING

  The Government's public spending plans have been reduced by Pounds 6.9 billion in 1995-96 and by Pounds 8.3 billion in 1996-97 and Pounds 8.9 billion in 1997-98. As a share of national output total spending will fall from 44 per cent to 41 per cent over the next three years. This has been achieved by:

  • savings on most programmes to reflect lower price levels;

  • tight control of public sector pay and administration costs Civil Service running costs are to fall by 10 per cent in real terms;

  • measures to restrain growth of social security by a drive against fraud and by reforming housing benefit and income support for mortgage interest payments.

  Resources will be focused on the Government's priorities:

  • a package of measures to improve work incentives;

  • a real terms increase in public resources for the Health Service in each year;

  • extra money for home insulation and cold weather payments on top of last year's Pounds 1 1/4 billion package of help for the least well off and for pensioners to meet the extra cost of VAT on fuel;

  • provision for record numbers of students in higher and further education in 1995-96;

  • pensions, unemployment benefit, income support and child benefit will all be uprated in line with prices in the usual way;

  • extra funds for science and overseas aid.

    

    Where it comes from Where it goes pounds billion pounds billion a.Income tax 70.1 a.Social security 87.1 b.Nat.Ins. contributions 44.5 b.Health services 33.0 c.Corporation tax 26.4 c.Defence 21.7 d.Value added tax 49.0 d.Local government 73.4 e.Excise duties 28.0 e.Other spending 60.7 f.Other reciepts 60.8 f.Debt interest 24.5 g.Borrowing 21.5

    THE ECONOMY

    The overall objective of the Government's economic policy is to promote sustained economic growth and rising prosperity. This requires policies to improve the long term performance of the economy and overall economic stability. This means:

    • keeping inflation down: the Government's target is to keep underlying inflation, as measured by the Retail Price Index excluding mortgage interest payments, in the range 1-4 per cent and in the lower half of this range by the end of the present Parliament. Interest rates are set to achieve this objective;

    • ensuring sound public finances: the Government's aim is for the public finances to be in broad balance over the medium term;

    • making the economy work better: the long term prospects for growth and jobs will depend on how responsive the economy is to market disciplines. The Government is helping to improve this by structural policies to enlarge the market sector, increase competition, keep regulations to a minimum and improve the climate for enterprise.

    Low inflation and sound public finances give businesses the stable framework they need to plan ahead. The structural reforms will improve the prospects for a recovery that lasts and creates jobs.

    PROSPECTS

    • Growth in the UK economy has been stronger than forecast in the summer and is now expected to be 4 per cent in 1994. Exports have led the way. Growth is forecast to slow to 3 1/4 per cent in 1995, largely as a result of slower growth of oil output.

    • Underlying inflation was 2 per cent in October, well within the lower half of the Government's target range and its lowest level for 27 years. It may rise to a temporary plateau of 2 1/2 per cent while prices adjust to higher commodity prices and profit margins increase in the buoyant manufacturing sector. But with continuing spare capacity in the economy as a whole it should then resume its downward trend over the medium term.

    • Unemployment has fallen by over 455,000 from its peak at the end of 1992. It now stands at 2.52 million. Employment is expected to continue to rise as the economy strengthens. Productivity continues to grow strongly and firm cost control in manufacturing is bringing unit labour costs down.

    • The current account deficit has declined sharply in 1994. It is now forecast to fall to Pounds 4 billion as a whole from Pounds 10 1/2 billion in 1993. Much of this improvement is from a lower visible deficit, with exports rising strongly. The invisible surplus has also increased mainly because of record levels of net investment income.

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    ECONOMIC PROSPECTS: SUMMARY

                                  Percentage changes on a year earlier
                                  unless otherwise stated
    

                             1994                1995
    

                             Treasury       Treasury     Independent Panel(1)
                                                         
                                                         Average           Range
    

    Gross domestic product        4         3.25           3         2.5 to 3.75
    
    RPI excluding mortgage 
    interest payments (fourth     2         2.5            3         2   to 4
    quarter)
    
    Current account               -4        -3.5           -5        -12 to 2
    (pounds billion)
    
    PSBR (financial year,         34.5      21.5           25        17  to 32
    pounds billion)
    

    (1) Submitted to the Chancellor of the Exchequer on 2 November

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