|Previous Section||Index||Home Page|
Next year, I forecast growth of between 1 and 1.5 per cent., as I said in the Budget. Because of the underlying strength of our economy, the pick-up in world demand
and the substantial spare capacity opened up by the recession, my Budget forecast, broadly in line with that of the Bank of England, of growth of 3.5 per cent. in 2011 and 2012 remains unchanged. This growth, however, will come from more varied sources and not depend as much on the financial sector, which will, of course, remain an important part of our economy. Growth will be driven by fresh opportunities to export as the global economy expands and by investment by businesses in the key industries of the future. It is growth that I am determined to support in this pre-Budget report.
Partly because of the reversal of the VAT cut, consumer inflation will rise from 1.5 per cent. to around 3 per cent. early next year, before falling back. The Bank of England expects inflation then to fall below target and reach 1.5 per cent. by the end of next year.
The global recession has had an impact on the public finances in every country, with tax revenues falling and spending increasing to support the economy. Here in the United Kingdom, the financial sector, which provided over a quarter of all corporate tax revenues, has been hard hit. Revenues from stamp duty and income tax are sharply down and it will take time for tax revenues to recover.
Our steps to maintain stability in the banking sector have also had an impact on the public finances. At the Budget, given the extreme uncertainty at the time, I made a provisional £50 billion estimate of the possible taxpayer losses from our interventions in the financial sector. Those risks have now significantly diminished because of the successful intervention of Governments to support the global financial system. Lloyds Banking Group, for example, has been able to raise capital from the markets and is not receiving Government support in the asset protection scheme. We have also restructured RBS's participation in that scheme, so there are no expected losses for the taxpayer. Other banks are also in a much more stable situation. As a result, I can revise down my provision for any potential impact on the public finances from £50 billion to around £10 billion, but our objective remains to get all the taxpayers' money back, on top of the fees charged for supporting banks through this crisis.
I have made clear that support during the downturn must go hand-in-hand with steps to rebuild our fiscal strength once recovery is firmly established. Backed by legislation introduced today, the Government will ensure that public sector net borrowing as a share of GDP falls every year and is more than halved by 2013-14, and that net debt as a share of GDP is falling in 2015-16. I believe that that is a sensible timetable. To consolidate too soon, too quickly or too indiscriminately, as some have proposed, would risk delaying the recovery and threatening a longer recession. When Japan tightened prematurely in the 1990s, it pushed the economy back into recession, making debt and deficits higher, not lower.
Taken as a whole, this pre-Budget report secures a fall in borrowing each year until 2013-14 to meet our deficit reduction plan. In the Budget, I forecast that public sector net borrowing would be £175 billion this year and would then fall to £97 billion in 2013-14. Because of the severity of the recession, my forecast for this year's borrowing is £178 billion. Next year it will
fall to £176 billion. As the economy recovers and the deficit reduction plan starts to take effect, it will fall to £140 billion and then to £117 billion, and will reach £96 billion in 2013-14-a slightly lower level than I forecast in April-before falling to £82 billion in 2014-15. As a share of GDP, borrowing will be 12.6 per cent. this year, 12 per cent. next year, then 9.1 per cent, then 7.1 per cent., and 5.5 per cent. in 2013-14. It will fall to 4.4 per cent. in 2014-15. If we exclude public sector investment, or capital spending, and take the economic cycle into account, the budget deficit is expected to fall to 1.9 per cent. at the end of the forecast period.
Public sector debt has increased in every G20 country as a result of this global recession. Net debt as a share of GDP is expected to reach 82 per cent. in Germany, 83 per cent. in France, and 85 per cent. in the United States. As a result of the lower provision for possible losses in our financial sector this year, I can forecast that net debt will reach 56 per cent. of GDP. It will then rise to 65 per cent. next year, and to 78 per cent. by the end of the forecast period in 2014-15. However, net debt as a share of GDP will fall the year after that. Even at its peak, debt will be in line with the average for the other G7 economies.
I believe that we have made the right choices to help the country through the recession when we could have chosen to do nothing. We also need to make the right choices to reduce the deficit. In the Budget, I set out how we would do that by encouraging growth now and in the future, with fair tax increases and with tighter control of public spending. I now want to set out further details of how we will achieve this deficit reduction plan.
The combination of the talents of the British people and today's low inflation and low interest rate environment provides us with a strong platform to meet our ambition of long-term sustainable growth-so does having the most flexible labour market in Europe, the lowest rate of corporation tax in the G7, and a competition regime that is among the best in the world. That is why ours is judged to be one of the best locations in which to do business and attract inward investment. I am determined to build on those strengths today by maintaining our leadership in the low-carbon sector, boosting investment in our national infrastructure and skills, and supporting our world-class high-tech industries.
In line with the overall neutrality of this pre-Budget report, two thirds of the targeted measures that I shall now announce come from within existing budgets. If businesses are to expand and grow, they need access to credit. Following the intervention by the Government, total bank loans to businesses today are above where they were when the crisis hit in 2007. We have seen over £50 billion in new business loans from RBS and Lloyds alone. But unsurprisingly, at the same time other businesses have reacted to the uncertainty by repaying existing loans, which is why net lending as a whole is down. I am very aware that some small and medium-sized businesses still encounter difficulties in obtaining loans. As recovery gets under way, we shall need to ensure that SMEs obtain the credit they need. We must work with the banks to ensure that that happens. We are also working to secure a contribution from major banks towards a £500 million growth capital fund which will invest specifically in small businesses. We will announce further details shortly.
In January we launched the enterprise finance guarantee, which has already offered Government guarantees on bank loans to over 6,000 businesses. Today I have decided to extend the scheme for a further 12 months, which will guarantee a further £500 million of loans to small businesses.
This week sees the start of the UN conference on climate change, an historic opportunity for the reaching of a universal agreement to tackle global warming. We can be proud that the UK has led the way: on meeting Kyoto targets, introducing carbon budgets, and recognising that developing countries need help to reduce their own emissions. Tackling climate change will bring new opportunities for new low-carbon industries, and that will create the high-skilled, high-paid jobs that are crucial to our future prosperity.
Today I can redirect existing funding and invest in wind power, renewable energy and other green industries. Through the innovation investment fund and the Carbon Trust's venture capital scheme, we will support at least £160 million of public and private investment in low-carbon projects. We will also invest £90 million in the European Investment Bank's new 2020 fund, which will enable €6.5 billion of finance to be made available for green infrastructure projects. I can also tell the House that we will double our commitment to finance four carbon capture and storage demonstration projects, which will make us world leaders in that vital area.
As well as investing in clean and low-carbon technologies, we must all become more energy-efficient and cut emissions as well as household bills. The roll-out of smart meters, which will be completed in 2020, will help families to identify how to become more energy-efficient. Improving home insulation is key. A quarter of all the country's emissions come from households. Already 235,000 homes have benefited from the Warm Front scheme to provide more efficient heating and insulation for the most vulnerable. Today I can announce an additional £200 million, from April, to help with energy efficiency. An extra 75,000 households will benefit from an extension of the scheme. That will go alongside further requirements, amounting to up to £300 million overall, for the energy companies to provide discounts on energy bills for a further 1 million low-income households.
Inefficient domestic boilers add over £200 to household bills and 1 tonne of carbon to the atmosphere each year. I therefore want to build on the successful car scrappage scheme. I want to help 125,000 homes to replace those inefficient boilers with new models. I can also announce changes to the climate change levy, company car tax, and fuel benefit charge.
I have three more targeted measures to announce. From April, people with home wind turbines or solar panels who plug excess power into the national grid will receive, on average, £900 a year. I intend to make that payment tax-free. To help to boost the number of electric cars on our streets, I have decided to exempt them from company car tax for five years. I can also announce 100 per cent. first-year capital allowances for electric vans.
A key component of our growth strategy is investment to keep goods and people moving. The Government have made huge strides in rebuilding the national infrastructure following years of neglect. Continued public investment here is essential to growth. This year public sector investment reached a 30-year high, and
has delivered more than 70 road and motorway schemes and improved journey times across the rail network. Work is now under way on Crossrail, the Thameslink project and, from this month, the upgrade of the M1. All that work will continue; so will the rail electrification programmes for the Great Western main line and the north-west that were announced in July.
I have given the go-ahead to further plans for rail electrification between Liverpool, Manchester and Preston. My right hon. and noble Friend the Secretary of State for Transport will announce further details shortly. The Government will also respond, early next year, to the proposals for a new high-speed rail line from London to the west midlands and to the north and Scotland.
Since 1997, we have helped millions of people gain qualifications or training. The number of apprenticeships has doubled. New advanced apprenticeships will meet the skills needed in key growth areas, such as advanced manufacturing, low carbon, digital technologies, and the biosciences. We also want to break down informal barriers that close off some careers to undergraduates, particularly from poorer backgrounds, so I can announce that we will offer financial support for up to 10,000 undergraduates from low-income backgrounds to take up short-term internships in industry, businesses and the professions. This will give them a taste of careers that they may not otherwise have considered. We will announce further details shortly.
We are modernising the UK's digital infrastructure and, in the process, creating thousands more skilled jobs. We have provided funding to help extend the opportunities of the broadband network to more remote communities. We now want to go further, so that we can provide the next generation of super-fast broadband to 90 per cent. of the population by the end of 2017. That will be funded through a duty of 50p a month on landlines, which will be included in the Finance Bill.
The oil and gas industry is an essential part of our economy. To encourage further investment, I am today relaxing the criteria of the field allowances, to support the development of up to eight known fields and to encourage further exploration. We will work with industry to look at how best to ensure the development of infrastructure to the west of Shetland.
We already have a tremendous track record in key growth industries. We have the leading medical biotechnology sector in Europe. Our aerospace industry is the second largest in the world. Our creative sector has increased exports by 60 per cent. since the beginning of this decade. All of that has been supported through our investment in science and our targeted tax policy. This country has a remarkable record of ideas and innovation. We have won more Nobel prizes than any other country of our size. We need to do more to support this ingenuity and ensure this creativity is harnessed by this country. I want to encourage research and development in the pharmaceuticals and biotech industries in particular. So, following consultation with business, I will introduce a new 10 pence corporation tax on income that stems from patents in the UK. This will help maintain jobs in science and technology in this country.
I also want to build on our world-class achievements in medical research. With the Wellcome Trust, Cancer Research UK and University college London, we are working on plans to establish the largest institute in Europe for research into long-term medical challenges.
The new strategic investment fund, set up in April, has already agreed vital support to hi-tech projects such as Airbus in Wales and the life sciences in Scotland. We will expand this work through £100 million of redirected funds and an extra £100 million. By supporting the low-carbon sector and investing in our vital infrastructure and our world-class industries, we will secure growth, create new jobs and provide the revenue to help rebuild our fiscal strength.
Supporting growth is vital to provide the future revenue to halve borrowing over the next four years, but, as I have said, it also requires us to take some tough decisions on tax now. I am determined that any tax increases will continue to be guided by our values of fairness and responsibility. Last year, the banks made collective losses of £80 billion in this country alone. This would have been much higher without the unprecedented level of support from the taxpayer. There is no bank that has not benefited, either directly or indirectly, from this help. This should be a time for banks to rebuild their capital base and become stronger. A tax on profits, as has been suggested, would prevent them from doing that, so I have decided against a windfall tax. However, there are some banks who still believe their priority is to pay substantial bonuses to some already high-paid staff. Their priority should be to rebuild their financial strength and increase their lending, so I am giving them a choice: they can use their profits to build up their capital base, but if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer. I have decided to introduce from today a special one-off levy of 50 per cent. on any individual discretionary bonus above £25,000. This will be paid by the bank, not the bank employee, and anti-avoidance measures will be introduced with immediate effect. High-paid bank staff will, of course, also have to pay, as usual, income tax at their top rate on any bonus they receive. On a cautious assumption, which includes our expectation that some banks will rein back on bonuses, this levy is expected to yield just over £500 million. That additional money will be used to pay for the extra measures that I have already announced, such as help for the young and older unemployed to get back into work.
Under the existing rules, the highest earners benefit disproportionately from tax relief on pensions. At present, a quarter of all the money spent on pensions tax relief goes to the top 1.5 per cent. of earners. To make this fairer, I announced in the Budget that we would reduce pension tax relief for people with incomes of over £150,000. I want to do that as fairly as possible, and to treat individuals the same regardless of whether they receive their pay as current salary or as a future pension benefit, and prevent avoidance, so I have decided to include employer pension contributions in the definition of income for this tax measure. To provide certainty, I will introduce a floor so that, irrespective of the size of employer pension contributions, no one with an income below £130,000 will be affected.
I believe it is right that parents should be able to pass on savings to their children. Before the financial crisis rocked the global economy, I enabled married couples to combine their inheritance tax allowances, and this will continue. I also said then that allowances would rise to reflect inflation and the expected continued increase
in house prices, but I do not believe that raising this allowance can possibly be a priority given the impact of the downturn on the country's finances, so I have decided to freeze the individual allowance at £325,000 for the next year. That will still mean that fewer than 3 per cent. of estates will pay inheritance tax.
I have decided against any further changes to income tax rates or thresholds next year, except for some changes in what can be tax-deductible. Because RPI inflation was negative in September, this will provide a real-terms benefit relative to inflation, but in April 2012 I have decided to freeze the point at which people start to pay income tax at 40 per cent. for one year. No one with income below £43,000 will be affected by this change.
It is also fair that those who should pay tax do not escape their responsibilities. I am determined to tackle activities such as avoidance and evasion, which undermine tax receipts. Since the Budget, Her Majesty's Revenue and Customs has asked for details of at least 100,000 offshore accounts held at over 300 financial institutions. This pre-Budget report sets out anti-avoidance and smaller tax measures to deliver additional revenues and protect £5 billion a year of existing revenues.
These are tough, but necessary, measures to increase tax, but I have done this in a fair way: those on modest incomes are protected; those on middle incomes will pay more, depending on their earnings; but the biggest burden will fall on those with the broadest shoulders. Today's measures, combined with those from the Budget and last year's pre-Budget report, mean that over half of the additional revenue raised will be paid by the top 2 per cent. of earners.
Fairness in tax is a crucial part of maintaining fiscal sustainability, but the majority of the reduction in borrowing will have to come from slower growth in overall public spending. We have already set out our spending plans until April 2011, but I believe it would be dangerous, as the head of the International Monetary Fund said only a couple of weeks ago, to reduce spending too soon, so to continue to support jobs and the economy, we have decided to stick to our spending plans for next year. In 2010-11, total public spending will increase by £31 billion, a growth rate of 2.2 per cent. in real terms, providing continuing strong support for the wider economy until the recovery is firmly established. Once recovery is secured, we must, as I made clear at the time of the Budget, reduce the rate of growth in public spending, and meet our ambitious target to halve the deficit.
We take these decisions from a position of strength. In 1997, our public services were in crisis. Chronic under-investment in health and education had taken its toll: hospitals with too few nurses and doctors to meet the needs of patients; schools with too few teachers, textbooks and computers. The country had failed, too, to invest in transport and national infrastructure, all of which was damaging to our economy and prosperity. That was the record we inherited and that was the record we had to deal with. We have worked to turn it around, through a combination of strong investment and far-reaching reform.
|Next Section||Index||Home Page|