Pre-Budget Report

This means that the projection for the underlying budget deficit, excluding investment, will be 2.8 per cent. of GDP this year and 4.4 per cent. next year. But consistent with my commitment to sustainability and as a result of my announcements today, the underlying budget deficit, excluding investment, then improves, as a share of GDP, to 3.4 per cent., then 2.3 per cent., then 1.6 per cent. and 1 per cent., projected to reach balance by 2015-16. The economic crisis and the action by Governments across the world inevitably mean sharp increases in national debt relative to GDP—we will be no exception—but because we started from a stronger position, our debt will remain below that of other major countries. UK net debt, as a share of GDP, will increase from 41 per cent. this year to 48 per cent. in 2009-10, then 53 per cent., before peaking at 57 per cent. in 2013-14. If we did nothing, we would have had a deeper and longer recession, which would cost the country more in the long term. So in these exceptional circumstances, allowing borrowing to rise is the right choice for the country, as the CBI, the Institute of Directors, the Institute for Fiscal Studies, the IMF and many other countries have all said in recent weeks. We will continue to invest in public services, just as we have done over the last 10 years. Investing in school or hospitals, or modernising infrastructure and transport links, is not just an effective way of stimulating the economy, safeguarding jobs and protecting incomes. It is also vital for the future strength and health of our country. We have seen in the past the long-term damage that cutting public investment has on the essential fabric of the country and the support that people need. Since 1997, we have doubled the NHS budget, cutting hospital waiting lists. Spending on education is 60 per cent. higher, improving schools and exam results. Transport spending is up by 70 per cent, with over 130 major road schemes, and record numbers now travelling by rail. Total Government spending on much-needed investment and public services has increased from £322 billion 10 years ago to £584 billion last year. Through the current spending review, we will continue to support and improve key public services, to meet the ambition of the people of this country. The challenge is to continue to deliver these improved services while ensuring that we continue to get value for money. Today I can tell the House that, since 2004, the Government have delivered £26½ billion of efficiency savings, exceeding the target set by Sir Peter Gershon by £5billion. Building on this, at last year's comprehensive spending review, we committed to improve value for money, targeting a total of £30 billion by 2010-11, without putting public services at risk. But as the original Gershon report said, there is a point at which front-line public services would be affected—and we will not pass that point. However, having carefully considered the extent and the limits of efficiency savings, today I can announce that the Government will now find an additional £5 billion of efficiencies in 2010-11 for a total saving of over £35 billion over three years. We know extra savings are achievable because independent reviewers have identified new efficiencies across public sector operations, coming through lowering the cost of back-office operations, better procurement, and examining property holdings and asset sales. By continuing to make efficiency savings, we can help to fund the action needed to help families and business, but we will also ensure that spending continues to rise from £584 billion last year to £682 billion by 2010-11. In the next spending review thereafter, we will continue to put money into public services and investment, to maintain the gains of the last decade, by increasing current spending by an average 1.2 per cent in real terms. As businesses and families across the country watch what they spend, it is only right that the Government work even harder to make savings. I now want to turn to a wide range of measures that I am taking to support the economy and the people of this country. They will help businesses, support home owners and boost people's incomes now. Bringing forward capital spending on major projects supports jobs and businesses, and I want to do more. It is right that, at this time, we reprioritise investment from within the existing three-year limits, so that more money is being spent now, when the economy is weaker. I can announce today that £3 billion of capital spending will be brought forward from 2010-11 to this year and next. That money will be used to increase capacity in the motorway network, improve and build new social housing, renew primary and secondary schools, and invest in energy efficiency measures. I have looked at these programmes in detail, and I know that they can be delivered on this revised time scale. It will put people to work; it will renovate infrastructure; and it will modernise schools and create more fuel-efficient homes. That is all vital for the future prosperity of the country, supporting jobs in key industries. It is only possible because I am prepared to take action now. This spending will help to put the money into the economy in the coming months, but to prevent the recession from deepening, we also need to take action to put money into the economy immediately. I have looked at a wide range of ways in which we might achieve this. I have decided that the best and fairest approach is a measure which will help everyone, including millions of households that pay no direct tax at all, and it is to deliver a much-needed extra injection of spending into the economy right now. I therefore propose to cut VAT from 17½ to 15 per cent. until the end of next year. This reduction will come into effect next Monday, 1 December. It will continue for 13 months before returning to the present level of 17½ per cent. at the beginning of 2010, by which time we expect the recovery to be under way. This temporary reduction is equivalent to the Government giving back some £12½ billion to consumers to boost the economy. We would like retailers to pass it on as soon as they can. It will make goods and services cheaper and, by encouraging spending, will help stimulate growth. Again, this is possible only because I have rejected advice to take no action. I am also taking additional measures to help people on modest, low and middle incomes. In May, I announced an increase, for this year alone, in the income tax personal allowance—a benefit of £120 a year for basic taxpayers. I have decided to make that temporary tax cut permanent, and I have also decided to increase it to £145 a year in April. That will benefit 22 million basic-rate taxpayers. My announcement in May helped 4.2 million households that were affected by the abolition of the 10p rate, and this announcement will help another half a million households—not just this year, but for good. Along with those immediate steps to help businesses and families now, I am also announcing measures to ensure sustainable public finances in the medium term. I have considered a number of options to raise revenue in future years, and I have chosen those that are fairest and affect those who have done best out of the growth of the past decade. By 2011, we expect the economy to be recovering strongly, profits to be rising and incomes to be growing at close to 4 per cent., as they have done over the past decade. Today's pre-Budget report shows that the tax burden, as a share of gross domestic product, will fall from 36.3 per cent. last year to 35 per cent. in 2011-12. Against that background, I propose from April 2011 to increase by ½ per cent. all rates of national insurance contributions for both employees and employers. To ensure that the increase does not fall on those on low or modest incomes, I have decided, at the same time, to raise the starting point for national insurance to align it with that for income tax, so that no one on under £20,000 will pay any more national insurance contributions as a result. Secondly, those with the highest incomes have seen their earnings almost double since 1996, so—again from April 2011—I intend, only on income over £150,000, to introduce a new rate of income tax of 45 per cent. This higher rate of tax will affect only the top 1 per cent. of incomes. I also intend to withdraw the long-standing anomaly of the income tax system under which the personal allowance is worth twice as much to higher-rate than to basic-rate taxpayers. Again, I will protect those on middle incomes; this will affect only those earning over £100,000—that is, the top 2 per cent. So from April 2010, those with incomes between £100,000 and £140,000 will see the value of their personal allowance reduced, so that they get the same benefit as basic-rate taxpayers. For people with incomes above £140,000, I will withdraw the full value of that personal allowance. I also intend to maintain the ceiling on tax relief given to people with pension funds of up to £1.8 million until and including 2015-16. The reduction in VAT lowers the amount of tax paid on tobacco, alcohol and petrol. In addition, of course, petrol prices have come down by about 7p a litre since last month alone, so I will offset the VAT reduction by increasing those duties to an amount that will keep the overall cost to consumers the same this year. Of course, if we see a stronger economy and increased tax revenues—[Interruption.]