Pre-Budget Report

Statement. Today's pre-Budget report takes place at a critical time for our economy and for our country. Governments across the world have taken co-ordinated steps to deal with the biggest financial crisis for over half a century. In the UK, our action has reduced the impact of this downturn on families and businesses, but there is still much uncertainty, so the task today is to ensure the recovery and promote long-term growth. To promote growth, we need to invest in the dynamic sectors of the future—in digital, bio and low-carbon technology—and I will announce measures that will support those industries. To promote growth, we also need to invest in the skills of young people to prevent a lost generation of youth unemployment. I will announce measures to guarantee work opportunities for the young. To promote growth we also need to maintain support until the recovery is secured and to halve the deficit over four years, in an orderly way that does not threaten investment vital to our future. The choice is between going for growth and putting the recovery at risk—to reduce the deficit while protecting front-line services, or cuts that put those services in danger. The choice is between two competing visions. This pre-Budget report is about building a fairer society and securing opportunity for all. When I delivered the pre-Budget report just over 12 months ago, we were faced with the sharpest and most widespread global downturn in generations. The near collapse of the financial system quickly fed through into the wider global economy. World trade went down sharply and unemployment sharply up across the world. Families and businesses in every continent felt the pain. Governments around the world intervened to rescue the banking system. We supported our economies with tax cuts, increased Government spending and co-ordinated action to lower interest rates and to boost money supply. No choices were easy choices; indeed, some even argued that we should not have acted at all. But as a result of those actions, there is growing evidence that global confidence is returning. The US housing market, which triggered the crisis, is stabilising—so is the housing market here. Global manufacturing is up almost 6 per cent., world stock markets by 30 per cent. As the world's largest financial centre, the turmoil in the banking sector has had a substantial effect on the UK. With more home owners here than in Europe, a global slump in property prices hit confidence hard in this country. As the sixth biggest exporter of goods and the second largest exporter of services, our trade has been hit. But as demand picks up abroad, as is already happening, British businesses will benefit. So I am confident that the UK economy will start growing by the turn of the year. However, across the world, there remain risks to recovery. Oil prices are volatile. Recent market reaction to financial problems in Dubai highlights just how fragile world confidence remains. So while I am confident that the UK economy is on the road to recovery, we cannot be complacent. We must continue to support the economy until recovery is established. To cut support now could wreck the recovery. That is a risk that I am not prepared to take. This time last year, we recognised the exceptional trading difficulties that businesses here were facing. In the past, inaction by Government to support firms led to widespread—and avoidable—business failure. I was determined that we did not repeat that mistake. So in an unprecedented move, I cut VAT to 15 per cent. for a year, to put more than £11 billion into the pockets of consumers and retailers. That countered the impact on businesses of the global credit squeeze and the collapse in consumer demand when it was needed most. I can confirm that VAT will return to 17.5 per cent. on 1 January, as planned. I have no other changes in VAT to announce. To ease problems with cash flow and access to bank lending, we deferred tax rises and extended tax allowances for businesses. Because we chose to intervene, the rate of business insolvencies is far lower than would have been expected. In the recession of the early 1990s, proportionally twice as many businesses went under. While some measures such as the VAT cut and the working capital and trade credit insurance schemes are finishing, it is right to extend others while uncertainty remains. The time-to-pay scheme has helped more than 160,000 businesses spread their tax payments over a timetable that they can afford. They can get additional time when they need it most and, because firms continue trading, the likelihood of companies paying the tax owed increases, so I have decided that the scheme will be extended for as long as it is needed. Last year, I temporarily increased the threshold for empty property relief to help small businesses. I can announce that it will be extended, so that for 2010-11, empty commercial properties with a rateable value below £18,000 will be exempt from business rates. Seventy per cent. of all empty properties will continue, therefore, to be exempt. I have one further announcement to help small businesses. I have decided to defer the increase in corporation tax for smaller companies. That will leave the 2010 rate unchanged for 850,000 small businesses, helping them until the recovery is secured. In the early 1990s, hundreds of thousands of families lost their homes. I did not want to see that repeated, so we introduced a range of measures to allow families to stay in their homes and to help young couples on to the housing ladder. As a result, repossessions are now running at around half the rate of the recession of the early 1990s. By the time the stamp duty holiday finishes at the end of this month, I expect 240,000 home buyers to have been helped. But with unemployment still likely to rise, it would not be right to withdraw all support now for home owners. Last year I improved the scheme giving support for mortgage interest, to provide better cover for mortgage interest payments for those who had lost their jobs. More than 220,000 people have been helped so far. I have decided that that additional support will be extended for a further six months. There will, of course, be a cost to that and other continued Government support, but the cost to families of losing their home would be immense, and it would be a false economy for the country. The more successful these measures are in restoring confidence to the housing market, the lower the cost will be to the Exchequer. The best way of avoiding repossessions is to help people to stay in work or re-enter the labour market quickly. Such a deep global recession was always going to have a damaging impact on employment. The bleak news last week that Corus is to shut its Teesside plant underlined the fact that the reduction in global demand will have an impact on jobs for some time to come. That is why, yesterday, I agreed with the Secretary of State for Business, Innovation and Skills to provide £30 million from within existing resources to help industry in Teesside. No Government, even during times of the strongest economic growth, can prevent every job loss. Unemployment has risen in the UK and will keep rising for some time, but it remains lower than it was in France, Canada, the United States and the euro area. In fact, even now, there are some 2.5 million more people in work than there were in 1997. Because of our values of fairness and opportunity, promoting employment has always been, and remains, a top priority for this Government. Unemployment can never be a price worth paying. As the global recession hit our country, we responded by bringing forward investment in vital infrastructure projects to protect jobs, and finding an additional £3 billion to help people to find new work more quickly. We expanded the Jobcentre Plus network and offered support through the rapid response service to staff in 3,000 firms hit by redundancies. Help including training, volunteering and recruitment subsidies has been offered for those still unemployed after six months. It is clear that we are making a difference. Unemployment has increased much less than expected by independent forecasters. If we had seen the same rate of job losses, relative to GDP, as we saw in the early 1990s, four times as many people would have lost their jobs. Despite the severity of the global recession, the claimant count today stands at 1.6 million, compared with the 3 million reached in 1985 and 1992. Our comprehensive support means that a short spell in unemployment is not turning into a lifetime on benefits, as happened in the recessions of the '80s and '90s. Indeed, more than 3 million people have been helped off the claimant count in the past year. Despite this support, there are groups who need more help. Past recessions have had a very damaging impact on young people, who should have been starting their working lives, but instead were unemployed. Our package of support for the young already includes a place for every 16 and 17-year-old in education or training. I intend to provide funding so that this guarantee will be available to school leavers again next September. In the Budget, I went further and announced that every 18 to 24-year-old would be guaranteed work or training after 12 months out of work. I do not want them to have to wait that long, however, so I am going to bring that forward. I have decided that, from next month, no one under 24 needs to be unemployed for longer than six months before being guaranteed work or training. In the past, older people were allowed—indeed, often encouraged—to drift into permanent unemployment, but we cannot afford to write off their experience. So we will ensure that the over-50s receive specialist and tailored support to equip them with the confidence and skills they need to get a job. We also want to encourage those who want to stay working part-time after they reach retirement age, and to make work pay for everyone, regardless of their age. To make it easier for those over 65 to receive the working tax credit, we will reduce the minimum number of hours they need to work to be eligible. We chose not to let people sink when they lost their jobs, but to intervene to help them to stay afloat. That is good for the individuals and their families, and also for the wider economy, boosting spending and, in turn, creating new jobs. The more successful our targeted support, the more likely that the rise in unemployment will be lower than expected and therefore cost the country less, as has already happened. Government action has made a real difference. The worldwide recession has had an impact on all families, and it is often the most vulnerable who are affected the most, including those on modest incomes who have been put on shorter hours. The Government's flexible tax credits system has risen to the challenge of the downturn, delivering substantial support to families to compensate for that loss of pay. I can tell the House that so far this year, because of tax credits 400,000 families whose income has fallen have benefited from that extra help—on average by £37 more per week. For those who doubt the value of tax credits, here is the proof that they work. The recession has also had other effects. For the first time in half a century, the retail prices index has been negative for much of the year. That helps families with the cost of essential goods, but many benefits and tax credits are also linked to the September RPI. RPI inflation last September was minus 1.4 per cent. That would have meant no increase in those benefits in April. I do not believe that such a freeze would be fair, so I can confirm that the basic state pension will not be frozen, but will rise by 2.5 per cent. in April—a real-terms increase of nearly 4 per cent. I can also tell the House that, from the time of the Budget, I will cut bingo duty from 22 to 20 per cent.—[Interruption.]Obviously a popular measure. I also want to help families in receipt of other benefits linked to the inflation figures, such as child benefit and some disability benefits, so those benefits will rise by 1.5 per cent. in April. We are committed to helping people back into work, and making work pay. I have decided to roll out across the country a guarantee that anyone in work will always be better off than they were on benefits. If that is not happening already, they will be guaranteed extra money from the Government, making sure that work really does pay for everyone and encouraging more people to re-enter the labour market. So we are continuing to provide targeted support for people and businesses, as we secure the recovery. Across world economies, the first half of this year saw a sharper deterioration than had been expected. That was also true here in the UK. Up to the third quarter of this year, the global recession has meant a cumulative economic contraction of 3.2 per cent. in the United States, 5.6 per cent. in Germany, 5.9 per cent. in Italy and 7.7 per cent. in Japan. Over the year as a whole, the UK economy is expected to have contracted by 4.75 per cent. this year, but as I forecast at the Budget, I expect a return to growth in the fourth quarter. 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. So, although the period ahead is going to be challenging, our public services are in a better state they have been for decades. However, we have to be realistic: the spending environment will be tough over the next few years. For as long as extraordinary uncertainties remain in the world economy, this is not a time for a spending review. We have already set out clear and firm departmental budgets for the next financial year, but to try to fix each Department's budget now for the next five years is neither necessary nor sensible. We can, however, set out a clear direction, based on our economic priorities and our values as a Government. We are clear that, following the investment made over the past decade, current spending growth can be set lower than in the past and fall to an average of 0.8 per cent. a year between 2011-12 and 2014-15. That will mean cuts to some budgets, as programmes come to an end or resources are switched, and it will mean that some programmes will need to be stopped altogether. We believe that if Departments can find further savings and cuts within their existing budgets, as many are already announcing, that will release resources so that they can continue to provide services. Already individual Departments have made great strides in finding savings—£10 billion in the NHS, £800 million in education and more than £400 million in the police—but even in this much tighter financial environment we are determined to protect front-line services and sustain the improvements that have been delivered over the past decade. The pre-Budget report sets out our plan to do that while halving the deficit. First, we must make sure that we get maximum value for every pound we spend. Between 2005 and 2008, we delivered £26.5 billion of annual efficiency savings, and between 2008 and 2011 we are delivering further efficiencies worth more than 3 per cent. of total departmental spending per year. This week, we announced plans to deliver another round of savings, amounting to £12 billion a year by 2013-14. We will abolish quangos, cut consultancy and marketing costs, improve procurement and streamline back-office functions. We will also sell those assets that can be managed better by the private sector. Secondly, we need to focus better on those areas that make most difference to people's lives. We have begun a root-and-branch review to examine every area of Government spending to drive through efficiency, to cut waste and to cut lower priority budgets. Today, I am able to announce £5 billion of savings from spending programmes. This includes: phasing-in the roll-out of pension personal accounts; cutting back on the scope of major IT projects; reforming legal aid and outsourcing inefficient prisons; refocusing regeneration spending, so that it is spent where it is most needed; and cutting the cost of residential care by supporting older people to stay in their own homes. Those are necessary choices. Thirdly, on public sector pay and pensions, public pensions need to be broadly in line with those offered in the private sector. So, by 2012 contributions by the state to public sector pensions for teachers, local government, the NHS and the civil service will be capped, saving about £1 billion a year. Public sector workers will make a greater contribution to the increasing value of pensions, with those earning more than £100,000 paying more. Public sector pay makes up about half of departmental spending. The senior civil service will take the lead with a cut in its pay bill of up to £100 million over three years, and any new Government appointment of someone on more than £150,000 and all bonuses of more than £50,000 will require explicit approval by the Treasury. I can announce that for the two years from 2011 we will ensure that all public sector pay settlements are capped at 1 per cent. [Interruption.] ... As with previous pay decisions, we will recognise the special circumstances of the armed forces. There will be savings of £12 billion from greater efficiency, of £5 billion from scaling back or cutting lower priorities, and of more than £4.5 billion from reducing the cost of public sector pay and pensions. These are difficult choices, but they are essential if we are to stick to our plan to halve the deficit and protect the front line. Our first priority today must be to ensure that our armed forces have all the resources they need. The whole House, especially this week, will want to join me in praising the dedication and valour of our troops, especially those engaged in the conflict in Afghanistan. They deserve all our support and we must match that support with resources. For the next year, I can announce that a further £2.5 billion will be set aside for military operations in Afghanistan. At the same time, we will continue to improve the effectiveness of core defence spending, reducing the civilian work force and restructuring the Department. I also want to do more to help those who have served in combat zones and are retiring from the forces, so I can announce that £5 million will be allocated from the strategic investment fund to help ex-service personnel who want to set up their own businesses. In 2005, we led the way towards abolishing the debts of the poorest countries, and we have committed to doing more in the fight against global poverty. Spending on overseas aid remains a very small proportion of our overall budget, but it does make a huge difference to the lives of millions of people, as well as creating a fairer world, helping to build markets for our goods and countering extremism. I can confirm that we will honour our commitments, so spending on overseas aid will rise to 0.7 per cent of gross national income by 2013. Our priority is to protect those services that are absolutely essential to the health of our society and the strength of our economy: the health service, which is crucial for our well-being; the police force, which is crucial for our safety; and our schools, which are crucial for our future. I am determined that we will protect improvements in those front-line services, on which millions of people rely. That cannot be done without a further difficult decision. I intend to increase all employer, employee and self-employed rates of national insurance by a further half pence from April 2011. But to protect those on modest incomes, I have also decided to raise the starting point from which national insurance is payable, and no-one earning less than £20,000 will pay more contributions as a result. This will raise £3 billion a year from 2011-12. As a result, I am today able to offer guaranteed minimum real-terms increases in front-line NHS and schools spending for two years from 2011, as well as providing sufficient funding to maintain the number of police and community support officers. That means that I can confirm not just that we will increase spending as planned next year on hospitals, schools and policing, but we can pledge that spending on these crucial front-line services will continue to rise over and above inflation after 2010-11, so that we can meet the improved public service guarantees and entitlements that we have set out. There will of course be Barnett consequentials for Scotland, Wales and Northern Ireland. I have one further announcement to make: because of my decisions today, I am able to extend free school meals to 500,000 primary school children of low-income working parents who previously would not have been eligible. Once that is fully rolled out, it will lift an additional 50,000 children out of relative poverty and will be a step towards our target of abolishing child poverty by 2020. The decisions the Government have made have helped support businesses and families through the deepest global recession for more than 60 years. These are decisions that have been followed across the world but, of course, have been opposed by some here. The steps that I have announced today are aimed at securing recovery, reducing borrowing and, through targeted investment, providing a springboard for long-term growth. The choice facing the country is between securing recovery and wrecking it; between investment to build a fair society where all prosper or a divided society that favours the wealthy few; and between ambition driven by the values of fairness and opportunity or austerity driven by an outdated dogma. I commend this statement to the House.