PRE-BUDGET 98

Securing Britain's long term economic future

A pocket guide
November 1997
HM Treasury

The Pre-Budget Report

The aim of this, the first ever Pre-Budget Report, is to begin a national debate on the major economic issues facing Britain. This debate will help to inform decisions in the Spring 1998 Budget.

Lasting results will only be achieved if government, business and individuals work together with common economic purpose. This Pre-Budget Report presents the Government's own analysis of the economic challenges facing Britain and possible solutions, but it wants to hear other views as well. There is a wealth of experience in Britain and the Government wants to encourage as wide a discussion as possible.

The Government's economic priorities

The Government's central economic objective is to achieve high and stable levels of growth and employment so that everyone in Britain can share in higher living standards and greater job opportunities. Building a modern flexible economy will depend upon:

strengthening the economic framework to deliver low inflation and low government borrowing;
removing barriers to growth and jobs by promoting competition, innovation and investment;
modernising the welfare state and tax and benefit systems so they support employment opportunity for all, rather than discouraging work and trapping people in poverty;
developing a tax system which is fair to current and future generations and is seen to be fair;
delivering high quality public services efficiently.

The future challenge

Britain faces a growing challenge in the global marketplace. The Pre-Budget Report addresses the key long-term issues we now face:

raising our productivity;

improving everyone's employability;

ending the cycle of boom and bust.

And in the short term, there is a direct link to be made between responsible wage bargaining now and achieving growth and jobs in the future by keeping interest rates as low as possible.

Achieving long-term stability

A stable economic environment is necessary so that people and businesses can plan and invest with confidence. That means low inflation and sensible management of the public finances.

To build confidence in monetary policy, the Bank of England now sets interest rates independently to achieve the Government's target of low inflation. Britain's framework for monetary policy is one of the most open and transparent in the world.

The Government is now proposing to legislate for a Code for Fiscal Stability, to ensure that decisions on the public finances are taken to promote long-term economic goals. This framework will be based on a set of five principles: transparency, stability, responsibility, fairness and efficiency. It will require more open reporting and improved standards of accounting.

Growth through competition, innovation & investment

In partnership with business, the Government wants to remove barriers to growth and promote a stable, competitive and innovative economy.

The Competition Bill creates a modern, effective and open framework to encourage competition and innovation. A review of utility regulation has been started.

Success in the global economy depends on identifying and pursuing new market opportunities. The Government will be using its twin presidencies of the EU and G7 in 1998 to pursue reductions in barriers to international trade.

The Government wants business to make better use of our science base to help improve research and development and innovation. It has set up a group to look at financing for hi-tech companies. Extending Public-Private Partnerships will ensure that high quality infrastructure complements business investment.

A tax system promoting high quality investment will be based on:

abolition of advance corporation tax from April 1999, to remove a distortion from the tax system;

a move towards quarterly payments for corporation tax for larger companies, phased in over four years from 1999, following consultation by the Inland Revenue;

a 1 per cent cut in the main rate of corporation tax, from April 1999;

capital gains tax reforms to produce a fairer tax system and encourage long-term investment, especially by entrepreneurs.

Employment opportunity in a changing labour market

After 5 years of economic recovery, unemployment on the internationally recognised definition still stands at 7 per cent, around 2 million people. And almost 1 in 5 working-age households has no-one in work.

Since May the Government has begun to put in place the measures necessary to tackle the problems of today's job market through a New Deal that provides job opportunities for the young unemployed, long-term unemployed, lone parents and the disabled.

The Government is developing the Welfare to Work programme by: extending the New Deal for lone parents, making resources available for childcare, introducing innovative proposals to help people on long-term sickness and disability benefits and helping to meet the problem of skill shortages.

Tax and benefit reform

The Government is looking at options for reform of the tax and benefit system, to promote work incentives, reduce poverty and welfare dependency, and strengthen community and family life through:

a new tax credit paid to families on low income directly through the wage packet;

reform of national insurance contributions, where there is scope for bringing the current structure more into line with income tax to ease burdens on employers and to improve work incentives;

the 10p starting rate of income tax which the Government is committed to introducing as soon as it is prudent to do so, improving work incentives for the low paid.

Fairness in tax

The Government has explained that its tax policy is to encourage work, savings, investment and fairness, so that the tax system evolves in ways which benefit the many, not just the few, and so that it is seen to be fair:

energy saving materials: the Spring Budget will introduce a 5 per cent reduced rate of VAT for some schemes helping to insulate the homes of the less well off. This will benefit an extra 40,000 homes a year;

ISAs: everyone should have the opportunity to save in a tax favoured environment. The proposed individual savings account (ISA) is an opportunity to spread the savings habit and encourage long term saving. A consultation document will be launched on 2 December;

tax avoidance: since the last Budget, Inland Revenue and Customs and Excise have been reviewing procedures for countering tax avoidance, including combating alcohol and tobacco smuggling and fraud. Draft generalised anti-avoidance legislation may be published in 1998.

Environment - fairness to future generations

water pollution: the Department of the Environment, Transport and the Regions will issue a consultation paper on options for dealing with water pollution, including charges for polluting rivers, streams and watercourses;

transport: the Chancellor will look at transport tax issues particularly in the light of international environmental discussions and the review of National Air Quality Standards.

Pensions

The Government's pensions review will report in 1998. Meanwhile, for this year and next, to help with their fuel bills, pensioner households will receive £20 in addition to the Christmas bonus. Pensioner households on income support will receive £50. There will also be pilot projects to identify the best way of providing more automatic help to pensioners not claiming their income support entitlement.

The Spring 1998 Budget

The Pre-Budget Report should not be taken as an indication of all the likely tax areas where the Government may act in the Spring 1998 Budget.

In some cases, e.g. where consulting could cost the Exchequer revenues due to forestalling or disrupt markets, it may not be appropriate to give advance notice. In other areas, policy may develop between now and the Spring. The intention is, however, to use this Report to achieve greater openness in developing tax policy to create a fairer tax system.

What are your views?

The Chancellor of the Exchequer welcomes all contributions to this debate. Comments can be sent by post to: The Chancellor of the Exchequer, Pre-Budget 1998, HM Treasury, Parliament Street, London SW1P 3AG or by e-mail to: budget@hm-treasury.gov.uk

The Treasury will be arranging a number of regional meetings in the coming months to discuss the issues raised. Further information on the Pre-Budget Report and accompanying documents can be obtained from the Treasury's Public Enquiry Unit, Room 89/2, HM Treasury, Parliament Street, London, SW1P 3AG (Tel: 0171 270 4558 or 4860) or from the Treasury's internet site: http://www.hm-treasury.gov.uk

Summary of the new economic forecast

per cent
	1996	1997	1998	1999	2000
Growth of the economy¹	2½	3½	2¼-2¾	1½-2	2¼-2¾
Inflation²	3¼	2¾	3	2½	2½
Public borrowing³	22½	12	6
¹ GDP ² Q4, retail prices less mortgage interest payments ³ PSBR £billion, excluding windfall tax receipts and associated spending (financial years)

Growth

After growth of 3½ per cent this year the economy is expected to slow to a more sustainable rate from 1998.

The forecast is presented as a range to illustrate the potential for higher levels of prosperity through policies to get people from welfare into work and through responsible wage bargaining. The lower end of the ranges provide a cautious basis for public expenditure planning.

Inflation

Underlying inflation is forecast to increase to around 3 per cent by the beginning of 1998 before returning to the Government's inflation target of 2½ per cent by the end of 1999.

Public Borrowing

Excluding windfall tax receipts and associated spending, public borrowing (PSBR) is forecast to fall from £22½ billion last year to £12 billion this year and £6 billion next year.

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