Mr Major’s Autumn Statement – 15 November 1989

Below is the text of Mr Major’s Autumn Statement, given in the House of Commons on 15th November 1989.

CHANCELLOR OF THE EXCHEQUER:
The Chancellor of the Exchequer (Mr. John Major) : With permission, Mr. Speaker, I should like to make a statement. Cabinet agreed the Government’s expenditure plans this morning. I am now able to inform the House of the public expenditure outturn for this year; the plans for the next three years; proposals for national insurance contributions in 1990-91; and the forecast of economic prospects for 1990 required by the Industry Act 1975. The main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I sit down. The printed Autumn Statement will be published next Wednesday.
Tight control of public expenditure remains a central element of the Government’s economic strategy. In the past seven years this has led to a sharp fall in the ratio of public spending, excluding privatisation proceeds, to national income. This fall has made it possible to improve dramatically the Government’s finances while still making substantial reductions in tax rates. The ratio of public spending to gross domestic product was nearly 47 per cent. in 1982-83. In the current year, it is likely to be 38.75 per cent., significantly below the level expected at the time of the last Autumn Statement. For the next two years the plans I am announcing today show ratios of 39 and 38.75 per cent. Those are unchanged from the ratios published in last year’s Autumn Statement, and permit a cash increase in general Government expenditure in 1990-91 of around £5.5 billion. By 1992-93 the ratio is expected to fall further to its lowest level since the mid-1960s.
For the current year, the outturn of expenditure is expected to be about £168 billion–£1 billion higher than the original planning total. This partly reflects a lower level of privatisation proceeds, but its principal cause is massive overspending by local authorities on both current and capital account. As the House knows, new arrangements for the finance and control of local authority expenditure in England and Wales are being introduced on 1 April 1990. This year’s outturn shows how necessary those new measures are. Central Government spending remains firmly under control. The plans for the next three years have been set on the new definition of the planning total which the Government announced in July last year and which was welcomed by the Treasury and Civil Service Select Committee.
This includes central Government support for local authorities, but excludes their self-financed expenditure. The composition of general Government expenditure remains unchanged. For 1990-91, the new planning total has been set at £179 billion and, in the following two years, at £192 billion and £203 billion respectively. Within that, the estimates of privatisation proceeds are unchanged, at £5 billion a year. There are also substantial reserves, rising from £3 billion in 1990-91 to £6 billion and £9 billion in the following two years.
The new plans also show continued real growth in spending on the Government’s priorities. Thus, between this year and next, spending on the National Health Service in the United Kingdom will rise by £2, 400 million. Taking account of income generation and cost savings, that is equivalent to a £2,600 million increase in resources, or 5.5 per cent. in real terms. These plans will finance the improvements in the management of the service outlined in the National Health Service review. They provide more than £200 million extra for hospital building and other capital expenditure next year ; and they will finance continuing growth in services for patients. They are the clearest possible evidence of the Government’s practical commitment to improving the care available in the National Health Service.
There will be substantial increases also for investment in transport. Spending on national roads is planned to double between 1988-89 and 1992-93. Extra financing of £400 million to £500 million a year is being made available for the railways and London Regional Transport, including upgrading the services on Network SouthEast and the London Underground, to relieve congestion and improve safety, and for rail services for the Channel tunnel. In total we have added £1.8 billion to the planned spending on transport in the next two years. The plans provide an extra £250 million over the next two years for a new initiative to tackle homelessness, to be announced today by my right hon. Friend the Secretary of State for the Environment. Central Government support for the provision of new homes by housing associations will more than double from £800 million in 1989-90 to £1,700 million in 1992-93.
My right hon. Friend the Secretary of State for Social Security has already announced real increases in benefits which will help 1.5 million families and 500,000 long-term sick and disabled people. There will be a further increase of over £500 million in the total resources available for higher education in 1990-91 compared with this year. It will provide for the continuing growth in the number of students, which has risen by 30 per cent. since 1979, and is now at a record level and it will cover the cost of the Government’s proposals on top-up loans. There is provision for more environmental research, including the new climate change centre and the doubling of our contribution to the United Nations environmental programme. About £1.5 billion has been added to planned capital spending by central Government and public corporations in 1990-91. That represents a real increase of around 10 per cent. compared with 1989-90.
Mr. Eric S. Heffer (Liverpool, Walton) : On a point of order, Mr. Speaker, I have been a Member for a long time, but I wish to know whether I am allowed to ask the Chancellor of the Exchequer a question. He is making a long statement. Am I allowed to ask a question and, if not, when can I ask him a question?
Mr. Speaker : Surely the hon. Member does not need to pose that question. If I call him later, he can ask the Chancellor a question then.
Mr. Major : The new plans include the money central Government provide to support local authority spending. The Government’s proposals for aggregate external finance in 1990-91 were announced to the House in July. Measures have also been announced which will ease the transition from rates to community charge. The cost to the taxpayer of these measures will be nearly £700 million in 1990-91, with further substantial sums in each of the following two years.
Capital grants and credit approvals will provide central Government support for local authority capital expenditure under the new arrangements. The new plans provide support for a sustained programme of school and college building and modernisation, for local authorities to contribute to the homelessness package, for transport projects, as well as capital spending on other local services, including local roads and environmental improvement. As in the past, these improvements have been possible only through a rigorous selection of priorities, substantial gains in value for money, and a very welcome reduction in the burden of debt interest. They have been found within an affordable level of total public spending. Overall public spending excluding privatisation proceeds is expected to grow on average by 1.75 per cent. a year in real terms throughout the period between 1988-89 and 1992-93. This was the rate of growth projected in last year’s Autumn Statement and we have stuck to it. Over the 1970s, a decade of high borrowing and high inflation, as well as high public spending, it grew not by 1.75 per cent. a year but by 3 per cent. a year.
The Government’s new plans demonstrate their continuing commitment to two vital principles : first, to maintain firm control over total spending; and secondly, to increase efficiency in order to provide more resources where they are most needed. I should like to congratulate my right hon. Friend the Chief Secretary on his skilful and successful conduct of the public spending round.
I turn next to national insurance contributions. As the House knows, we have now implemented the reform of employee contributions announced by my right hon. Friend the member for Blaby (Mr. Lawson) in the Budget. From last month, two of the three step increases in contribution rates have been abolished. This means that employees who get pay increases taking them just above these steps can no longer lose more in higher contributions than they gain in extra pay. And the initial step at earnings of £43 a week, where people first enter the contribution system, has been more than halved. These measures have reduced contributions by up to £3 a week for nearly 19 million employees and are of particular help to many employees on modest incomes ; they have also removed some important disincentives. The usual autumn review of contributions has been conducted in the light of advice from the Government Actuary on the prospective income and expenditure of the national insurance fund, and taking account of the statement on benefits made in October by my right hon. Friend the Secretary of State for Social Security.
Next year, the initial class 1 contribution rate payable on earnings up to the lower earnings limit will remain at only 2 per cent. This means that a payment of only 92p a week will buy entitlement to the basic pension and other contributory benefits for those who earn just enough to pay contributions. On additional earnings, up to the upper earnings limit, the rate will remain unchanged at 9 per cent. For employers, the main rate will also be unchanged at 10.45 per cent.
The lower earnings limit will be increased to £46 a week, in line with the single person’s pension, and the upper earnings limit will be raised to £350 a week. For employers, the upper limits for the three reduced bands will be increased broadly in line with prices. I am also publishing today the economic forecast required by the Industry Act 1975.
It is clear beyond doubt that the economy has greatly strengthened over the last decade. We have experienced eight years of strong and sustained growth with inflation at moderate levels. This has brought an increase in employment of about 2.75 million since March 1983 and a sustained rise in living standards. However, it is also clear that in the last two years, 1987 and 1988, demand, and with it output, rose at a rate which exceeded expectations and could not be sustained. That became apparent in increased inflationary pressures and the growth of the current account deficit.
These pressures had to be reduced and monetary policy was tightened accordingly. The effects of this tightening are already apparent in recent retail sales figures, and the turnaround in the housing market. The Government’s fiscal position is also very strong. I now expect this year’s fiscal surplus to be about £12.5 billion, equivalent to 2.5 per cent. of GDP. That represents a very tight fiscal stance by any standards. Both tax yield and expenditure are higher than forecast at Budget time, but lower proceeds from privatisation and the very high take-up of personal pensions mean that the public sector debt repayment will be slightly below the Budget projections.
Looking at the wider economy, as always, a great deal inevitably depends on the actions of companies and individuals. So there is bound to be uncertainty about the speed with which the economy will adjust to the present tight stance of policy. Our forecast is that growth in domestic demand will be a little over 3.5 per cent. in the current year–a sharp, but inevitable, slowdown from over 7 per cent. recorded in 1988.
Non-oil GDP is expected to grow by 3 per cent. this year. GDP growth as a whole for the current year looks like turning out at 2 per cent., a little below the forecast published at Budget time. This results from lower than expected North sea oil production, which is taking longer than expected to recover from the several serious accidents of the past two years.
Business investment is likely to increase by 9.25 per cent. this year, giving a total of over 40 per cent. in the three years to 1989. This is the largest-ever rise in business investment over a three-year period and is two and a half times as fast as the growth of personal consumption over the same period. This has inevitably contributed to strong import growth and a higher current account deficit in the short run. Notwithstanding this unwelcome effect, the resulting increase in productive capacity will help to sustain the growth of output and in due course bring the deficit down. Looking ahead to 1990, our tight fiscal and monetary policy will have an increasing impact both on household spending and on company spending, which typically reacts later than the personal sector. Investment should continue to grow, but it will do so more slowly. The slowdown in the economy means that GDP is forecast to increase by only 1.25 per cent. in 1990. This will bring the average growth in the four years to 1990 to 3 per cent. a year.
As domestic demand slows, import growth should moderate. At the same time, the strong rise in exports, which has been one of the most welcome developments in 1989, is forecast to continue. Non-oil visible exports are expected to rise by over 11 per cent. this year, the highest rate since 1973, and we expect a further substantial increase next year. As a result, we now forecast that the current account deficit will fall from some £20 billion in the current year to about £15 billion in 1990
We will also see a further reduction in inflation. The headline measure of retail price inflation has already peaked at over 8 per cent. in May and June this year, and has since come down a little. Following the recent rise in mortgage rates, it will remain high for some months, but our forecast is for it to fall to 5.75 per cent. by the fourth quarter of 1990, and I expect to see it fall still further after that.
Our main priority must be to bring inflation decisively down, and keep it down. To achieve this, the economy must slow down for a while. This does mean that 1990 may not be an easy year, but the economy enters the 1990s in incomparably better shape than it entered the 1980s. The supply side reforms of the last decade have left business and industry better able to handle both the short-term difficulties before us and the longer-term opportunities to come. I have no doubt that we must stick to the policies that have turned the economy around, and that we are determined to do.