1 The Budget

The public finances

1.03 But the economy has grown faster than envisaged a year ago, with GDP now expected to be up 4 per cent in 1994. And inflation has turned out lower, taking it well into the lower half of the Government's target range.

1.04 Faster growth will tend to bring the PSBR down more rapidly. But lower prices reduce revenues, which tends to raise public borrowing. So the Government has made substantial cash reductions in its spending plans, which are also slightly lower in real terms than a year ago. This should enable the PSBR to return to balance by the end of the decade, as intended in last year's Budget, with the public sector current account deficit eliminated by 1997-98. The new projections are summarised in Table 1.1.

Table 1.1 The public sector's finances1
						Per cent of GDP

				1994-95	1995-96	1996-97	1997-98	1998-99	1999-2000
Receipts2			37¾	39¼	39¾	40	40¼	40¼
Current expenditure2, 3		42	41¼	40½	39½	38¾	38

Current balance2			-4¼	-2	-½	½	1½	2¼

Net capital spending2, 4		1¾	1½	1½	1¼	1¼	1¼

Financial deficit2			6	3½	2	¾	0	-1
Privatisation proceeds and
 other financial transactions		1	½	¼	¼	0	0

Public sector borrowing
 requirement - per cent		5	3	1¾	¾	0	-1
		- £ billion		34½	21½	13	5	-1	-9
In this and other tables, constituent items may not sum to totals because of rounding.
Figures on a national accounts basis. See Annex B to Chapter 4.
Includes depreciation of fixed capital.
Capital spending net of depreciation and less capital transfer receipts.

1.05 The cash reductions in spending plans are bigger than the likely reduction in receipts, so the PSBR is forecast to come down faster than before. The main changes in the projections in cash terms since the last Budget are set out in Table 1.2.

Table 1.2 Changes in the projections since November 19931

						£ billion
					

					1995-96	1996-97	1997-98	1998-99

PSBR path in November 1993 Budget		30	21	11	2
Changes in:
 general government expenditure2		-8	-9	-11	-13
 general government receipts3		-1½	-3	-5½	-8½
 other items4				-1½	-1½	-1	+1½
Total change in PSBR			-8½	-7½	-6	-3
PSBR path in 1994 Budget			21½	13	5	-1

 November 1993 forecast adjusted for classification changes - see paragraph 6A.7.
 Excluding privatisation proceeds. See Table 4.8.
 See Table 4.7.
 A minus sign indicates higher privatisation proceeds or lower public corporations' market and overseas borrowing.

1.06 These changes are analysed in more detail in Chapter 4. Most of the reductions in general government expenditure are accounted for by reductions in the Control Total, though cyclical social security is also lower because of lower unemployment, lower prices and the measures in the Budget (see paragraph 6.73). Privatisation proceeds are also increased from 1995-96 to 1997-98. The changes in receipts are mainly accounted for by changes in the path of the economy; the medium-term effect of the Budget measures is comparatively small (see Table 4.7), though transitional relief for business rates reduces revenue in the short term.

1.07 The Budget is intended to be broadly neutral in its effects on the public finances, given the changed paths of output and inflation since last November. Higher output is reflected in a lower PSBR than in the November 1993 Budget, particularly in the next three years. The impact of the Budget measures on the public finances is summarised in Table 1.3.

Table 1.3 Budget changes in tax and spending

						£ billion
					

					1995-96	1996-97	1997-98

Taxes and NICs
changes from an indexed base1, 2		-1.0	-0.7	-0.4
Public expenditure
total Budget changes in cash terms3		-7.2	-9.0	-9.8
total Budget changes in real terms3, 4		-0.9	-2.3	-2.8

Of which transitional relief for business rates:	-0.6	-0.1	0
See Tables 1.4 and 5.1.
Changes in the Control Total since the November 1993 FSBR, adjusted for classification changes, and Budget
measures affecting cyclical social security. See Table 6.2.
£ billion, 1993-94 prices. See Table 6.2.

Table 1.4 The Budget tax and national insurance measures1

								£ million yield (+)/cost (-)
							

							Changes
							from
							a non-
							indexed
							base	Changes from an indexed base
							
	

							1995-96	1995-96	1996-97	1997-98

Income tax
  main personal allowance and thresholds indexed		-555	0	0	0
  personal allowances for 65s and over up by £430		-200	-150	-210	-210
  lower rate band increased by £200				-170	-80	-100	-110
Savings
  TESSAs - extended.					*	*	-150	-160
  PEPs extended to corporate bonds etc				-10	-10	-25	-40
Helping people back to work
  employer NICs - lower rates reduced by 0.6%			-235	-235	-260	-265
employer NICs - rebate for long-term unemployed			0	0	-45	-45
Investment in small businesses
  Venture Capital Trusts					-150	-150	-290	-240
  Enterprise Investment Scheme - extended			-5	-5	-10	-10
  CGT reinvestment relief - extended.				*	*	-15	-20
Business taxation
  business rates - new transitional scheme			-605	-605	-135	-10
  VAT treatment of business cars changed			-140	-140	-100	-50
  higher threshold for quarterly payments of NICs/PAYE		-75	-75	*	*
  relief for post-cessation expenditure.				*	*	-10	-10
  VAT on second-hand goods					-60	-60	-55	-55
  scales for free fuel in company cars increased			20	20	25	25
Anti-avoidance measures
  VAT avoidance						340	340	335	335
  other measures against avoidance				100	100	175	225
Simplification/deregulation measures			-125	-125	-120	-120
Excise duties
  alcohol - most duties frozen					-10	-110	-110	-120
  tobacco - 10p on a packet of 20 cigarettes etc			15	15	15	20
  road fuels - 2.5p on a litre of petrol, 3.2p on diesel		90	90	110	130
  VED - £5 on cars, freeze for lorries				125	45	45	45
  gaming machine licence duty				-20	-20	45	65
Other tax changes					125	140	185	175

Total effect of Budget changes				-1 545	-1 015	-700	-445

The measures and their revenue effects are set out in more detail in Chapter 5.
The cost/yield of measures announced before the Budget are set out in Annex B to Chapter 5.
* = Negligible

Table 1.5 The public spending plans1

								£ billion
				

				Estimated
				 outturn		New plans		Changes from previous
										plans
				
	
			

				1994-95	1995-96	1996-97	1997-98	1994-95	1995-96	1996-97
Control Total by department
Social security2			70.4	73.0	76.2	79.5	1.5	0 	0 
Health				31.7	33.0	33.3	34.1	0 	0 	0 
DOE - Local government		29.9	30.3	30.9	30.9	0 	-0.5	-1.5
DOE - Other			9.4	8.7	8.6	8.6	-0.1	-0.6	-0.6
Scotland, Wales and N. Ireland	28.3	28.9	29.3	29.6	0 	-0.4	-0.6
Defence				22.5	21.7	21.9	22.3	-0.3	-0.3	-0.2
Education			10.5	11.0	11.2	11.2	0 	-0.2	-0.2
Home Office			6.3	6.4	6.4	6.6	0 	-0.1	-0.1
Transport				6.1	4.4	4.4	5.1	0.3	-1.1	-0.9
Other departments			23.6	23.7	23.2	23.0	0.8	-0.3	-0.5
Local authority self-financed
 expenditure			11.9	11.8	12.0	12.2	1.0	0.7	0.8
Reserve					3.0	6.0	9.0	-3.5	-4.0	-4.5
Allowance for shortfall		-1.0				-1.0

Control Total			249.6	255.7	263.5	272.1	-1.3	-6.9	-8.3
  - real terms3			244.7	242.8	244.1	246.5	3.5	-0.5	-1.6
  - real growth4			1.4	-0.8	0.5	1.0

Cyclical social security		14.1	14.1	14.1	14.5	-0.7	-1.4	-2.2
Central government debt interest	22.1	24.5	26.0	26.2	-0.4	0.1	0.4
Accounting adjustments		9.5	10.7	12.5	12.7	0.2	0.2	0.9

General government
 expenditure excluding
 privatisation proceeds		295.2	305.0	316.0	325.4	-2.1	-8.1	-9.1
  - real terms3			289.4	289.6	292.8	294.8	3.6	-0.5	-1.2
  - real growth4			2.3	0.1	1.1	0.7
  - per cent of GDP			43½	42½	41¾	41 

For definitions, rounding and other conventions, see notes in Annex A to Chapter 6.
Excluding cyclical social security.
1993-94 prices.
Per cent.

Table 1.6 The public finances in 1994-95 and 1995-961

				£ billion
				

				1994-95	1995-96

RECEIPTS
Income tax			64.2	70.1
Corporation tax			20.1	26.4
Value added tax			43.3	49.0
Excise duties2			26.3	28.0
Other taxes3			39.7	43.0
Social security receipts		42.5	44.5
Other receipts			16.3	17.8

General government receipts		252.5	278.9

				£ billion
				

				1994-95	1995-96

EXPENDITURE
Control Total			249.6	255.7
Cyclical social security		14.1	14.1
Central government debt interest	22.1	24.5
Accounting adjustments		9.5	10.7

General government expenditure
 excluding privatisation
 proceeds			295.2	305.0

Privatisation proceeds		-6.3	-3.0

General government expenditure	288.9	302.0


Expenditure, receipts and borrowing

					£ billion

				1994-95		1995-96

General government expenditure	288.9		302.0

General government receipts		252.5		278.9



General government borrowing 
	requirement		36.5		23.1
Public corporations' market and 
	overseas borrowing		-2.0		-1.6

Public sector borrowing requirement	34.4		21.5

On a cash basis. See Annex B to Chapter 4.
Fuel, alcohol and tobacco duties.
Includes council tax as well as other central government taxes.

The main measures

Measures to help the economy work better

• To help people back to work, family credit will be increased for those in full time work; payments of housing benefit and family credit will be accelerated for people taking jobs; and, in a pilot study, family credit will be paid to people without children. To help the unemployed back into work, Community Action will be extended; there will be more Work Trial opportunities; three existing pilot schemes, Jobfinder's Grant, Workwise, and 1-2-1, will become available nationally; and two other pilot schemes, Workstart and Jobmatch, will be further developed.
• To make it cheaper to take on new staff, employer national insurance contributions will be cut by 0.6 per cent for employees earning less than £205 a week; and they will no longer have to be paid for the first year of employment when taking on someone who has been unemployed for two years.
• To reform training, the Training for Work programme will be refocused with the aim of increasing the number of trainees who get jobs. Around £325 million will also be spent over the next three years on the training measures announced in the Competitiveness White Paper.
• To improve the working of the housing market, housing benefit will be reformed so that, whether or not rents are met through housing benefit, landlords and tenants take price as well as size and quality into account in agreeing tenancies. Scaling back income support for mortgage interest from October 1995 will transfer more of the cost of mortgage default to lenders and borrowers where it properly belongs, and also reduce the work disincentives which current arrangements create.
• To help exporters, ECGD average medium- and long-term premiums will be reduced by around 10 per cent. The limit on cover for important developing country markets is rolled forward and increased by £300 million in 1997-98.
• To promote investment, the private finance initiative is gathering speed. Private finance contracts involving around £5 billion of capital investment are expected to be let in 1995.
• To encourage more investment in small businesses, there are a number of proposals flowing from the Industrial Finance Initiative. A new Venture Capital Trust scheme will be introduced which will provide income tax relief at 20 per cent, and CGT reinvestment relief, on investments up to £100,000 a year in the shares of trusts which invest mainly in unquoted trading companies. Income and gains on these shares will be tax free. Improvements will be made to the Enterprise Investment Scheme introduced earlier this year.
• To cut the regulatory burden on small firms, the threshold for quarterly payments of PAYE and NICs will be raised to £600 a month. The VAT registration threshold will be indexed. There will be consultation on annual VAT accounting and a simplified VAT scheme for small traders.
• To encourage personal saving, holders of Tax Exempt Special Savings Accounts will be able to deposit up to £9,000 capital from a mature account in a new account. Personal Equity Plans will be extended to cover corporate bonds and preference shares.
• Measures to restrain and re-focus public spending The Control Total is reduced by £6.9 billion in 1995-96 and £8.3 and £8.9 billion the following two years. This is achieved by:
• savings on most programmes to reflect the lower level of prices; - a concerted drive to improve efficiency and reduce waste in Government: cash running costs of civil departments are planned to be the same in 1997-98 as in 1993-94; provision for the rest of the public sector assumes pay increases will be offset by efficiency gains and other economies;
• measures to restrain the growth of social security including a reform of housing benefit. A drive against fraud and reform of income support for mortgage interest will also restrain social security spending which falls outside the Control Total;
• reductions in the housing and roads programmes.

Tax measures

• increase the main personal allowance and income tax thresholds in line with prices. The annual exempt amount for CGT and the threshold for inheritance tax are also indexed. The lower rate tax band is increased by £200 to £3,200;
• help pensioners by increasing personal allowances for those aged 65 and over by £430; - support environmental and health objectives by raising road fuel duties by 5 per cent in real terms and tobacco duties by 3 per cent in real terms, in line with the commitments given in last November's Budget. Duty on diesel is aligned with unleaded petrol. Vehicle excise duty for cars rises by £5. A tax on landfilled waste will be introduced in 1996 after consultation, with costs on business offset by lower employer national insurance contributions;
• ease the transition for those businesses facing higher rates bills in 1995-96 and beyond following the revaluation of properties. Increases in real terms will be limited to 10 per cent a year for large premises and 7 1/2 per cent for smaller premises. Support will be funded partly by the Exchequer and partly by limiting real gains for those with lower valuations to 5 per cent a year for large premises and 10 per cent for smaller premises;
• stop a number of artificial schemes to avoid tax.