BUDGET IN BRIEF - 1995

Published by HM Treasury, 28 November 1995

MAIN BUDGET THEMES

people will keep more of what they earn and save

more will be spent on the public services people care about, while public spending remains under firm control

public borrowing will be kept on a clear downward path to deliver a sustained recovery

TAX

To help people to keep more of what they earn and save

three steps towards a basic rate of 20p
- basic rate of income tax cut by 1p to 24p
- 20p lower band increased by 700 pounds
- tax on savings income cut from 25p to 20p
main personal allowance increased by 240 pounds
threshold for higher rate tax increased by 1,200 pounds

To protect family savings

inheritance tax threshold increased to 200,000 pounds
package of help for the elderly needing long term care.

To boost enterprise and help business

small companies' corporation tax reduced to 24p
more help with rates bills for businesses
employers' national insurance contributions cut by 500 million pounds from April 1997
another boost to employee share ownership

SPENDING

more money for schools, hospitals and the police
reductions in costs of bureaucracy and action on fraud
growth in private financing and management of projects in the public sector
overall public spending remains under firm control

Graph: Expenditure, receipts and public borrowing (extract from FSBR).

TAX MEASURES

The Budget aims to cut tax in a way that will improve incentives and boost enterprise. Overall, taxes are reduced by 3 1/4 billion pounds in 1996-97.

The Budget reduces the marginal rates of tax for 18 million taxpayers and about 350,000 companies. It ensures that nearly one quarter of all taxpayers will pay tax at no more than 20 pence in the pound and takes 220,000 people out of tax altogether. The Budget also cuts taxes on savings and inheritance.

Personal tax

The Budget takes three important steps towards a basic rate of 20 per cent:

the basic rate of income tax will be reduced from 25 per cent to 24 per cent
the lower rate (20 per cent) band will be widened by 700 pounds to 3,900 pounds, 500 pounds more than inflation
tax on savings income, such as bank and building society interest, will be reduced from 25 per cent to 20 per cent. This will benefit around 14 million taxpayers.

The main personal allowance will be increased by 240 pounds.

The threshold for higher rate tax will rise by 1,200 pounds.

The married couple's allowance and the income limit for age-related allowances will increase in line with inflation.

Protecting family savings

The starting point for inheritance tax will be increased from 154,000 pounds to 200,000 pounds, so more people will be able to pass on more of their wealth to their families.

To help elderly people who need long-term care, the Budget:

doubles to 16,000 pounds the level of assets below which people are eligible for help from the Government for care in residential and nursing homes
exempts from tax the benefits from a range of long-term care insurance policies
promises consultation on a new partnership scheme.

Boosting enterprise

The small companies' rate of corporation tax, which applies to profits of up to 300,000 pounds, will be reduced from 25 per cent to 24 per cent. All three million unincorporated businesses which pay tax will benefit from the income tax cuts.

More help will be given to businesses whose rates are rising following the recent revaluation. The maximum real increase in bills will be reduced for next year from 10 per cent to 7 1/2 per cent. For small properties it will be reduced from 7 1/2 per cent to 5 per cent. Over one million properties will benefit.

Employee share ownership will be boosted by a package of new measures.

From 1997 employers' national insurance contributions will be cut by 0.2 per cent, a 500 million pound boost to employment.

Pie chart: Public Money - where it comes from (extract from FSBR).

Taxes on spending

27 pence off a bottle of spirits
duties on beer, wines and most cider will remain unchanged
the car tax disc will rise by 5 pounds to 140 pounds
1 per cent cut in betting duty
6 per cent cut in pools duty
tax on petrol and diesel is up 3 1/2 pence a litre in line with previous commitments to raise duties in real terms to curb emissions
tax on tobacco is up, putting 15 pence on a packet of 20 cigarettes in line with previous commitments to use tax to encourage people to stop smoking.

Environmental taxes

A new tax is introduced on landfill waste at a rate of 2 pounds a tonne on inactive waste and 7 pounds on other waste
tax on gas used in vehicles is cut to encourage the use of this cleaner fuel.

PUBLIC SPENDING

The Government plans to reduce public spending to below 40 per cent of national income (GDP), while providing extra resources for priority areas.

The Budget reduces planned spending by 3 1/4 billion pounds for 1996-97. As a share of GDP, total spending will fall from 42 per cent now to 38 3/4 per cent over the next three years.

There will be extra resources for schools (878 million pounds), the National Health Service (1.3 billion pounds extra current spending) and the police (resources for 5,000 extra police).

Greater use of private finance will improve the efficiency and value for money of investment in public services. The Private Finance Initiative is a modern way of financing public sector projects, delivering better quality services more efficiently. A total of 14 billion pounds of private finance contracts are expected to be agreed by the end of 1998-99.

Challenge funding will foster partnerships between communities and the private sector by allocating public funds on a competitive basis.

The cost of Government is being cut in cash terms in each of the next three years. By 1998-99 the annual cost of the Civil Service will be nearly 2 billion pounds - over 12 per cent - lower in real terms than it is this year.

Tackling the growth in social security spending remains the most important priority for controlling public spending. Planned spending is expected to grow by one per cent per year in real terms over the next three years. A new campaign against fraud will help ensure that the extra spending represents legitimate spending on people in genuine need.

Pie chart: Public Money - where it goes (extract from FSBR).

THE ECONOMY

The Chancellor's aim is to keep Britain on course to be the Enterprise Centre of Europe. The Government's economic policy is designed to promote sustained economic growth, increased employment and rising living standards. Achieving this depends on keeping inflation low, keeping Government borrowing on a downward path and making the economy work better.

Economies work best when inflation is low and stable. The Government therefore sets interest rates to achieve underlying inflation of 2 1/2 per cent or less. Underlying inflation has been below 4 per cent for over three years now, the best run for nearly 50 years.

Thanks mainly to the firm control of public spending, government borrowing remains on a firm downward trend, in line with the Government's policy of moving back towards balance over the medium term. The tax and spending decisions in this budget are broadly neutral in their impact on borrowing.

Within a stable macro-economic framework, making the economy work better depends on structural policies which help markets to work more flexibly, labour market reform, education reform and active labour market policies to help the unemployed back to work. The tax and spending measures in this budget contribute to these aims.

THE PROSPECTS

Growth

GDP growth slowed from 4 per cent in 1994 to a forecast 2 3/4 per cent in 1995. This reflects a tightening of policy to bring growth onto a sustainable path and the effects of slower growth in world trade. Growth is expected to pick up again during 1996, with GDP forecast to increase by 3 per cent in the year as a whole.

Inflation

Underlying inflation was 2.9 per cent in October. It may be close to its peak and is expected to resume its downward path during 1996. It remains on course to meet the Government's target of 2 1/2 per cent or below by the end of the present Parliament.

Unemployment

Unemployment has fallen by more than 700,000 since its peak. It now stands at 2 1/4 million. Employment has risen in the last year by 250,000. Vacancies are at their highest level for six years.

Current account

The current account has moved into deficit this year, mainly because net investment income has dropped back from last year's exceptionally high level. A deficit of around 6 1/2 billion pounds is forecast for 1995, which is expected to narrow to around 5 billion pounds in 1996.

TREASURY FORECASTS

                                Percentage change on a year earlier
                                         unless otherwise stated
                                          1995 Budget
                                             forecast
Gross domestic product
1995                                              2 3/4
1996                                              3
RPI excluding mortgage interest payments
1995 Q4                                           3
1996 Q4                                           2 1/2
1997 Q2                                           2 1/4
Current account (billions of pounds)
1995                                             -6 1/2
1996                                             -5
PSBR (billions of pounds)
1995-96                                          29
1996-97                                          22 1/2