Budget to focus on welfare to work reforms

Next month's Budget will focus on making work pay for low earners and on closing tax loopholes for the well-off. But demands for additional government spending will not be satisfied. Diane Coyle, Economics Editor, and Andrew Verity report.

Additional welfare-to-work measures will form the centrepiece of next month's Budget, including changes to national insurance and the introduction of a tax credit for low-paid families.

At the same time the Budget will crack down firmly on tax loopholes currently exploited by both companies and wealthy individuals. Geoffrey Robinson, the Treasury minister at the centre of controversy about his own offshore tax arrangements, is expected to be moved to another job after the Budget.

Alongside the Budget's emphasis on welfare reform, Gordon Brown, the Chancellor, will affirm his determination to stick to tough spending plans. A plea by the Trade Unions Congress (TUC) this morning for an extra pounds 3.3bn of expenditure on increased benefits and priority spending areas such as health and education is likely to fall largely on deaf ears.

Yesterday Martin Taylor, chairman of the Government-appointed task force on reforming the tax and benefit systems, said he would be recommending a variant of the American system which is designed to reinforce the work ethic by channelling top-up income to the low paid through pay packets.

But he indicated that the Budget would not simply copy the US system, which relies entirely on a tax rebate without any benefit payment such as Britain's existing Family Credit. There had been real concern that replacing Family Credit entirely with a tax credit would take money away from women and children and put it into men's pay packets.

Mr Taylor told the House of Commons' social security committee that his task force did not regard a "big bang" integration of tax and benefits as necessary or desirable. He argued that a tax credit could have "important psychological effects on the way people feel about work".

The full report of the task force, due to be published around the same time as the Budget, is expected to be reflected in the measures announced by the Chancellor.

Mr Taylor also told the committee his group regarded the introduction of an income tax starting rate of 10p in the pound "almost as a given", as it had been a long-term Labour manifesto commitment.

However, the Chancellor's determination to keep government borrowing on a downward path means the TUC's proposals for billions in extra spending are unlikely to be accepted.

The TUC argued that most of this could be financed by spending the pounds 2.8bn remaining in the contingency reserve for 1998/99, but it would be very unusual - and considered most imprudent by the Treasury - to allocate all of the reserve at the start of the financial year.

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