Pre-Budget Report: A Pocket Guide

Steering a stable course for lasting prosperity

Introduction

The Government's central economic objective is high and stable levels of growth and employment. Its aim is to build an economy equal to every challenge posed by the global economy and one which will close the productivity gap with our competitors. That is why the Government has taken action to build a stable and strong economy capable of sustained growth. Britain cannot be immune from the slowdown in the world economy. In an uncertain and unstable world the Government is steering a stable course for lasting prosperity.

The key elements of the Government's strategy are:

• promoting national and international economic stability;
• improving productivity performance;
• encouraging and rewarding work;
• creating a fairer society and protecting the environment.

This Pocket Guide provides: a progress report on what has been achieved so far; updated information on the economy and the public finances; and sets out the direction of Government policy and further measures under consideration in the run-up to the 1999 Budget.

The Pre-Budget Report forms the basis for a wide-ranging consultation over the coming months on the steps that need to be taken to rise to the productivity challenge and to secure high and stable levels of growth and employment.

Strategy for long-term stability

Economic instability damages long-term growth and employment. Since coming to office, the Government has taken the tough decisions necessary to provide a platform for long-term economic stability and sustained growth aimed at low inflation and prudent management of the public finances: independence for the Bank of England to set interest rates to meet the Government's inflation target; strict fiscal rules to get public finances back under control and to reduce borrowing; and a new public expenditure regime together with the three year public expenditure plans contained in July's Comprehensive Spending Review (CSR). These have helped to:

• reduce long-term interest rates to their lowest level for 35 years; compared to 15 per cent in the last cycle, short-term interest rates currently stand at 7 1/4 per cent;
• ensure inflation is at its target level of 2 1/2 per cent compared to nearly 10 per cent in the early 1990s;
• ensure the public finances as measured by the current balance are in surplus, the first time in a decade;
• target spending on the Government's priorities - an extra £40 billion will be invested in health and education and public investment is set to double as a proportion of national output over the next three years.

Economic and Fiscal Prospects

The recent events in Asia and Russia and the turbulence in Latin America mean that world economic growth is forecast to slow from 4 per cent to 2 1/2 per cent next year. No country is immune from this. Growth in the UK will therefore be slower than expected at the time of the last Budget: output growth is now forecast to be between 1 and
1 1/2 per cent for 1999. The reduction in the forecast since the summer is the result of the world economic slowdown.

The forecasts also show that output will pick up in 2000.

Summary of UK Economic Forecast

1 Gross Domestic Product (GDP)
2 Retail prices less mortgage interest payments

This slowdown in growth will inevitably impact on the public finances. But as a result of its cautious approach and prudent spending announcements in July, the Government remains on course to meet its tough rules for the public finances and its spending plans, including £40 billion for health and education, will be delivered.

With its long-term fiscal and monetary framework the UK is better placed to steer a course of stability in an uncertain world.

Productivity Challenge:
equipping Britain for high and stable levels of growth and employment

The long-term prosperity of the UK depends on the output of UK workers and businesses. Action needs to be taken to close the productivity gap of some 40% with the US and 20% with France and Germany. This is why the Chancellor and the Secretary of State for Trade & Industry launched a series of seminars with business people to examine some of the underlying causes of the UK's poor productivity performance and the key steps for improvement which are necessary for higher living standards.

The Government has already taken steps to begin to address this productivity gap: reforms to the corporate and capital gains tax systems will encourage long term investment and reward entrepreneurs; and the extra £19 billion for education and £1.4 billion for science announced in the recent CSR will enhance our skills base and promote innovation.

But more needs to be done. The Government will continue to work to promote innovation, investment, competition and skills. The Pre-Budget Report sets out for consultation an initial package of ideas to boost productivity, including:

• a review of policies on employee share ownership, to encourage more employees to take a stake in their companies;
• a review of tax measures to encourage investment and growth in small and medium sized enterprises;
• proposals to encourage more investment in and exploitation of research and development;
• a £25 million Science Enterprise Challenge to endow up to 8 Institutes for Enterprise in universities;
• working with the banks in a review of the banking sector including the support it gives to growing businesses;
• additional resources for the Office of Fair Trading which will help to strengthen competition;
• measures to improve partnerships between business and schools, prepare young people for the world of work and set challenging new skills targets;
• a drive to improve productivity in the public services.

Encouraging and rewarding work

Reforms to increase employment opportunities, work incentives and skills will play a critical role in tackling poverty, rewarding work and will contribute towards improved growth. The Government has already taken a number of steps to encourage and reward work:

The New Deal helps unemployed young people and other disadvantaged groups into jobs - over 30,000 young people have already moved into employment through the New Deal

• Tax and benefit reform: the announcement in the 1998 Budget of the Working Families Tax Credit (WFTC) will provide a guaranteed minimum income for families with one member in full-time work of at least £190 per week from October 1999. Combined with the minimum wage this will give a minimum hourly income of £5 for a family with one child. Those families earning less than £220 per week will no longer pay any net tax;
• The Disabled Persons Tax Credit will, from October 1999, provide a guaranteed minimum income of £150 per week for a single disabled person who moves from benefit to full time work;
• National minimum wage: from April 1999, some two million workers will benefit from the introduction of the minimum wage of £3.60 per hour for workers aged 22 years and over, £3.20 for trainees and £3 for 18 - 21 year olds;
• Reform of employer National Insurance Contributions (NICs) to remove disincentives to job creation.

Further measures include:

• announcement of an income tax personal allowance set at £4335 a year for 1999 - 2000 and the alignment with it of the employer NICs threshold;
• plans for future reforms of employee NICs and a new 10p starting rate of income tax, which will be introduced when it is economically right to do so;
• encouraging family-friendly working practices - such as term-time working - which can also help the labour market to operate more flexibly in the interest of employers, employees and carers.
  

Creating a fairer society

The Government has already taken steps to promote a fairer society through:

• an extra £40 billion investment in health and education over the next three years;
• a cut in VAT on domestic fuel and power to 5% giving help to those on lower incomes;
• a £2.5 billion package for pensioners, including a guaranteed minimum income for single pensioners of at least £75 per week, a new winter fuel payment and an end to charges for eye tests for pensioners;
• an increase in child benefit of £2.95 per week for the eldest child from April 1999 and help towards childcare costs;
• targeted initiatives, such as Sure Start and the New Deal for Communities, which will help tackle the underlying causes of poverty by increasing education and employment opportunities.

Further measures to promote a fairer society include:

• £250 million extra for the NHS this winter;
• a minimum guarantee on tax for pensioners so they will have no income tax to pay unless their income rises above a specified level which will be announced in the next Budget;
• tightening up on tax avoidance and evasion.

The Environment

The tax system must be designed in a way that is fair to future as well as present generations. It has an important role to play in underpinning the Government's strategy on sustainable development. This means securing economic growth, higher living standards and social progress, while protecting the environment. The Government is exploring the scope for using the tax system to help to deliver Britain's environmental commitments. Progress has been made on a number of fronts:

• the Government is committed to reducing the UK's greenhouse emissions which will require better use of energy by all sections of the economy. The recommendations of Lord Marshall's report on the possible use of new economic instruments for improving industrial and commercial use of energy will be given careful consideration;
• the Government is consulting on the best way of implementing the reduction of £50 in Vehicle Excise Duty for the cleanest and the most environmentally efficient cars;
• the Government will consider other measures designed to tackle climate change, improve local air quality and limit the impact of land use and water pollution.

Next Steps

The Government will be consulting widely between now and the next Budget. A number of regional road shows will focus on how the Government, business and the workforce can work together to achieve high and stable levels of growth and employment and rise to the productivity challenge.

We would very much welcome your views which can be sent by post to:

Pre-Budget, Freepost SE 2693, London SE99 7XU

or by e-mail to:

budget@hm-treasury.gov.uk

Further information can be obtained from HM Treasury's internet site site:

http://www.hm-treasury.gov.uk/

or HM Treasury's Public Enquiry Unit :

telephone 0171 270 4558

The charts set out the allocation of tax and public expenditure this year. Following the Comprehensive Spending Review, the share of public expenditure spent on education and health will increase over the next three years.

Please write your comments here and return
in an envelope (no stamp required) to:
Pre-Budget, Freepost SE 2693, London SE99 7XU.

© Crown Copyright