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2006 Pre-Budget Report
PRE-BUDGET REPORT STATEMENT TO THE
HOUSE OF COMMONS, DELIVERED BY
THE RT HON GORDON BROWN MP,
CHANCELLOR OF THE EXCHEQUER,
6 DECEMBER 2006
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Check against delivery
This is my tenth Pre Budget Report and under this government the tenth consecutive
year of growth.
I can report not only the longest period of sustained growth in our history, but of all the
major economies – America, France, Germany, Japan - Britain has enjoyed the longest
post war period of continuous growth.
And the Treasury forecast is that growth - sustained under this government for a record
38 quarters - will continue into its 39th and 40th quarter and beyond.
Ten years ago Britain was 7th in the G7, bottom of the league for national income per
head. In the last two years Britain has been second only to the USA.
In no other decade has Britain’s personal wealth - up 60 per cent - grown so fast.
And this Pre Budget Report drives forward the great economic mission of our time – to
meet the global challenge, to unleash the potential of all British people, so that the
British economy outperforms our competitors – and deliver security, prosperity, and
fairness for all.
Let me report:
growth in quarter one of 0.7 per cent,
quarter two 0.7,
quarter three 0.7.
The forecast for 2006 was annual growth of between two per cent and two and half per
cent.
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I can report that growth this year will surpass this figure and is expected to be two and
three quarters per cent, and rise to two and three quarters per cent to three and a
quarter per cent next year.
Business investment is up five and three quarters per cent, exports are up 6 per cent,
and investment overall is up 6 per cent.
Despite contending with global imbalances, exchange rate uncertainties, stalled trade
talks and high commodity prices, Britain's investment led, export led growth is forecast
to continue in 2007, investment and exports both to rise by five per cent or more.
And by mid 2007 we expect inflation to be at its 2 per cent target and remain at target in
2008.
Uniquely Britain continues to combine recession free growth with the longest period - a
decade - of simultaneous employment and productivity growth.
Productivity, which in the last economic cycle up to 1997 grew by 1.9 per cent is
averaging since 1997 2.4 per cent - and from 1997 to, and including, this year our
productivity per worker has moved 3 per cent ahead of Germany, 11 per cent ahead of
Japan and we have halved the gap with France.
And as productivity continues to rise - Britain the only G7 country to narrow the gap with
the USA this year alone there are 200,000 more people in employment,
now 2 and a half million more jobs than in 1997,
the highest ever number of men and women in work in our country,
and employment higher since 1997 in every region and nation.
While the Secretary for Work is today strengthening the New Deal with further
measures to bring more lone parents and the unemployed into jobs, there is already
today a higher proportion of the working age population in employment in Britain than in
America, Japan, Germany, France or the whole of the euro area.
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And I can report also that the number of people with tax free savings accounts is now
over 16 million, in contrast to just nine million under the old system of TESSAs and
PEPs, and I can confirm that the tax free advantages of Individual Savings Accounts will
continue beyond 2010 and will be made permanent.
In line with independent forecasters we have decided to maintain trend growth at 2.75
per cent while basing our public finances, audited by the NAO as cautious and
reasonable, on a rate of 2.5 per cent.
Mr Speaker, as I will show when I give all the fiscal figures in detail, Britain will meet
both its fiscal rules in this cycle and also in the next.
So we build for the future from the fundamentals of a recession free decade of stability
and growth with low inflation.
And this is the strongest foundation from which to address the great global challenges
ahead.
Let me summarise:
Asia is already outproducing Europe;
China alone is manufacturing half the world’s computers, half the world’s clothes, and
more than half the world's digital electronics
and this Christmas, more than 75 per cent of children’s toys.
But in the next ten years the competitive challenge is even more profound. Once
responsible for just one eighth of the world's growth, China and India will soon capture
almost half.
And increasingly they are competing not just on low cost, but on high skills. While every
year Britain adds 75,000 engineers and computer scientists, India and China add half a
million; and while annually Britain turns out quarter of a million graduates, India and
China now graduate four million.
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So economies like ours have no choice but to out-innovate and out-perform competitors
by the excellence of our science and education, the quality of infrastructure and
environment, and by our flexibility and our levels of creativity and entrepreneurship.
And just as in the last decade by planning long term we created a new and enduring
British framework for economic stability, so too for the coming decade the task is to
think long term again and to create a new British framework for investment and
innovation, a British strategy to make the next stage of globalisation work for the British
people.
A shared finding of each review we have published is that the investments that Britain
must make can only be achieved in a new era of shared responsibility and partnership
between private and public sectors.
And if the focus of our first decade was to replace or repair old hospitals, old schools
and old housing, that is catch up investment – the new priority is world leading
investments that will move Britain sustainably ahead of our competitors – the road and
rail networks, the affordable housing, the advanced medicine and science and the
schools and colleges of the future.
And we in Britain now have a long term choice to make – whether to commit to the
essential investments these reports recommend.
First, science and innovation.
Twenty five years ago the market value of our top companies was no more than the
value of just their physical assets. Today the market value of Britain's top companies is
five times their physical assets, demonstrating the economic power of knowledge, ideas
and innovation.
And the next challenge for Britain is to match strength in basic research with success all
round in transforming knowledge into successful products and new jobs.
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So having consulted on the way forward for university research, we are today detailing a
new system for assessment and funding.
And as a first step universities will have access to £60 million a year directed to applied
research with commercial potential.
We are determined that Britain be a world class location for future medical research,
including stem cell. So that Britain leads the world in developing new treatments and
new drugs, we will bring together the research capability of our universities, institutes
and pharmaceutical companies with the unique resources of the NHS.
I can confirm with a pooled budget of over £1 billion a year and a new fast-track
procedure for priority research, President of the Academy of Medical Sciences,
Professor John Bell, will lead this new drive to identify for Britain the most useful and
fruitful areas for potential medical breakthroughs.
British science can also do more to eradicate poverty and disease around the world, so
the International Development Secretary is establishing a new partnership with the
research councils and charities, including the Wellcome Trust and the Gates
Foundation, so that we can maximise the contribution of British inventors, scientists and
researchers to this urgent global task.
It is because the future success of our creative and knowledge based industries
depends upon Britain having a robust intellectual property regime that the Secretary for
Industry is announcing today he will tighten the penalties for copying and piracy while
giving individuals new rights for personal use; and he will introduce a new fast track
protection for small companies to safeguard their trademarks.
Since 1997 the number of films made in Britain has increased by 50 per cent. To
encourage an even more vibrant British film industry, I am today confirming January 1st
as the date to introduce new tax reliefs.
I am also addressing avoidance and the rules governing managed service companies.
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Mr Speaker, the best way to make globalisation work for the British people is to
combine open markets, free trade and flexibility with investment in people - and also
fairness to them.
The Minimum Wage is now £5.35 per hour. But to be effective we must ensure British
workers and good British companies are not undercut by illegal rates. In January we will
raise the penalties for persistent illegality, and to raise the standards of enforcement I
am announcing a 50 per cent increase to £9 million in the budget to monitor and police
the Minimum Wage.
In the last ten years, over 1 million more adults have gained literacy and numeracy
qualifications and the British workforce has 3 million more men and women with skills.
The Leitch Report says instead of today's 6 million unskilled workers, the 2020 economy
will need only half a million unskilled workers.
And instead of 9 million high skilled workers and graduates today we will need 14
million.
I want British workers to gain the skills for these higher paid jobs of the future. So our
aim is by 2020:
90 per cent of adults reaching at least the equivalent of 5 GCSEs – achieving in just
over one decade an ambition that no other country has yet managed;
by reforming underperforming colleges, doubling from 2 to 4 million the number of
adults achieving ‘A-level’ equivalent skills;
and ensuring our economy has over 5 million more men and women with high level
professional and graduate skills.
But our objectives cannot be achieved either by government alone or business alone.
The review assesses that after 2010 a new statutory entitlement to skills training may be
required.
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But there is an urgent need to make progress now and by consensus – so the Secretary
for Education is today appointing the former Director-General of the CBI, Sir Digby
Jones to advance an agenda of:
employees taking more responsibility to train;
employers taking more responsibility to offer time off, with in return more say over what
training is provided;
and government taking more responsibility to reform and invest in training provision at
work, in colleges and online.
To meet the skills needs of the future we must also encourage young people who too
often lose out to stay on, study for qualifications and go to university and college.
Around Education Maintenance Allowances, we are introducing an ‘earn to learn’
programme for people to gain graduate qualifications whilst still working part time; new
‘summer universities’ along with work experience and coaching to motivate young
people to stay on in education after sixteen; and we are extending the support to 16 and
17 year olds who are not in education or employment, to help them into training and
then into work.
And we will now consult on £2,000 bursaries for looked after children to encourage
them to go to university; and also on a new path for entry to university in which students
volunteer in return for a reduction in tuition fees.
But to ensure every child and young person has the best start in life we must also
address the causes of child poverty.
In April child benefits paid to the poorest child - only £28 in 1997 will rise to £64 a week
– these tax credits, the main vehicle that has ensured that, since 1997, 2 million children
have been taken out of absolute poverty and almost one million out of relative poverty.
Now that the Healthy Start scheme offers half a million pregnant mothers and families
with young children up to £5.60 a week more for nutrition, it is time to do more.
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I have received powerful representations that in the last months of pregnancy when
nutrition is most important and in the first weeks after birth, the extra costs borne by
parents could be better recognised if we did more to help through our universal benefit,
child benefit paid to all.
Maternity grants are available to low income mothers from the 29th week of pregnancy.
Help should be available to all mothers expecting a child. So child benefit will be paid on
that basis for every mother – additional child benefit that recognises the important role
at this critical moment that child benefit can play.
We are today also publishing the interim report of the third sector review; and also an
action plan for third sector involvement in public services.
And we propose more stability in funding for third sector success, particularly for small,
local organisations. I can announce that in the spending review the norm should not be
one year funding but three year funding for third sector organisations. Community
ownership of assets can provide local communities with a financial and social stake in
their own areas. So we are announcing a new £30 million fund to encourage local
authorities and the third sector to work together to expand community ownership of
community assets.
Reviews on children and disability, issues of social care and local regeneration will
report next year.
And with 100,000 Olympic volunteers already, the Culture Secretary and Minister for the
Third Sector will now consult on the next stage: how young people can do more to
volunteer in the run up to 2012.
Mr Speaker, the same partnership of responsible individuals, companies and
governments is vital to meeting the environmental challenge.
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I have said that we should use market mechanisms and incentives to work towards
global carbon trading.
I can report that following the Stern Review, 31 countries in the EU and EFTA have
already signed up to emissions trading as the first step to this global framework.
And we are bringing together the major financial institutions: our aim, to make London
the world's leading centre for carbon trading.
On the development of biofuels, Britain has now signed a partnership agreement with
Brazil, Mozambique and South Africa;
on the preservation of rainforests we are working with Latin American and Asian
countries;
on clean coal with China and India;
and today, Norway and Britain are launching the first feasibility study for a new
infrastructure for carbon capture and storage under the North Sea;
and the Secretary for Industry will be appointing engineers ahead of a decision to be
made next year on the first carbon capture demonstration plant in the UK.
It is time also to set a long term framework for curbing the carbon emissions from
homes - 30 per cent of all emissions.
Next week the Secretary for Communities and the Housing Minister will set out plans to
ensure that within 10 years every new home will be a zero carbon home, and we will be
the first country ever to make this commitment.
And to accelerate the building of zero carbon homes, for a time limited period the vast
majority of new zero carbon homes will be exempted from stamp duty.
And for existing homes I will consult on a new facility to undertake energy audits and
offer low loans that would in time, because of low energy bills, pay for themselves.
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Through greater energy efficiency our aim is to reduce emissions and to eliminate fuel
poverty.
In addition to the Basic Pension rising from next April by 3.6 per cent and the winter
allowance, the pension credit minimum guarantee will rise by £5 a week for a single
person and £7.65 a week for a couple.
And with grants of £300 to £4,000 – through the Warm Front programme which I
extended last year – we are providing not only insulation but free central heating for low
income pensioners and extra support towards central heating in all other pensioner
households.
By the end of 2008 we will have insulated 2.7 million homes.
And in the coming year, an extension of Warm Front and going community by
community will make it possible for 300,000 pensioner and other households most
vulnerable to fuel poverty to have free insulation and central heating.
I turn to the framework for transport, responsible for 30 per cent of all carbon emissions,
the aviation sector accounting for a fifth of these.
Currently aircraft emissions are not part of the EU emissions trading scheme. Nor is
aviation fuel taxed.
While we continue to work internationally to seek a global agreement on reducing
aviation emissions, each country must take action domestically.
From February 1st we will double air passenger duty. For most journeys - over 75 per
cent of them – duty will rise from £5 to £10 – securing extra resources in the coming
spending round for our priorities such as public transport and the environment.
A priority for vehicles, responsible for 25 per cent of emissions, is to promote cleaner
fuels through fiscal incentives.
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Today I am extending the 20 pence per litre discount to include the next generation of
biodiesel, a discount we will offer to all new innovative fuels as they develop. I am also
consulting prior to a Budget decision on extending the current 40 pence per litre duty
discount for biogas and on the level of tax discounts for company cars using high blend
biofuels; and I am relieving small biofuel producers of requirements to register or submit
returns.
And while I will go ahead with an inflation rise in fuel duty from midnight tonight, of 1.25
pence per litre, I will not restore the fuel duty escalator and I have rejected a real terms
increase in fuel duty.
And I can also announce that to incentivise the use of cleaner fuels in trains in the same
way we do for cars, vans and lorries, the tax rate for piloting rebated fuels mixed with
biofuels will be reduced from 53p to 8p.
For greater energy efficiency in public procurement, we are publishing new guidelines to
ensure that £125 billion we invest each year is spent both well and in a sustainable way,
and as a first step we will pilot school designs that achieve a level of excellence in
carbon reduction.
Tackling climate change is an opportunity for Britain to create thousands of new jobs.
And our new institute to investigate new environmental technologies will start with a
budget of £550 million and I can also confirm a second enterprise capital fund focused
on innovative green technologies.
The theme of both the Eddington Review on transport and the Barker Review on
planning flexibility is that we must systematically modernise and improve Britain's road,
rail, housing and civic infrastructure, run down in the 70s, 80s and early 90s, by
investing in a sustainable infrastructure that will contribute to the future prosperity of the
country.
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And just as we made monetary policy independent of government, then financial
services policy, then competition policy and much of industry policy, it is time to adopt
the same approach for planning. We will now consult on the proposal that in future,
while ministers set policy guidelines, strategic decisions on location and planning
permission for major infrastructure projects will be made outside of day to day political
control and instead by an independent planning body.
As we move forward our risk based approach to local and national regulation I can
confirm we are setting new incentives that will cut the numbers of local authority
inspections and, on tax, after consultation with and support from business, we will now
implement a new approach offering early rulings, time limits for decisions and a better
approach to managing risk.
And as we consult on and then implement the Barker and Eddington recommendations,
we are today also designating new brownfield sites that will raise the number of new
homes on surplus land to 130,000, and a doubling within four years to 160,000 families
who will be able to become homeowners for the first time through shared equity.
Properly equipping ourselves for the economic and social challenges ahead requires a
long term commitment of new investment.
Our capacity to finance this depends on the strength of our fiscal position, on our ability
to release resources for priorities, and on the choices we as a country agree to make.
First the fiscal position.
I am today publishing the document Britain's long term public finances. Its detail shows
that even after taking into account our new commitments on pensions, the country's
public finances are on a sound and sustainable basis for the long term - and stronger
than other countries.
Before I give this year's fiscal figures, I can confirm that to fund operations in
Afghanistan and Iraq and other international obligations the Secretary of Defence has
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been allocated an additional £600 million. I want to pay tribute to our armed forces and
security services for their contribution to our country.
I can also announce an additional £84 million directed to intelligence and counter
terrorism. Our budget for security, which was just £1 billion in 2001, will now be for
2008, over £2 billion.
Our two fiscal rules for the economic cycle are the golden rule that current spending is
paid for by tax revenues, and the sustainable investment rule that with debt at a prudent
level we can invest in our education, the NHS, infrastructure and other essential
priorities.
These rules are demanding. And no other major economy - neither America, nor Japan
nor the euro area - meets them today.
But I can report that even after the new commitments, I am announcing our current
deficit falls from 15 billion to 8 to 1 and then we record a surplus in successive years to
2011 of 4, 7, 10 and 14 billion.
So Mr Speaker, with an overall surplus in this economic cycle of £8 billion we meet the
golden rule and already we are on course to meet it in the next.
This compares with the two economic cycles under the previous government – in their
first economic cycle the rule was missed by a margin of £140 billion and in the cycle
from 1986 to 1997 they missed it by £240 billion.
The strength of our position today is that over the economic cycle and for the first time
for four decades no borrowing is necessary to cover current spending.
I turn to our second rule, the sustainable investment rule, a rule especially challenging
for Britain because we had to catch up after decades of under investment in our
infrastructure.
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Even after doubling of investment in education, transport and the NHS we meet our
second rule.
I can report that debt is:
47 per cent of national income in the USA;
in the euro area 55 per cent;
90 per cent in Japan;
but 37.5 per cent in the United Kingdom;
net debt levels will in future years be 38.2, 38.6, then 38.7, 38.7, and 38.5.
Total net borrowing, which under the last government went as high as 7.8 per cent of
GDP, the equivalent today of £100 billion, will fall from 37 billion this year to 31, 27, and
then 26, 24 and 22 - falling from 2.3 per cent of national income next year to by 2011-
12, 1.3 per cent.
So, with overall deficits and debt lower than our competitors, and lower than in recent
decades, Britain is meeting both fiscal rules in this cycle and the next.
And within this strong and sustainable fiscal position we are well placed to make
decisions about, and to meet our long term priorities for public services, and for
investment.
To do so, and get most resources to the front line, I am requiring every department to
examine each of their assets and consider the case for sale, granting new powers to the
Office of Government Commerce including tighter rules on fees, removing old financial
barriers to the disposal of surplus government assets, and based on a register to be
published in January we will identify additional assets which can be sold.
Already share sales - including Westinghouse and other assets - will raise this year and
next an additional £7 billion, and over the spending review periods we will raise a further
£30 billion from sales of land and buildings. Following the Varney report, we can release
£400 million more resources for our priorities by cutting government call centre
operating costs by 25 per cent.
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To free up resources for the front line, I can also confirm real term reductions, of 5 per
cent a year, in the budgets of HMRC, DWP, Cabinet Office and Treasury and of 3.5 per
cent a year in the Department for Constitutional Affairs.
And I can announce that for the years to 2011, I have reached agreement with
Secretaries of State for net efficiency savings in their overall budgets of 3 per cent a
year; and to cut their administration budgets by 5 per cent a year - which taken together
with the other measures release by 2011 for our priorities like education, the NHS, and
policing and security, an additional £26 billion a year.
As recently as the mid 1990s, 75 per cent of all new public spending went to debt
interest and social security benefits. Today it is down to less than 20 per cent. And the
purpose of all these savings is to ensure front line services will have the resources they
need.
So, Mr Speaker, up against the global challenge and with fiscal rules that allow us to
borrow for sustainable investment we should not postpone nor avoid essential new
investment in infrastructure and education.
One choice for Britain is to adopt a balanced budget policy. But to achieve that by
cutting back on essential investment in schools and infrastructure would weaken us for
the global challenge ahead.
I have also considered representations for a third fiscal rule which would require us to
cut spending by £28 billion this year alone. This is a choice for Britain I reject, because it
would deny us investment in education, health, infrastructure and vital priorities and
leave Britain wholly ill-prepared and ill-equipped for the future.
Instead I can confirm:
that capital investment in education – only £1½ billion in 1997 will be £8.3 billion next
year and we will set out long term plans for investment to rise further over the next
decade;
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I can also confirm that investment in transport – just £4 billion in 1997 – will be £9.6
billion next year and in the spending review we will set out an updated ten year
spending plan;
and that investment in housing, just £2 billion in 1997 will be nearly £8 billions next year,
with sustained investment in the next spending round.
And I can announce the spending review for the years to 2011 will be based on planned
capital investment rising from £39 billion last year to £60 billion in 2011-12.
Let me give details of the investment we will make over the five years ahead: next year
£48 billion, rising in 2008 to £51, then £54, £57 and £60 billion – showing our
commitment to modern roads and rail, modern schools and science, to new housing,
hospitals and the renewal of communities.
The single most important investment we can make is in education. And today I can
start implementing the recommendations that have been put to us on skills.
In 1997 there were 80,000 apprentices. Today in England alone there are over 250,000
- half of them now in manufacturing, construction and technology. I can announce that
in the years to 2020, the number of apprenticeships will rise to 500,000.
I can also announce that under Train to Gain we will increase the number of adults
leaning basic workplace skills from 100,000 last year to by 2011 350,000 a year.
And it is even more important that the next generation do not lose out or fall behind on
the basic skills they need to succeed.
So the Secretary for Education is also announcing today that the Every Child a Reader
programme - which has already the best results in literacy – will, year by year, be
extended nationwide: all boys and girls who are at the age of 6 falling behind in reading
will be offered special catch up tuition.
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And in secondary schools where the learning gap between boys and girls is greatest
there will be new funds for extra support for mentoring, small group tutoring and
personalised learning.
Since 2001 all children at the age of 1, 2 and 3 receive books to encourage them to
read; and I can announce today that all children starting primary school at age 5 and
moving to secondary school at age 11 will also receive books free of charge – in total 3
million books going direct to children to lift the reading standards of young people.
I have become convinced that for Britain to rise to the global challenge, we should
commit now to year by year improvements in investment in our schools and educational
establishments.
It is right that we now make a spending settlement right through to 2011 that covers all
capital investment in education.
Separate announcements will be made for Scotland, Wales and Northern Ireland.
To ensure all 21,000 schools are fit for the 21
st
century I can announce educational
investment in our schools, colleges and university buildings, facilities and equipment
which stood at just £1½ billion in 1997 will by 2010-11 be £10.2 billion.
The investments we will make are £8.3 billion next year, £8.6 billion in 2008-09, £9.1
billion in 2009-10 rising to £10.2 billion. In the next four years a cumulative investment in
education alone of £36 billion – matching by 2010 state school capital investment per
pupil to private schools as year by year we close the overall gap.
Our goal is:
12,000 new or completely refurbished schools - half of all primary schools and 90 per
cent of all secondary schools benefiting four million children each year;
in addition 100 colleges rebuilt serving one million students;
and in total 3,500 new childrens centres for nearly three million boys and girls.
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And every one of our constituencies is benefiting from the biggest programme of
educational investment ever in support of our decision to prepare for the global
economy as the most educated nation in the world.
And for next year too I can go beyond my Budget announcements on spending per
pupil.
In striking the right balance between tax, spending and borrowing I am able to meet
both our fiscal rules and release additional resources for the coming year.
I propose to increase the cash we give to every school and every head teacher to be
used in the way local schools think best.
The typical primary school received £39,000 this year in direct payments;
for April next year I propose this be £50,000;
the typical secondary school received £150,000 this year;
for April next year I propose it be £200,000.
Mr Speaker, this is the equivalent of £200 for every pupil paid three months from now
direct to the school.
Money I could use for tax cuts.
But I say invest in education first.
Money which would not be invested if we had a third fiscal rule.
Mr Speaker
Stability our foundation
Education our number one priority
Education first now and into the future
And I commend this statement to the House