Financial Statement and Budget Report 1997

2 The Budget Measures - continued

Changes to excise duties
	Changes in duty (per cent)	Effect on tax(1) of typical item (increase in pence)	Unit
Tobacco
Cigarettes	8.2(()2)	19	packet of 20
Cigars	8	8	packet of 5
Hand-rolling tobacco	0	0	25g
Pipe tobacco	8	10	25g
Fuel
Leaded petrol	8.2	4	litre
Unleaded petrol	9.3	4	litre
Super-unleaded petrol	8.5	4	litre
Diesel	9.3	4	litre
Gas oil	3.2	0.08 exc VAT	litre
Fuel oil	3.1	0.06 exc VAT	litre
AVGAS	8.2	2	litre
Road fuel gas	0	0	kg
Alcohol
Spirits	3	19	70cl bottle
Beer	3	1	pint
Table wine	3	4	75cl bottle
Cider	3	1	pint
Coolers	3	1	33cl bottle
Sparkling wine	3	5	75cl bottle
Fortified wine	3	5	70cl bottle

1 Tax refers to duty plus VAT unless otherwise stated.

2 Specific duty up by 9.2 per cent; ad valorem duty unchanged at 21 per cent of retail price.

Vehicle Excise Duty

2.26 Vehicle Excise Duty (VED) on private/light goods vehicles (PLG), chiefly cars, taxis and vans will rise by Ł5 to Ł150 (3.4 per cent) for licences taken out after 15 November 1997. Duty rates on goods vehicles will also rise by the same percentage (rounded to the nearest Ł10). (All linked rates will rise accordingly.) (21).

2.27 A measure will be taken to enable the Driver and Vehicle Licensing Agency (DVLA) to charge motor manufacturers and vehicle fleet operators for the setting up and use of computer links for registration and licensing ($).

Other tax measures

Gilt Interest

2.28 From 6 April 1998 anyone holding gilt-edged securities will be able to receive their interest gross rather than after deduction of tax if they want to. This simplifies and helps make the gilt market more attractive to investors (24).

VAT turnover thresholds

2.29 The annual turnover threshold above which traders must register for VAT will rise from Ł48,000 to Ł49,000 on 1 December 1997, and the deregistration threshold will rise from Ł46,000 to Ł47,000. The registration and deregistration thresholds for acquisitions from other Member States will rise from Ł48,000 to Ł49,000 on 1 January 1998 ($).

Gas levy reduction

2.30 The Government proposes to cut the gas levy to zero, with full effect from April 1998. Under present market circumstances the levy distorts the market and consumers suffer through higher prices. It also imposes an unreasonable handicap on those companies affected. In taking the decision, the Government has considered the tax burden on Centrica which would result from having to pay both the windfall tax and gas levy. Appropriate legislation to bring about this change will be introduced in the next year (25).

Tax policy reviews

North Sea taxation

2.31 The Budget also announces a review of the North Sea fiscal regime to ensure that an appropriate share of North Sea profits are being taxed while continuing to maintain a high level of oil industry interest in the future development of the UK's oil and gas reserves.

Capital Gains taxation

2.32 The Budget announces that the Government will consult industry widely on the reform of capital gains tax. The findings of the review will be reported in the next Budget.

Charities

2.33 The Budget announces a review of charities' taxation. The review aims to explore options for a simpler, more coherent system of tax reliefs which is better suited to the way charities work today. Charities will be asked to send initial views by 1 December 1997 and these will then be worked into a consultation paper for publication in spring 1998.

Anti-avoidance

2.34 The Budget announces a review of leakage and avoidance of direct taxes. This will include identifying situations in which significant amounts of tax are, or are at risk of, leaking from the Exchequer and how the Inland Revenue approaches the defeat and deterrence of tax avoidance schemes. One outcome of the review is expected to be proposals for legislation to counter tax leakage in future Finance Bills.

Alcohol and tobacco duties

2.35 The Budget announces a review aimed at reducing loss to Government and industry revenue through alcohol and tobacco fraud, smuggling and cross border shopping, to report by the end of 1997. It will also look at health and law and order issues. Trade associations and other interested parties will be consulted at an early stage and their views sought on the extent of the problem and practical ways in which it can be tackled.

EIS/VCT Scheme

2.36 Arrangements where a substantial part of the return to investors is guaranteed, or which are backed by property, will be excluded from the Venture Capital Trust scheme and Enterprise Investment Scheme. After taking views from interested parties, the Government will publish draft legislation on guarantee arrangements for the Finance Bill following the next Budget, taking effect from 2July 1997, and will lay regulations in Parliament on asset-backed arrangements.

Table 2.2 Revenue effects of Budget tax measures

Ł million yield (+)/cost (-) of measure

Changes
from a non-indexed base Changes from an indexed base

1997-98 1997-98 1998-99 1999-00

Promoting economic stability

    1 Mortgage interest relief - restricted to 10 per cent 0 0 +900 +950

    2 Stamp duty - increase in rate on transfers of property above Ł250,000 +240 +240 +490 +540

Encouraging long-term investment

    Companies and shareholders

    3 Reduce the main rate of corporation tax from 33per cent to 31per cent from 1April 1997 0 0 -1 400 -1 950

    4 Reduce small companies' rate from 23per cent to 21per cent from 1 April 1997 0 0 -200 -250

    5 Abolish payable tax credits for pension schemes and UK companies from Budget day; changes for everyone else from 6April 1999 +2 300 +2 300 +3 950 +5 400

    6 Abolish foreign income dividends from 6 April 1999 0 0 +100 -200

    7 Double capital allowances for small and medium enterprises' plant and machinery for one year 0 0 -230 -170

    8 Limit carry back of trading losses to one year 0 0 +100 +250

    Other measure

    9 Films: 100 per cent write-off for production costs $ $ -5 -15

Funding the modernisation of the welfare state

    10 Windfall tax on privatised utilities +2 600 +2 600 +2 600 0

Moving towards a fairer tax system

    VAT on domestic fuel & power

    11 Reduce rate from 8 per cent to 5 per cent from 1 September 1997 -220 -220 -485 -510

    Private medical insurance

    12 End income tax relief +25 +25 +115 +135

    Anti-avoidance measures

    13 Corporation tax: block tax leakage by taxing dividends on trading assets as trading profits 0 0 +110 +190

    14 Corporation tax: finance leasing: block acceleration of capital allowances +250 +250 +300 +70

    15 Corporation tax: finance leasing (sale and leaseback): block transfer of unused past allowances 0 0 +40 +40

    16 Corporation tax: block tax leakage through company purchase avoidance schemes $ $ +100 +100

    17 PAYE: take action against trade debt schemes +10 +10 $ $

    18 VAT: cash accounting scheme +10 +10 +15 0

    19 IPT: extension of 4 per cent rate to certain long-term health insurance from 1 October 1997 $ $ +5 +5

Protecting the environment and health

    Excise duties on:

    20 Road fuels - increase escalator to 6per cent real(1) +730 +730 +230 +440

    21 VED indexed for licences after 15 November 1997 +35 +5 +20 +20

    22 Fuel and gas oil indexed +5 +5 0 0

    23 Cigarettes duty up 5.2per cent real, hand-rolling tobacco frozen, other tobacco up 5 per cent real; tobacco escalator increased to 5 per cent(1) from 1 December 1997 +5 +5 +160 +360

Other measures

    24 Gilt interest: simplification 0 0 -75 -30

    25 Reduction on gas levy 0 0 -170 -190

    26 Alcohol duties indexed from 1 January 1998 +20 0 0 0

    27 Not indexing air passenger duty in November 0 0 -5 -5

Total cost (-)/yield (+) +6 010 +5 960 +6 665 +5 180

Total cost (-)/yield (+) (excluding windfall tax) +3 410 +3 360 +4 065 +5 180

$ negligible
1 Tax increases previously announced and at a minimum confirmed in this Budget

5 per cent real increase in road fuel duties 340 210 880d 965

3 per cent real increase in tobacco duties 15 10 250d 265

Total 355 220 1130 1230

d Yields in 1998-99 on a non-indexed base are Ł1 420 million and Ł500 million for road fuels and tobacco respectively.

Providing high quality public services

2.37 The Government's policy is to keep to the Control Totals announced by the previous Government in respect of 1997-98 and 1998-99. The Control Totals for those years are unchanged from previous plans. (See table 2.4.)

2.38 There will be no public expenditure Survey in 1997. Instead the Government is carrying out the Comprehensive Spending Review which it promised before the General Election. Paragraphs 1.60-1.65 describe the approach being taken to the Review. It will provide the basis for spending plans to be set for 1999-2000 onwards.

The Control Total

2.39 No change has been made to the departmental ceilings within the Control Total for 1997-98. Each department is expected to work within its existing ceiling.

2.40 For 1998-99 the Government has allocated part of the existing Reserve within the Control Total to its priorities of health and schools. Within the 1998-99 Control Total, the previous Government set a Reserve of Ł5 billion, part of which would normally be allocated to priority programmes, and part retained in the Reserve to deal with unforeseen contingencies. The Government has allocated part of the Reserve in this way to its priorities. It has made this allocation rather earlier than usual in order to allow the key public services to plan ahead. The details of the allocation are shown in Table 2.3.

Table 2.3 The 1998-99 Control Total and Reserve

Ł billion

Reserve set in 1996 Budget 5.0

Allocation to NHS 1.2

Allocation to schools 1.0

New Reserve 2.8

Control Total unchanged at: 273.6

2.41 An extra Ł1.2 billion has been allocated to the National Health Service, and Ł1 billion to schools. Scotland, Wales and Northern Ireland will receive shares of these allocations based on their relative populations, according to the long-standing Barnett formula.

2.42 This allocation provides an additional Ł1 billion for the NHS in England, and Ł835 million for schools in England. Correspondingly, Scotland has been allocated an extra Ł195 million, Wales an extra Ł110 million, and Northern Ireland an extra Ł60 million.

2.43 The Government intends to announce guideline budget increases for local authorities to ensure that councils do not increase spending excessively. If necessary the Government will use its capping powers to ensure councils stay within these limits. For the longer term, the Government is working on a number of measures to improve local authority accountability, so that it can abolish universal capping.

2.44 Other departments will be expected to work within their existing spending ceilings for 1998-99. If there are fluctuations in spending on demand-led programmes which would involve an excess of spending over departmental ceilings, then, first, departments will take policy measures to offset these, and secondly any excess will be borne on the Reserve. The Reserve for 1998-99 has been set at Ł2.8 billion.

2.45 No plans are being published for the Control Total for the years after 1998-99, because spending plans for these years will be set as part of the Comprehensive Spending Review. The fiscal arithmetic set out in Chapter 4 is based on illustrative projections of Control Total expenditure from 1999-00 onwards.

Table 2.4 The Control Total, GGE(X) and GGE(1)

Ł billion

Provisional
Outturn
Plans/forecasts Changes from previous
plans/forecasts

1996-97 1997-98 1998-99 1996-97 1997-98 1998-99

Control Total 260.4 266.4 273.6 -0.2 0.0 0.0

Welfare to Work
0.2 1.2 0.0 0.2 1.2

LA spending under the capital receipts initiative 0.2 0.7 0.0 0.2 0.7

Cyclical social security 14.3 13.7 14.0 0.0 -0.5 -0.3

CG net debt interest 22.3 24.6 24.4 0.1 -0.2 0.0

Accounting adjustments 11.4 10.1 10.7 1.1 0.9 0.8

GGE(X) 308.4 315.3 324.7 0.9 0.6 2.5

Privatisation proceeds -4.4 -2.0 0.0 0.1 0.0 1.5

Other adjustments 5.1 6.2 6.6 -0.5 -0.2 0.1

GGE 309.0 319.4 331.3 0.5 0.4 4.1

GGE(X) as a percent of GDP 41 39 1/2 38 3/4 - 1/4 - 1/2 - 1/4

1 See Annex B to Chapter 4 for conventions and definitions.

General Government Expenditure

2.46 Table 2.4 shows the components of General Government Expenditure up to 1998-99. The Control Total is unchanged. In addition to the Control Total, there are two new special, one-off elements of expenditure which the Government promised before the General Election:

the Welfare to Work package financed by the windfall tax on the excess profits of the privatised utility companies. This provides a New Deal for the under 25s and long-term unemployed, lone parents, and for schools, beginning with Ł0.2 billion in 1997-98 and Ł1.2billion in 1998-99. Details of the Welfare to Work package are given in paragraph 2.07;
investment in housing under the Capital Receipts Initiative. The Government has started to meet its commitment to reinvest capital receipts from the sale of council houses by allowing increased capital expenditure of Ł200 million in 1997-98 and Ł700 million in 1998-99. The investment will be used to improve local authority housing stock, to provide new social housing and to fund housing-related regeneration projects. The allocation of these sums between the different countries of the United Kingdom will be announced shortly.

2.47 Other components of General Government Expenditure have been newly forecast in the Budget:

cyclical social security - the figures in Table 2.4 are new forecasts based on the Government's convention of assuming flat unemployment for planning the public finances, and taking into account measures to reduce the arrears of child maintenance payments and to limit backdating of social security claims;
the figures for debt interest are new forecasts based on the Government's new market interest rate assumption;
the accounting adjustments are new forecasts based on latest information from the Office of National Statistics.

2.48 The spending aggregate GGE(X) measures the share of national income taken by public expenditure. This aggregate is a measure of the combined expenditure of central and local government, based on national accounts aggregates: General Government Expenditure is adjusted to exclude privatisation proceeds, expenditure out of the proceeds of the National Lottery, and receipts of interest and dividends from public corporations and the private sector are also netted off. GGE(X) is the resulting aggregate. The ratio of GGE(X) to GDP is shown in Table 2.4.

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Prepared 2 July 1997

	Ł million yield (+)/cost (-) of measure
	Changes from a non-indexed base	Changes from an indexed base
	1997-98	1997-98	1998-99	1999-00
Promoting economic stability
1 Mortgage interest relief - restricted to 10 per cent	0	0	+900	+950
2 Stamp duty - increase in rate on transfers of property above Ł250,000	+240	+240	+490	+540
Encouraging long-term investment
Companies and shareholders
3 Reduce the main rate of corporation tax from 33per cent to 31per cent from 1April 1997	0	0	-1 400	-1 950
4 Reduce small companies' rate from 23per cent to 21per cent from 1 April 1997	0	0	-200	-250
5 Abolish payable tax credits for pension schemes and UK companies from Budget day; changes for everyone else from 6April 1999	+2 300	+2 300	+3 950	+5 400
6 Abolish foreign income dividends from 6 April 1999	0	0	+100	-200
7 Double capital allowances for small and medium enterprises' plant and machinery for one year	0	0	-230	-170
8 Limit carry back of trading losses to one year	0	0	+100	+250
Other measure
9 Films: 100 per cent write-off for production costs	$	$	-5	-15
Funding the modernisation of the welfare state
10 Windfall tax on privatised utilities	+2 600	+2 600	+2 600	0
Moving towards a fairer tax system
VAT on domestic fuel & power
11 Reduce rate from 8 per cent to 5 per cent from 1 September 1997	-220	-220	-485	-510
Private medical insurance
12 End income tax relief	+25	+25	+115	+135
Anti-avoidance measures
13 Corporation tax: block tax leakage by taxing dividends on trading assets as trading profits	0	0	+110	+190
14 Corporation tax: finance leasing: block acceleration of capital allowances	+250	+250	+300	+70
15 Corporation tax: finance leasing (sale and leaseback): block transfer of unused past allowances	0	0	+40	+40
16 Corporation tax: block tax leakage through company purchase avoidance schemes	$	$	+100	+100
17 PAYE: take action against trade debt schemes	+10	+10	$	$
18 VAT: cash accounting scheme	+10	+10	+15	0
19 IPT: extension of 4 per cent rate to certain long-term health insurance from 1 October 1997	$	$	+5	+5
Protecting the environment and health
Excise duties on:
20 Road fuels - increase escalator to 6per cent real(1)	+730	+730	+230	+440
21 VED indexed for licences after 15 November 1997	+35	+5	+20	+20
22 Fuel and gas oil indexed	+5	+5	0	0
23 Cigarettes duty up 5.2per cent real, hand-rolling tobacco frozen, other tobacco up 5 per cent real; tobacco escalator increased to 5 per cent(1) from 1 December 1997	+5	+5	+160	+360
Other measures
24 Gilt interest: simplification	0	0	-75	-30
25 Reduction on gas levy	0	0	-170	-190
26 Alcohol duties indexed from 1 January 1998	+20	0	0	0
27 Not indexing air passenger duty in November	0	0	-5	-5
Total cost (-)/yield (+)	+6 010	+5 960	+6 665	+5 180
Total cost (-)/yield (+) (excluding windfall tax)	+3 410	+3 360	+4 065	+5 180
$ negligible 1 Tax increases previously announced and at a minimum confirmed in this Budget
5 per cent real increase in road fuel duties	340	210	880d	965
3 per cent real increase in tobacco duties	15	10	250d	265
Total	355	220	1130	1230
d Yields in 1998-99 on a non-indexed base are Ł1 420 million and Ł500 million for road fuels and tobacco respectively.

	Ł billion
Reserve set in 1996 Budget	5.0
Allocation to NHS	1.2
Allocation to schools	1.0
New Reserve	2.8
Control Total unchanged at:	273.6

	Ł billion
	Provisional Outturn	Plans/forecasts		Changes from previous plans/forecasts
	1996-97	1997-98	1998-99	1996-97	1997-98	1998-99
Control Total	260.4	266.4	273.6	-0.2	0.0	0.0
Welfare to Work		0.2	1.2	0.0	0.2	1.2
LA spending under the capital receipts initiative		0.2	0.7	0.0	0.2	0.7
Cyclical social security	14.3	13.7	14.0	0.0	-0.5	-0.3
CG net debt interest	22.3	24.6	24.4	0.1	-0.2	0.0
Accounting adjustments	11.4	10.1	10.7	1.1	0.9	0.8
GGE(X)	308.4	315.3	324.7	0.9	0.6	2.5
Privatisation proceeds	-4.4	-2.0	0.0	0.1	0.0	1.5
Other adjustments	5.1	6.2	6.6	-0.5	-0.2	0.1
GGE	309.0	319.4	331.3	0.5	0.4	4.1
GGE(X) as a percent of GDP	41	39 1/2	38 3/4	- 1/4	- 1/2	- 1/4