2 The Budget Measures

2.01 Chapter 1 describes the Government's overall approach to economic policy. This chapter summarises and explains the specific tax, national insurance contributions and spending measures announced in the Budget[1] and relates them to the key policy aims listed in paragraph 1.04.

2.02 Chapter 1 also describes the key principles that will underpin the tax system: fairness, and a tax system which is seen to be fair, encouraging employment opportunities and work incentives for all, and promoting savings and long-term investment. This Budget will make a start in meeting these objectives.

Promoting economic stability

• reduces mortgage tax relief from 15  per cent to 10  per cent with effect from 6 April 1998. Relief will remain at the basic rate for those aged 65 and over who take out a loan to buy a life annuity (1); and

• increases the rate of stamp duty on transfers of property (except shares) from 1 per cent to 1 1/2  per cent if the price is more than £250,000, or to 2  per cent if the price is more than £500,000. The new rates will apply from 8 July, except where the transfer is made in pursuance of a contract made on or before 2 July (2).

Encouraging long-term investment

Companies and shareholders

• reduction in the main corporation tax rate - the main rate of corporation tax will be reduced from 33 per cent to 31 per cent from 1April 1997, enhancing the UK's position as the major industrialised country with the lowest corporate tax rate, 50,000 companies will benefit (3).

• reduction in the small companies' rate - the small companies' rate of corporation tax will be reduced from 23 per cent to 21 per cent from 1April 1997, 400,000 companies will benefit (4).

• abolition of payments of tax credits (5):

  - payment of tax credits to pension schemes and UK companies (other than charitable companies) will be abolished for dividends paid on or after Budget day;

  - other shareholders will generally not be affected by changes to tax credits until 6April 1999, when tax credits will normally no longer be payable to other shareholders with no tax liability;

  - the rate of tax credits will halve to 10 per cent from April 1999. No individual shareholder paying tax at the lower, basic, or higher rates on all his or her dividends will face a higher income tax bill as a result of the changes, because dividend income within the lower or basic rate bands will be taxed at 10 per cent and higher rate income at 32.5 per cent (the halving of the rate of tax credits to 10 per cent reduces the amount of gross dividend income, so the 22.5 per cent extra tax payable at the higher rate is equivalent to the 20 per cent extra payable under the existing system);

  - the April 1999 change is timed to fit with the introduction of individual savings accounts which will be available for holders of TESSAs and PEPs as well as other individual shareholders and savers;

  - transitional relief for charities will be available from April 1999 through public expenditure over a five year period.

• advance corporation tax - will continue to be paid by companies at the same rate as now.

• abolition of foreign income dividends from April 1999 - with the exception of the arrangements for international holding companies, the special rules for foreign income dividends will cease to apply from 6 April 1999. The change will protect the Exchequer yield of advance corporation tax once the abolition of payable tax credits has made shareholders indifferent whether they receive an ordinary dividend (which currently carries a payable tax credit) or a foreign income dividend (which does not)(6).

• temporary doubling of capital allowances for small and medium enterprises' plant and machinery - expenditure on plant and machinery by small and medium sized enterprises for 12 months after Budget day will qualify for a first year allowance at double the previous rate of writing down allowance, that is at 50  per cent, or 12  per cent if the long-life asset rules apply (7).

• restriction of loss carry back to one year - the period for which a company can carry back trading losses and certain other reliefs will be reduced from three years to one year, except for losses made in the 12months before a trade ceases. This reverses a change introduced in 1991 at the depth of the recession (8).

The film industry

• 100 per cent write-off for production and acquisition expenditure incurred after Budget day on British qualifying films costing £15 million or less to make and completed in a period of three years from Budget day (9).

Modernising the welfare state

Welfare to Work

• From January 1998, in 10-15 pathfinder areas, and from April 1998 nationally, the New Deal for young people will help those aged under 25 who have been unemployed for more than six months through four routes from welfare into work. The programme is described in more detail in the box on page 31.

• In a New Deal for the long-term unemployed, from June 1998 businesses will be offered a subsidy of £75 a week for six months if they employ anyone who has been unemployed for a period of two years or more. This will help business cover the increased costs it faces while the new employee's work skills are being upgraded. The Government will also reform the "16 hour" rule to help this group access full-time training and education where it improves their employability.

• Lone parents whose youngest child is in the second term of full-time school will be offered help with job search, training, re-skilling and if necessary childcare. The programme will be voluntary and will be delivered by designated Employment Service caseworkers. The Government's approach will be demonstrated in eight areas starting in July 1997, and will be available nationally from October 1998. The programme will be supported, as part of the Government's national childcare strategy, by extra help with childcare costs within Family Credit, Housing Benefit and Council Tax Benefit; by the use of lottery money to deliver after-school clubs; and by 50,000 new places for trainee child carers taken on under the New Deal for the unemployed.

Welfare to Work - a New Deal for the young unemployed

The employer option

Many young people will find they can move straight from welfare into a job. To encourage employers to play their part, the Government will offer a £60 a week subsidy payable for up to six months. The payment will be made with the minimum of bureaucracy, and will be accompanied by a national effort to engage the business community. In addition, £750 per person has been allocated to finance training towards accredited qualifications.

Full-time education or training

For some young people the most appropriate option will be full-time training in skills up to NVQ level 2. The method will vary from on-the-job training in vocational skills to a course at the local college. In each case the emphasis will be on improving employability. For this programme, the Government will reform the “"16 hours study rule”" which has prevented unemployed people from accessing full-time education and training.

A job with the voluntary sector

Voluntary organisations will be invited to come forward with innovative ideas to provide young people with the work experience and skills that will help improve their employability. The placement must have a training element. The Government is looking in particular for placements that help meet other social and economic objectives, for example tackling the causes of crime. Particular emphasis will be placed on voluntary sector placements to provide 50,000 new trained childcarers to support other aspects of the Welfare to Work programme.

The Environmental Task Force

The aim of the new Environmental Task Force will be to improve the employability of young people through projects of benefit to the whole community, including projects to help meet the Government's target for heat conservation and efficiency. It will be delivered by a wide variety of private and voluntary sector providers. Again, training for accredited qualifications will be an important element.

Under the New Deal, rights need to be balanced by responsibilities. Benefit sanctions will apply to young people who refuse an offer of help.

• While there is a pressing need to target spending on the problems of the existing young and long-term unemployed, a root of the unemployment problem lies in under-achievement at school. The New Deal for schools will start to tackle the run-down infrastructure of schools, so that youngsters will be educated in schools fit for the twenty first century, not the nineteenth. It will also cover IT equipment to equip school leavers with technology skills. In order to benefit, individual schools will have to commit themselves to improved performance.

2.08 For the programmes for the unemployed to be successful in breaking the cycle of despair, an enthusiastic response from employers and the voluntary sector will be essential. A task force, headed by Sir Peter Davis, Chief Executive of the Prudential Group, has been established to advise on the development of the programme and monitor its effectiveness.

2.09 These programmes are a first step. The Government aims to extend the approach adopted on behalf of the young and long-term unemployed and lone parents to other groups excluded from the labour market, including people on Incapacity Benefit. The Government also plans to improve skills and employability through a new University for Industry. Detailed proposals will be announced in due course. Provision has also been made within the resources provided by the windfall tax for future initiatives in support of the Welfare to Work strategy.

Windfall tax

2.11 A company's windfall tax liability will be assessed as a proportion of the difference between the value placed on the company at the time of sale and a valuation figure derived by applying a single price-earnings ratio of 9 to its average annual post-tax profits for normally four full accounting years following privatisation.

2.12 The tax will be charged at a rate of 23  per cent. It will be paid in two instalments due on 1 December 1997 and 1 December 1998. Table 2.1 shows the profile of receipts from the tax, compared with the expected spending.

2.13 The yield from the windfall tax will be about £5.2 billion. Taking into account the change to the gas levy (see paragraph 2.30), which the Government considered appropriate in part because of its impact on Centrica, the yield of the two measures to the Exchequer is some £4.8 billion over the next three years.

Table 2.1 Financing Welfare to Work(1)

	£ million
	1997-98	1998-99	1999-00	2000-01	2001-02	1997-02
Spending by programme:(2),(3)
A New Deal for young people	100	700	830	770	740	3 150
A New Deal for the long term unemployed	0	100	80	80	80	350
Sub-total	100	800	910	850	830	3 500
of which - initially allocated to departments	100	700	800	700	700	3 000
- unallocated						500
A New Deal for Lone Parents(4)	0	40	50	60	60	200
A New Deal for Schools	100	300	300	300	300	1 300
Provision for Future Measures(5)	0	50	50	50	50	200
Total expenditure	200	1 180	1 310	1 260	1 240	5 200
Windfall tax(6)	2 600	2 600	0	0	0	5 200
1 The spending in this table, financed by the windfall tax, is outside the Control Total, see Table 2.4. 2 Illustrative levels of spending based on current levels of unemployment. Actual provision for any particular year will be decided in the light of the number of eligible people and the effectiveness of the programme. 3 Departmental breakdown of spending on the basis of these illustrative figures would be:
Department for Education and Employment	160	900	1 010	920	920	3 900
Department of Social Security	20	50	50	60	60	240
Scottish Office	10	30	30	30	30	120
Welsh Office	0	20	20	20	20	60
Northern Ireland	10	40	40	40	40	180
4 Plus extra help with child care through Family Credit and other in-work benefits. 5 Including the University for Industry and Welfare to Work help for people on Incapacity Benefit. 6 Forecast receipts.

2.14 The windfall tax will be complemented by a forward-looking review of utility regulation which will seek to ensure a long-term stable framework of regulation for the utilities, one which adequately protects consumers and provides the right incentives for the firms themselves. Any proposals from the review which have implications for companies will be introduced only after the windfall tax instalments are paid.

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