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Orders of the Day

WAYS AND MEANS

Financial Statement

Mr. Deputy Speaker (Sir Alan Haselhurst): Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that at the end of the Chancellor's speech, copies of the Budget resolutions will be available in the Vote Office.

INTRODUCTION

12.31 pm

The Chancellor of the Exchequer (Mr. Gordon Brown): It is a great honour and privilege to deliver a 10th Budget. Hon. Members may be aware that the last Chancellor to deliver 10 Budgets in a row was Nicholas Vansittart in 1822. In order to win the House's indulgence to be able to deliver so many Budgets, he did of course have to agree to abolish income tax. I regret to inform the House that that is a precedent that I do not intend to follow—at least this year. I can also tell the House that, for Mr. Vansittart, being Chancellor was preparation for his next important position in government: Chancellor of the Duchy of Lancaster.

The British economy is strong and strengthening. I can report that inflation is currently 2 per cent. and on target. From the latest quarter, the economy is growing at an annual rate of 2.5 per cent. and on target, as we enter the 10th year of growth under this Government—the only Government in British history to be entering the 10th consecutive year of uninterrupted economic growth. With the world's pace of economic change accelerating, this is a Budget to strengthen Britain further for the global opportunities ahead: to lock in stability, but also to lead the world in new industries and technologies, which will increasingly shape our future; for British people, higher skilled jobs with higher wages, but also new choices for parents to balance work and family life; to invest in and reform public services, housing and infrastructure; and, building on the climate change levy, to meet the energy and environmental challenges. Most of all, this is a Budget for Britain's future to secure fairness for each child by investing in every child—a modern Britain that leads on enterprise and prosperity, because we lead in opportunity and fairness.

For 50 years, Britain's economy was prone to high and volatile levels of inflation, and our first challenge was and is not just achieving low inflation today, but entrenching a culture of stability that allows Britain to invest for the long term. I can report that we have met our inflation target this year and every year since 1997; and looking five years and 10 years ahead, under current policies, inflation is still expected to be in line with our target. In just a decade, long-term inflationary expectations have virtually halved to 2 per cent., and today long-term interest rates are the lowest they have been for 40 years, at just 4 per cent.

Indeed, even when facing in succession the Asian crisis, the IT bubble, an American recession, euro area stagnation and, most recently, the challenge of the oil
 
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shock and house price inflation—challenges which in previous decades led to British recessions—our economic framework for stability has proved resilient, robust and prudent.

On Black Wednesday in September 1992—not so long ago, as the Leader of the Opposition will remember—interest rates reached 15 per cent. Since 1997, interest rates have averaged 5 per cent.

Mortgage rates, which averaged 11½ per cent. between 1979 and 1997 have since then averaged just half of that at 6 per cent. I have said before: no return to boom and bust.

In new measures, I propose to entrench stability today. We will continue to have the strength to take the long-term decisions that matter.

First, since 1997, my approach has been that day-to-day management of monetary policy be independent of Government and the same principled approach be applied in other areas: to competition policy, industrial policy, small business policy and the management of debt. Today, I am publishing a new remit for the debt management office. Last year, our stability enabled us for the first time in a generation to issue bonds with maturities of up to 50 years. I can announce that in the next issue, long-dated gilts will increase from just under half to just under two thirds, reflecting the benefits we now gain as a country from long-term stability.

Today, I am also publishing the detailed proposals, modelled on Bank of England independence, for official statistics to be the responsibility of an independent board, and for enhanced accountability to Parliament.

I am also publishing today the new memorandum of understanding between the Treasury, the Bank of England and the Financial Services Authority so that Britain has in place the most up-to-date early warning and response system to deal with any risk to financial stability.

We will continue to be vigilant over global imbalances and oil prices.

We will take no risks with inflation at home. The public sector pay settlements will show settlements this year averaging just 2¼ per cent., combining fairness in pay, with more for nurses, with vigilance and discipline in the fight against inflation.

It is Britain's new economic stability, and also our commitment to free trade, open markets and scientific progress, and our willingness to invest, that make our country better placed than ever to be one of the global economy's success stories. A year ago, some said that the doubling of oil prices would push our inflation far beyond target and that a recession was required to slow the increase in house prices. Instead, I can confirm to the House, as stated in the pre-Budget report, that growth will be 2 to 2½ per cent., followed in 2007 and 2008 by growth of between 2¾ to 3¼ per cent.

Domestic demand is expected to grow this year by 2 to 2½ per cent., strengthening to 2¾ to 3¼ per cent. in 2007 and 2008. As industrial production grows, exports are projected to rise by between 5 and 5½ per cent. and 4¾ and 5¼ per cent. in 2007 and 2008.

Since 1997, economic growth in the euro area has averaged just 2 per cent.—in France, just over 2 per cent; Germany, 1.4 per cent.; Italy, 1.4 per cent.; Japan, just over 1 per cent.—but in Britain, growth has averaged
 
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2.8 per cent. a year since 1997. Britain stands with the USA and Canada as the fastest-growing economies of the G7.

This is the 10th successive year that we have grown faster than the rest of Europe.

In fact, we have not only achieved growth in every quarter of every year since 1997, but, averaging 2.8 per cent., our growth rate now is significantly higher than the 2.1 per cent. average of the period 1979–97. Before we came to office, Britain was seventh out of seven in the G7 for national income per head. Figures published today show that since 1997, as a result of stability and sustained growth, Britain has risen from seventh to sixth, then to fifth, fourth, then third, and we are now second in the G7—second only to America in national income per head.

The test of our monetary policy is that we are achieving sustained stability and growth not just for a year or two, but for the long term. The test of our fiscal policy is that we match a commitment to balance the current budget over the economic cycle with the ability to make the necessary long-term investments. Figures for the current budget from now to 2010–11 are minus £11 billion, minus £7 billion and then surpluses of £1 billion, £7 billion, £10 billion, and £12 billion in successive years.

So we meet our first fiscal rule—the golden rule—and we do so by a margin of £16 billion. This £16 billion surplus contrasts with a deficit in the last economic cycle from 1986 to 1997—a deficit of £157 billion under the previous Government, and we are well placed to meet our golden rule in the next cycle too.

The purpose of our second fiscal rule, the sustainable investment rule, to keep debt at a prudent and sustainable level of income, is to end the situation where, under Governments of both parties in the past, Britain was plagued, as everybody knows, not just by stop-go in the economy, but by stop-go in capital investment. So meeting our second fiscal rule allows us to combine stability with the necessary long-term investment in transport infrastructure, health, education and science. As a result of our success so far, total net public investment, which was just £5 billion a year in 1997, is this year £26 billion—five times as high.

Schools capital investment, which was just £600 million in 1997, is £6 billion this year, and even after inflation we have invested £32 billion since 1997 in modernising our schools in just nine years, compared with just £14 billion in the 18 years before. We have invested twice as much in half the time. To meet the infrastructure needs of business we have been able to double investment in skills, transport, and science, yet even with such levels of investment vital to our economy, we are still comfortably meeting our second fiscal rule.

Net debt is now 47 per cent. of national income in France and in America, 62 per cent. in Germany, 83 per cent. in Japan and 100 per cent. in Italy. This year in Britain it is 36.4 per cent. of national income. I can report that in future years debt will be 37, 38, 38, 38, and 38 per cent. of national income successively, so we meet our second rule over the cycle, and we do so by a margin of £26 billion.
 
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Net borrowing, which was £90 billion just over a decade ago, will be £37 billion this year, £36 billion next year, then £30 billion. It will fall to £25 billion, £24 billion and £23 billion in 2010–11 as we borrow to invest, borrowing in that year 1.5 per cent. of national income, compared with 8 per cent. just over a decade ago. In line with what I said in the pre-Budget report, net borrowing adjusted for the economic cycle will fall in future years from 2.4 per cent. of national income to 1.9 per cent. and then in successive years it will fall to 1.6 per cent., 1.6 per cent., 1.6 per cent. and then 1.5 per cent.

For this Budget I received representations to increase investment in skills, transport, infrastructure and science. I also received representations that we should adopt a third fiscal rule, that over the economic cycle and regardless of the needs of the economy, infrastructure and services, public spending and investment must, as a matter of principle, always rise more slowly than growth. Having analysed this proposal against our published plans, I have found that it would require in the coming year public spending £17 billion lower than this year and £16 billion lower the year after, closing off the possibility of additional investment. I have rejected these representations.

We are consistent that facing the economic challenge ahead we still, as a country, need to invest more. Meeting our fiscal rules and in line with our published plans, public investment to meet our infrastructure needs will rise from £26 billion this year to £29 billion next year, then 31, 32, 34 and 36 billions in the years ahead. And gross investment will rise from £48 billion this year to £63 billion in 2010–11. That sustained long-term investment in our education and infrastructure and in our future is possible because of the stability that we have achieved. So, Mr. Deputy Speaker, we can meet our fiscal rules, support the needs of business and make necessary long-term investments in, first, science, innovation and enterprise, secondly, infrastructure and transport, thirdly, security and the defence of our country and fourthly skills and education.

I turn first to science, enterprise and innovation. With the right long-term decisions, I believe that Britain can lead in some of the fastest growing and highest value-added sectors—City and business services, education and health, creative industries and science-based industries. Once small, now one third of our whole economy and one third of our exports, soon those industries will have a much higher share of jobs and wealth. In each one of those areas, I am proposing today to do more to support the dynamism and enterprise of our businesses.

I start with the importance of Britain's leading in scientific invention and discovery. The Secretaries of State for Health and for Trade and Industry are today announcing that to strengthen medical science and excellence in basic research, Britain will in future have a single budget for the Medical Research Council and NHS research, which will be worth at least £1 billion a year. America has its path-breaking national institutes of health, and we will now build agreement on the right design and institutional arrangements for a British model. To make best use of the additional £1.5 billion a year we invest in scientific discovery, we are proposing today a change of policy. We are setting out plans for a radically simplified allocation of the research funding that goes directly to universities.
 
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We are continuing our policy of making industrial policy more independent and at arm's length from Government. We will refocus around business's own priorities, and £180 million is now available for investment in cutting-edge technologies. Every advanced industrial country knows that falling behind in science and mathematics would mean falling behind in commerce and prosperity. So the Secretary of State for Education and Skills is announcing today a comprehensive programme for recruitment, retraining, retention and reward of 3,000 science teachers, a new entitlement to study the full range of science subjects at GCSE level and the funding of after-school science clubs starting in 250 schools. And to ensure that that investment is matched by performance in our schools, we will benchmark science results just as we now benchmark English and mathematics.

Britain's stability and our commitment to openness and free trade make us well placed to attract business investment from around the world. In the past 10 years, business investment has grown on average at 5 per cent. a year, compared with 3.4 per cent. in the previous 10 years. Ten years ago, British business investment was £77 billion a year; this year it is £113 billion. We expect that in the next two years business investment will grow faster than the economy at 4.5 to 5.25 per cent. in 2007 and 2008, rising to £126 billion in 2008.

Since 1997, there are more than 500,000 extra new businesses, and there are an additional 105,000 self-employed men and women. There is growth in every region, reflecting the dynamism and breadth of Britain's growing entrepreneurial culture. In the cycle that ended in 1997, productivity growth averaged 2 per cent. a year. In the current cycle, it is 2.3 per cent., which is a rate of productivity growth higher than at any time since the '60s—the result of our stability. After decades behind, Britain has caught up with Germany in productivity, is ahead of Japan and has halved the gap with France.

In total, there are now 4.3 million businesses and 3.7 million self-employed. To meet and master global challenges, it is right today to do more to back our enterprise culture.

To boost creative industries—soon to be 10 per cent. of our economy—as well as modern manufacturing, we are expanding the successful R and D tax credit by doubling the size of companies that can claim higher credit. With the aim of trebling our education exports, which will soon be £50 billion of our economy, we are signing new education partnerships with India, Russia and South Africa and China. To make Britain more attractive for overseas students, from May this year the Home Secretary will make it easier for those with specialist skills who graduate from English universities to work here for one year.

Alongside a new City of London taskforce to promote British financial services globally, and backed by a new British advisory board and council, the Foreign Secretary and the Secretary of State for Trade and Industry are announcing a revamped UK Trade and Investment, which will set new targets for expanding trade with China, India and emerging economies, and for making Britain the location of choice for international business.
 
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Growing companies need venture capital, so we will refocus tax incentives for venture capital, with a 30 per cent. relief for investments in venture capital trusts. From today, twice as much investment as before will be eligible for income tax relief in enterprise investment schemes.

Since 1997, corporation tax has been cut from 33p to 30p, small business tax from 23p to 19p, and capital gains tax for long-term business assets from 40p to 10p—a corporate tax system that we will continue to discuss with business and keep internationally competitive. I agree with employers who have suggested that for low-paid workers there is a case for better alignment of the national insurance and income tax systems, so we will conduct a review in time for a consultation after the pre-Budget report.

Small firms with high growth potential also need equity finance, so I can announce £100 million of new money to double enterprise capital funds. Modern manufacturing in Britain will benefit not only from expanding the R and D credit, but the growing role of the manufacturing advisory service and a smaller number of business services offering more targeted support.

Today I can announce the formation of a national enterprise network of more than 200 schools: new summer schools in enterprise, including scholarships to American business schools for young British entrepreneurs.

In the last Budget, I announced that Britain would pioneer risk-based regulation. Today, the Government publish our code based on a legal requirement for inspection only where there is risk. Risk-based regulation will work best if it is applied not only here, but in the European union. We are asking the European Council tomorrow to adopt the same risk-based approach in the interests of British and European competitiveness.

Incomplete liberalisation of energy markets is one factor in high gas prices. So, again at the European Council tomorrow, we propose that all energy and other sectors which fail to liberalise and open up to competition be subject to independent investigation and enforcement.

Nowhere does the current restructuring of the global economy impact more than on jobs and on skills. A Britain that thinks long term and thinks globally will not compete on low skills but invest in the higher skills. The new deal enacted the principle of an active labour market policy for any person out of work, and the economy has generated 2.4 million additional jobs since 1997. The claimant count, which was 1.7 million then, is today, even after recent rises, 920,000—800,000 lower. Britain has 75 per cent of adults in work, which is a higher rate than America or the European Union, and there are 170,000 more people in work than when I gave my Budget a year ago. If we had Euro areas levels of employment, we would have 3 million fewer jobs.

But while other countries have yet to succeed in the fight against mass unemployment, the new deal in Britain is now rising to a new challenge. Today, the British economy has just 9 million highly skilled jobs. By 2020, it will need 14 million highly skilled workers. And of 3.4 million unskilled jobs today, we will need only 600,000 by 2020. Employers rightly tell us that their greatest long-term need is a skilled, flexible labour force. With the typical worker changing jobs seven times during a working life, investing in skills and the ability to re-skill will make Britain the most flexible economy of
 
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the future. So this Government will not abolish the new deal, which has helped more that 1 million people into jobs—we will strengthen it as a new deal for skills and jobs. The Leitch review is now considering a far-reaching proposal under which Britain can lead in skills: how to bring together at a local level employment and training services for not only the unemployed, but all who seek new skills.

Thanks to the national employer training programme, 100,000 women workers are gaining skills for the first time. Following the recommendations of the women and work commission, I can today announce new help for working women who want a wider range of career choices offering higher earnings and to close the pay gap with men. We will double available training for women with low skills, we will increase the work credit, and from October we will increase the minimum wage to £5.35 an hour. And we will address the unacceptable discrimination in women's pay.

As the cities paper published today shows, our cities and largest towns are our biggest job creators, but they are also the home of most unemployment in our country. So the Ministers with responsibilities for communities and for work are setting out measures, first, to help 30,000 more lone parents into work and, secondly, to pilot partnerships with the voluntary sector and local authorities for thousands more jobs.

We are well on our way to meeting our objective of 2 million new homeowners since 1997. After 160,000 new homes built last year, there are now already an additional 1.8 million homeowners—something that has been possible because of low mortgage rates. But Government must also help to balance supply and demand. Our priority, as the Barker report recommended, has been: first, to speed up planning; and secondly, to release more public sector land, now and in the future, to build 100,000 more homes. To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA. To help finance necessary new infrastructure, our policy is that local communities should retain more of the planning gains that are generated in their area.

Britain is pioneering shared equity to bring home ownership within the reach of first-time buyers. The Deputy Prime Minister is today allocating £970 million for shared equity that will help 35,000 new homeowners get their first step on the ladder of home owning in this country. The Minister for Housing and Planning is inviting housing associations, local authorities, builders and building societies to offer shared equity, and we will now pilot minimum holdings as low as 25 per cent. We will also pilot a new scheme so that instead of tenants continuing to have to use housing benefit to pay their rent, the same money is used to bring sites back into use and to build new homes.

The climate change levy, the resulting climate change agreements, and the Carbon Trust funded by it have cut carbon emissions in this country by a total of more than 28 million tonnes. That is why we are already able to meet our Kyoto targets. In each of the next five years, these climate change measures will cut emissions by more than 6 million tonnes, and, as the Prime Minister said, they will account by 2010 for 40 per cent. of our total carbon reductions.
 
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Because of the climate change levy, 10,000 businesses have signed climate change agreements. Under the Carbon Trust funded by the levy, 3,000 businesses have reduced their emissions. Enhanced capital allowances have underwritten investment in 13,000 energy-saving products. So I reject representations to abolish the climate change levy. I can confirm today our resolve to continue to reduce emissions, including through the climate change levy. Having kept the climate change levy at its original level for its first five years, it is my intention that for 2007 we index the climate change levy in line with inflation. As before, we will continue to return its revenue directly to business, and we will consult them on the most effective way of doing more to support investment in energy efficiency and the environment.

Our supply of energy should be stable, secure, competitive and environmentally sustainable. With 98 per cent. of emissions occurring outside Britain, climate change is a global issue which demands global solutions. Our first ambition is an international framework, and I can tell the House that at the heart of this is this Government's plan to strengthen and extend beyond 2012, as the Environment Secretary has said, the EU emissions trading scheme.

The developed world has a responsibility also to help developing countries meet their energy needs, so at the World Bank meetings in April, we will propose a World Bank facility—a $20 billion fund—for developed economies to invest in alternative sources of energy and greater energy efficiency for developing countries.

We want also to be a world leader in the discovery and development of new energy technologies. Following a joint study with the Norwegian Government, we have found that carbon capture and storage in the North sea can reduce emissions from gas and coal power stations by 80 per cent. So we are today publishing proposals for industry-wide consultation to move this important environmental advance, which will cut emissions, from research to commercial development.

Britain also has a unique opportunity to lead the development of all low-carbon technologies to meet the challenge of climate change. After discussions in recent weeks with some of the world's biggest energy companies, they have agreed to work in partnership to create for Britain a new energy and environmental research institute. For it to become, for Britain, at the cutting edge of science and engineering, our aim is that the public and private sectors together raise finance of £1 billion.

Britain must lead not only in environmental research, but in the exploitation of new sciences. So to help British companies to commercialise new environmental technologies, we are setting aside an initial sum of £20 million as seedcorn finance for the first enterprise capital fund for the environment.

The energy used in buildings accounts for nearly half of UK carbon emissions, so our next ambition is for Britain's homes and businesses to be the most energy efficient in the world. Regulations to take effect next month will improve the energy efficiency of new buildings by 40 per cent., compared with 1997 standards. But we will now do more. In the climate change programme review published next week, the Secretary of State for the Environment will announce additional incentives and cash support to pilot
 
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smart metering and a new labelling scheme highlighting the energy efficiency of consumer goods. And I can announce today, following an agreement reached this week with energy companies, a major extension of help for insulation—an additional 250,000 homes over the next two years. With every pensioner and low-income family eligible for special help, from 1997 to the end of this Parliament a total of 2 million more British homes will have been insulated.

I can also announce a fund, initially £50 million, for microgeneration technologies which make it possible for homes and businesses to generate their own renewable energy. The purpose of this fund is to show how we can make these technologies, from wind turbines to solar heating, affordable to schools, housing associations, including local authority tenants, and businesses. Initially, it will cover 25,000 buildings.

While half of carbon emissions come from buildings, a quarter come from vehicles. So today I want to do more to encourage cleaner fuels and cars. I propose to radically reform vehicle excise duty. I am introducing, to take effect tomorrow, a zero rate for a small number of cars with the very lowest carbon emissions, which will pay no duty at all. Instead of £75 for cars with low emissions, we will have significantly lower rates of £40. Duty rates from today will be zero, £40, and then £100, £125, £150, £190 up to a new band of £210 for the small number of new cars that are the most polluting—1 per cent. of all cars. This will help to pay for 5 million more fuel-efficient cars to have their duty cut. As a result of our decisions, and at an eventual cost of £10 million a year to the Exchequer, the duty paid on 50 per cent. of cars will be frozen or reduced from tomorrow. Instead of just 300,000 motorists paying £100 a year or less, 3 million will now pay £100 or less.

To reduce carbon emissions further, 5 per cent. of fuel will be made from biofuels by 2010, with support and incentives that will, with the 20p duty differential, be worth up to 35p per litre by 2008. It is our policy that each year fuel duties should rise at least in line with inflation, as we seek to meet our targets for reducing emissions and to fund our public services. But for the fourth successive Budget, because of high and volatile prices in the oil market, I propose to defer the usual inflation increase until 1 September. I will maintain the duty differential for rebated oils. And next week, when she publishes the climate change review, the Secretary of State for the Environment will set out her plans for a proposed annual carbon report. I can tell the House that the measures we announce today are essential for the progress in cutting carbon emissions that we all want to make.

The Budget task is to strike the right balance between tax cuts that are affordable, investments that are essential, and stability that is paramount. In striking the balance between tax, spending and borrowing, I am able to do more for hard-working families. Taken together, child benefit and the child tax credit effectively mean no income tax liability for a two-child family with earnings up to £425 a week. So 3 million of Britain's 7 million families with children have their income tax liability effectively wiped out by this family tax cut.

I have examined which tax decision could do most for families in future. We are raising the personal tax allowance from £4,895 to £5,035. One option would be to raise that personal tax allowance further. But
 
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spending £500 million on a family tax cut in this way would give a two-child family on median earnings of £24,000 a year £22 a year more, or 40p a week. However, using the same resources to raise the child tax credit will give that same family a family tax cut worth £140 a year more, over six times as much: £2.70 a week. So the best way to do most to help low and middle-income families with children, the best family tax cut, is to do as I will do today: to raise the child element of the child tax credit. Over the next three years, I will improve it by 14 per cent. For a family with two children, the child tax credit will be worth up to £88 a week in 2009, or £4,500 a year, a far bigger family tax cut than we could give if we used the same money to improve personal tax allowances or to cut the tax rate. Every one of Britain's 7 million families with children will gain as we raise child benefit on 10 April this year to £17.45 a week.

Since 1997, we have also recognised that a rising economic tide does not automatically lift all people's living standards, and that over and above securing economic growth, we as a Government have a responsibility to address and cut child poverty. Because of investing in the child tax credit, child poverty has fallen by 700,000 in our first seven years. But we want to do more. It is by raising child benefits, as we have done today, and encouraging more single parents into work—as we have also announced today—that 300,000 children will no longer be growing up in poverty. Instead, they will have better chances.

It is also our intention that every child born and growing up in Britain is not only freed from poverty but also has assets to their name. Since September 2002, every child born in Britain receives £250—for lower income families, £500—for their own individual child trust fund, to encourage savings. Today, with 1.5 million accounts already in being, I can announce that for these same children, additional payments of £250 and £500 will be made at the age of seven as well. This is an investment in the future, and in a savings culture among young people, that will in time allow all young people to have more of the choices previously available only to some.

I understand the very real pressures that mothers and fathers face in affording safe, high-quality child care. In 1997, there was almost no direct help available for child care at all, other than for workplace nurseries. From April, working mothers and fathers can receive help through the child care tax credit worth up to £240 a week or, with the support of their employers, through the employers child care vouchers. That means help is available for working mothers and fathers at every income level, and it is the first time in Britain that we have made an offer of universal help for child care.

The Childcare and Work and Families Bills will provide new rights to nine months' paid maternity leave and establish a new duty on local authorities to ensure child care places. But today I am also raising the value of the tax-free child care voucher from £50 to £55 a week. I am making capital grants available to medium and small employers to establish workplace nurseries, which will complement the rise from 6 April in the child care tax credit and the expansion of Sure Start children's centres from 700 now to 3,500 by 2010. Overall, that is an increase in child care places for families to 1.2 million—90 per cent. more than in 1997.
 
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I am able to take further decisions on taxation. On insurance premium tax, the aggregates levy, air passenger duty and corporation taxes, I propose that rates remain unchanged. On cigarettes, my decision is, for public health reasons, to go ahead with the annual inflation rise of 9p a packet from tomorrow. I will freeze duty on whisky and all spirits for the ninth successive year—for whisky, the longest period without an increase for half a century. I will implement, from midnight on Sunday, only the normal annual inflation rise of 4p on wine and 1p on a pint of beer. But in anticipation of World cup success this summer, I am freezing duty on champagne, and on British sparkling wine. I will also freeze duty on cider.

On VAT, I will continue to help churches and faith groups by refunding VAT paid on renovation of church buildings, monuments and other sacred places. I will extend the special VAT scheme for horse racing. I hold to our pledge not to extend VAT to a number of items: food, books and newspapers, public transport fares, children's clothes and children's shoes, including flip-flops.

I am publishing today a full updated list of the goods and services now subject to the reduced VAT rate of 5 per cent, and measures to tackle VAT fraud and avoidance. Last year, I proposed that the European Union should raise the duty free allowance for bringing goods into this country from outside the EU. This year, the European Commission has proposed to increase it from £145 to £340, but I am submitting proposals today for a further increase to £1,000.

The tax-free limit for ISAs will remain £3,000 cash and £7,000 in total. I can report that £190 billion has already been invested by 16 million people. I can confirm as usual the tax-free winter allowance of £200 for pensioners and £300 for the over-80s. Further support for pensioners will be contained within the forthcoming pensions White Paper. I will raise the exemption on stamp duty to £125,000, which means, with the last Budget's measure and this, we have taken 400,000 homeowners out of stamp duty. I will raise the amount of inheritance exempt from tax over the next four years from £275,000 this year to £325,000—94 per cent. of estates pay no tax.

Meeting all our fiscal rules, I have been able this year to cut vehicle excuse duty, continue the freeze on fuel duty, freeze spirits duties, take more people out of stamp duty, extend the family tax cut, child tax credit, and give more employers and employees tax incentives to cut the cost of child care, while at the same time improving tax allowances for business research, development and investment. Because of the strength of our fiscal position, I could cut further taxes while still meeting all my fiscal rules.

In each Budget, instead of dogmatically imposing a third fiscal rule, I look at the merits of the case to get the balance right between tax, spending and borrowing. Therefore, in doing so, it is also right to consider the case for additional investment in the national interest. I turn to our priorities: finance for our important educational reforms; plans for the Olympics and sports; and, first, defence, law and order and national security.

This is the first Budget since the attacks and tragedies of 7 July, a day when the nation stood as one against terrorism. We will never forget those who lost their lives
 
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and those who were injured. Today, we are allocating funds towards a memorial that will reflect the wishes of the victims' families. We will also support with an initial endowment of £1 million the creation of a new charitable fund to support British citizens injured in or affected by terrorist acts at home and abroad.

Since 11 September, we have also doubled the budgets for security here at home from £1 billion to £2 billion. The country depends on the strength of our security services and our armed forces. To support our armed forces who serve us so well in Iraq, Afghanistan and other international commitments, I am allocating an additional £800 million. To promote peacekeeping in the most troubled countries of the world, I am today also setting aside an additional £200 million. I can also announce that the UN emergency relief fund, with starting finance of $250 million, will, at the instigation of the Secretary of State for International Development, immediately provide as its first major disbursement $30 million in famine relief to the horn of Africa, building on our own emergency contribution of $60 million.

To deliver on the promises made at Gleneagles on aid and transparency, to move forward our international finance facility, and as part of the doubling of aid to Africa, I and fellow Finance Ministers from the IMF and World Bank will set out in Mozambique next month a new initiative that will be launched by President Mandela—and we are grateful to him—to finance new, detailed 10-year plans so that we can meet the millennium development goal of free schooling for every child by, and if possible before, 2015. Those initiatives are founded on keeping our promises to increase development aid each year to reach 0.7 per cent of national income.

As the Prime Minister has said, 2006 must also see an ambitious outcome for the world trade round. To ensure that developing countries can both support the round and be beneficiaries of it, we will contribute to an aid-for-trade fund that will help build the infrastructure and capacity to trade in developing countries that are urgently in need of our support.

The 2012 Olympics will be a proud moment for London and the whole of Britain. Together, the Greater London Authority, the Government and the national lottery have already agreed funding of £3.4 billion. I am able to announce the next stages. We will invest now in our 2012 Olympic champions. Recent results in Melbourne—and today, again, in India—have shown the outstanding sports talent that exists in our country. For training and facilities for world-class athletes of the future, I can announce £200 million of public money to be matched by raising £100 million in sponsorship, and, with another £300 million from the lottery, over £600 million will be available in total as world-class funding for world-class athletes in our country.

The Olympics will inspire young people across Britain and we must open up to them new opportunities to take part in sports. So we are also announcing that each year, from now until 2012, there will be a schools Olympics. Starting in Glasgow this year, and in a different city each year, we will fund annual national competitions in Olympic events open to all schoolchildren throughout the United Kingdom.
 
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The 2012 Olympics is for athletes to excel in, but it must also be an event in which all in Britain can share. Today, we are also announcing an Olympic trust fund for nationwide cultural and sporting events, which will take place alongside the Olympics. The games will end in 2012, but their legacy must continue, and it should benefit not just London but the whole country.

Because we want the 2012 Olympics and, beyond that, any English bid for the 2018 World cup to regenerate sports across our country, I want us to build in every area over the next decade public-private partnerships that can locally renovate and extend sporting facilities at the grass roots. We are today announcing initial funding of £34 million for a new national sports foundation. It will start next week, modelled on the Football Foundation's success, and will bring together public and private finance for new local sports facilities and grass-roots participation. I am also setting aside £2 million for a new venture between police, premier league football clubs and community groups, with the Football Foundation, to offer young people evening sports and to tackle antisocial behaviour.

Following the Russell commission which I set up two years ago, the new gap-year and volunteering scheme, youth national community service, will be launched in May with 26 company partners, a budget of up to £150 million and a target of 1 million young volunteers. It will be backed by youth community service on environmental projects, to be financed by an expansion of the landfill tax credit scheme.

But we must also do more to invest in youth and community facilities, both for the future—where banks and building societies have agreed, unclaimed assets will go to finance new facilities—and from next month, when in each local authority with budgets averaging half a million pounds, young people will for the first time decide on their own local services. I propose that we extend that with a new challenge fund open to all young people proposing innovative projects for youth and community facilities in their area—additional cash to reward innovation and spread best practice across the country.

Further to support that and the voluntary sector as a whole, which are at the heart of the life of every community, we will now set up in the Treasury an office for the voluntary sector, including faith as well as non-faith charities. It will advise on gift aid and futurebuilders, and will conduct a nationwide consultation with the voluntary sector to inform our spending decisions.

But as well as making these additional investments, this Budget will now start the process of setting out our priorities and plans for the next spending round and the years ahead. Our aim must be to ensure by our investment that hard-working families are the beneficiaries of this era of great change. It is right to have the fullest possible debate on spending priorities.

A decade ago, our first comprehensive review reflected the British people's priorities for education, health and public services. Today I am publishing plans to begin a public debate on our second comprehensive spending review. But there are already two areas in which, by setting out our direction now, we can best deliver our priorities in the future.

In order to release new resources for our priorities—central to which is building world-class schools and education—we are reviewing the use of assets in all
 
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areas. After asset sales reported at £6 billion last year, we plan total sales by 2010 of £30 billion, releasing finance for our front-line priorities. In addition, I can confirm that the sale of Westinghouse will be completed in the next year, and we expect it to raise £3 billion.

The Government will move ahead in the coming year with the sale of the Tote. To diversify risk further and after the energy review has reported, we are prepared to sell part of our stake in British Energy and related energy assets. We will publish plans for the sale and release of public spectrum. All those decisions will release new money for our priorities for the future.

Also published today are the figures for the first £6 billion of Gershon savings, including a reduction in civil service posts of 40,000. And I can announce today further savings in the years of the next spending round from 2008 to 2011.

The Home Secretary has agreed that we can invest more in priorities like policing and security, while making savings in other areas within a three-year budget at its 2007–08 real-terms level. Her Majesty's Revenue and Customs, the Treasury, the Department for Work and Pensions and the Cabinet Office have also agreed that necessary modernisation will be funded from an innovation fund, and alongside this the spending review for those four Departments will proceed on the basis of minus 5 per cent. a year in real terms below the baseline of 2007–08—efficiency savings that will allow us to focus new and additional resources on front-line priorities.

To meet and master the global challenge, the most important investment in our economy and our future and the most pivotal reforms we can make will be in the education of our children and young people. I, like so many people, am grateful for the inspirational teachers and the high quality of education from which I benefited. And just as I had the best chances, my aim is that all young people from whatever background have the best of chances.

There are two priorities where, in this Budget, Britain can speed up our progress and advance even more quickly towards our ambition of world-class standards and excellence. With China and India turning out 4 million graduates a year, we can no longer afford to write off the talent or waste the potential of any British young person. So the Secretary of State for Education and Skills is announcing today that those who have missed out on their first chance in education will have a second chance to make the best of themselves. We are setting aside resources so that, for the first time, up to the age of 25, further education all the way up the scale to A-level standards will be free of charge.

That new right to free learning will be backed by adult learning grants to help with costs of living. And with financial help also for school leavers who have fallen through the net—and whom we want to help make the transition into training and work—our aim is a Britain where all young people stay on in part-time or full-time education, and gain skills throughout their working lives.

But 80 per cent. of the 2015 work force is already in work, and to make a reality of second chances in education for all ages, we must also strengthen our further education colleges—centres of learning that have been neglected in the past, but must be at the forefront of future success. So we are announcing for
 
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each college a step change in employer involvement, so that we can match the demand for skills to the courses on offer. The Secretary of State is also announcing new powers to redirect resources from failing courses to the best courses, the ones that individuals, employees and employers want to use.

We will match these further education reforms that promote individual choice, increase local accountability and business engagement and reverse failure with £500 million of capital investment and an annual budget worth £7 billion by 2008. As with other allocations, separate announcements will be made for Scotland, Wales and Northern Ireland.

But while we have a duty to ensure that there are second chances, we also have to ensure for every child the best first chance. Even with a doubling of investment, Britain's share of national income spent on education is still behind America and other major competitors.

We know the educational benefits of more individual attention, small group teaching and tuition, and we know that they are easier to get when the overall teacher-pupil ratio is low. In private schools there is one teacher for every nine pupils, compared with one teacher for every 16 in state secondary schools. To secure better results, we have improved the pupil-teacher ratio and doubled the money spent per year for the typical pupil from £2,500 to £5,000.

But that figure of £5,000 per pupil still stands in marked contrast to average spending per pupil in the private sector of £8,000 per year. Our long-term aim should be to ensure for 100 per cent. of our children the educational support now available to just 10 per cent.

So to improve pupil-teacher ratios and the quality of our education, we should set as an objective for our country that stage by stage, adjusting for inflation, we raise average investment per pupil to today's private school level. And I can start immediately in the coming spending round by closing today's gap between capital investment for pupils in private schools and in state schools, so that all schools and all pupils have world-class IT and world-class equipment, teaching materials and buildings. So in the coming five years, investment in schools will rise from £5.6 billion a year to reach £8 billion a year—a 50 per cent. rise, making a total of £34 billion of new investment over five years.

By 2011, annual investment in the typical child's education will be over £1,000 per pupil, matching in state schools—in IT, equipment and buildings—what private schools spend today, and demonstrating, fully within the discipline of our fiscal rules, that by investing more in education and investing not a lower share of our national income but a higher share, we can make a practical reality of our goal that every child should have the best possible start in life. It is a goal we could not achieve if bound by a fiscal rule that cut investment, but a goal we can achieve if we build a national consensus around a rising share of investment in education.

I have further announcements to make. This Budget's choice is to invest more, not less, in schools and families; to strengthen the new deal, not abolish it; to maintain the climate change levy, not remove it; and instead of cutting investment, to hold firm and not waver on the principles that have given Britain stability and jobs, and now allow us to do even more for our priorities.
 
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To tackle crime and the fear of crime, there are already a record 140,000 police officers and 6,000 community support officers. In 1,000 neighbourhoods, there are full community policing teams. But the Home Secretary and I want every community to have a community policing team as soon as possible. So, at an additional cost of £100 million, we will ensure by April next year that we more than double the number of community support officers from 6,000 to 16,000, and ensure that there will be neighbourhood policing in every community in England and Wales.

From 1 April there will be free local bus travel for every pensioner and for disabled people, but we believe that there should also be free national bus travel. So the Transport Secretary is announcing today, from April 2008, at a cost of £250 million, for every pensioner and for disabled people free off-peak national bus travel in every area of the country.

I have one further announcement. In 1997, there was no payment at all direct to primary and secondary head teachers. With £270 million extra from April, rising to £440 million next year, I can today put much more money than before direct to our schools for tuition, teachers and teaching support. There are those who say—as with the £1.5 billion that I have already found for law and order, policing, security, environment and the Olympics—that this £440 million for education should be used to cut taxes. I could, of course, afford to do so, but I say: investing in education comes first, and investing in education is this Budget's choice. So for the typical primary school, up from this year's £31,000, £44,000 will go direct to the head teacher. For the typical secondary school, up from this year's £98,000, from next week £150,000, and next year £190,000—twice what it is now. For the largest secondary schools with the greatest needs, from £260,000 to £365,000 next week, rising to £500,000 next April. Next year, £440 million more will go direct to schools, helping pay since 1997 for 30,000 more teachers.

Excellence in education, my priority; more investment and reform, not less; a strong and strengthening economy; this is a Budget for Britain's future and I commend it to the House.


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