Investment and competitiveness

1.32 Deficiencies in fixed investment are only part of the story. Of equal concern is the low level of skills in the workforce, with nearly one-third of those of working age having no qualifications at all; and low levels of investment in technology and innovation - Britain's industrial expenditure on research and development has grown more slowly than our main competitors since the 1980s.

1.33 This poor record of investment is a major limiting factor on the rate of growth that the economy can sustain without creating inflation. Unless Britain can improve its investment record relative to other countries, it will be unable to compete effectively with them in the modern world and improve its relative prosperity.

1.34 The Government wishes to encourage entrepreneurial, outward-looking and internationally competitive businesses. Britain has some of the most successful businesses in the world but does not have enough of them. The Government is determined to tackle the obstacles holding back long-term investment and competitiveness. Its approach will not be to follow a policy of directing or controlling industry or attempting to pick winners, but rather to work with business to create a supportive and flexible environment in which more businesses can rise to match the best.

Improved climate for business investment

Small and growing firms

Investing in infrastructure

1.38 The Government has begun to implement its commitment to allow capital receipts from the sale of council houses to be reinvested. Legislation has been introduced for this purpose and provision has been made for local authorities to increase capital expenditure on housing by £200 million in 1997-98 and by £700million in 1998-99.

Investing in technology and innovation

Investing in skills

Improving competition

1.42 Business success depends on Britain having a positive and open approach to our relations with the European Union which accounts for over 50  per cent of this country's trade. The Government is taking steps to ensure that British companies have full access to the European market. Under the British Presidency of the European Union from January to June 1998, a high priority will be given to the competitiveness agenda and, in particular, to completing the single European market.

Regulation

1.44 The Government has announced a review of the regulation of the utility industries. This will be taken forward by the DTI. It will consider whether changes are required in order to ensure a stable framework with open and predictable regulation which is fair to all consumers and shareholders and which promotes the Government's objectives for the environment and sustainable development, while providing sufficient incentives to managers to innovate, raise standards and improve efficiency.

- corporation tax rate cut from 33  per cent to 31  per cent

- small companies' corporation tax rate cut from 23  per cent to 21  per cent

- reform of tax credit arrangements to encourage companies to retain and reinvest profits

- enhanced capital allowances for one year for small and medium-sized firms

- measures to boost investment in the British film industry

- reinvestment of local authority receipts from council house sales in housing.

Modernising the welfare state

1.46 The welfare state has to be modernised. People can be trapped in poverty with little money, no skills and no hope. The claimant count records over 1.6 million people unemployed and claiming benefit, of whom 350,000 have been unemployed for longer than two years and 420,000 are under the age of 25. The Labour Force Survey consistently records even higher levels. One in five households of working age contains nobody in employment.

1.47 The Government wants a modern welfare state which can help people gain the skills and opportunities they need to play a full role in the modern economy. The tax and benefits systems have important roles to play in ensuring that, while people have enough money to live a decent life during periods of change, they also have the right financial incentives to take up work. Inactivity is bad for the economy as a whole, as well as denying the individuals concerned a full stake in society. In carrying out the necessary reforms, the Government will help those who are prepared to help themselves, and so encourage a culture in which rights go hand-in-hand with responsibilities.

Setting the European Union and International Employment Agenda

It is unacceptable that over 18 million people remain unemployed across the European Union. Europe needs to do better at creating real and lasting jobs for all of its people. That's why in June the Chancellor launched a UK action plan: "Getting Europe to Work".

Finding ways of getting people into work in socially responsible ways is a problem the European Union shares with other industrial countries. We have much to learn from each other. The economic framework and policies set out in this chapter are designed to support growth and the creation of jobs in the UK.

The UK initiative sets a new agenda to increase employability and adaptability to change, and to include those currently excluded from the labour market. The aim is to ensure that economic change and the pursuit of sound macroeconomic policies are consistent with providing individuals with real and lasting jobs. It is important that everyone can share the rewards of more dynamic and efficient economies.

A central element of the UK's approach is to share best practices on employment, and identify where more needs to be done, through the preparation of national Employment Programmes. The UK plans to submit the first Employment Programme on these lines to ECOFIN in the autumn.

The UK initiative also aims to build up small and medium sized enterprises through a task force whose aim is to cut bureaucracy, reduce costs on cross-border trade, open up new financing possibilities and provide training and information on the opportunities of the single market and - for those that participate - EMU.

These measures will be complemented by a focus on completing the single market by 1999, and dealing with the key remaining market distortions and sectoral obstacles to market integration so as to enhance the job creating potential of the internal market.

The initiative was supported at the Amsterdam European Council, which agreed with the UK that economic efficiency and social inclusion are complementary aspects of a more cohesive European society. The European Council concluded that progress on the range of employment issues should be considered at a special meeting of the European Council during the Luxembourg Presidency this year.

Employment will also be a key theme of the G8 Summit that the UK will host early next year, following a special G8 Conference of Finance and Employment Ministers on Growth, Employability and Inclusion, to be chaired by the Chancellor.

Welfare to Work

1.49 This situation is not only divisive, because it denies people the ability to participate fully in society, but it is also bad economics. A large element of unemployment in the UK is structural. By getting the long-term unemployed back to work, we can not only get unemployment down, but have sustainable growth with low inflation. If the root causes of structural unemployment can be tackled by re-integrating the long-term unemployed into the labour market, the huge costs of economic and social failure can then be addressed and the social welfare payments saved can be targeted on other priority areas.

1.50 One million lone parents are now bringing up two million children dependent on benefit, at a cost of £10 billion a year (which is more than is spent on the unemployed), and growing. They often face difficulties in entering the workforce, including making satisfactory arrangements for childcare. Lone parents in Britain are among the least likely to work anywhere in Europe. However, most of them do want to work and the Government wants to help them achieve their aspirations for themselves and their children. Once in work, lone parents are on average £50 a week better off.

1.51 The Government intends to make an immediate start on rectifying these problems. It is launching a New Deal for the young and the long-term unemployed and a New Deal for lone parents. The Government is also considering how this help can be extended to those excluded from the labour market, including people on Incapacity Benefit. The specific programmes, to be financed from the windfall tax, are described in more detail in Chapter 2.

The tax and benefits systems

New Deal for schools

Life-long learning

- New Deal for the young and the long-term unemployed, for lone parents and for schools, financed by windfall tax on excess profits of privatised utilities.

Providing high quality public services

1.56 The myth that the solution to every problem is increased spending has been comprehensively dispelled in recent years. How effectively money is spent counts for much more than how much money is spent. The Government will ensure, not only that the total level of spending is affordable and prudent, but also that spending is targeted at priority areas and that it is being spent effectively and efficiently.

1.57 The Government's approach to public spending is based on the following principles:

• government does not have to act on its own using public spending in every area. It can set standards for the private sector, or the public and private sectors can work together to meet shared objectives;

• efficiency and value for money in public spending are of central importance. Every pound must be justified both by its objective and the efficiency with which it is spent. The Government will strip out ill-targeted programmes that benefit only the few and redirect spending towards the priorities of the many;

• public spending decisions must be based on clear priorities. In addition to national responsibilities for law and order and defence, the new Government's decisions will be guided by its key priorities: encouraging investment for the long term, expanding employment and opportunity, and fairness.

1.58 To implement this approach, the Government is committed to maintaining the Control Totals for 1997-98 and 1998-99 which it inherited from the previous Government. It is sticking to these tough plans. There will be no public expenditure survey in 1997. Instead of debating how much money should be spent, the Government is engaged in a Comprehensive Spending Review to decide how best to use the available resources to meet its objectives in the medium term.

1.59 Within the unchanged Control Total for 1998-99, the Government is allocating part of the £5 billion Reserve to its priorities of health and schools. An extra £1.2 billion for the National Health Service, and £1 billion for schools, will help deliver high quality public services. Allocating part of the Reserve earlier than usual enables the NHS and local education authorities to plan ahead and focus on the long term.

Comprehensive Spending Review

1.61 The Review is in three parts. First, departments are re-examining and re-ordering the allocation of spending within their budgets for 1997-98 and 1998-99 to reflect the new Government's priorities. They are also starting to examine measures that can be taken to improve efficiency.

1.62 Secondly, departments will examine their objectives, and each item of spending with a view to setting new plans for 1999-2000 and beyond. The review will explicitly look to the medium term. Each department will set out clear objectives which they will have examined to ensure they contribute to the top level objectives of the new government and complement the objectives of other departments. Each department will examine every item of their expenditure from a zero base, to ensure each item is necessary for the achievement of the Government's objectives and is being spent in the most efficient way possible. In particular departments will look at:

• the efficiency of their activities;

• their assets - each department will draw up a comprehensive register of its assets by November 1997, in order to identify assets which are being used unproductively or which could be disposed of;

• and the use of public/private partnerships.

Private Finance Initiative

The Government sees productive Public/Private Partnerships as being key to delivering high quality public services that offer the taxpayer value for money. It has already re-invigorated the Private Finance Initiative (PFI). One of its first actions was to get a senior businessman, Malcolm Bates, to review the whole process.

All the recommendations of the review have been accepted and will be pursued to the timescales proposed by Malcolm Bates. A new Treasury Taskforce will be set up to combine central project and policy expertise and to drive the process forward. It will have a specific mandate to quality-assure all significant new projects at the outset. Effort will be focused where it will achieve results, cutting costs for the public and private sectors alike.

To tackle blockages in the health sector immediate legislation has been introduced to unlock major hospital projects. Similar legal steps are underway to ensure Local Authorities also have access to the same opportunities offered by PFI.

The Government's early reforms to streamline the PFI process also include dropping the requirement for universal testing and prioritising projects already in procurement.

The Government is determined to make PFI work where appropriate. Other forms of Public Private Partnership will also be encouraged and employed where they offer the best value for money.

1.64 The third part of the Review will be an examination of the allocation of resources across government as a whole, leading to a complete set of new departmental spending plans from 1999-2000 onwards, in line with the Government's strategy and priorities.

1.65 The Comprehensive Spending Review is already under way, led by the Chief Secretary to the Treasury. It will report to the Ministerial Committee on Public Expenditure and then to Cabinet. Departments are producing terms of reference for their reviews, which will be published shortly. It is a unique opportunity to look to the long-term and set a clear new direction to make better use of the £320 billion which the Government spends.

- within unchanged Control Total for 1998-99, extra £1.2 billion for the National Health Service and £1 billion for schools

- £1.3 billion New Deal for schools.

Fair taxes

The Government's Tax Objectives

1.67 But taxation is not wholly neutral in the way it raises revenue. With the current burden of taxation amounting to about 36  per cent of Gross Domestic Product, how and what is taxed sends clear signals about the economic activities which governments believe should be encouraged and discouraged, and the values they wish to entrench in society.

1.68 It is essential that tax policy is based on clear principles. These are to encourage work, savings and investment, and fairness. A tax system should also be well designed, to meet the objectives of the government of the day, without generating undesirable side effects; it must keep taxpayers' compliance costs to a minimum; it should avoid the less well off bearing an unfair burden; and attention must be paid to any implications for the United Kingdom's international competitiveness.

1.69 Over time, and while respecting the need to maintain a stable environment in which individuals and companies can plan for their futures, this Government will develop a tax system that reflects and is underpinned by the following key principles:

Encouraging employment opportunities and work incentives for all by:

• encouraging work and rewarding effort. A comprehensive examination of the interaction of the tax and benefit systems will seek to correct the present situation in which large numbers of people have been discouraged from working because the benefit and tax systems did not work in their favour. The tax and benefit systems must be streamlined and modernised, so as to promote work incentives, reduce poverty and welfare dependency, and strengthen community and family life;

• seeking ways, by means of the tax/benefits review, to reduce the high marginal rates at the bottom end of the earnings scale, not only in the pursuit of fairness, but to encourage employment and work incentives;

• a commitment not to raise the basic or top rates of income tax.

Promoting savings and long-term investment by:

• encouraging individuals to save, both to underpin long-term investment and to secure their own financial welfare for the future; and

• making use of the tax system to ensure that growth is achieved in an environmentally sustainable way.

Fairness: so that the tax system evolves in a way which will:

• benefit the many, and not the few; ensuring that everyone bears their fair share of taxation and pays the correct amount;

• maintain a broad tax base, so that sufficient revenue can be raised from a variety of sources, and no sector or individual bears an unfair burden, or enjoys an unfair advantage; and

• not extend VAT to food, children's clothes, books and newspapers and public transport fares.

and which is seen to be fair by:

• vigorous pursuit of tax avoidance and evasion, so that businesses and individuals pay what they should, and when they should; with

• better information provided to the public about how their taxes add up and where the money is spent; and by

• reducing the cost of the tax system wherever possible, whether in its administrative costs, the compliance burden on the taxpayer, or wider costs to the economy; with

• simplification of the existing tax law, to make it easier to use, so taxpayers understand more clearly their rights and obligations.

- VAT on domestic fuel and power reduced from 8 per cent to 5 per cent

- abolition of income tax relief on private medical insurance

- package of anti-avoidance measures to ensure businesses and individuals pay the proper amount of tax.

Protecting the environment and health

1.71 Delivering sustainable growth is a task that falls across government. Within this, there is a clear role for the tax system. Just as work can be encouraged through the tax system, so environmental pollution can be discouraged.

1.72 To that end, the Government will explore the scope for using the tax system to deliver environmental objectives - as one instrument, in combination with others like regulation and voluntary action. Over time, the Government will aim to reform the tax system to increase incentives to reduce environmental damage. That will shift the burden of tax from "goods" to "bads"; encourage innovation in meeting higher environmental standards; and deliver a more dynamic economy and a cleaner environment, to the benefit of everyone.

1.73 But environmental taxation must meet the general tests of good taxation. Itmust be well designed, to meet its objectives without undesirable side-effects; it must keep deadweight compliance costs to a minimum; the distributional impact must be acceptable; and the implications for international sectoral competitiveness must be taken into account.

1.74 Where environmental taxes meet these tests, the Government will use them.

- statement of intent issued on role of taxes in environmental policy

- commitment to 6  per cent real annual increases in road fuel duties. Increase from Budget day

- commitment to 5  per cent real annual increases in tobacco duties. Increase from December

- vehicle excise duty increased from November. Reductions for "clean" buses and lorries to follow

- study announced on environmental costs of quarrying and consultation on options to reduce water pollution.

A stronger and fairer Britain