The Budget speech: 'Steadfast for stability and tackling inequality'

This is an edited version of the speech given by the Chancellor yesterday

War chest

Mr Deputy Speaker, it is half a century since a Budget has been presented with Britain engaged in military conflict. On 10 April 1951, the then Chancellor told the House of Commons that, heavy as the burdens may seem at times, they were small set against the cause which is great and the courage of our armed forces which is even greater.

And even as we look forward to the end of conflict in Iraq, my first Budget decision is to ensure proper provision for our military, for our domestic security and for international development and reconstruction. I can confirm that I have set aside £3bn, in a special reserve available to the Ministry of Defence, so that our troops continue to be properly equipped and given the resources that they deserve and have a right to expect.

I believe we owe a debt of gratitude to the strong leadership in a difficult time of our Prime Minister.

At home, our responsibility is to safeguard communities from terrorist threats and our resolve is absolute. It is therefore right also to set aside an extra £330m for additional domestic counter-terrorism measures.

To contribute to the United Nations appeal and to carry out humanitarian work in Iraq the Government will contribute £240m, including, for the UN, $100m (£64m).

And to back up the UN, I will today set aside an additional $100m.

World economy

This Saturday, in Washington at the G7 and then IMF and World Bank meetings, Britain will table a plan for a $50bn a year International Finance Facility to fund primary education for the 115 million children without it, and to fund health care and drugs to tackle Aids, malaria and TB at prices poor countries can afford.

It is now time for the world's richest countries in word and deed to fulfil obligations to the world's poorest.

And, as the major economies look forward to the opportunity, if the right decisions are taken, of a global upturn, Britain starts from the foundation of low inflation: the lowest inflation for 30 years; the lowest interest rates for 40 years; the highest levels of employment in our history. And I can report that Britain has now experienced the longest period of sustained economic growth and the longest period of growth in living standards for half a century.

I can tell the House that – unlike America, Germany, and Japan – the British economy has grown uninterrupted, free of recession, in every single quarter over the past six years. Because it is a Britain of economic strength and social justice we seek, we plan – paid for by the national insurance rise – by 2008, 80,000 more nurses than 1997 and 25,000 more doctors and this Budget will further reform and secure public services and the NHS we believe in: free at the point of need.

Inflation

I can report that inflation has averaged 2.3 per cent in the last year, is expected to be at 2.75 per cent in the fourth quarter of this year and will be 2.5 per cent next year, for every one of the following years.

Mr Deputy Speaker, before Bank of England independence the pre-1997 inflation target was 2.5 per cent or less but market expectations of UK inflation 5, 10 and 20 years ahead were around 4.5 per cent, almost double the target.

Today in 2003, because of the success of the new monetary regime we introduced in 1997 – and I pay tribute to the retiring Governor of the Bank of England, Sir Edward George, and the UK Monetary Policy Committee – we have a symmetric target of 2.5 per cent and on a 5, 10 and 20-year perspective the markets expect inflation to be exactly that. And it is because since 1997 our monetary policy and the Bank of England have established credibility that, in a particularly uncertain period for the global economy, monetary policy has been able, supported by fiscal policy, to steer a stable course between deflation and inflation: cautious about domestic risks, including affordable pay settlements and the housing market; and vigilant to global risks in equities, trade and investment.

And it is for these reasons that while under the old regime, 30-year British interest rates were higher than those of Germany and America – in 1997, 7.7 per cent compared with 7 per cent in the USA and 6.5 per cent in Germany – our hard-won stability now means these long term British interest rates – at just 4.7 per cent – are today below those of Germany, below those of the euro area and below those of America.

So British monetary and fiscal policy has been able to respond to the world downturn and keep the British economy stable and growing. And that same steady economic leadership is essential for a post- conflict world economy.

Employment

I can now report that since the last Budget there are 253,000 more jobs in the UK. In the last quarter of 2002 alone 150,000 new jobs were created.And there are now 1.5 million more people in work than in 1997. Unemployment in Germany, France and Italy is about 9 per cent, in the euro area as a whole it is 9 per cent, but in Britain it is 5 per cent. British unemployment today is lower than in the euro area, Japan and America together for the first time for nearly 50 years. Over the same two years a total of three million jobs were lost in America, employment has risen in Britain by half a million, and the number of unemployed claiming benefit has fallen below 1 million for the first time since 1974.

So, of all major global economies, Britain is now alone in combining low inflation with the lowest unemployment in a generation.

Economic growth

We now know that in 2001 and 2002 economic growth in Germany has averaged just 0.4 per cent: Japan has also averaged 0.4 per cent The euro area 1.1 per cent, and America just 1.4 per cent. And here in Britain with growth in 2001 of 2.1 per cent and then in 2002 1.8, we have averaged 2 per cent. And German growth expected at the time of the pre- Budget report to be 1.3 per cent in 2003 is now expected to be 0.5 per cent. Here in Britain, I expect growth this year will be 2 to 2.5 per cent – double the euro area and Japan, and about the same as America. So, just as the record shows that in 2001 and 2002 Britain with North America outperformed the rest of the G7 industrialised economies and were the fastest growing, so again, with all the risks, we are expected to be the fastest-growing G7 economies in 2003.

In the previous two world downturns, in both the early 1980s and in the early 1990s, the British economy was in recession, output contracting for five whole quarters in a row – but this time it has grown in every single quarter; employment, which fell by 1.3 million in the early 80s downturn and 1.6 million in the early 90s downturn, this time has not fallen but risen by half a million; inflation, which rose to 20 per cent in the 80s downturn, and to almost 10 per cent in the early 90s, has this time averaged 2.3 per cent; interest rates, which peaked at 16 per cent in the 80s downturn and at 15 per cent in the 90s downturn, are today 3.75 per cent; and mortgage rates, which rose to 15 per cent in both the early 1980s and early 90s, are under 5 per cent today.

Fixed investment, which has fallen, just as business investment has fallen, round the world – and is, in the euro area, still falling – is expected to grow in Britain by 4.25 to 4.75 per cent this year. Manufacturing output, which has fallen in every major industrialised country in the past year, with difficulties for the whole sector, is expected to grow in Britain by 0.25 per cent to 0.75 per cent this year and then 2.25 to 2.75 per cent next year. With the housing market and consumer spending now moderating, we expect domestic demand to grow by 3 to 3.5 per cent this year and in 2004.

Small business

For small firms looking for capital of between £250,000 and £1m, there is evidence of an equity gap that prevents them from realising their full growth potential.

Small business investment companies backed by government incentives now make almost 60 per cent of all venture capital investments in American small business – and helped finance the early growth of now large companies such as Intel, Apple and FedEx.

To match this success I am publishing proposals for the creation of British Small Business Investment Companies – private-sector vehicles to inject new capital into small and medium-sized firms.

I will today back up the cut to 19 pence in small business tax by funding three tax reliefs and incentives that will help companies in industrial and rural areas make the most of the opportunities of the upturn.

I have examined rates of corporation tax, small business corporation tax and capital gains tax. I propose to freeze them. On air passenger duty, I propose to freeze rates.On insurance premium tax, I propose to freeze rates. On the climate change levy I propose to freeze rates.

Beer and bingo

I propose, from Monday, the annual inflation rise of 1p on a pint of beer, 4p on a bottle of wine. I will freeze duties on cider and sparkling wine. Because past governments set higher taxes on the alcohol content of spirits than on beer and wine, I will, for the sixth Budget in a row, freeze all spirits duties, the longest freeze for 50 years. I turn now to bingo. I will abolish the bingo tax on 4 August just as I have abolished direct taxes on the pools and on betting on horse racing. The tax on bingo players' stakes and the tax on bingo prizes will be replaced in the same way as tax on betting and the pools. So I can tell the House it will be a gross tax on company profits for bingo at "one and five" – 15 per cent.

Motoring and smoking

Owing to the recent high and volatile level of oil prices as a result of military conflict in Iraq, I have decided to defer the 1.28p a litre annual revalorisation of fuel duties until six months from now – 1 October – and will legislate to this effect. And if the current international uncertainties and volatility remain I will not proceed with the change at all.

I will also freeze vehicle excise duty rates for lorries and for motor cycles and raise excise duty rates from 1 May on cars and vans only by the normal inflation rise of £5.

To encourage the development of the least polluting cars I will offer a new rate, £110 lower than standard for a licence. Bio-ethanol fuel reduces air pollution and greenhouse gas emissions. To encourage its development I can announce that on 1 January, 2005 we will reduce bio-ethanol duty by 20p per litre.

My decision on cigarettes is, for public health reasons, to go ahead with a rise but only the annual inflation rise of 8p per packet of 20.

Domestic living

Last year, I raised the exemption for inheritance tax to £250,000. I propose now to raise the exemption to £255,000. 95 per cent of estates will pay no tax. All income tax rates and tax allowances will remain as set out in last year's Budget and the pre-Budget report.

I can now report that, since 1997, an additional 1.1 million British families have become homeowners for the first time – home ownership benefiting from the lowest mortgage rates for 40 years and rising in all parts of the UK and to 70 per cent of all households, the highest level in our history, higher than in America and Europe.

Housing finance needs to become more certain and planning more flexible. So I have asked David Miles, Professor of Finance at Imperial College, to examine the case for, and how, Britain can develop a market for long-term fixed-rate mortgages – something that is important to the UK in or out of the euro, and more important in a single currency area.

I will freeze stamp duty on homes and business property purchases. As a result of tax avoidance, only half of all large commercial property transactions – worth £10bn a year – are paying the stamp duty owed. The Finance Bill will introduce new anti- avoidance powers to close these loopholes.

Government policy

The flexibility I propose – in employment, in pay, in the liberalisation of capital, labour and product markets generally, flexibilities important for competitiveness in the global economy and our engagement in Europe – is not bought at the cost of fairness to families but is underwritten by policies for full employment, tackling poverty through tax credits, and more investment in public services. And these are measures that combine the flexibility – too often undervalued in Europe – that is essential for enterprise with the fairness – too often undervalued in the USA – that is essential for social cohesion: making Britain a leader for those who see enterprise and fairness advancing together. And that is because from 1997 we took decisions: to freeze spending; to cut debt; to use the spectrum auction to repay more debt; and cut unemployment and debt interest payments.

Because of those decisions, we have been able to raise public expenditure on health, education and anti-poverty and meet the additional commitments on employment, industry and support for families I am announcing today. And at every stage of the economic cycle and including in the cautious case have been able to meet our fiscal rules.

Let me provide the detailed figures. Figures for our current Budget for last year, 2002-03, and for the five years to 2007-08 are minus 12bn, minus 8bn, minus 1bn, plus 2bn, plus 6bn and plus 9 bn. We meet our golden rule over the cycle – not just achieving a balance but with an estimated surplus at £32bn, showing it is right and prudent that we borrow at this, the right time in the economic cycle. And adjusted for the cycle we meet the golden rule this year and every year to 2008. Our second rule – the sustainable investment rule – is that debt should be kept below 40 per cent of GDP.

Debt this year is actually rising to 42 per cent in France, 46 per cent of GDP in the USA, 49 per cent in Germany, 55 per cent in the euro area, 76 per cent in Japan. But I can tell the House that, in Britain, debt this year and in future years will be at 32.2, 32.7, 33.2, 33.5 and 33.8 per cent – comfortably meeting our sustainable investment rule, doing so over the cycle and in every year.

Pensioners

There is no section of our society who have contributed more to our NHS and who now depend on it more than Britain's elderly. It is wrong the elderly who have saved all their working lives for their retirement through their national insurance contributions should now suffer the reduction of their pension entitlement to pay for hospital care.

For pensioners: even if they stay in hospital for up to a whole year, I am today announcing we will abolish this charge and that is with immediate effect.

Starting next month, we will be writing to every pensioner in Britain telling them that from October all single pensioners with income below £139 a week and all pensioner couples with total income below £203 a week stand to benefit from our pension credit Many couples will benefit by up to £19.20 a week, and single pensioners by up to £14.79. The average additional payment will be £7 extra for single pensioners and £9 extra a week for couples.

For every household where a pensioner reaches the age of 80, or is over 80, we will add to the winter fuel allowance of £200 with an extra payment of £100

Mr Deputy Speaker. A Budget meeting our responsibilities abroad and at home. Steadfast for stability, enterprise and full employment. Tackling inequality. Renewing public services. A Britain of economic strength and social justice. And I commend this Budget to the House.