BUDGET GUIDE

BUDGET in Brief

A Budget for

lasting prosperity

combining sustained economic growth with low inflation so that living standards go on rising year after year

For helping people keep more of what they earn

basic rate of income tax reduced to 23p
20p income tax band widened personalallowances increased
inheritance tax threshold increased

For high quality public services spending more on services people care most about

the health service
education
combating crime

For responsible public finances

maintaining firm control of public spending
reinforcing the downward path of borrowing

For protecting the ordinary taxpayer

fighting tax and social security fraud
closing tax loopholes
phasing out special reliefs and allowances

Chart: Spending, income and public borrowing

The Budget helps people keep more of what they earn

The Government believes in a low tax economy and is committed to a 20p basic rate of income tax.

The Budget takes another step towards this goal and further boosts wage packets by:

cutting the basic rate of income tax by 1p to 23p, the lowest basic or standard rate for nearly 60 years;
widening the 20p income tax band by 200 Pounds;
increasing personal allowances by 200 Pounds more than inflation.

All 26 million taxpayers will pay less income tax because of these changes and over a quarter of all taxpayers now pay tax at only 20 per cent.

So that people can leave more to their families, there will be a further 15,000 Pounds increase (three times more than inflation) in the level where inheritance tax becomes payable.

The Budget helps deliver high quality public services

The Government will spend more on the services people care most about while maintaining firm control of public spending. Continuing growth of the Private Finance Initiative will improve efficiency throughout the public sector.

The Budget gives extra money to:

the health service (1,600 Pounds million for patient services);
education (an extra 875 million Pounds);
combating crime (an extra 450 million Pounds).

The Government will also continue to clamp down on its own running costs.

Buying services through the Private Finance Initiative brings high quality services at better value for money. Last year 1 1/2 billion Pounds worth of PFI deals had been agreed. That figure has now risen to more than 7 billion Pounds. Challenge funding will continue to foster partnerships between communities and the private sector by allocating funds on a competitive basis.

The Budget promotes responsible public finances

To maintain a world beating modern economy fit to compete in international markets, the Governments objective is to reduce borrowing and bring public spending down to below 40 per cent of national income (GDP).

The Budget helps to achieve this by:

maintaining a firm control of public spending;
reinforcing the downward path of borrowing.

The Government is set to meet its target of reducing public spending to below 40 per cent of GDP in 1997-98. It will fall further in the following years. Budget decisions mean that spending in 1997-98 will be about 2 billion Pounds less than would otherwise have been the case.

Borrowing will fall from 31 1/2 billion Pounds in 1995-96 to a forecast 26 1/2 billion Pounds in 1996-97 and 19 billion Pounds in 1997-98 before moving back into balance by the end of the decade.

The Budget changes some indirect taxes

the duty on spirits will be cut by 4 per cent, with 26p tax off a bottle;
the duty on beer and wines will be frozen;
the Government is concerned about the attraction of alcopops to under-age drinkers so duty on these will go up by 40 per cent, putting 7p to 8p on a bottle;
previous commitments to use tax to encourage people to stop smoking will be reinforced with duty on cigarettes, cigars and pipe tobacco increasing by 5 per cent more than inflation, putting 15p on a packet of 20 cigarettes;
the car tax disc will rise from 140 Pounds to 145 Pounds;
insurance premium tax will increase from 2 1/2 per cent to 4 per cent;
air passenger duty will go up from 5 Pounds to 10 Pounds for most flights within Europe and from 10 Pounds to 20 Pounds for flights outside Europe.

The Budget helps protect the ordinary taxpayer

Tax due should be tax paid. The Government is committed to securing the tax base in order to spend money on high quality public services while reducing the rate of income tax.

The Budget takes steps to achieve this by:

spending money to save money:
increasing resources for the Inland Revenue and Customs and Excise to mount a powerful crackdown on tax avoidance and evasion;
boosting the fight against social security fraud to make sure that taxpayers money is spent only on those in genuine need.
closing tax loopholes where they are being exploited to reduce tax bills;
tackling a number of special reliefs and allowances which have outlived their purpose:
capital allowances for business assets with lives over 25 years will be brought more into line with normal commercial accounting treatment;
special tax relief for production oil wells will end, bringing its tax treatment in line with other business activity;
tax relief on profit related pay will be phased out starting from 1998.

The revenue raised by these measures over the next three years will help bring lower tax rates and protect public services for everyone.

The Budget helps business and enterprise

The Government is committed to business and enterprise. As well as a stable economic framework with low inflation and low interest rates, taxes on UK business are among the lowest of any G7 country.

The Budget takes further steps to improve the environment for business to grow and invest:

the small companies rate of corporation tax will be cut from 24p to 23p helping 400,000 small firms to keep more of their own profits to invest as they choose;
more than 1 1/4 million small properties (including 400,000 small shops) will have no increase in their rates bill next year;
in line with previous commitments, another cut in employer national insurance contributions (worth around 500 million Pounds) will take effect next April;
the VAT registration threshold will be increased in line with inflation;
the cost of the tax disc for lorries will be frozen for the seventh year running.

The Budget helps the environment

The Budget builds on the measures introduced last year to help the environment:

to reduce air pollution, the tax disc will be reduced by up to 500 Pounds for lorries meeting strict emission standards;
ultra-low sulphur diesel will be favoured by a 1p per litre tax advantage over ordinary diesel;
to encourage the conversion of cars and lorries to cleaner gas power, the duty on road fuel gas will be cut by 25 per cent;
in line with previous commitments to encourage fuel efficiency and reduce air pollution, duty on petrol will be increased by 5 per cent more than inflation, putting 3p on the price of a litre;
energy efficiency programmes will get an extra 20 million Pounds over the next three years;
land and buildings used for Habitat Schemes will get relief from inheritance tax in the same way as those used for farming.

SNAPSHOT OF THE MAIN BUDGET TAX MEASURES

Income tax

Basic rate reduced from 24p to 23p in the Pound Personal allowances up from 3765 to 4045 Pounds Lower rate band up from 0-3900 to 0-4100 Pounds Basic rate limit up from 25500 to 26100 Pounds Married couples allowance up from 1790 to 1830 Pounds

Capital taxes

Inheritance tax threshold increased from 200,000 to 215,000 Pounds Capital gains tax annual exempt amount up from 6300 to 6500 Pounds

Business measures

Corporation tax small firms rate reduced from 24p to 23p Business rates frozen for small properties VAT registration threshold up from 47000 to 48000 Pounds

Measures to secure the tax base

Profit related pay phased out starting from 1998 Capital allowances on long life assets brought into line with commercial accounting treatment Relief for oil drilling wells tax treatment brought into line with other business activities Tax avoidance and evasion a new crackdown

Excise duties

Beer, wine and cider frozen Spirits cut by 4 per cent Tobacco duties up by 5 per cent more than inflation Petrol and diesel up by 5 per cent more than inflation Ultra-low sulphur diesel to be favoured by 1p per litre tax advantage over ordinary diesel Car vehicle excise duty up from 140 to 145 Pounds Lorry vehicle excise duty frozen for seventh successive year; from 1998, reduced by up to 500 Pounds for low emissions

Other indirect taxes

Insurance premium tax up from 2 1/2 per cent to 4 per cent Air passenger duty up from 5 to 10 Pounds for most flights within Europe, 10 to 20 Pounds outside Europe

Pie Chart: Where it comes from

Pie Chart: Where it goes

Economic policy

The Chancellors policies are designed to combine sustainable growth with low inflation to create jobs and raise living standards year after year. Achieving this depends on a responsible approach to public finances and making the economy work better.

Economies work best when inflation is low and stable. Interest rates are set to achieve an underlying rate of 2 1/2 per cent or less and then keep it there year after year.

A commitment to responsible public finances means keeping public borrowing on a clear downward path, in line with the objective of moving back towards balance over the medium term.

Within a stable macro-economic framework, making the economy work better depends on making markets work more flexibly. The Government has pursued this through privatisation, deregulation, labour market reform, education reform, training reform, helping the unemployed back to work and tax changes to sharpen incentives and promote enterprise.

Economic prospects

Growth

The economy is now well into its fifth successive year of economic growth. Growth is expected to reach 2 1/2 per cent in 1996 and rise to 3 1/2 per cent in 1997. The IMF and OECD expect the UK to be the fastest growing major European economy in both 1996 and 1997.

Inflation

Recent inflation performance has been the best for almost half a century. Underlying inflation went up to 3.3 per cent in October, but this increase is expected to be temporary and inflation is forecast to resume a downward path to meet the Governments target of 2 1/2 per cent or less.

Unemployment

Unemployment has fallen to its lowest level for over 5 1/2 years. The UK has a greater proportion of its peope in work and a lower rate of unemployment than any other major European country. Unemployment has fallen by nearly one million since December 1992 and now stands at 2,030,000.

Consumer expenditure

Consumer confidence is at its highest level for more than eight years. Consumer expenditure is forecast to rise by 3 per cent this year and by 4 1/4 per cent in 1997.

Business investment

Business investment is increasing. It is expected to rise by 6 per cent in 1996 and 9 1/4 per cent next year.

Current account

The current account is in its strongest position for nine years, reflecting strong export growth and income from overseas investments. It is expected to remain close to balance.

Treasury forecasts

Percentage changes on a year earlier unless otherwise stated

                                      1996 Budget
National income (GDP)    1996           2 1/2
                         1997           3 1/2
Underlying inflation     1996           3
(RPI ex MIPs) (Q4)       1997           2 1/2
Current                  1996          -2 1/4
account (Pounds bn)      1997          -4 1/4
Public borrowing (PSBR)  1996-97       26 1/2
(Pounds bn)              1997-98       19

Return to the main index