- sound public finances;
2.02 In July, the International Monetary Fund's annual mission to review the UK economy concluded that the UK's economic performance was "enviable" and in large measure due to "sound economic policies". This Budget continues to build on these policies and, in particular, has taken firm action to bring the public finances back on track. This will safeguard the rising prosperity that has been achieved and ensure living standards continue to rise.
2.04 Monetary policy's role is to deliver permanently low inflation. The Government has set an explicit inflation objective since October 1992. The aim is to achieve underlying inflation (measured by the RPI excluding mortgage interest payments) of 2 1/2 per cent or less. Monetary policy will continue to be set to achieve this target.
| Per cent of GDP | |||||||
| Outturn | Forecast | Projection | |||||
| 1995-96 | 1996-97 | 1997-98 | 1998-99 | 1999-00 | 2000-01 | 2001-02 | |
| GGE(X)(1) | 42 1/4 | 41 1/4 | 40 | 39 | 38 1/4 | 37 1/2 | 36 3/4 |
| General government receipts | 38 | 37 3/4 | 38 | 38 | 38 1/2 | 39 | 39 1/4 |
| Other items(2) | 1/4 | 0 | 1/2 | 1/2 | 1/2 | 1/2 | 1/2 |
| PSBR | 4 1/2 | 3 1/2 | 2 1/2 | 1 1/2 | 1/2 | - 3/4 | -2 |
| Memo:General government financial deficit(3) | 5 | 4 | 2 1/2 | 1 1/2 | 1/4 | -1 | -2 1/4 |
| Public sector current balance | -3 1/2 | -2 3/4 | -1 3/4 | - 3/4 | 1/2 | 1 3/4 | 2 3/4 |
(2) Lottery-financed spending, interest and dividend receipts, privatisation proceeds and public corporations' market and overseas borrowing.
(3) Definition as for Maastricht criterion.
2.11 The projected improvement in the PSBR is largely driven by the Government's tax and spending policies. Over the next five years, the PSBR as a share of GDP is projected to fall by more than 5 percentage points. Tight control of government spending contributes over 4 percentage points of this reduction, and is in line with the Government's objective of getting spending as a share of GDP down below 40 per cent. The Budget measures designed to protect the ordinary taxpayer will help secure the tax base. These changes, along with the existing commitment to future real increases in road fuel and tobacco duties, raise the ratio of government receipts to GDP.
2.12 The continuing fall in borrowing at first stabilises, and then reduces, the ratio of government debt to GDP. Lower borrowing reduces the burden of debt interest payments over time, helping to release resources for spending on public services or reducing taxes. The debt ratio is lower than in 1979, in contrast to all other major European Union countries where very sharp increases have been recorded.
2.13 The general government financial deficit (GGFD) ratio to GDP is forecast to fall below the 3 per cent Maastricht reference value in 1997-98, enabling the UK to meet the 1997 deficit criterion for qualification for participation in the single currency. The corresponding ratio of gross general government debt to GDP remains below its reference value of 60 per cent throughout. This compares favourably with the position of other European Union member states.
2.14 The development of resource accounting and budgeting, as set out inlastyear's White Paper "Better Accounting for the Taxpayer's Money" (Cm2929), will contribute to the overall picture of the public finances and help ensure that decisions on public sector current and capital spending better reflect their economic significance. Resource accounting will be implemented in all government departments by 1998, and the first resource accounts will be published in respect of 1999-2000. These will provide information on the use of assets and the allocation of expenditure by objective. Resource budgeting will be introduced in 2000.
2.15 In recent years national saving has risen from the relatively low levels to which it fell in the early 1990s. The continuing reduction of public sector borrowing can be expected to raise the level of national saving, providing resources for investment and improving the long-run productive potential of the economy.
2.17 These policies have resulted in many improvements:
- so far in the 1990s the share of UK income being spent by businesses on investment is greater than that spent in the 1980s, which in turn was greater than in the 1970s;
- the UK has succeeded in attracting record levels of inward investment, including nearly 30 per cent of all inward direct investment in the European Union, and over 40 per cent of North American and Japanese investment in this region;
- in the latest recovery employment began to rise sooner and unemployment began to fall earlier than in the previous recovery; unemployment peaked in the 1990s at a lower level than the previous peak for the first time since the 1960s, unlike any other major European Unioncountry; long-term unemployment was also lower on a similar comparison, both absolutely and as a proportion of total unemployment;
- unemployment has fallen steadily for almost four years without putting upward pressure on wages; and earnings growth is running at half the rate seen in the 1980s recovery;
- working days lost to strikes fell in the 1990s to their lowest levels since records began over 100 years ago;
- during the 1980s the UK met reviving demand by sucking in imports. In this recovery, imports have grown but exports have risen faster. Thecurrent account is broadly in balance and is expected to remain so.
2.18 Both the IMF and the OECD recently commended the UK for its programme of reforms. The IMF said that "structural policies - notably privatisation, labour market reforms and deregulation - have contributed importantly to improving economic performance and prospects"; while the OECD in its annual survey of the UK economy noted these reforms had helped the UK become "a more flexible and less inflation prone economy".
2.19 The Budget continues to build on this success by cutting tax rates further, and by targeting spending on priority areas such as the health service, education and combating crime while maintaining a responsible approach to the public finances.
- the main rate of corporation tax has been reduced from 52 per cent in 1978-79 to 33 per cent now - the lowest of any major industrialised country;
- four out of five companies pay tax at the small companies rate, which has been reduced from 42 per cent in 1978-79 to 23 per cent from 1997-98;
- tax reliefs for Venture Capital Trusts and Enterprise Investment Schemes have helped promote investment in small firms.
- a range of active labour market measures has helped unemployed people to get jobs and to compete effectively in the labour market;
- reforms in education and training have contributed to higher standards and increased participation; almost 90 per cent of 16 year olds are now in education and training compared with 71 per cent in 1989-90, and almost one in three young people enter higher education, compared with one in seven in 1987.
- the Private Finance Initiative has harnessed private sector efficiency and management expertise, with over £7 billion of deals now agreed;
- market testing, contracting out and competitive tendering have improved efficiency throughout the public sector;
- reforms in the NHS and other public services have led to improvements in efficiency and better levels of service.
- the UK has improved market opportunities for businesses through a commitment to trade liberalisation, for example by taking the lead in implementing and developing the European Union single market, and in other areas such as the negotiation of double taxation agreements.
[Prepared November 1996]