1 The Budget

1.01 The Government is achieving its aim of combining economic growth with low inflation so that living standards go on rising year after year. The Budget provides for high quality public services, while securing the tax base and taking a further step towards the goal of a 20p basic rate of income tax. It takes no risks with the economy and ensures that borrowing remains firmly on a downward path.

The economy

- it is now well into its fifth year of sustained growth. Output is over 8 per cent higher than at its previous peak in 1990. The IMF and OECD expect the UK to be the fastest growing major European economy in both 1996 and 1997;

- living standards are rising. A one earner, two child family on average earnings should be over £1,100 better off next year after earnings growth, tax and inflation than in 1991-92 ;

- unemployment has fallen to its lowest level for over 5 1/2 years and 3/4 million jobs have been created in this recovery;

- the UK has a greater proportion of its people in work and a lower unemployment rate than any other major European country;

- the UK is enjoying the longest period of low inflation for almost half a century;

- interest rates remain at low levels by historical standards, with the lowest mortgage rates for a generation.

1.03 The Government is determined that healthy economic growth should continue and that inflation should remain low so that families and businesses can plan for the future with confidence.

1.04 The main risks to the economy are that economic growth might be driven off course by a pick up in inflation, or that high public borrowing might lead to unsustainable levels of public sector debt. The Government has shown its determination to meet its inflation target, most recently by the interest rate increase announced on 30 October. The Budget decisions reinforce the downward path of borrowing.

The public finances

Table 1.1 Impact of Budget policy changes on the PSBR(1)

	£ billion
	1997-98	1998-99	1999-00
Public expenditure(2)	-1.9	-2.5	-2.7
Revenue effects of public spending measures(3)	-0.5	-1.2	-1.8
Tax and NICs(4)	+0.7	+0.6	-0.8
Total(5)	-1.8	-3.2	-5.2

(1) Measures which increase the PSBR (eg higher spending or lower taxes) are shown as positive numbers.Measures which reduce the PSBR (eg lower spending or higher taxes) are shown as negative numbers.

(2) Changes in the Control Total since the 1995 Budget and Budget policy measures directly affecting GGE(X). In this and other tables, references to the 1995 Budget mean after adjusting for classification changes. See Table 5.2.

(3) Extra revenue generated by spending package, mainly from spending measures which improve tax compliance and strengthen the fight against tax evasion. See Table 5.2.

(4) See Tables 1.4 and 6.1.

(5) In this and other tables, the totals are based on unrounded figures. They may therefore differ from the sums of the rounded figures.

1.06 As a result, in part, of the Budget measures, the projected path of the PSBR remains on a clear downward track, in line with the Government's objective of returning towards balance over the medium term.

Table 1.2 The Public Sector Borrowing Requirement

	1996-97	1997-98	1998-99	1999-00	2000-01	2001-02
- £ billion	26 1/2	19	12	3	-8	-18
- per cent of GDP	3 1/2	2 1/2	1 1/2	1/2	- 3/4	-2

1.07 The projected fall in the PSBR over time is driven by continued firm control of public spending coupled with a gradual increase in receipts as a percentage of GDP. The increase in receipts partly results from the Government's continued commitment to future real increases in road fuel and tobacco duties, and from the measures announced in this Budget to increase the effectiveness of tax collection.

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The Budget measures

Public spending

1.09 Within these tight overall spending plans, the Budget reallocates public expenditure to provide more money for the Government's priorities:

- the health service;

- education;

- combating crime

- higher social security spending; and

- the costs of BSE.

"Spend to save"

- fight social security fraud; and

- improve the Inland Revenue and HM Customs and Excise's ability to combat tax evasion and further improve tax compliance

Tax

1.12 The Government's objectives for the tax system have long recognised that low tax rates go hand-in-hand with a broad tax base, and that while special reliefs and allowances have a role in certain circumstances, they can have distortionary effects on business decisions. The Budget makes changes to a number of special tax reliefs and allowances:

- bringing the tax treatment of both long-life business assets and the drilling of development oil wells more closely into line with normal accountancy practice;

- phasing out tax relief for profit related pay from 1998. This relief was introduced in 1987 as a way of stimulating the take up of profit related pay. Profit related pay is now widely recognised as normal element of remuneration in many businesses. The Government sees profit related pay as an important way of maintaining pay flexibility, but believes that it is now well established, and the time has come to start phasing out its specially favourable tax treatment.

- the public finance arithmetic already assumes that duties on tobacco and road fuels will be increased each year in real terms by 3 per cent and 5 per cent respectively. The Government plans to go further this year by increasing duty on cigarettes, cigars and pipe tobacco by 5 per cent in real terms;

- the Budget also increases insurance premium tax from 2 1/2 per cent to 4per cent, and air passenger duty from £10 to £20 for flights outside the European Economic Area and from £5 to £10 for flights within the EEA;

- duties on beer, most wine and cider have been frozen, and the duty on spirits has been reduced by 4 per cent.

1.15 The inheritance tax threshold is increased by a further £15,000 to £215,000. This threshold has been increased by over £60,000 in the last two Budgets.

Analyses

1.17 Tables 1.3 and 1.4 show the new public spending plans by department and summarise the Budget tax and national insurance measures.

1.18 Table 1.5 summarises the Government's revenue and expenditure plans for 1996-97 and 1997-98.

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Table 1.3 The new public spending plans(1)

	£ billion
	Change from previous plans		New plans
	1997-98	1998-99	1997-98	1998-99	1999-00
Control Total by department
Social security(2)	0.6	1.2	79.7	82.9	86.2
Health(3)	0.8	0.4	34.9	35.4	36.1
DOE - Local government	-0.1	0.0	31.4	31.7	31.6
DOE - Other	-0.2	-0.3	7.6	7.6	7.0
Scotland, Wales and N Ireland(2)	-0.3	-0.3	29.5	29.6	29.8
Defence (excluding sale of married quarters)	-0.1	-0.4	21.8	22.2	22.8
Education and employment(4)	-1.0	-1.0	14.0	14.0	14.0
Home Office	0.2	0.1	6.8	6.8	6.9
Transport	0.4	0.1	5.2	4.6	4.3
Other departments	-0.3	0.3	19.5	20.1	20.3
Local authority self-financed expenditure	0.8	0.3	13.7	13.7	14.3
Reserve	-2.5	-2.5	2.5	5.0	7.5
Control Total	-1.7	-1.9	266.5	273.7	280.9
Cyclical social security(5)	0.0	-0.4	14.1	14.3	14.7
Central government debt interest(6)	0.8	0.4	24.8	24.4	24.0
Accounting adjustments	0.1	0.2	9.2	9.8	11.0
GGE(X)(7)	-0.8	-1.8	314.7	322.2	330.6
Real growth (per cent) Control Total GGE(X)			1/4 1/4	3/4 1/2	1/2 1/2
GGE(X) as per cent of GDP			40	39	38 1/4

(1) For definitions, rounding and other conventions, see notes in Annex A to Chapter 5.

(2) Excluding cyclical social security.

(3) Of which NHS0.50.534.435.235.9

(4) £Does not include local authority Total Standard Spending on education.

(5) Of which Budget policy changes-0.3-0.6

(6) Central government debt interest payments, net of interest and dividend receipts from outside general government.

(7) General government expenditure excluding privatisation proceeds and lottery-financed spending and net of interest and dividend receipts.

Table 1.4 The Budget tax and national insurance measures(1)

	£ million yield (+)/cost (-) of measure
	Changes from a non- indexed base	Changes from an indexed base
	1997-98	1997-98	1998-99	1999-00
Income tax
basic rate reduced to 23 per cent	-1 250	-1 250	-1 800	-1 800
personal allowances up by £200 over indexation	-1 290	-920	-1 370	-1 420
lower rate band widened by £100 over indexation	-120	-60	-140	-160
basic rate limit - indexed	-140	0	0	0
married couple's allowance - indexed	-50	0	0	0
Capital taxes
inheritance tax threshold raised to £215,000	-45	-30	-55	-65
CGT reinvestment relief extended	-5	-5	-10	-15
Business measures
small companies' corporation tax rate cut to 23 per cent	0	0	-80	-110
business rates transitional scheme extended	-115	-115	-100	-80
VAT registration threshold - indexed	-15	0	0	0
Measures to secure the tax base
relief for profit related pay - phased out	100	100	700	1 700
capital allowances - long life assets	45	45	325	675
finance leasing of assets	80	80	150	150
relief for drilling production oil wells	*	*	150	200
VAT anti avoidance and revenue protection measures	560	560	320	320
insurance premium tax to 17.5 per cent on insurance sold with certain goods and services	160	160	235	260
other measures	165	165	145	150
Excise duties
beer, most wine, cider and perry unchanged	0	-95	-100	-105
spirits cut by 4 per cent	-35	-50	-50	-50
most tobacco duties up by 5 per cent in real terms(2)	140	140	150	155
petrol and diesel up by 3p a litre (including VAT)(2)	15	15	15	15
ultra low sulphur diesel 1p differential from ordinary diesel	-15	-15	-15	-15
road fuel gas cut by 25 per cent	*	*	-5	-10
fuel and gas oil up by 5 per cent in real terms	20	15	15	20
car VED etc increased by £5, lorry VED unchanged, reductions for lorries meeting low emissions	120	40	35	30
Other indirect taxes
main rate of insurance premium tax increased to 4 per cent	325	325	455	470
air passenger duty increased to £10/£20	125	120	385	415
Other measures	-125	40	55	50
Total (2)	-1 350	-735	-590	780
* = Negligible
(1) The measures and their revenue effects are set out in more detail in Chapter 6.
(2) Costings exclude yield from previously announced excise duty increases confirmed in this Budget:	1 610	1 085	1 180	1 290

Table 1.5 The public finances in 1996-97 and 1997-98(1)

	£ billion
	1996-97		1997-98
	1995 Budget	Latest forecast	Forecast
RECEIPTS
Inland Revenue
Income tax	70.2	68.1	71.8
Corporation tax	26.6	26.1	27.2
Petroleum revenue tax	1.0	1.7	1.6
Capital gains tax	1.0	0.9	1.1
Inheritance tax	1.5	1.6	1.6
Stamp duties	2.4	2.4	2.7
Customs and Excise
Value added tax	47.9	47.5	50.7
Fuel duties	17.4	17.4	19.6
Tobacco duties	7.7	7.8	8.4
Alcohol duties	5.7	5.7	6.1
Betting and gaming duties	1.7	1.5	1.6
Air passenger duty	0.3	0.4	0.8
Insurance premium tax	0.7	0.6	1.2
Landfill tax	0.1	0.1	0.4
Customs duties & levies	2.6	2.2	2.4
Other
Vehicle excise duties	4.3	4.3	4.5
Oil royalties	0.5	0.7	0.6
Business rates(2)	14.7	14.2	14.6
Social security contributions	46.9	46.7	49.1
Council tax	9.9	9.9	10.6
Other taxes and royalties	5.7	5.8	5.5
Total taxes and social security contributions	268.7	265.6	282.1
Other receipts(3)	16.1	15.3	17.2
General government receipts	284.8	280.9	299.4
EXPENDITURE
Control Total by department
Social security	76.4	76.9	79.7
Health	33.8	34.0	34.9
DOE Local government	31.3	31.3	31.4
DOE Other	8.2	8.4	7.6
Scotland, Wales and N. Ireland	29.4	29.6	29.5
Defence	21.4	22.1	21.8
Education and employment	14.6	14.8	14.0
Home Office	6.5	6.6	6.8
Transport	4.2	4.9	5.2
Other departments	19.5	19.3	19.5
Local authority self-financed expenditure	12.5	13.3	13.7
Allowance for shortfall		-0.6
Reserve	2.5		2.5
Control Total	260.1	260.6	266.5
Cyclical social security	13.9	14.3	14.1
Central government debt interest(4)	22.3	22.2	24.8
Accounting adjustments	9.7	10.3	9.2
GGE(X)(5)	306.1	307.4	314.7
Privatisation proceeds	-4.0	-4.5	-2.0
Other adjustments(6)	6.2	5.6	6.3
General government expenditure	308.3	308.5	319.0
Expenditure, receipts and borrowing
	£ billion
	1996-97		1997-98
	1995 Budget	Latest forecast	Forecast
General government expenditure	308.3	308.5	319.0
General government receipts	284.8	280.9	299.4
General government borrowing requirement	23.5	27.7	19.6
Public corporations' market and overseas borrowing	-1.1	-1.3	-0.4
Public sector borrowing requirement	22.4	26.4	19.2

(1) On a cash basis. See Annex B to Chapter 4.

(2) Includes district council rates in Northern Ireland.

(3) Includes interest and dividends, gross trading surpluses, rent, other financial transactions, and payments to the National Lottery Distribution Fund.

(4) Central government debt interest payments net of interest payments and dividend receipts from outside general government.

(5) General government expenditure excluding privatisation proceeds and lottery financed spending and net of interest and dividend receipts.

(6) Lottery financed spending, and interest and dividend receipts.

[Prepared November 1996]