5

Fairness for families and communities

The Government is committed to building a fairer and more inclusive society in which everyone can contribute to, and benefit from, the country's rising economic prosperity. In particular, this means tackling child poverty and its causes, providing security in old age, rewarding work and saving, and concentrating extra help on the people and communities that need it most. The key challenges the Government faces in its efforts to build a fairer society are: finding effective ways to support families and children. The Government wants to ensure that every child has the best possible start in life, by combining financial support for all families - especially those with lower incomes - with targeted interventions to assist the most vulnerable families and communities; developing a long-term strategy for supporting pensioners. As the proportion of senior citizens in our society grows, it becomes ever more important to create a system of support which ensures that all pensioners share in the rising prosperity of the country, is sustainable in the long-term, rewards those who have saved for their retirement, and targets extra financial support on the poorest pensioners; delivering world-class public services. To support an inclusive, safe and fair society, the Government wants to maintain its drive for ever better public services by combining prudent management of the economy and the public finances with focused, carefully-chosen spending plans; and creating a modern and fair tax system which encourages work and saving, raises sufficient revenue to pay for high quality public services, and tackles tax abuse and avoidance.

INTRODUCTION

5.1 The previous chapters set out how the Government is helping to build a strong and stable economy for the long-term, based on high and stable levels of growth and employment. But Britain's prosperity cannot be measured by these factors alone. A strong and productive economy must be underpinned by fairness and inclusion, enabling every individual to fulfil their potential - regardless of gender, disability, ethnicity, age, family circumstance, or the area in which they live.

5.2 The Government believes that where work is an option, it remains the best route out of poverty and social exclusion. Work brings with it independence for workers and their families. Chapter 4 sets out the Government's strategy to provide employment opportunity for all.

5.3 Social inclusion and the spread of opportunity to all are therefore at the heart of the Government's economic agenda. The Government recognises that while those who can work have a responsibility to do so, those who cannot have a right to security and support. But it also believes that opportunity has to be viewed dynamically, so that opportunity is not one-off but repeated and continuous. Support must be available at the right time in people's lives, to tackle problems before they take root, and to prevent opportunities being denied.

5.4 In particular, this means tackling child poverty, which is still at an unacceptably high level. The Government is committed to the eradication of child poverty within a generation, ensuring that people's life-chances are no longer unfairly determined by their childhood circumstances. This is why the Government is targeting financial help on those families, with children, who need it most, and developing new services to support children from particularly deprived backgrounds.

5.5 A fair society is also one that guarantees security for people in their old age. The Government is committed to ensuring that all pensioners share in the country's rising prosperity, creating a system of support for pensioners that is sustainable in the long term and targets most resources on those pensioners who need them most. For many people, savings - however modest - are a good way of ensuring security and independence. The Government wants to promote the right environment for supporting those who make provision for the future by saving some of their income.

5.6 Excellent public services, accessible to all, are essential to the development of a society that is fair and just. The availability of high quality education and health services, and the standard of public infrastructure, are key determinants of quality of life. The Government is committed, through the 2000 Spending Review, to a large programme of increased investment in Britain's key public services, with the long-term aim of bringing standards up to those of the very best.

5.7 The opportunity for the Government to make sustained increases in investment in public services depends partly on maintaining high and stable levels of economic growth. But it also requires prudent management of the public finances, based on a tax system in which everyone pays their fair share.

5.8 This chapter describes how the Government is applying these principles to help deliver a fairer society and a better quality of life for all. It describes the Government's approach to, and support for:

• families and children;
• people with disabilities;
• pensioners;
• savings;
• high quality public services;
• strengthening community life; and
• a fair and modern tax system.

SUPPORT FOR FAMILIES AND CHILDREN

5.9 Over the past two decades, while the economy has grown, the proportion of children living in low-income households has more than doubled. This has denied opportunities to many in society and has also restricted the economy from growing at its full potential.

5.10 Alongside the rise in the number of children in low-income households, families with children overall have taken a decreasing share of national income. Between 1979 and 1995-6, average incomes after housing costs rose by 35 per cent for working households with children, and by 43 per cent for those without.

The challenge of child poverty

5.11 The Government's aim is for every child to have the best possible start in life. A substantial body of evidence suggests that children who grow up in low-income households experience disadvantage and lack of opportunity that affect not only their own experience as adults but also the life chances of their children.¹

5.12 Lack of opportunity is of greatest concern when it persists between generations - when an individual's life chances are determined by their family background, rather than by their own skills and aspirations. Children's outcomes as adults are clearly related to their families' economic circumstances. For example, evidence shows that:

• the sons of the lowest paid are more than five times as likely to be in the lowest income quartile than the sons of the highest paid. Between 40 and 70 per cent of a child's earnings in adulthood can be related to his or her parents' earnings; and
• although children frequently do end up in a different economic position from their parents, for most people the movement is limited.

5.13 The influence across generations is strengthened further as children who grow up in disadvantaged families are more likely as adults to be dependent on benefit and unable to afford their own home. Daughters from disadvantaged families are also more likely to become teenage mothers.

5.14 Educational development over the first ten years of a child's life is linked to a range of factors that are more likely to occur in disadvantaged families, such as large family size, housing overcrowding and unemployment of the father. Even after allowing for such characteristics, low income has an additional adverse impact on educational outcomes. Children who grow up in poverty have poorer school attendance records, are less likely to remain in school at or beyond 16, and are up to ten percentage points more likely to have no qualifications. The effect of poverty on education may explain around half of the impact of childhood disadvantage on adult economic and social outcomes.

5.15 It is unacceptable that children's life-chances are affected by their family circumstances in this way. This is why the Government has set a long-term commitment to halve child poverty within ten years and to abolish it within a generation. A new milestone along the way is the 2000 Spending Review Public Service Agreement to reduce by at least a quarter by 2004 the number of children living in households with an income of less than 60 per cent of the median.

5.16 Child poverty is a complex problem. It therefore requires a multi-dimensional approach. The Government's strategy includes:

• ensuring a decent family income, with work for those who can and extra support for those who cannot;
• targeted interventions such as the Sure Start programme for those with additional needs and at key stages in life, particularly where there are very young children;
• harnessing the power and expertise of the voluntary and community sectors, providing support for innovation and good practice, and fostering a strategic partnership with these sectors to fight child poverty; and
• a world-class education system for all, ensuring that children from poor backgrounds have the skills and education they need to break the cycle of disadvantage.

5.17 The Government's second annual report on tackling poverty and social exclusion²sets out progress the Government has made in these areas and the scale of the task ahead. The report sets out a range of child poverty indicators, including a set of five headline indicators covering low income, worklessness, education, housing and health to monitor progress towards eradicating child poverty in 20 years. The report makes the commitment to improve the lives of children in all of these key areas.

5.18 The Government is making progress in tackling the high levels of poverty that built up over the past two decades:

• over 1.1 million families are currently claiming the Working Families' Tax Credit, around 300,000 more than received its predecessor, Family Credit, at its peak;
• families receiving the Working Families' Tax Credit are receiving on average £30 a week more than under Family Credit;
• couples on Income Support with two children under 11 are now nearly £30 a week better off in real terms than in 1997; and
• in the three years to spring 2000, the number of children living in households where no-one is in work fell by more than 250,000.

Financial support for families with children

5.19 The Government's approach to tax and benefit reform for families with children is underpinned by two principles:

• providing extra financial support for all families with children, recognising the costs and responsibilities which come with parenthood; and
• targeting help on those who need it most, when they need it most. This includes families on lower incomes, and those with young children or a new baby.

5.20 With these principles in mind, the Government has introduced the following changes over the Parliament so far:

• record increases in Child Benefit, with a 26 per cent real increase in the rate for the first child since 1997. By April 2001 Child Benefit will be worth at least £15.50 a week for the first child and at least £10.35 a week for subsequent children;
• replacing the married couple's allowance with a new Children's Tax Credit, to be introduced in April 2001. The Children's Tax Credit will be worth up to £442 a year and will give extra help to around 5 million families with children under 16;
• the introduction of the Working Families' Tax Credit in October 1999, to make work pay for low and middle-income working families with children; and
• increases in Income Support and other income-related benefits. Rates for children under 11 have been increased by 72 per cent in real terms since 1997. With the latest increases, from October this year, a lone parent on benefit with two children under eleven is now at least £1,300 a year better off and a couple £1,500 a year better off compared with 1997.

5.21 Chart 5.1 shows that the Government has increased support for all families with children. It also shows that the greatest increases have been targeted on families on lower incomes.

Chart 5.1

5.22 As a result of measures announced so far in the current Parliament, by 2001:

• a family with two children and gross earnings of £12,500 will be £2,600 a year better off in real terms; and
• a family on average earnings of £25,000 and with two children will be £370 a year better off, as well as having the lowest direct tax burden since 1972.

Chart 5.2

Box 5.2: A better-integrated system of support for children While reforms so far in the current Parliament have achieved significant progress in securing the Government's aims, there is still a lot more to be done. However, progress is constrained by the nature of the tools the Government has at its disposal. Looking to the longer term, the Government wants to create a tax and benefit system for the 21st century that will enable it to deliver on its child poverty and employment ambitions. As set out in Budget 2000, the Government therefore intends to introduce a new system of support, which will bring together payments for children currently made through the tax and benefit systems. A single tax credit will integrate the different strands of support for children available through the Working Families' Tax Credit, the Disabled Person's Tax Credit, Income Support/Job Seekers' Allowance and the Children's Tax Credit, building on the foundation of universal Child Benefit. This tax credit will be paid directly to the main carer in families in and out of work. It will be complemented by an employment tax credit for people in work (as set out in Chapter 4). The new tax credits will be administered by the Inland Revenue, and, subject to the legislative timetable, will be introduced from 2003. This better-integrated system for supporting children will have the following advantages: transparency: bringing together all the income-related payments supporting children will make it simpler for parents to understand how much they can expect to receive. Currently, child elements of income-related benefits and tax credits are mixed with adult elements into a single payment; security: the integrated system will provide a secure income bridge to support children that covers families in and out of work, and helps people in the important transition from welfare to work; a combination of universal and targeted support: building on the foundation of universal Child Benefit, a single framework for assessment and payment of income-related support will allow extra resources to be directed at those most in need; payment: all support for children will be paid to the main carer; and simplicity: a single mechanism will produce efficiency gains for government and reduce hassle for parents. This approach is similar to that adopted by a number of other countries. The Canada Child Tax Benefit, for example, provides support for children regardless of whether their parents are in or out of work. This is an important element in a wider series of reforms aimed at reducing child poverty, tackling the unemployment trap and promoting attachment to the labour market.

5.23 Over the Parliament as a whole, the tax and benefit measures introduced will lift around 1.2 million children out of poverty. Chart 5.2 above shows that all families have gained from the Government's measures to support children, but that the largest gains have been by those on the lowest incomes.

Support for families in the early years of a child's life

5.24 Around two fifths of children are born into poverty. Mothers on low incomes face particularly difficult and restricted choices about how they help their children in the early months. In the past, the tax and benefit system has not provided adequate support. Financial help has not been available quickly enough - some of the lowest-paid women have not been entitled to maternity pay or to tax credits when their child is first born.

5.25 During this Parliament, a number of reforms have been introduced to address these problems, and better reflect the needs of new parents on low incomes:

• extending maternity pay: entitlement to the Maternity Allowance has been extended to around 16,000 low-earning women who were previously unable to claim it (those earning at least £30 a week but less than the lower earnings limit). The allowance has also been increased for self-employed women, benefiting around 11,000 women by an extra £7.95 a week;
• introducing a new maternity grant: the new Sure Start Maternity Grant replaced the Maternity Payment from April 2000, and, as announced in Budget 2000, will be increased to £300 from December 2000. The grant is linked to contact with a healthcare professional to ensure expert advice on child development and services. It will be available to over 200,000 mothers in low-income families every year. By October 2001, the £500 capital limits in the Sure Start Maternity Grant will be abolished to ensure that families on low incomes receive help to cover the costs associated with the birth of a new baby. This will benefit up to an additional 15,000 low-income families every year; and
• making tax credits more responsive when a child is born: reforms announced in Budget 2000, and to be implemented in April 2001, will allow mothers to qualify for the Working Families' Tax Credit when they are on maternity leave (claiming either Maternity Allowance or Statutory Maternity Pay) rather than having to wait until they return to work. Also, for the first time, families will be able to renew their WFTC claim as soon as a new child is born, rather than having to wait until their old claim expires. This gets the extra support for the new baby - plus any increase in payments because their income has dropped - to the family more quickly.

5.26 In making these reforms, the Government is ensuring that more help is directed towards the poorest families, to give these mothers more choice about how they support their family around the birth of a child and whether and how to plan a return to work.

5.27 In Budget 2000, the Chancellor announced a review of what further improvements might be made to maternity pay and parental leave. The review is being led by the Secretary of State for Trade and Industry, and the intention is to publish a formal consultation document before the end of this year. The Government will bring forward firm proposals in the light of the responses it receives.

Public services to tackle child poverty

5.28 The Government is committed to tackling the causes of poverty and social exclusion, not just the symptoms. This principle formed the basis for many of the announcements in the 2000 Spending Review.

Children's Fund

5.29 The 2000 Spending Review announced resources of £450 million for a new Children's Fund, over the three years to 2003-04. The majority of the Fund will be targeted at increased preventative services for children (primarily those aged 5 to 13) and their families, helping them before they hit crisis. Part of the Fund, £70 million over three years, will be distributed directly to local community groups through a network of local funds administered by the voluntary sector itself, for children of all ages.

5.30 Problems facing children and their families are often multi-dimensional. To make a real difference, support needs to be integrated, for example through learning mentors, out of school activities and parenting support. The preventative stream of the Children's Fund will aim to develop services so that children at risk of social exclusion and failure are identified early and provided with a package of support which enables them to overcome barriers and disadvantage, and start to meet their aspirations.

5.31 The Children's Fund will engage voluntary and community groups both through the network of local funds and by ensuring that they are closely involved in drawing up and delivering proposals for increased preventative services. The Government is hosting a conference in November 2000 to help develop the Children's Fund and engage the views of key players including the voluntary and community sector, private sector, local government and young people themselves.

Sure Start

5.32 Sure Start is a central part of the Government's campaign to eradicate child poverty by 2020. The programme is committed to tackling the causes of poverty and social exclusion by working with parents and children to promote the physical, intellectual and social development of pre-school children. Initially, the Government committed funds to the creation of 250 local programmes by 2001-02. Of these, 129 programmes are already in place. Sure Start programmes are managed by local partnerships between local parents, private and voluntary organisations and statutory services, to offer a coherent, joined-up service that addresses local needs.

5.33 Significant further investment in the 2000 Spending Review demonstrates the Government's determination to ensure wider coverage for the Sure Start programme. The new money includes provision for a major geographical expansion of Sure Start - doubling the number of programmes to at least 500 by 2004 and more than doubling planned expenditure to almost £500 million by 2003-04. By 2004, Sure Start will reach one third of poor children under four years old. The Government is currently looking at ways to integrate Sure Start practice into all services for under-5s as part of its overall strategy for halving child poverty by the end of the decade.

5.34 Sure Start is an evidence-based policy, drawing on the results of numerous studies conducted in the US and elsewhere. This research shows that the environment a child is exposed to, both during pregnancy and in the first years after birth, is crucial to later development. Focused intervention in early childhood can significantly improve the development and life opportunities of a child. For example, Sure Start is committed to developing local services for pregnant women: Budget 2000 increased the Sure Start Maternity Grant, and the 2000 Spending Review includes additional resources for local services for pregnant women, setting a new public service agreement target of a 10 per cent reduction in the number of mothers in Sure Start areas who smoke during pregnancy by 2004.

The importance of a good start in education

5.35 Education is an important influence on a child's life chances. It is critical to employment opportunity and to the well being of people throughout their lives. Together with extra resources provided in Budget 2000, the 2000 Spending Review allocated resources that will result in average real growth in education spending of 6.6 per cent a year across the UK over the four years from 1999-2000 to 2003-04.

5.36 Strong numeracy and literacy, together with good communication and technology skills, are essential prerequisites for making the most of the opportunities offered by the modern economy. Good progress has already been made, particularly in primary schools. For example, between 1998 and 2000 the number of pupils achieving the standard expected for 11 year-olds in maths rose by 13 percentage points, to reach 72 per cent; while in literacy there was an improvement of 10 percentage points, to 75 per cent. Schools across the country are well on course to achieve the existing targets for 2002 of 75 per cent in maths and 80 per cent in literacy.

National e-Learning Foundation

5.37 Learning through ICT boosts attainment, with the greatest gains often experienced by the most disadvantaged children. The Government has decided to allocate £5 million additional money from the windfall tax reserve to help establish the National e-Learning Foundation. Building on pilots run over the last two years, this will lever-in significant private sector funding to provide portable ICT equipment offering Internet access. It will be targeted at the most disadvantaged areas first, where the digital divide is greatest.

Connexions

5.38 The 2000 Spending Review provided for the progressive introduction of the Connexions personal adviser service to support young people aged between 13 and 19 to remain in education or undertake training. As a young person's vulnerability increases, more help will become available. Alongside Connexions, there will be an expansion of other services for vulnerable young people, such as the treatment of drug and mental health problems.

Educational Maintenance Allowances

5.39 Educational Maintenance Allowances (EMAs) are enabling young people from poorer families to pursue education beyond the age of 16. Budget 2000 announced an extension of the pilots to enable local education authorities in 56 of the most disadvantaged areas across England to provide EMAs from September 2000. As set out in the 1998 Comprehensive Spending Review White Paper, "if successful, EMAs would replace Child Benefit after 16 for those staying in education beyond their GCSEs".³

5.40 Although it is too soon to reach a judgement about the success of EMAs, evidence from early evaluation of the pilots is encouraging. This includes an estimated increase in participation rates during the first year of around five percentage points. In addition, there have been significant improvements in attendance, effort and quality of coursework. The approach of linking payment of EMAs to delivery of the student's 'learning agreement' has proved particularly successful.

FAIRNESS FOR PEOPLE WITH DISABILITIES

5.41 The Government is determined to increase opportunities for people with disabilities to live fulfilling and independent lives. The New Deal for Disabled People, described in Chapter 4, is helping those who want to work, with advice and support specific to their needs. The Disabled Person's Tax Credit, also set out in Chapter 4, increases the gains to work for people with disabilities and removes the administrative complexity of a separate benefit claim and cheque. From October 2000, the disabled child credit in the Disabled Person's Tax Credit was extended to families in receipt of the Working Families' Tax Credit.

Disability Income Guarantee

5.42 Budget 2000 announced that from April 2001, severely disabled people under 60 years of age on income-related benefits will receive a guaranteed income delivered through a new premium, of at least £134 a week for single people, and £176 a week for couples. The Secretary of State for Social Security will be announcing a further £200 million a year package of measures to help disabled people and carers in the coming days.

5.43 Also from April 2001, children aged three to four with severe disabilities will receive an additional £37.40 a week through the extension of the Disability Living Allowance. Reforms to Incapacity Benefit will provide up to £26.70 a week more for people who were disabled before the age of 20.

5.44 From January 2000, the maximum earnings disregard in the Independent Living Fund was increased from £30 to £106.50 per week. This further removes barriers to work for people with disabilities, and ensures that work pays for those Fund beneficiaries who wish to take up employment.

5.45 In June 2000, the Government announced a package of measures aimed at easing the burdens on families with children suffering from vaccine damage. From July 2000, the one-off payment under the Vaccine Damage Payment (VDP) scheme was increased to £100,000 (a threefold increase from 1997 levels) and previous VDP recipients will also receive top-up awards to bring the value of their payment (at current prices) up to the new level. The Government intends to bring forward legislation to reduce the disability threshold for eligibility to VDP from 80 per cent to 60 per cent and to extend the time limit for making a claim to encompass all young people up to 21 years.

FAIRNESS FOR PENSIONERS

5.46 Over the past 20 years, the gap between rich and poor pensioners has grown so that pensioner incomes are now as divergent as those of the population as a whole. The Government is committed to developing policies which enable all pensioners to share in the country's rising prosperity, and which tackle this growing inequality. This means:

• acting to end pensioner poverty;
• enabling today's workforce - tomorrow's pensioners - to plan ahead to make decent provision for their own retirement, protecting themselves against poverty in the future;
• rewarding today's low and modest income pensioners who have worked hard to provide for their retirement; and
• treating pensioners in the tax system fairly, and paving the way to further tax-benefit integration.

Box 5.3: Pensioner incomes Over the last 20 years, the gap between rich and poor pensioners has grown dramatically wider. In this period, the incomes of the richest fifth of pensioners rose by 80 per cent, but the incomes of the poorest grew by only 30 per cent. By comparison, during the same period, average earnings grew by 36 per cent. The first reason for this growing inequality in pensioner incomes is that more people have been retiring with good occupational pensions, and more pensioners have investments and savings. In 1998-99, average disposable income was £141 a week for single pensioners and £272 a week for pensioner couples - more than double the level of the basic state pension. One in six pensioner couples now retires on an income of £20,000 a year or more. State pensions and benefits have also served to increase inequality. Over the last 20 years the growth in average benefit income has been significantly higher for better-off pensioners than for the poorest. This is largely due to SERPS, the state earnings-related pension, which pays more to those who earned more during their working life and which matured in 1998. By the 1990s, the progressive effect of state support for pensioners was negligible. The poorest pensioner couples received lower levels of benefit income and state pensions than middle-income couples. This is why the Government believes that the first priority was to target resources on the poorest, followed by those on low and modest incomes. Planning for the future on the basis of the earnings link in the basic state pension would not do enough to help those pensioners in most need, or to tackle and reduce these inequalities. This is why the Government is spending substantially more on the Minimum Income Guarantee and introducing a Pension Credit from 2003.

Tackling pensioner poverty

5.47 The Government's first priority has been to help those in greatest need. The pattern of pensioner incomes now reflects that of earners. Like earners, the top fifth of pensioners are now three times better off than the lowest fifth. As this gap between the richest and poorest has widened, too many pensioners have not shared in the rising prosperity of the country.

Minimum Income Guarantee

5.48 To address this first priority quickly, the Government built on the existing structure of Income Support to introduce a more generous Minimum Income Guarantee (MIG). The MIG has raised the income of poorer pensioners and has risen in line with earnings, ensuring the incomes of these pensioners have kept pace with the incomes of the wider population. Around 2 million pensioners now benefit from this extra support, and the Government has been running the largest ever advertising campaign and simplifying the claims process to promote further take-up of the MIG.

5.49 The current system, however, continues to penalise low-income pensioners who have worked hard to build up savings for their retirement. This is why, as a first step, the Government has taken action on the capital rules attached to the MIG. Currently these capital rules allow pensioners to have only £3,000 of savings without any reduction in benefit. Savings over that level reduce benefit entitlement. With over £8,000 of savings, MIG entitlement is removed altogether. As announced in Budget 2000, from April 2001, the Government will double the lower limit to £6,000 and increase the upper limit from £8,000 to £12,000 to reward savers. As a result, half a million pensioners will gain an average of £5 a week.

5.50 To help protect future pensioners from the poverty and inequality today's pensioners have had to endure, the Government is giving today's workers a real opportunity to build up a decent second-tier pension by the time they retire through:

• SERPS reform, which will provide more support than in the past for lower paid workers, and for carers and the disabled. Some 18 million people stand to gain from the introduction of the State Second Pension; and
• Stakeholder pensions which will provide a safe, flexible, low-cost way to save for retirement for moderate and higher earners.

Security for all pensioners

5.51 The Government is also committed to ensuring security in retirement for all pensioners, not just the poorest, so it has introduced:

• winter fuel payments, paid to every household with someone over 60 - 8.5 million in total - each winter. When introduced in 1997, this payment was worth £20, and was then increased further to £100 last winter. Budget 2000 increased the winter fuel payment, and set this at £150 for future years;
• from November 2000, concessionary TV licences for households with someone aged 75 or over. Over 3 million households will benefit - almost half of which are in the bottom three income deciles;
• free eye tests for all those over 60;
• free passes giving an entitlement to concessionary travel for all pensioners from April 2001; and
• as set out in Chapter 6, measures to combat fuel poverty through the Home Energy Efficiency Scheme, the Government's Affordable Warmth Programme, a reduced VAT rate of five per cent to grant-funded installation of heating systems, and a reduced rate of VAT on domestic fuel.

5.52 The Government is also determined to ensure that pensioners who pay tax are treated fairly. Six out of ten pensioners aged 65 and over do not have any income tax to pay. But for those who do, the Government has made a series of changes to the tax system to ensure that pensioners who have provided for their retirement continue to enjoy this security:

• over 4 million pensioners benefited from the introduction of the 10 pence starting rate of income tax on pensions, savings income and earnings from April 1999;
• almost 3 million older people who pay income tax benefited from the reduction in the basic rate to 22 per cent from April 2000; and
• for 2000-01, the personal tax allowances for people aged 65 or over increased to £5,790 for someone aged 65 to 74, and to £6,050 for someone aged 75 or more. These increases built on the above-indexation increases in the allowances for 1999-2000, so no-one aged 65 or over need pay any income tax until their income reaches at least £111 a week.

5.53 In order to simplify the tax system for older taxpayers, the Government has decided to announce changes to the levels of the age-related tax allowances in the preceding Pre-Budget Report for the years 2001-02 and 2002-03. This will mean that people see the benefit of increases in the allowances from April and will help to make their tax affairs easier to understand. The age-related personal allowance will rise in 2001-02, in line with prices, to £5,990 for people aged 65-74 and to £6,260 for people aged 75 or more. The income limit for these and other age-related allowances will also rise in line with prices.

'Taxback' campaign

5.54 The Government has also recently launched a 'Taxback' campaign to encourage pensioners and other savers to claim back any tax due to them. It is estimated that there is around £100 million to be claimed by some 1.5 million pensioners.

Next steps: the Pension Credit - rewarding low and modest income pensioners

5.55 The Government believes that there is more to do - to tackle pensioner poverty and inequality, and to help ensure all pensioners share in rising prosperity. This means providing greater support - not just for the very poorest, but also for those on low and modest incomes.

Need for radical reform of the current system

5.56 The Government's priority for the next Parliament is therefore to reward savings for those on low and modest incomes. Too many pensioners work hard to provide for their retirement, building up second-tier pensions or other savings, only to find that they get little or no benefit from them. The current system has been successful in getting more help more quickly to those in greatest need. But it still:

• sets a savings trap. It penalises those on the MIG for every pound of pension they have built up. And those with incomes just above the MIG feel let down because they are so little better off: an 80-year-old with £20 a week of occupational pension and full basic state pension will find herself just one or two pounds a week better off than someone who has saved nothing. It also excludes some pensioners, through unfair capital rules, from extra support because they have built up a small amount of savings; and
• involves an intrusive weekly means test, which contrasts with the less burdensome annual cycle for wealthier pensioners in the tax system, making some pensioners reluctant to claim their entitlement. The six different rates in the current MIG, ranging from £78.45 a week for a single pensioner to £131.05 a week for a couple, also add to the complexity that deters many pensioners from claiming.

The Pension Credit

5.57 The Government is determined to tackle the inequalities and unfairness of the current system. Budget 2000 said that the Government intended to examine for the longer term whether, through an income taper or other measures, the MIG could provide extra help to people who have provided for themselves. The Secretary of State for Social Security is therefore publishing, for consultation, detailed proposals for a Pension Credit to be introduced from 2003. The Pension Credit will:

• reward low and modest retirement incomes above the level of the basic state pension - a cash reward for every pound of second-tier pension, earnings or investment income for those on the Credit;
• modernise the system by abolishing the capital rules and weekly means test, and instead bring the system closer in line with the tax system, improving its transparency and administration, and paving the way for further tax-benefit integration; and
• act to end pensioner poverty by simplifying and increasing the MIG, and by linking this to the rise in earnings throughout the next Parliament.

5.58 By linking the guaranteed minimum income and maximum Credit rate to earnings, the Pension Credit will ensure that low and modest income pensioners on the Credit will get, year on year, an increase in support greater than they would receive from an earnings link in the basic state pension. So, based on trend forecasts, an 80-year-old with a basic pension of £77.00 a week and a Pension Credit of £20 a week will get £4.30 a week more the following year, more than the £3.45 a week delivered by linking the basic state pension to earnings.

Increases for pensioners who pay tax

5.59 In the same way that the Pension Credit will deliver year-on-year increases to poor and modest income pensioners, so the Government intends to help older taxpayers too.

5.60 Most pensioners have no income tax to pay. But for those who do, the Government proposes, subject to consultation, to raise the age-related personal allowances in 2003-04 by £240 over and above indexation. On current forecasts, that would take the allowances to £6560 for those aged 65 to 74 and to £6850 for those aged 75 or more. The Government then proposes to increase the allowances by reference to the rise in earnings rather than prices throughout the remainder of the Parliament. In the same way that a pensioner on an income of £130 a week will be entitled to a Credit of £2 a week extra, so a pensioner paying tax at 22 per cent on income of £170 a week would receive £1 extra a week in 2003-04 through this more generous tax allowance. Over 3 million pensioners aged 65 or more would benefit from the increase.

5.61 In designing the Credit, the Government is seeking ways to build upon the progress made since 1997 in bringing the tax and benefit systems closer together. That progress is set out fully earlier in this chapter and in Chapter 4. This programme of tax-benefit integration has been informed by the following principles:

• to tackle poverty, minimum levels of income should be guaranteed for the most vulnerable groups in society - the elderly, families and the sick and disabled;
• to promote incentives to work and save, the tax burden and high marginal tax-benefit withdrawal rates at the lower end of the income distribution should be reduced;
• to maximise take up, the stigma and hassle of claiming support should be reduced;
• to ensure that support is targeted at those who need it most, new credits should be assessed on a household basis where possible, while respecting the principles of independent taxation that each person should be taxed on
  their own income and have their own income tax allowance and rate bands; and
• to improve customer service and increase efficiency in Government, the administration of tax and benefits should be brought closer together.

5.62 The Pension Credit and associated changes build on these principles and represent a further step towards tax and benefit integration. The consultation document to be issued by the Secretary of State for Social Security will explain these changes in more detail. Over time, it is the Government's intention to take tax and benefit integration further: in particular, to make receipt of the credit more automatic; to take steps to reduce overlap between the two systems; and ultimately to merge support for older people through the credit and the tax system to create a seamless and integrated system of support.

Moving towards a Pension Credit

5.63 The new Pension Credit will deliver substantial gains to all pensioners on low and modest incomes from 2003. But ahead of this, the Government is determined to deliver benefits to them straight away. The Government will therefore:

• increase the winter fuel payment, which is set at £150 for future years, to £200 this winter. So this winter, 8.5 million pensioner households will be eligible for a payment of £200 - almost £4 a week - double the amount of last year's payment;
• increase the basic state pension by £5 to £72.50 a week in April 2001, and by a further £3 to £75.50 a week in April 2002 for single pensioners. For couples this will mean an increase of £8 to £115.90 a week in April 2001, and of a further £4.80 to £120.70 a week in April 2002; and
• increase the lower rates of the MIG to equal its highest rate, raise this by earnings and further, by the real increase in the basic state pension, so that all pensioners gain fully from the increase in the basic state pension. From April 2001, the new, simplified MIG will be £92.15 a week for single pensioners, and £140.55 a week for couples.

Based on current forecasts, from 2003, when the Pension Credit is introduced, the earnings-linked guaranteed minimum income will be at least £100 a week for single pensioners, and for couples at least £154 a week. By then, reflecting the return to normal price uprating, the basic state pension will be at least £77 a week for single pensioners and £123 a week for couples.

5.64 As Chart 5.3 shows, all pensioners will have gained from the Government's measures during this Parliament, with those in greatest need benefiting the most. Next year, around
2 million of the poorest pensioner households will be at least £15 a week, or £800 a year, better off in real terms as a result of the Government's measures since 1997.

Chart 5.3

5.65 The Government's tax and benefit reforms will mean that next year the average pensioner household will be £580 a year - £11 a week - better off. Virtually all pensioner households will be better off as a result of the Government's measures than they would have been with an earnings link in the basic state pension. Next year, the Government will be spending over £2 billion more on the poorest third of pensioners - five times more than an earnings link in the basic state pension would have given them.

SUPPORTING SAVING

The Government's savings strategy

5.66 The Government wants more people to enjoy the benefits of having savings for independence throughout their lives, for security if things go wrong, and for comfort in old age. The Pension Credit will ensure that people who have saved for their retirement are not unfairly penalised. The Government is tackling a number of other problems that may have discouraged saving in the past, including poor returns for small savers, inaccessible and inflexible savings products and a lack of effective competition in the financial services industry.

5.67 These measures fit within the Government's overall strategy to encourage saving, which is to:

• create the right environment for saving:
  • a stable macroeconomy with low inflation;
  • employment opportunity for all;
  • a well-regulated and efficient market in financial services;
  • flexible and accessible savings products; and
  • an integrated and coherent approach to saving;

• create the right incentives for people to save:
  • a tax system with greater incentives to save, particularly for low-income savers;
  • a tax and benefit system that does not unfairly penalise savers; and
  • lower charges to enhance the rewards to saving; and

• provide information and education to help people make the right saving choices:
  • clear, impartial information; and
  • greater financial literacy.

5.68 Further details of the Government's strategy are set out in the Treasury paper Helping People to Save⁴, published alongside the Pre-Budget Report.

Individual Savings Accounts (ISAs)

5.69 Individual Savings Accounts (ISAs) were introduced in April 1999 to encourage tax-free saving, particularly among lower-income savers. In the first year, 9.3 million accounts were opened and over £28.4 billion invested - a third more than was invested in Tax Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs) during their last, and most successful, year. More than £9 billion has been invested in ISAs during the first quarter of 2000-01.

5.70 ISAs - particularly mini cash ISAs - have succeeded in attracting relatively more low income and younger savers than TESSAs and PEPs. More than a quarter of mini cash ISAs have been taken out by those earning less than £11,500 per year, compared with around one in five TESSAs and one in six PEPs⁵. To build on the success of ISAs, the Government will retain the £7,000 contribution limit for a further five years until April 2006. Keeping a higher £3,000 limit for cash will particularly help those low-income and younger savers who have saved in mini cash ISAs. From April 2001, this will include 16 and 17-year olds, who will be able to save in a cash ISA for the first time. There are 100,000 16 and 17 year-olds who work and pay tax and could benefit from the opportunity to save tax free.

Encouraging small savers

5.71 The Government's priority for saving is to encourage people on low or moderate earnings to save. It is already beginning to achieve this with ISAs. From April 2001, 4 million people on low or moderate earnings without access to good occupational pension schemes will have access to stakeholder pensions which will offer a low cost, flexible and secure way to save for retirement. The Government will continue to look at ways of encouraging people on low and moderate incomes to save.

Fair treatment for savings

5.72 The Government will also ensure that small savers are not unfairly penalised by the tax and benefit system. The Pension Credit will provide fair treatment for pensioners with savings. By October 2001 the Government will abolish the £500 capital limits in the Sure Start Maternity Grant and Funeral Payments to ensure that families on low incomes with small amounts of savings receive support from the Government to help cover the costs associated with the birth of a baby or the death of a close relative. This will benefit up to 25,000 low-income families every year. The next phase of modernising the social security and tax credit system offers an opportunity for a thorough review of the treatment of income and capital in assessing entitlement to support for working-age families.

An integrated approach to saving

5.73 People have wide-ranging saving needs for the short and longer term. ISAs and stakeholder pensions provide simple, flexible products that meet those needs. The Government is also making the savings system more integrated by improving transferability between vehicles. New tax rules for pensions will allow someone to contribute at least £3,600 a year regardless of earnings, allowing them to start saving in an ISA and transfer the money into a pension when they are ready to save for the longer term. Also, anyone who builds up substantial shareholdings in a new All-Employee Share Ownership Plan will be able to transfer shares directly into an ISA or a stakeholder pension. The Government wants to increase flexibility where possible and is currently investigating with the pensions industry whether it would be useful in practice to allow certain eligible ISA collective investments to be transferred directly into a stakeholder pension and to be placed in an Individual Pension Account.

Transparent savings products

5.74 To give people confidence to take out ISAs and other financial products, the Government developed CAT standards as voluntary benchmarks for charges, access and terms. A study of the ISA market, carried out for the Treasury by McKinsey's, has found that CAT standards have helped ISA savers achieve value for money. They have set an interest rate floor for cash ISAs, while a typical saver investing in a CAT-standard equity ISA would pay £35 a year less in charges than someone investing in a non-CAT ISA.

Competitive financial services

5.75 The Government wants to promote effective competition in the financial services industry. The Treasury has therefore endorsed proposals from the Financial Services Authority (FSA) to work towards modernising the regulations on how retail investments are sold (see Box 5.4).

Box 5.4: Polarisation Since 1988, the market for retail investments has been polarised. That is, FSA rules have insisted that retail sales firms must either offer the products of only one group of firms, or be fully independent and offer their customers access to the whole market. The Director-General of Fair Trading reported in 1999 that aspects of these rules were significantly anti-competitive and should be reformed. Independent research for the FSA, published in July 2000, foresaw that liberalisation of the rules would improve market competition, with scope for lower prices and greater variety of choice for consumers, without undermining the role of independent financial advisers. The FSA is now planning proposals to update polarisation in two stages. Subject to consultation, the first phase, aimed for spring 2001, will reform the rules covering investment in stakeholder pensions, potentially CAT-standard ISAs, and direct sales offers including new developments such as Internet fund supermarkets. These are all areas where consumers often feel confident to select for themselves. The second phase will extend reform to the full range of retail investment products, with scope for radical change, drawing on work the FSA plans on improving disclosure arrangements for a wide range of retail investments. This stage of reform will take longer to bring into effect but could have a significant effect on the structure of the market for retail investments. The aim is to deliver a better choice for consumers through more effective competition and enhanced transparency.

Information on financial products

5.76 Within its wider regulatory role, the FSA is responsible for promoting understanding of the financial system. Following consultation, the FSA is moving closer to launching published tables of information about several ranges of retail financial products. Those to be published first, in early 2001, will cover endowment policies, investment bonds, mortgages, personal pensions and pooled fund ISAs. The tables will be accurate, authoritative and kept continuously up to date on the FSA website. The Government will work with the FSA to consider ways of increasing access to good, impartial information and advice for low-income savers.

HIGH QUALITY PUBLIC SERVICES

5.77 By ensuring that tough fiscal rules are met and economic stability is maintained the Government has been able to free significant resources to strengthen Britain's public services. The Government is committed to improving frontline public services in order to achieve its priorities.

5.78 The 2000 Spending Review provides for a doubling of net investment in infrastructure over the next three years (see Box 5.5) to deliver integrated transport and modern schools and hospitals, while current spending will increase by 2.5 per cent a year in real terms. Three-quarters of this increase will be spent on the Government's priorities of health, education, transport, housing and law and order.

5.79 On a consistent basis, £43 billion of additional funding has been allocated to Departmental Expenditure Limits by 2003-04 (see Table B15). This provides for average real growth for the three years from 2000-01 of 5.2 per cent a year for education (UK); 5.6 per cent a year for health (UK); 20 per cent a year for transport; 12 per cent a year for housing; and 4.2 per cent a year for the criminal justice system. The Government is able to afford these increases to deliver improvements in key public services because of prudent management of the public finances, its success in reducing unemployment and by dealing with fraud and unnecessary bureaucracy.

Chart 5.4

Box 5.5: Investment in public services The Government is committed to boosting the public sector's capital stock as an integral part of improvements to public services. Net public investment is set to more than double, from £7 billion in 2000-01 to £18 billion in 2003-04. This will deliver: a two-and-a-half fold increase in transport investment; a further £1.5 billion for education to enable several thousands of schools a year to receive renovation and modernisation; a further £1.4 billion for the NHS, building on the 38 major hospital plans already approved since May 1997; a £1 billion programme of investment in science laboratories; and £1 billion of investment to ensure public services can be delivered online. This is enhanced by Private Finance deals anticipated to be worth around £12 billion over the three years from 2000-01. Investment is accompanied by rigorous Departmental Investment Strategies setting out how government departments will deliver concrete outcomes. These will be published by each department, along with a summary White Paper, later this month.

Public Service Agreements

5.80 The quality of public services, however, depends not only on how much the Government spends but also on how effectively it spends it. Following the Comprehensive Spending Review in 1998, the Government introduced a new system of performance management for public expenditure. The 2000 Spending Review allocates spending and sets out in Public Service Agreements (PSAs) the outcomes that every part of government will deliver to the public. It details the improvements in public services the public can expect over the next three years and describes how the Government will allocate its funds to achieve these improvements.

5.81 The publication of PSAs is an important step in improving democracy, transparency and accountability. PSAs are agreements with the public, showing the taxpayer exactly what the Government will deliver in return for his or her investment. By publishing clear and measurable targets, the Government is making it possible for everyone to judge whether it meets them.

5.82 This is the most ambitious attempt internationally to set explicit goals for outcomes across the whole of Government. On 3 November, departments published their plans for the good management of their resources to achieve these objectives in new Service Delivery Agreements (SDAs).⁶

A modern National Health Service

5.83 In Budget 2000 the Government announced a substantial increase in health funding, with growth averaging 6.1 per cent a year in real terms over the four years to 2003-04. This is the longest period of sustained high growth in the history of the NHS, and will fund extra investment in NHS facilities such as new hospitals and increases in numbers of doctors and nurses. The 2000 Spending Review also increased social services funding significantly in real terms to provide resources for the elderly, children and other vulnerable groups. Challenging new PSA targets include:

• to reduce the maximum wait for an outpatient appointment to three months, and the maximum wait for inpatient treatment to six months by the end of 2005; and
• to reduce substantially by 2010 the mortality rates from major killers - from heart disease by at least 40 per cent in people under 75, and from cancer by at least 20 per cent in people under 75.

5.84 The Government needs to look further ahead to ensure that the NHS will always have access to the level of public funding that it needs to provide a comprehensive, high-quality service available on the basis of clinical need and not on ability to pay. Budget 2000 announced that the Chancellor is commissioning a long-term assessment of the technological, demographic and medical trends over the next two decades that will affect the health service, to report to him in time for the start of the next spending review in 2002.

Education

5.85 The extra funds for education announced in the 2000 Spending Review will add over £10 billion to spending on education and training in England by 2003-04. A 33 per cent real increase in spending is projected for UK education between 1996-97 and 2003-04. These funds will enable schools, colleges and universities to achieve even higher standards. PSA targets from the 2000 Spending Review include:

• to increase the overall percentage of pupils obtaining five or more GSCEs at grades A* to C, with at least 38 per cent to achieve this standard in every local education authority by 2004; and
• to increase the participation of 18-30 year olds in Higher Education towards 50 per cent by the end of the decade.

Extending the New Deal for schools

5.86 To tackle further the backlog of repairs in schools, and to ensure that our children are learning in a suitable environment, the Government will invest a further £200 million in school buildings across the UK in 2000-01. These resources have been released from the revenue raised by the windfall tax, due to lower unemployment, and will be additional to those made available for schools in the 2000 Spending Review.

Transport

5.87 The Government is committed to transforming the country's transport system with public investment rising to over £6 billion a year by 2004, a doubling in real terms. The Ten-Year Plan for Transport will reduce road congestion, produce better and more reliable trains, and deliver a renaissance in local public transport. New PSA targets include:

• to increase rail use in the UK from 2000 levels by 50 per cent by 2010, while at the same time securing improvements in punctuality and reliability; and
• to reduce congestion in the road network in England below current levels by 2010, by promoting integrated transport solutions and investing in public transport and the road network.

Tackling crime

5.88 To build a safe, just and tolerant society the Government is tackling crime and strengthening communities by raising police spending to record levels, making major investment in local crime prevention and setting challenging targets for reduction in vehicle crime, burglaries and robberies. Key PSA targets include:

• reducing vehicle crime by 30 per cent by 2004, domestic burglary by 25 per cent by 2005, and robbery in our principal cities by 14 per cent by 2005; and
• halving from 142 to 71 days by 2002 the time taken from arrest to sentence for persistent young offenders.

STRENGTHENING COMMUNITY LIFE

5.89 Conditions in Britain's most disadvantaged communities are unacceptably poor. For example, child poverty in the poorest 10 per cent of wards is three times the national average. Those living in poorer neighbourhoods have to put up not only with a rundown physical environment and limited opportunities, but often also the poorest public services.

Government intervention in deprived areas

5.90 The 2000 Spending Review set for the first time specific PSA targets to start narrowing the gap between our poorest communities and the rest of the country on education, health, worklessness, crime and housing. This will ensure that the new resources announced in the 2000 Spending Review go to the places that need them most. Further details of the Government's response to the longer-term challenge will be set out in the National Strategy Action Plan to be published shortly. This will be taken forward by the new Neighbourhood Renewal Unit announced by the Prime Minister in September this year.

Neighbourhood Renewal Fund

5.91 The Neighbourhood Renewal Fund will channel £800 million over the next three years to the most disadvantaged areas to help local authorities and others make early progress in improving services in poor neighbourhoods. The Fund will provide extra money to enable more spending on teachers, police officers, crime prevention programmes, social services or other services that can deliver real improvements for the community. Local people, councils, those who provide local services, business and the voluntary sector will form Local Strategic Partnerships to decide how the money can best be spent to meet the individual needs of their communities.

The New Deal for Communities

5.92 There are now 39 neighbourhoods benefiting from the New Deal for Communities - with investment totalling around £2 billion over ten years. To help learn the emerging lessons, the next phase of the New Deal will focus on supporting more, smaller schemes, including additional support for helping local people influence public services, promoting community involvement at local and neighbourhood level, establishing a National Centre for Neighbourhood Renewal and providing better neighbourhood-level data.

Urban renewal

5.93 The Government has also taken further action to encourage enterprise and business growth in disadvantaged communities within a clear framework bringing regions, cities, districts and neighbourhoods together to deliver higher prosperity for all. Box 3.4 describes the Government's strategy for urban renewal and summarises further proposals to help transform disadvantaged communities and make the most of successful towns and cities. The forthcoming Urban White Paper will set out a comprehensive strategy for improving the performance of all the UK's towns and cities.

Strengthening rural communities

5.94 The Government recognises the challenges the countryside is facing, and will work with rural people to overcome them. In the forthcoming Rural White Paper the Government will set out its vision for a vibrant and living countryside with thriving rural communities. It will focus, among other things, on how best to involve local people in the decisions that shape their communities; how market towns can be rejuvenated; and how best to support the delivery of vital services that are at the heart of village communities. Chapter 6 describes the steps being taken by the Government to reduce pressure on the rural environment.

Modernising local government

Local PSAs

5.95 The 2000 Spending Review announced a new initiative to strengthen links between local and central government and improve the delivery of services through:

• a concordat for local services agreed between the Government and the Local Government Association and the establishment of a national-level Local Government PSA drawing together in one place the targets which local authorities and their local partners are expected to deliver; and
• the piloting of local PSAs - which the Government will develop jointly with local authorities and the Local Government Association.

5.96 Local authorities will commit to enhanced targets covering key national and local priorities, while rules and regulations that are unnecessarily getting in the way of better performance will be removed and improved performance rewarded. The Government aims to reach agreements with 20 pilot local authorities for 2001-02, ahead of a planned wider rollout in 2002-03. Local PSAs will focus on key local services such as education, social services and transport, and cross-cutting issues such as social exclusion, linking to other locally-based initiatives such as the Neighbourhood Renewal Fund.

Charity taxation: getting Britain giving

5.97 Budget 2000 introduced a number of measures from April 2000 to encourage and simplify giving to charity:

• the minimum limit of £250 for Gift Aid donations was removed, so that the scheme now applies to all donations - large or small, regular or one-off;
• the £1,200 limit on payroll giving donations was abolished;
• a new income tax relief was introduced on gifts to charity of most shares and securities, in addition to existing capital gains tax relief; and
• a de minimis exemption was introduced to allow charities to engage in small-scale trading activities, without the need to set up a subsidiary company.

5.98 The Government remains committed to developing a thriving voluntary sector. It wants to develop a culture of giving, of both time and money, and to continue to work together in partnership with the voluntary sector to achieve this.

Promoting payroll giving

5.99 In October 2000, the Government launched a national publicity campaign to promote awareness of the income tax relief attracted by payroll giving. The campaign stresses the simplicity of payroll giving and encourages larger employers to provide a payroll giving scheme to their staff or to improve their existing scheme.

5.100 To help meet its aim of achieving a sustained increase in charitable giving, the Government has also agreed to support a voluntary sector-led publicity campaign to encourage donations of both money and time, and to improve awareness of existing tax reliefs.

5.101 Volunteering and helping each other out are central to healthy, democratic and socially inclusive communities. The 2000 Spending Review set out a package of measures to deliver substantial progress by 2004 towards one million more people being actively involved in their communities.

A FAIR AND MODERN TAX SYSTEM

Modernising the tax system

Stamp duty

5.102 The Government is modernising the administration of the tax system to help facilitiate e-commerce and make electronic dealings with government easier. A new system for electronic conveyancing, enabled under the Electronic Communications Act, will remove the need for paper documents. It is intended that the legislation required to modernise stamp duty to deal with the new system will be published before Budget 2001.

Construction Industry Scheme

5.103 Building on the review of the Construction Industry Scheme (CIS) undertaken since Budget 2000, the Government has decided to extend the scope of electronic data exchange starting at the end of November 2000. As a first step, more sub-contractors will be able to qualify for the CIS5 certificate, which removes the requirement for them to present a certificate in person, and which allows contractors to provide details of payments electronically to the Inland Revenue. The change to CIS will help around 8,000 businesses and save over £1 million, in administration costs across the industry. The Government believes that, in the longer term, big savings can be achieved through a more fundamental shift to electronic data exchange, and will continue to consult with the construction industry on the precise steps required to achieve that shift.

Self-Assessment enquiries

5.104 The Chartered Institute of Taxation and the Inland Revenue will publish a joint report on enquiries into Self-Assessment tax returns in the next few days. The report will make some suggestions for improvements in the law and practice relating to enquiries. The Government will announce its response to the report at the same time.

Tobacco

5.105 The Chancellor will continue to base Budget judgements on the future level of tobacco taxes on a wide range of factors, including the Government's health objectives. The Government believes that there is a strong case for year on year real terms increases in the price of cigarettes. A vital part of the Government's strategy is to reduce the supply of cheap smuggled tobacco.

Smuggling

5.106 Tobacco smuggling not only undermines the Government's objective of reducing the levels of smoking in the UK as cheaper cigarettes become available, but brings with it widespread and serious criminality. Smuggling cost the Exchequer £2.5 billion in lost revenue in 1999. The Government has demonstrated its determination to tackle this threat by investing £209 million over three years in deploying almost 1,000 more Customs and Excise staff and establishing a nationwide network of the latest x-ray scanning technology, increasing substantially the amount of freight which can be examined.

Fiscal marks

5.107 In the 1999 Pre-Budget Report, the Government announced its intention to introduce a legal requirement for cigarette packs and hand-rolling tobacco pouches sold in the UK to carry a fiscal mark showing that UK duty has been paid on them. From 1 April 2001 the fiscal mark will be introduced allowing anyone buying or selling tobacco to know immediately whether they are dealing with legitimate goods.

Forestalling

5.108 Forestalling is a tax avoidance practice whereby manufacturers and importers build up large stocks of cigarettes in the months leading up to a Budget change and pay duty on their accumulated stocks just before the Budget increase takes effect. The November 1999 Pre-Budget Report announced that steps would be taken to put an end to this practice, which cost the Exchequer around £280 million in 1999-2000. There will be restrictions on clearances of cigarettes from duty-suspended warehouses in the months immediately preceding a Budget. These will be in place in time for the run-up to Budget 2001.

Betting

Reform of General Betting Duty

5.109 In March 2000, the Government launched a consultation exercise on the scope for modernising general betting duty. The Government's objective in considering the response to the consultation has been to assess the scope for a modernisation of General Betting Duty that would deliver a business environment in which the British betting industry can compete in both the domestic and international markets, taking full advantage of the opportunities offered by the development of e-commerce, while ensuring that the future revenue stream from betting is protected.

5.110 The Government believes there is scope for a modernising reform of General Betting Duty to deliver this objective. The Gross Profits Tax reform outlined in the consultation document is one such approach. The Government intends to hold further discussions with interested parties in the coming months, including with the betting industry, on how to ensure that the benefits of any change are fairly shared, with a view to an announcement at the time of Budget 2001.

PROMOTING FAIRNESS INTERNATIONALLY

5.111 The Government continues to apply the principles of economic reform and social justice to its work abroad. It supports the challenging targets set by the international community for 2015, such as

• halving the numbers of people living on less than $1 a day; and
• giving universal access to primary education.

5.112 Among the greatest barriers to achieving these targets are the world's killer diseases, particularly HIV/AIDs, malaria and TB. Together these diseases kill 5 million people a year - most in the developing countries. AIDS alone has already created 13 million orphans. The Department for International Development and others are already undertaking a wide range of projects, but a particular problem is that drugs and vaccines are not likely to be available in the immediate future. But research on vaccines suitable for developing countries remains minimal, with only a tiny fraction of new patents addressing diseases in developing countries. This is mainly because those who might be able to develop vaccines fear they would not be able to recoup the significant research expenditures that will be needed.

5.113 The Government has therefore set in hand urgent work to investigate the problem and come forward with new proposals. Working alongside and feeding into a wider review being conducted by the Performance and Innovation Unit, the Treasury will look at a range of tax options, focusing on creating the right incentives and tackling the scale of the perceived risks. This will build on the consultations already underway with the pharmaceutical industry, and will depend heavily on developing a shared commitment to tackle this issue. Throughout, the Government will keep closely involved with international efforts to solve the burden of infectious diseases.

¹ The evidence and sources are summarised in: Supporting Children Through the Tax and Benefit System, HM Treasury, November 1999.

² Opportunity for All, Second Annual Report 2000, Department of Social Security (Cm4865).

³ Comprehensive Spending Review: new public spending plans 1999-2002, HM Treasury (Cm 4011),
July 1998.

⁴The Modernisation of Britain's Tax and Benefit System, Number Seven, "Helping People to Save", HM Treasury, November 2000.

⁵Inland Revenue analysis of the 1999-2000 NOP Financial Research Survey.

⁶Spending Review 2000: Service Delivery Agreements 2001-2004: A Guide, HM Treasury (Cm 4915), November 2000.