The Rt. Hon. Sir John Major KG CH

Prime Minister of Great Britain and Northern Ireland 1990-1997

1993Prime Minister (1990-1997)

Text of the 1993 Budget – 16 March 1993

Below is the text of the 1993 Budget, held on 16th March 1993 and presented in the House of Commons by the Chancellor of the Exchequer, Norman Lamont.

Budget Statement

Mr. Deputy Speaker (Mr. Michael Morris) : Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that, at the end of the Chancellor’s speech, copies of the Budget resolutions will be available to hon. Members in the Vote Office.

The Chancellor of the Exchequer (Mr. Norman Lamont) : In my Budget last year, I announced a far-reaching reform that was supported, I believe, on all sides of the House. From November this year, public expenditure and taxation will be brought together in one annual Budget statement.

The advantages of the new system are clear. Ensuring that tax and spending decisions are taken at the same time will allow better control over Government borrowing. Indeed, that is the main purpose of the change. With tax, spending and borrowing decisions presented in a single statement, the relationship between them will be much easier to understand. However, for now, our existing, and, to me, rather antiquated, procedures remain in place. I shall therefore concentrate today largely on the tax side of the accounts. My Budget should nonetheless be considered alongside the autumn statement that I delivered just four months ago.

In that statement, I set a firm limit on public sector wage increases. This was essential and we shall stick to it. And I established tight overall spending ceilings for the next three years. But I also gave priority to programmes that would help to promote growth and the long-term performance of the economy. In this way, the autumn statement played a key role in putting Britain on course for recovery.

My Budget today is designed to ensure that this recovery will be sustained. Above all, this Budget has two objectives : first, to support the recovery in the year ahead ; and secondly, to set out a clear medium-term strategy for bringing the borrowing requirement back towards balance. The “Financial Statement and Budget Report,” with a number of press releases filling out the details of my proposals, will be available from the Vote Office as soon as I have sat down.


It is impossible to review the short-term prospects for the British economy without first considering what is happening in the world outside. Many people talk as if Britain’s economic problems were unique, as if we can somehow insulate ourselves from the economic tides that sweep across the world. The truth, of course, is quite different. As ours is an open economy which exports a third of its output, developments abroad have a profound impact on Britain. The one ray of light on the world scene has been the recovery in north America, and particularly in the United States. The United States economy grew by over 2 per cent. last year, with growth in the final quarter revised up to an annual rate of 4 per cent.; but the success of the United States stands in marked contrast to developments elsewhere.

Industrial production has been falling in many of the world’s largest economies – over the last year it has fallen 2 per cent. in Italy; by 2 per cent. in France; by 6 per cent. in Germany; and by 7 per cent. in Japan. By contrast, in Britain, industrial production has actually risen, and the recent indicators of GDP confirm this gloomy world picture. Even Japan has now been visited by the prospect of recession, with gross domestic product declining by per cent. in the second half of 1992. France and Italy have also had to cope with falling output. And Germany, still struggling with the costs of reunification, has now suffered three successive quarters of declining GDP.

It was against this background that my right hon. Friend the Prime Minister and I secured agreement at the Edinburgh Council last December to a European growth initiative. This was closely modelled on my own autumn statement, and was designed to deal with the most serious problem facing the European Community – and the seemingly inexorable rise in unemployment across the continent.

Last year, unemployment in the Community rose by 1 million, and it is projected to rise further this year, to some 11 per cent. of the work force. France, like Britain, has 3 million unemployed; in Ireland and Spain more than one in six are out of work. Even in west Germany, unemployment is rising once again.

To a large extent, this pattern reflects the impact of recession, but, particularly in the European Community, the recent rise in unemployment comes on top of a relentless upward trend. In the Community as a whole, unemployment rose in every single year from 1973 to 1985; and although it fell back in the boom of the late 1980s, it has stayed at well over twice the level of 20 years ago. Unemployment in Europe is much higher than in many other parts of the world; and it cannot be reduced simply by stimulating demand. A deep-seated problem needs more fundamental solutions. It requires more flexible markets, not just for labour but also for goods and services, and it requires support given by Governments to be directed less at propping up declining industries and more at helping the unemployed to rejoin the work force.

Above all, if we are to secure a lasting reduction in unemployment over the years ahead, we must continue to resist the imposition of job-destroying measures emanating from Brussels.

The high-cost economies of the European Community cannot insulate themselves from the world outside – from the more flexible economies of the Pacific rim and north America. Nothing would do more damage to job prospects, not just in Britain but across Europe, than the imposition of further tax or regulatory burdens on employers. That is why this Government will never sign the social chapter.


While activity has been falling in many parts of the world, GDP in Britain rose slightly in the second half of last year. With interest rates down by four percentage points in just six months, Britain enters the year ahead in a more favourable position than most of our major competitors. That is confirmed by the European Commission, which expects Britain to be the fastest growing of all the major European economies both this year and next. The substantial interest rate cuts I have made provide a solid foundation for recovery this year, and they come alongside the measures in my autumn statement to revive business confidence. We are already beginning to see their effects.

Lower interest rates have contributed to a pick-up in the growth of narrow money, while retail sales have been on a steady upward trend for almost a year. The abolition of car tax has prompted a surge in activity in the motor trade, right at the heart of British manufacturing. New car registrations were nearly 16 per cent. higher in the latest three months than a year earlier.

By the end of this month, the additional money that I provided in the autumn statement will have taken about 20,000 properties off the housing market. Although house prices remain weak, building society commitments and advances are stronger, and both house builders and estate agents are now reporting increased activity.

The extra support that I announced for British exporters will reinforce the competitiveness of our companies trading overseas, while exports in the last three months of 1992 were already at record levels; and the temporary increase that I announced in capital allowances will provide a continuing boost to business investment over the next six months. According to the CBI, manufacturers are more optimistic now than at any time for almost five years. The recovery we have seen in confidence rests, above all, on one crucial foundation – the dramatic progress that we have made in getting inflation down. There has been much debate about Britain’s experience with the ERM. Today I wish to make just two observations. First, it was absolutely vital to get inflation in this country down. The two years that we spent in the ERM were tough, but the war against inflation was one we had to fight, and one we had to win. Secondly, once sterling left the ERM, and with inflation sharply down, we were right to take the opportunity that that gave us to relax policy and get interest rates down.

Inflation is now at its lowest level for over 25 years. The rapid fall in the headline rate is, of course, partly the result of the reduction in mortgage rates; but even more significant is the fall in the underlying rate. That is down in the last year from 5 per cent. to 3 per cent. Except for a few months in 1986, after the collapse in the oil price, underlying inflation has not been this low since February 1968.

Short term prospects

In my Mansion House speech, I announced the establishment of the panel of independent forecasters. My intention in doing so was to demonstrate more clearly that the judgments the Government have to make are not based on one single forecast.

I have now received the panel’s first report, and I am most grateful to it for its contribution. The panel recognises that the substantial relaxation of monetary policy has greatly improved the prospects for recovery in 1993. Its forecasts for growth this year vary between and 2 per cent., with an average of just over 1 per cent.

The Treasury’s forecast is very similar. Broadly in line with the average of the panel’s forecasts, we expect GDP to grow by 1 per cent. this year, with the recovery gathering pace through the year. Growth in the year to the second half of 1993 might reach 1 per cent., rising to 3 per cent. in the first half of 1994.

However, as the panel stresses, uncertainties remain. It is possible that growth this year may exceed the 1 per cent. forecast that I have made, but there are significant downside risks, too. It is very difficult to be sure when consumers will feel that their finances are sound enough to support a stronger growth of spending, and there are, as I have said, considerable doubts about the prospects for our major export markets.

This will inevitably affect the prospects for the current account. The deficit in 1992 was about £12 billion, and as the economy recovers and the unfavourable short-term effects of the fall in the exchange rate feed through, I expect the deficit to widen this year to £17 billion. But the measures that I shall be putting in place today should help to strengthen our trade position over the years ahead ; and I expect the deficit in the meantime to be readily financeable.

The medium term

The key to an improved trade performance lies in the competitiveness of our products, and the signs are encouraging. Earnings are now growing more slowly than at any time for 25 years. Labour productivity has been rising rapidly; and while unit wage costs in manufacturing have been rising in Japan and Germany, here they showed no increase at all during 1992. British business now has a great opportunity to expand into overseas markets and to replace imports at home; but costs must be kept under firm control. The Government’s task is to provide a clear and predictable framework for policy–to ensure that business has the freedom and the support it needs to get on with the job. Our strategy for sustained growth rests on three key principles : first, that growth comes from the private sector, not from Whitehall; secondly, that a continuing commitment to low inflation is vital if competitiveness is to be maintained; and thirdly, that the only way to increase the country’s long-term growth rate is by improving the supply side performance of the economy.

Supply side policy

Supply side improvements are seldom the stuff of headlines, but the policies that this Government have pursued have begun to improve the way that markets work. We have transferred to private ownership some two thirds of the state sector we inherited; and our labour market reforms have given back to management the power to manage, so that last year the number of days lost to strikes was the lowest for a century.

But we still have a long agenda of unfinished business. In my autumn statement, I set out proposals to increase the role of the private sector in modernising Britain’s infrastructure. I also announced additional resources to underpin the education reforms that we have set in train.

The wealth of a nation depends largely upon the skills of its people; and nothing could be more important for the long-term performance of the British economy than the steady improvement in education and skills that this Government are determined to bring about.


However, if long-term improvements in economic performance are determined largely by the supply side, we have seen all too often in the past 20 years how short-term prospects can be blown off course by inflation. I am absolutely determined that this should not happen again.

The Government’s objective is to keep the underlying rate of retail price inflation within the range of 1 to 4 per cent.; and to bring it down to the lower half of that range by the end of this Parliament. I expect underlying inflation to be 3 per cent. at the end of this year, close to the top of its target range, but inflation should fall further over the medium term. Monetary policy is set to meet that objective.

The detailed framework for monetary policy was set out in my letter to the Treasury and Civil Service Select Committee last autumn; and since then, I have introduced two further developments to demonstrate our determination to conduct monetary policy in a way that will deliver our inflation target. We now publish a monthly monetary report which shows the information that guides our decisions. I have also asked the Bank of England to provide regular reports on our progress towards meeting our inflation objective.

Interest rate decisions are based on a continuing assessment of monetary conditions, measured principally by the growth of narrow and broad money, and movements in the exchange rate and asset prices. Alongside the target for inflation, I am setting monitoring ranges for both the narrow and broad measures of the money supply; for the period of this Parliament the ranges are 0 to 4 per cent. for M0 and 3 to 9 per cent. for M4.

In judging the prospects for inflation, I have to weigh the evidence from all the indicators, taken together. If any one is out of line, it is particularly important to assess its significance against the performance of the others.

Following the recent substantial reduction in interest rates, M0 growth may be above its monitoring range in the period ahead, but, on the basis of the indicators taken together, I believe that interest rates at their current level are consistent with the achievement of the Government’s inflation objectives. At the lowest level in the European Community, they are also fully consistent with the prospects for recovery this year.


I turn now to funding, a subject of peculiar fascination for many City commentators and of particular interest to a number of my right hon. and hon. Friends. The Government’s full fund policy ensures that their borrowing does not add to inflationary pressures. I am clear that this policy remains appropriate, but, from time to time, it has been right to reconsider its detailed application.

I have therefore decided that transactions by banks and building societies in gilts will, from now on, be included in the funding definition. In periods when banks and building societies reduce their holdings of gilts, extra sales to other sectors will be needed, but in current conditions the change I am making will help to ease the pressures on liquidity and avoid complicating money market management. If it also leads to some strengthening in the growth of M4, that would be no bad thing. In the year ahead, sales of gilts will, as usual, form the bedrock of the funding programme, but national savings will again make an important contribution.


In controlling inflation, monetary policy must of course be supported by a sustainable fiscal policy. I expect a PSBR in the current financial year of £35 billion – slightly lower than projected at the time of my autumn statement, but, because unemployment tends to increase for a while, even after growth has resumed, and because some taxes, particularly corporation tax, are collected a year in arrears, I expect borrowing next year to rise further. The PSBR for 1993-94 has therefore been set at £50 billion, some 8 per cent. of GDP.

Unless action is taken, large deficits will continue over the medium term. The PSBR could still be around 6 per cent. of GNP in 1996-97, the last year of this Parliament. I do not believe that borrowing on that scale is acceptable, and I shall be announcing measures today to reduce it progressively over the years ahead. In the early 1980s, we took steps to bring the public finances back under control. We turned a PSBR of over 5 per cent. of GDP into a surplus of 3 per cent., and we nearly halved the ratio of public sector debt to GDP. We did not shrink from making the necessary changes then and I shall not shrink from making them today.

The rise in the PSBR since 1989-90 is largely due to the recession, and, because of the reduction in the national debt in the 1980s, I have been able to allow the so-called “automatic stabilisers” – the increases in public spending and the reduction in tax receipts that directly reflect the weakness of the economy – to operate fully. It was right, I believe, to do this to maintain the level of demand during the recession. However, just as a business cannot go on year after year ignoring a fall in cash flow caused by a downturn in the economy, so too the Government cannot keep on running up debt in the hope that recovery will solve our problems. Even if the higher debt we now face was largely caused by the recession, the extra borrowing still has to be financed. As debt mounts up, so does the debt interest. In this way, what might have started off as a cyclical deficit could soon become a structural deficit unless action is taken to bring borrowing down.

All around the world, we see countries striving to reduce their fiscal deficits or suffering from their failure to do so sooner. President Clinton’s programme shows that the need for fiscal discipline is now widely understood. The deficit which the Italians are now having to deal with is a salutary warning to those who think that a problem postponed is a problem solved. Those who argue that there is no need for action should confront the consequences of such a course – the consequences not just for the public finances but also for the level of interest rates.

For all these reasons, I believe that the greatest threat to sustained recovery in Britain would come not from a lack of demand, but from excessive Government borrowing over the medium term. We have to address that problem now.

Action to bring the fiscal deficit down clearly has to start with the amount that the Government spend. The new control arrangements that I put in place last year were an important first stage, and we now have firm ceilings for expenditure over the next three years that will keep the growth of spending below that of the economy as a whole.

But proper control of public expenditure cannot be achieved simply by setting targets. It requires a continuous examination of each and every Department and of all the functions of Government. What was once a desirable role for the public sector may no longer be appropriate today. That is why the fundamental reviews of public spending are so important. Those reviews will inevitably take time, so I have also had to look at the revenue side of the accounts.


In doing so, I have had to balance two key objectives : first, the essential task of helping recovery; secondly, the need to tackle the deficit so that the recovery will be sustained. I believe that my proposals today strike that right balance. In the year ahead, 1993-94, their effect will be broadly neutral, thus allowing the recovery to take hold, and I will be announcing later some measures to improve that prospect by helping business and the unemployed.

However, for subsequent years, as the economy strengthens, my proposals are designed to build in a wedge of steadily rising revenue. Overall, they will raise revenue by £6 billion in 1994-95 and by £10 billion in 1995-96 – the equivalent of 1 per cent. of GDP.

In setting out the Government’s plans for raising revenue, good intentions are not enough. I intend that, as far as possible, these proposals should be legislated for this year, in this year’s Finance Bill. Taken together with the tight public spending plans that I announced in the autumn statement, they should ensure that the PSBR returns towards balance over the medium term; but if further action proves necessary, I shall not hesitate to take it.


Taxation objectives – The proposals I shall be announcing today are part of a continuing programme of tax reform–a programme which has strengthened work incentives and improved the efficiency of the economy. In deciding where to look for additional revenue, I have been guided by a number of principles : first, that, where possible, money should be raised in a way that will not damage the working of the economy; secondly, that in general this means that reducing the value of allowances and broadening the tax base is preferable to increasing marginal tax rates; thirdly, that taxation should support social, health and environmental objectives.

I will deal with my revenue-raising proposals in two parts. I will start with my proposals for the year ahead, 1993-94; I will then describe the measures that I propose for the two years thereafter. For the year immediately ahead, as I have said, my proposals are very broadly neutral. The objective has been to strengthen the recovery by giving help to business, but, in order to pay for that, I have had to raise revenue from other sectors of the economy.


The first is income tax. With inflation down to levels not seen for a generation, I propose for the year ahead to freeze the personal allowances, the married couple’s and related allowances, the basic rate limit and the income limit for age-related allowances. The threshold for inheritance tax, the capital gains tax exempt amount and the earnings limits for tax relief on pension contributions will also remain unchanged. This will save some £670 million this year.

Excise duties

The second is excise duties. The removal of customs controls at the channel has been welcomed by many thousands of travellers who are now seeing the benefits of the single market at first hand. It has also brought many benefits to British business, including some 10 million fewer forms this year. But there is a natural concern as well about the impact of an increase in cross-border shopping, and the effect that it might have on British businesses, particularly in the south-east.

In considering what changes to make to excise duties, I have had to balance that against the need to raise revenue. I have therefore decided to raise the duties on most alcoholic drinks by only 5 per cent. this year. From 6 pm today, the total tax on a pint of beer will rise by about 1p, and that on a bottle of wine by about 5p. I have also received many representations this year about the taxation of spirits, and, in particular, the taxation of whisky. This is one of Britain’s most successful exporting industries. I promised in my Budget speech last year to resist proposals from Brussels to introduce tax rules that would hit whisky sales in Europe; but, having succeeded in that, it is important that our own tax regime does not further disadvantage the industry. I have therefore decided to make no change in the duty on spirits this year. I am sure that that will be welcomed by hon. Members on both sides of the House, and especially in Scotland.

I turn next to tobacco. Last July, my right hon. Friend the Secretary of State for Health published a White Paper containing our commitment to maintain the real value of the taxation on tobacco products, but again I have also had to take into account the impact of the single market. I propose, therefore, to increase the overall burden of duty by some 6 per cent, four percentage points above the rate of inflation. This will add 10p to a typical pack of 20 cigarettes – and, I regret to say, some 4 p to a pack of five small cigars. But I also propose to make this increase in a different way from usual.

As the House will recall, cigarettes are subject to two different excise duties : a “specific” duty, which is a flat-rate charge per cigarette, and an “ad valorem” duty, on their price. Given that the health objective is to tax the harm that cigarettes do, it is better to tax the cigarettes themselves than to tax their price. I therefore propose to increase the specific duty on cigarettes by 10 per cent., while cutting the ad valorem duty from 21 per cent. to 20 per cent. This will mean a proportionately bigger tax increase for cheap cigarettes, many of which are imported.

I also propose this year to increase the duty on most gaming machines by 20 per cent. Taken together, those changes will raise £290 million in 1993-94 and £365 million in 1994-95.

I turn now to motoring taxes, where I propose to combine raising revenue with tax reforms. When I abolished car tax in my autumn statement, I said that I would recoup the cost from other motoring taxes. I therefore propose to raise all fuel duties by 10 per cent. from 6 pm today, putting 12p on a gallon of unleaded petrol and 15p on a gallon of four-star. From midnight tonight, vehicle excise duty for cars – the tax disc – will also rise, by £15, to £125.

Taken together with the abolition of car tax, those measures will raise a net £400 million in 1993-94. The overall impact will be to shift the tax burden from car buyers to car users; and to help both the environment and the industry. Together with the increases that I have announced on alcohol and tobacco duties, it will add a quarter of a percentage point to the RPI in April, compared with indexation.

Fuel scales

Alongside the increase in fuel duties, I propose to increase by 20 per cent. the scale charges for free fuel supplied to company car drivers for private use. I also propose to abolish the 50 per cent. discount currently available to drivers doing more than 18, 000 business miles a year. Employees can, of course, avoid this tax altogether by paying for the full cost of all fuel provided for private journeys themselves. The environmental impact of my proposals on fuel duties will be strengthened by reducing the number of motorists who use fuel at no direct cost to themselves. This measure will raise £65 million in the year ahead and £70 million in 1994-95.

Company cars and vans

I turn next to the tax treatment of company cars. From its introduction in 1976 until 1988, the income tax charge on company cars significantly under-estimated their true value. Since then, charges have been steadily raised to more appropriate levels. I propose this year to complete that process, by bringing the car scales up to a level which fully reflects the true value of the benefit of a company car. That requires an increase in car scales of 8 per cent., bringing additional revenue of £100 million in 1993-94.

However, as I said last year, the structure of the current regime remains unsatisfactory. In most cases, the value put on the benefit, and the tax that is payable, are determined not by the price of the car, but by the size of the engine. That might have mattered less when the scale charges were very low, but it now gives rise to serious distortions.

Following consultation with the industry, I propose from 1994-95 to replace the current car scales with a simple system based on the price of a car. The annual benefit of a company car will be valued for income tax purposes at a fixed percentage of the manufacturer’s list price. To ensure that the reform is revenue-neutral, I propose to set that percentage at 35 per cent. Company car users will then pay income tax at their marginal rate on that amount.

However, I do not believe that it would be right to apply the full rigour of the charge to those who use the company car largely for business purposes. I therefore propose that there should be a discount of one third for those company car users who drive more than 2,500 miles a year on business, and a discount of two thirds for those who do more than 18,000 business miles. In future, the tax on company cars will rise or fall automatically with the price of those cars. It follows that there will no longer be any need to set the tax charge each year in the Budget.

My reform will reduce tax distortions in the car market and enable manufacturers and fleet managers to plan production and purchasing in a more rational and stable system. For these reasons, I believe that it will be welcomed. I also propose to replace the existing complex arrangements for taxing employees’ private use of company vans with a simple scale charge, covering both the van and any fuel provided, set at the modest level of £500. This will raise £10 million in the year ahead and £35 million in 1994-95.


In addition, I intend to close a number of loopholes which have been exploited by people to avoid tax. First, from midnight last night I propose to exclude from the business expansion scheme all schemes which involve the provision of loans to BES investors. The BES was set up to encourage investment in small business – not to provide highly subsidised loans for top-rate taxpayers. Secondly, I intend to end the practice whereby group companies buy up other companies with capital losses simply in order to set those losses against their own capital gains. Thirdly, I intend to restrict the situations in which changes in company ownership can create scope to avoid advance corporation tax. Finally, I propose to tighten the rules for foreign companies under United Kingdom control. Full details of these and other measures are provided in a series of Inland Revenue press notices being issued today. The revenue is not insignificant. Taken together, the measures should raise some £70 million in the first year, rising to over £460 million in the following year.


Before leaving my proposals for 1993-94, I wish to make clear the position on stamp duties on securities and property other than land and buildings. Following the decision by the Stock Exchange last week to abandon TAURUS, stamp duty will remain in place at least for 1993-94, raising £1 billion during the coming year. I will review the position further in the light of the conclusions of the securities settlement task force set up by the Bank of England.

The measures that I have proposed so far will raise £2.4 billion in 1993-94, not including stamp duty. Of this, £750 million is required to finance the abolition of car tax. I will be using a large part of the rest to reduce taxes on business.


Before I turn to business taxes, I intend to set out my tax proposals for 1994-95 and the years thereafter. As I have already explained, these tax proposals will build up over the years, creating a wedge of increasing revenue, which, as far as possible, will be legislated for in the coming financial year.

National Insurance Contributions

In my autumn statement, I took some tough decisions on current spending to maintain capital programmes, but, to protect the poorest and most vulnerable members of society, we also decided to uprate social security benefits in full. That decision was warmly welcomed on all sides of the House. However, had no further action been taken, the effect of that decision, combined with the rise in unemployment, would have been to push the national insurance fund into deficit. To prevent this, I introduced a new Treasury grant, and legislation to implement this has been taken through the House.

This makes sense at a time when ensuring economic recovery is our priority, but it is clearly not a fair or reasonable basis for financing the national insurance fund over the medium term. A Treasury grant is paid for by the general body of taxpayers, including millions of pensioners who have already made a full contribution to the fund throughout their working lives. Accordingly, my right hon. Friend the Secretary of State for Social Security and I propose to place the finances of the national insurance fund on a firmer footing.

I do not propose to increase national insurance contributions in the coming year. However, from April 1994 my right hon. Friend and I propose to increase the class 1 main rate of employee national insurance contributions by 1 per cent., to 10 per cent., and the class 4 rate for the self-employed by 1 per cent., to 7.3 per cent. The arrangements for employees earning below the lower earnings limit and the self-employed with profits below the lower profits limit will be unchanged by these measures. The necessary legislation will be brought before the House in the coming year.

Taken together, these increases will raise about £1.8 billion in 1994- 95 and £2.2 billion in a full year.

However, that will still leave a deficit in the national insurance fund of £2.8 billion in 1994-95 and a similar sum the following year. National insurance contributions are, of course, paid not just by employees and the self-employed, but also by employers; and when a deficit of this size emerges in the fund, it is natural to look to all contributors to make up the balance. The remaining deficit is roughly equivalent to an increase in the employer national insurance contribution rate of 1.2 per cent. from 10.4 per cent. to 11.6 per cent. However, having reflected carefully, I do not believe that it would be appropriate to increase the burden on employers. I therefore propose to retain a smaller Treasury grant to make up the continuing shortfall in the fund.

North sea fiscal regime

One of the main objectives of this Government’s tax reforms has been to eliminate tax rules which distort investment decisions. This was the driving force, for example, behind the far-reaching reform of the corporation tax system in 1984. Today I wish to carry this principle through into another important sector of the economy – the North sea, and in particular petroleum revenue tax, or PRT.

When PRT was introduced in 1975, the North sea oil sector looked very different – oil prices were very high and the typical oilfield was relatively large. The purpose of the new tax was to ensure that the Exchequer got its fair share of the large profits to be made in the North sea, while companies were left with a reasonable return on their investments.

However, as the North sea has developed, the PRT regime has come to look increasingly anachronistic. As profits in many existing fields attract a marginal tax rate of over 83 per cent. there is little incentive for companies to keep costs under control or for additional investment in existing fields. Moreover, as a result of the uniquely generous allowances that are available, the Exchequer is no longer getting a fair return. In 1991-92, the PRT regime actually cost the Exchequer £200 million.

As many in the oil industry recognise, this is neither reasonable nor sustainable. The North sea tax regime has to be placed on a clear long-term footing, so today I intend to set out a major reform which will raise revenue in the medium term and give the oil industry a stable framework to plan ahead.

I propose from 1 July this year to reduce the PRT rate on existing fields from 75 per cent. to 50 per cent., and for new fields I propose with effect from today to abolish PRT entirely.

It follows that, for new fields, I also intend to scrap all the allowances that go with the existing PRT system, including, for example, relief for exploration and appraisal expenditure that can be set against PRT on existing fields : but contracts entered into before today for exploration and appraisal will continue to get relief against PRT on existing fields for the next two years. Allowances that can be claimed within existing fields will remain essentially unchanged.

This reform will greatly simplify the tax regime for new fields, disapplying at a stroke some 300 pages of complex legislation; and it means that the only tax on new oil fields in the North sea will be corporation tax – at 33 per cent., the lowest rate of business tax in the industrialised world. Britain will have a competitive tax regime which strikes a reasonable balance between the interests of the industry and those of the nation as a whole.

The paradox of this reform is that, despite the abolition of PRT for new fields, and the reduced rate for existing fields, after 1993-94 it will actually raise revenue for the Exchequer. I expect the yield in 1994-95 to be some £300 million and in the following year to be some £400 million.

Relocation expenses

I turn now to another area where reform is long overdue – the tax treatment of job-related relocation expenses.

When a company asks its employees to move house, it may offer help with relocation expenses. Usually, that involves paying for the cost of the removals, but sometimes, if the move is to a more expensive area, the employer will also pay allowances towards the employee’s higher living costs.

For the past 40 years, we have allowed employees to receive most of this help tax-free, provided the employee has sold his existing home – a condition which has been the subject of much criticism. That means that someone whose employer gives them as much as £25,000 might pay no tax on it at all. On the other hand, people who decide to move to find work and pay their own costs get no help whatsoever from the tax system.

I see a case for some measure of relief where employers help meet employees’ removal expenses, but it is difficult, in my opinion, to find a convincing rationale for a system of tax relief whose effect is to give the biggest subsidy to those moving to the highest-cost areas. With these reliefs expected to cost the Exchequer no less than the staggering sum of £800 million this year, I believe that the time has come for reform.

I am therefore asking the Inland Revenue to withdraw the present extra-statutory concession which helps people moving to a more expensive area, and I propose to restrict relief on removal expenses to payments of up to £8,000 for people whose employers require them to relocate after 6 April this year. Under the new system, the existing home need no longer be sold to qualify for relief. Although these changes come into effect immediately, they will not start to raise revenue until the year after – about £200 million in both 1994-95 and 1995-96.

Mortgage Interest Relief

I turn now to mortgage interest relief. The rapid expansion of home ownership is one of this Government’s most enduring achievements, and I have no plans to change the existing ceiling for mortgage interest relief of £30,000, but in the last few Budgets we have taken steps to improve the focus of mortgage interest relief and to contain its costs – most recently in my 1991 Budget – by restricting the relief to the basic rate.

Even so, mortgage interest relief is expected to cost the Exchequer £4.3 billion next year alone. I propose, therefore, to reduce the rate at which relief is given from 25 per cent. to 20 per cent., but I propose to defer the implementation of this change until April 1994. In all, this change will yield £900 million in 1994-95 and £960 million in the following year.

At the current mortgage rates, no borrower will be more than £10 a month worse off from the reduced rate of relief, and for many with mortgages below £30,000 the increase in payments will be even smaller. Moreover, it is the level of interest rates, not the amount of tax relief, that is the most important determinant of the cost of a mortgage. Because interest rates have fallen so far since October 1990, payments on the average mortgage have been cut by over £150 a month, so the cost of the change I am proposing is equal to just a fraction of the benefit mortgage payers have already received from lower mortgage interest rates.

I know that there are some elderly people with life annuity home income plans which allow them to draw down some of the savings that they have invested in their houses. Such schemes will continue to attract relief at 25 per cent.

I am fully aware that, despite some encouraging signs of increasing activity, the housing market remains fragile. That is why the changes I have described will not come into effect until next year; and it is also why I have one further proposal which will affect people buying houses. Whereas my proposals on mortgage interest relief do not apply until April 1994, this measure comes into effect immediately. I propose to double the stamp duty threshold to £60,000 for documents executed from today and not stamped before 23 March, when the required Budget resolution has been considered by the House.

This means that the cost of buying homes priced at between £30,000 and £60,000 will be reduced by up to £600. From today, the number of transactions in the housing market liable to stamp duty will be halved. This will be of particular benefit to first-time buyers, who tend to buy less expensive homes. With mortgage interest rates at their lowest level for decades, this reduction in stamp duty should provide a further stimulus to the housing market. The change will cost £220 million in 1993-94 and about £270 million in the following year. Last year, I announced a significant change in the treatment of the married couple’s allowance, giving couples greater flexibility in allocating it between them. Today, I have a further important change to propose.

At present the married couple’s allowance reduces a taxpayer’s liability at his or her marginal rate. A taxpayer on the 20 per cent. lower rate benefits by £344, but a higher rate taxpayer gets £688 – twice as much. There is no good reason why an allowance intended to recognise the responsibilities of marriage should give least to those on low incomes and most to those right at the top of the income scale.

From 6 April 1994, therefore, I propose to restrict relief for the married couple’s allowance to the lower rate of 20 per cent. It will then be worth the same amount to taxpayers at all levels of income. The allowances which are linked to the married couple’s allowance for those aged under 65 will be similarly restricted.

Because of the higher level of MCA to which they are entitled, this change will bear harder on elderly married couples, so, also from 1994-95, I propose to increase by £200 the married couple’s allowance for those aged 65 and over. This will ensure that pensioners paying tax at the basic rate are affected by the change in the same way as any other basic rate taxpayer, and some elderly married couples in the lower rate band will actually gain slightly.

As I have said, these changes will not come into effect until 1994-95. They will then raise about £900 million in 1994-95, and £1.2 billion in 1995-96.

Green measures

In recent years, there has been much debate on the subject of global warming and the role that tax measures can play in combating it. This has led the European Commission to propose a Community-wide carbon tax. There may indeed be a case for further co-ordinated international action on global warming, but I remain unpersuaded of the need for a new European Community tax. Tax policy should continue to be decided here in this House, not in Brussels.

Individual countries should, of course, take their own measures to give people the right signals to encourage the efficient use of energy. Today, I shall propose measures designed to do just that, and to raise revenue at the same time.

Last June, my right hon. Friend the Prime Minister signed the United Nations convention on climate change at Rio. This was a milestone in international efforts to halt global warming. When Britain and other countries have ratified the convention, the Government will be committed to bringing forward measures aimed at returning greenhouse gas emissions from this country to 1990 levels by the year 2000. My right hon. Friend the Secretary of State for the Environment published last December a consultation paper which set out the various options.

The largest contribution to the growth in United Kingdom carbon dioxide emissions in the coming years is expected to come from the transport sector. I therefore propose to make clear today the Government’s long-term intention on road fuel duty. We intend to raise road fuel duties on average by at least 3 per cent. a year in real terms in future Budgets, in addition to the increase I have already announced for this year.

In deciding the level of duty to be levied in any particular Budget, we will, of course, take full account of conditions at the time – including, if charges for motorways and urban roads are introduced, the overall level of taxes and charges which road users are paying. However, my announcement today will help manufacturers and consumers to plan ahead. It should provide a strong incentive for motorists to buy more fuel-efficient vehicles, and it will raise at least a further £520 million in 1994-95 and £950 million in 1995-96. However, in order to meet the commitment that we entered into at Rio, action will be required not just in the transport sector, but across the whole economy, and in deciding how best to meet our carbon emissions target, we will need to ensure that the right incentives are in place throughout the economy – encouraging people to consume less and conserve more. Above all, it is crucial to avoid taking measures that will have a disproportionate impact on the competitiveness of British industry.

Against this background, I have one further measure to propose that will not only encourage greater energy efficiency in every household in the country, but will also raise a considerable amount of revenue for the Exchequer over the years ahead.

Fuel and energy supplies to industry pay VAT in Britain. Those to the home do not. In this respect, we are unique in the European Community. I therefore propose, over the next two years, to end the zero rate of VAT on domestic fuel and power. Again, this change will not come into effect immediately, but in 1994. VAT will be charged at 8 per cent. from 1 April 1994 and at 17 per cent. from 1 April 1995.

This measure will raise some £950 million in 1994-95, £2.3 billion in 1995-96 and around £3 billion a year thereafter. For the first time, the rate of VAT on domestic fuel and power will be the same as that charged on goods like loft insulation material, which improve energy efficiency. This will bring to an end the current anomaly, which makes nonsense of any attempt to use the tax system to improve the environment. – [Interruption.]

Mr. Deputy Speaker : Order. The House should listen to the Chancellor.

Mr. Lamont : My intention is to legislate for this proposal this year.

Social security benefits will, of course, rise automatically to reflect the price effect of this change, but I recognise that this will cause particular problems for those on low incomes. My right hon. Friend the Secretary of State for Social Security will take this into account when the income-related benefits are uprated next year. Taken together with the measures which have already been announced, these tax proposals take Britain two thirds of the way to meeting the Rio target, and they will do so in a way that does the least possible damage to the competitiveness of British industry. I am confident that the remaining gap can be filled through sensible energy-saving measures, as and when the convention is ratified by our major industrial competitors.

The measures I have announced so far will raise substantial revenue in 1994-95 and beyond. I turn now to my measures for business.


Self-assessment and simplification

As the House is aware, the Government have embarked on a major drive to reduce the burden of regulation on industry. I will therefore start with three significant measures of deregulation, which should be of particular benefit to the self-employed and to small businesses generally. Self- assessment of income tax has operated successfully in many countries, including the United States, but none of my predecessors has found a way of introducing it here. For most people, that has not been a problem – the PAYE system already deals very simply with the tax affairs of some 16 million employees – but for the 8 million taxpayers who have to fill in a tax return each year, the current arrangements are very far from simple. Following a detailed consultation exercise, I now propose to offer these people, including 4 million self-employed, the option of self-assessment on income tax. Legislation will be brought forward in next year’s Finance Bill to implement the proposal from the earliest practicable date, which is 1996-97.

For those who choose to take it up, self-assessment should provide a significant reduction in bureaucracy and paperwork; and it will also bring out more clearly the link between public spending and the burden this places on the individual taxpayer. A more transparent tax system can only lead to more informed choices and debate; and I believe that self-assessment for a third of all taxpayers will contribute to that.

But for self-assessment to work, the system has to be simple enough for taxpayers themselves to be able to fill in their own returns. My second reform will achieve a significant simplification, particularly for the self-employed. One of the least attractive features of our present tax system is that it is simply too complicated for them to work out how much tax they owe : people setting up in business on their own are more or less forced to employ an accountant. Since 1926, the self-employed, working under the so-called “preceding year” basis of assessment, have generally paid a tax bill based on profits they made up to two years previously. People with several different sources of income may be assessed on a number of different bases, with separate tax bills and payment dates for each. It would be difficult to invent a more complicated system for taxing the self-employed, even if one set out with that very intention. Under my new proposals, people will have just one tax bill each year, covering all their income, and the self-employed will pay tax on the profits they make in the current year, not the preceding year. This should be a major simplification; and I am sure it will be warmly welcomed.

Taken together, these two measures amount to the most fundamental reform of income tax administration since the introduction of pay-as-you-earn in 1944.

Statutory audit

My third announcement is of particular interest to smaller businesses.

At present, all businesses which are incorporated have to have their accounts audited. While it is clearly important that accounts should be reliable and indeed that the Inland Revenue and other users should have the assurance they need that the accounts have been drawn up properly, the current statutory audit requirement imposes a disproportionate cost on many small businesses. My right hon. Friend the President of the Board of Trade will therefore shortly be issuing a consultative document setting out options for reducing this burden, at least for the very smallest businesses that are incorporated. This would deliver significant savings and would represent a major step in cutting out red tape and bureaucracy.


Reducing the Government’s borrowing requirement will benefit business by ensuring that the recovery is sustained, but, as I said in my Mansion House speech last October, the Government are determined to keep our policies under continuous review to ensure that British business has the backing it needs to compete in world markets. This is particularly true of our tax policies.

Britain already has the lowest rate of tax on business profits in the industrialised world, and we have a personal tax system which makes it attractive for entrepreneurs and managers to live and work in Britain. We intend to see that continue.

Britain has had an outstanding record over recent years in attracting investment from overseas – indeed, we have attracted no less than a third of all foreign investment into the European Community over the last few years – but we cannot be complacent. With the advent of the single market, the competition in Europe to secure inward investment has become ever more intense. So my Budget sets out to ensure that our business tax regime retains its clear competitive edge.

Surplus ACT and the taxation of dividends

In discussions with business organisations over the last few months, one issue has come up again and again the problem of surplus advance corporation tax, or ACT. Many believe that this feature of our tax system both penalises successful British-owned international companies and distorts investment decisions.

This issue has, of course, been with us for many years, and it has so far defied solution. Nonetheless, I made a commitment in my Budget last year to return to this subject, and I am pleased to be able to report to the House that I have now found a way forward.

I hope that the House will bear with me, as I am afraid that my proposals are complex, but they do attack the problem of surplus ACT, they are central to the strategy of this Budget, and they raise significant amounts of revenue.

At present, ACT is paid on dividends at 25 per cent. This funds a tax credit which covers the basic rate income tax bill of the shareholder, but, as its name implies, it is also an advance payment of the company’s corporation tax bill.

In normal circumstances, the system works very well, but sometimes it does bring problems, particularly for companies which earn a large proportion of their profits overseas. These companies often end up paying an ACT bill on their dividends that is greater than their entire United Kingdom corporation tax liability. The so-called “surplus ACT” that results cannot be claimed back, so in effect it becomes an extra tax on profits.

This can have damaging economic effects. For example, it gives some companies a strong incentive to move important activities, including research and development, abroad, leading to the loss of skills and jobs in this country. It cannot be right to distort the commercial decisions of British companies in this way or to give companies a positive incentive to move elsewhere in Europe; so today I am putting forward some proposals that will go a long way towards alleviating the problem.

First, I shall establish a special tax regime from 1994-95 to help foreign-owned international companies which are considering setting up their headquarters in the United Kingdom. This will make it more attractive for international companies to base their operations in Britain, and it will further promote London’s position as Europe’s leading financial centre.

Secondly, I am today issuing a consultation document proposing a scheme under which British companies may choose to class any dividend paid out of overseas profits as a “foreign income dividend”. Unlike normal United Kingdom dividends, this will not carry any tax credit, and although ACT would initially be payable in the usual way, the company will be entitled to a refund if it gives rise to surplus ACT. Once fully operational, this scheme could reduce the build-up of surplus ACT by some £250 million a year.

Finally, I have one further proposal which will help not just companies with surplus ACT, but all dividend-paying companies; and it will do so in a way that will raise considerable revenue. I propose simply to reduce the rate of ACT in two stages, from 25 to 22 per cent. in 1993-94 and then to 20 per cent. in 1994-95. This will give companies which pay dividends a cash flow benefit of about £2 billion over the next two years, and it will reduce the build-up of surplus ACT by about £300 million next year.

I also propose to reduce from 25 to 20 per cent. in 1993-94 the tax credit that shareholders get when they receive a dividend. Those who are familiar with these issues – a select few, I fear – will know that tax credits affect two main groups of shareholders. Those with no tax liability, particularly pension funds, can claim a cash payment from the Inland Revenue for the tax credit, and higher rate taxpayers have to make up the difference between the 40 per cent. top rate of tax and the 25 per cent. tax credit they receive. The reduction in the tax credit that I am proposing will therefore have two important effects. First, the payments that lower rate payers, non-taxpayers and particularly pension funds, get from the Inland Revenue will be reduced by five percentage points, saving the Exchequer no less than £1 billion a year. Secondly, higher rate payers will have to pay an extra 5 per cent of tax on the dividends they receive in order to discharge their liability to tax at the top rate of 40 per cent. This, in turn, will yield an extra £200 million a year.

Finally, in order to ensure that most ordinary shareholders are not affected by this change, I propose to reduce the rate of tax on dividends from the current basic rate of 25 to the lower rate of 20 per cent. The effect of this, combined with the change to the tax credits, is to leave basic rate taxpayers neither better off nor worse off than they are now.

Thus, these proposals achieve three objectives at the same time. They will give companies a £2 billion cash flow boost over the next two years, they will significantly reduce the problem of surplus ACT for the future, and they will raise £900 million extra revenue for the Exchequer from 1995-96 onwards.

There is, however, one group for whom I believe it would be desirable to ease the immediate effect of these changes. I therefore propose for charities to phase in the effect of the reduction in the tax credit over a four-year period. I also have some further measures for charities, to which I shall turn later.

Export credit

The House will be relieved to hear that my next measure is a little less opaque, but it is equally important for the long-term success of British manufacturing.

In the autumn statement, I announced a substantial increase in export credits to help British businesses win major contracts abroad, but the fact remains that export credit insurance has proved expensive for the taxpayer. For that reason, the Government have negotiated hard over the years to secure a reduction in the subsidies offered by other countries. Some progress has been made, and we shall continue in that effort, but in the meantime British firms, in my opinion, are sometimes at a competitive disadvantage in seeking business overseas. My right hon. Friend the President of the Board of Trade and I have therefore looked again at the whole range of ECGD services and have decided to make some important changes. The first relates to premiums. Last year, premiums were cut on average by about 20 per cent., but there is scope to do more. We have therefore decided to make a further reduction of 7 per cent. in the average level of ECGD premiums. This means that, while premiums for individual export markets will always differ, the average level of premiums paid by British exporters next year will be down to around the average paid by their G7 competitors.

The second is export credit cover. In the autumn statement, I increased the cover available to exporters by £200 million this year, and by a further £500 million for 1993-94. Over the next three years, my right hon. Friend and I propose that additional cover of £1.3 billion should be made available for those exporting into some of the fastest growing and most important markets around the world. Taken together with my autumn statement announcement, this means that the annual cover for these markets will have increased by more than 75 per cent. in just four years.

As a result, British firms will now be able to go into export markets with greater confidence that they can compete on a more equal basis with their overseas competitors. I am sure that they will seize the opportunities that are now available to them.


Over the years, one of Britain’s most successful exporting industries has been insurance, but for some years now the industry has argued that the tax reliefs available to some of their European counterparts put them at a competitive disadvantage. In fact, that is not the whole story; in other respects, our own tax system is very favourable. Nevertheless, having reviewed the position again, I believe that there may indeed by a case for allowing tax relief on certain types of equalisation reserves covering occasional, exceptional losses.

However, if such reserves were to be allowable for tax, they would also have to be within the regulatory framework for the industry. This would be a major departure for both the tax and regulatory systems. A consultation document will be issued later this spring to consider the options.


I also propose to introduce a significant reform of the tax regime for Lloyd’s. I propose to tax the gains on the disposal of assets which form the premiums funds of Lloyd’s names in the same way as those of corporate insurers, and I intend to replace the current reserve arrangements with a better targeted reserve, which should enhance Lloyd’s ability to deal with the particularly volatile type of risk which makes up most of its business.

My proposals will greatly simplify the taxation of Lloyd’s. Lloyd’s has certainly had a difficult time recently, but it remains vital if London is to retain its pre-eminent position in the world insurance market. Taken together, the two reforms I am proposing will cost the Exchequer nothing.


The measures I have announced so far will be of help particularly to large businesses, but small firms play a crucial role in our economy. Small businesses do not follow the economy ; they lead it. That has been demonstrated time and time again. In this Budget, I shall set out some further proposals which will help small businesses to lead the recovery once again.

Loan guarantee scheme

Following heavy losses in recent years, the banks are bound to be more cautious in their lending in future. Moreover, the fall in property prices has reduced the security for many of their loans. As the recovery progresses, small firms may therefore find that their prospects for expansion are increasingly threatened by a shortage of bank finance. My first proposal is directed precisely at that problem.

The Government’s loan guarantee scheme helps entrepreneurs who have viable projects but who do not have the track record or loan security to attract sufficient finance on their own. It enables them to borrow with a Government guarantee, usually for 70 per cent. of the value of the loan, in return for paying a premium of 2 per cent. on the guaranteed part of the loan.

In Germany and the United States, a large proportion of lending to small businesses is done at fixed rates of interest. By contrast, in Britain, most borrowing is linked to the level of base rates. I have long believed that many small businesses would benefit from making more use of fixed-rate finance, which would give them more stability and would enable them to plan ahead.

I propose therefore to make a substantial reduction in the loan guarantee scheme premium for guarantees on fixed-rate lending. This will fall to per cent. and will, I hope, encourage more fixed-rate lending. I also intend to reduce the premium on other variable rate loans to 1 per cent. The premiums will henceforth apply to the whole loan, not just the guaranteed portion. This change should take effect in the next month or so.

I also propose that the limit on the size of loan allowed to such businesses should be raised from £100,000 to £250,000, and the proportion of the loan guaranteed increased from 70 per cent. to 85 per cent. I am sure that those proposals will be warmly welcomed by small businesses. My right hon. Friend the President of the Board of Trade and I will be taking this forward urgently with the banks.

CGT reform

My second measure relates specifically to entrepreneurs who have built up successful businesses and now wish to sell them in order to start up a new one.

The current capital gains tax regime provides generous annual exemptions to those who make regular capital gains from trading in shares, but it is much less generous to the entrepreneur. Typically, he sells shares in his own company only once, so has only one year’s annual exemption to set against gains built up by hard work over a lifetime. Thus, for every £100 taken out of the old company at the margin, he has only £60 to invest in a new one. It is hardly surprising that entrepreneurs complain that they are locked in by the CGT regime, and prevented from investing their talents elsewhere. For this reason, I propose in future to defer the payment of CGT for any entrepreneur whose gains from the sale of his own company are reinvested in another qualifying unquoted trading company, or companies. I know that this will be widely welcomed by the venture capital industry.

I also propose to relax the conditions for CGT retirement relief by reducing the qualifying shareholding from 25 per cent. to 5 per cent. ; and to extend this relief to cover full-time employees as well as directors. These changes will cost £50 million in a full year.

VAT threshold

I turn now to the VAT regime, which for many small businesses takes up a great deal of time and can be a particular source of worry. The best way to help is to keep them out of the VAT system altogether. I am therefore raising the VAT threshold to the maximum extent possible. The new threshold will be £37,600.

Cash accounting and bad debt relief

Over the past couple of years, I have also announced measures to allow traders to reclaim VAT on debts which remain unpaid after 12 months, and to encourage firms to take advantage of the cash accounting scheme under which traders only have to pay VAT to Customs when they themselves have been paid by their customers. I now intend to take this further in a way that will help many small businesses. I propose to increase the ceiling on turnover below which firms may join the cash accounting scheme by £50,000 to £350,000. This will allow an extra 15,000 businesses to benefit, on top of the 400,000 that qualify already.

I also intend to help businesses which are too big to take advantage of the scheme. At present, VAT can be reclaimed on any invoice which remains unpaid after 12 months. I propose to halve that qualifying period to six months.

These measures will give considerable help to companies, improving traders’ cash flow by some £150 million in the year ahead.

VAT penalties

In addition, I have a further series of reforms to propose to the current system of VAT penalties.

First, I intend to focus the rules better so that only larger errors and the most persistent offenders will incur the “misdeclaration penalty”. This will reduce the number of penalties imposed by over 40 per cent. Secondly, I propose to place a three-year limit on the number of years’ interest that can be charged when tax has been underpaid. Thirdly, I have decided to reform the VAT default surcharge so that traders will be notified sooner of default and surcharged at a lower rate, and only on larger defaults. This will make the surcharge more effective, but remove some 125,000 small traders from the default surcharge altogether. I know that this will be welcomed by small businesses.

Keith Report

I have one final reform of the VAT penalty system. Following Lord Keith’s 1983 review, the Government concluded that it would be wrong to give Customs discretion over the level of VAT penalties. After considerable debate, this conclusion was eventually accepted by the House–I remember the strong debates very well – but the controversy has continued ever since, and, over time, more and more people have come to believe that it is wrong to have a penalty regime which is almost entirely automatic.

I have considered this matter all over again, and I have concluded that the time has come to make a change. I propose, therefore, that Customs should be given some discretion to mitigate the penalties for misdeclarations, to enable them to take account of the individual circumstances of the trader. If necessary, of course, the trader will still be able to appeal to a VAT tribunal, which will also have greater scope for discretion.

These reforms will put the VAT compliance system on to a secure long-term basis. They will be of most benefit to small businesses, for whom the burden of compliance is heaviest; and I know that they will be widely welcomed on both sides of the House.


I have already announced my intention to extend value added tax to domestic fuel and power from 1 April next year. I have one further announcement to make on VAT.

As the House knows, it has long been this Government’s intention to switch the burden of taxation from direct taxes on income to indirect taxes on consumer spending. It is perhaps less well known that Britain has one of the lowest effective rates of VAT in the European Community.

Against this background, and in a Budget designed to place the public finances on a sound footing, I have inevitably had to look very carefully at the whole structure of our current VAT regime, and particularly at whether all different category.

Having reflected carefully, I have decided nonetheless not to extend the VAT base beyond fuel and power. I do, however, have one further announcement on VAT, which will I hope offer some consolation to those hon. Members who would rather be at Cheltenham today, watching the Champion Hurdle.

For some time, the bloodstock industry has been concerned about competition from other EC countries which levy a lower rate of VAT on horses. The single market has exacerbated this problem and created a major incentive to move bloodstock business abroad, threatening 30, 000 jobs.

There have been intensive discussions between the Jockey Club and Customs, and I am pleased to announce that a way forward has been found. As a result of proposed changes in the Jockey club’s rules, owners who wish to do so will now be able to organise their racing activities in a more commercial way. This in turn will enable them to meet the normal business test for VAT registration and to claim credit for VAT on purchases, subject to the usual rules.

I know that there have been representations on this from both sides of the House, and I know that registration on this basis meets the industry’s concerns over this problem. No Government have done more for racing than this one – and quite rightly so, for it is an important industry, and a vital part of our national life. This measure will be welcomed by the industry and by its many supporters in this House.


I have one final announcement, which will be of direct help to many businesses.

My last Budget helped many thousands of firms by altering the business rates transitional arrangements to accelerate the gains of those who gained most from the change in the system, while freezing real rates bills which otherwise would have risen substantially. The freeze applied for one year only, so many businesses now face a substantial increase in their rates bills in the year ahead – up to 20 per cent. over and above inflation on large properties and up to 15 per cent. on small properties.

It would, I believe, be wrong to impose such increases in present circumstances. I therefore propose for a further year to freeze in real terms the rates bills of those losing from the new system. As a result of this and last year’s measures, no business will face a real increase in its rates bill in the year ahead, and many will benefit from reductions. In cash terms, that means that no bill will rise by more than 3.6 per cent. – the increase in the RPI in the year to last September.

Subject to Parliament’s approval, the Government will again pay extra sums into the business rates pool to ensure that the income of local authorities is not reduced. My right hon. Friend the Secretary of State for the Environment will shortly introduce a Bill to implement these proposals. Full details will be published today in a press notice.

The new measure will reduce the total business rates bill in England and Wales next year by 2.6 per cent. Bills in Scotland and Northern Ireland will likewise be reduced by 2.6 per cent. in aggregate. My right hon. Friends the Secretaries of State for Scotland and for Northern Ireland will be announcing the details. These measures will again bring significant and early benefit to many thousands of businesses throughout the United Kingdom. About 800,000 business properties will benefit. The revenue cost is estimated to be some £370 million in 1993-94, and some £260 million in 1994-95.

Taken together, the measures I have announced will reduce the burden on business by about £1 billion in the year ahead. I hope that the House will agree that this is the best possible use for the sums I have been able to raise this year.


The House is aware, also, of the Government’s plans to introduce a national lottery from next year. This will provide a substantial increase in resources for a number of good causes : charities, sport, the arts, the national heritage and the millennium fund. I have no doubt that the lottery will be both popular and successful. We have always made it clear that the national lottery will be taxed. In deciding the tax rate, I have taken into account the level of tax on other forms of gambling and the extent to which spending is likely to be diverted from other taxed activities. Much, of course, will depend on how the lottery develops and I shall keep the position under review, but for the first year of its operation I propose that national lottery tickets should be taxed at a rate of 12 per cent. Existing society and local authority lotteries will be exempt. Winnings will incur no tax whatsoever. I believe that these proposals will make sure that the national lottery gets off to a good start. Since 1979, the Government have done an enormous amount to help charities. Indeed, their special position in society is recognised by the substantial tax reliefs, approaching £1 billion, that they already receive, and they will also benefit from the new lottery. I now have two further changes to propose.

First, I intend to raise the annual limit for income tax relief under the payroll giving scheme from £600 to £900 with effect from 6 April. Secondly, I propose that the minimum gift attracting tax relief for single donations under the gift aid scheme should be reduced from £400 to £250 from today, thus increasing substantially the incentive, through the tax system, to charitable giving. These measures build on the principle that tax reliefs for charity should focus on what individuals give, rather than what charities themselves spend. Taken together, they will boost tax relief on donations to charities by some £30 million in a full year.


In the autumn statement, the Government announced a number of measures to help the unemployed, and in my Budget I have set out my further proposals to help business and sustain recovery. That it the best way to promote employment.

However, we know from experience that unemployment may continue to rise for a while even after growth has resumed. That is a matter of great concern to the whole country, and it is a concern which I fully share. My right hon. Friend the Secretary of State for Employment and I have therefore decided to take further special measures to help an extra 100,000 unemployed people.

First, we have decided to provide more help for those who wish to set up their own businesses under the business start-up scheme. This offers advice and financial assistance, and has been one of the most successful employment schemes. We propose to offer an additional 10, 000 places in 1993-94. That will give a direct boost to small business creation and self-employment in years ahead.

Secondly, the Secretary of State for Employment proposes to introduce a new initiative to allow the long-term unemployed to learn the practical skills they need to find work. In the past the benefit rules have been an obstacle to allowing them to study. We intend to introduce an education allowance that will enable 30,000 long-term unemployed people to study on full-time vocational courses. Thirdly, it is widely agreed that, in every community, there are plenty of jobs needing to be done, and plenty of people who want to do them.

My right hon. Friend the Prime Minister has recently indicated the importance of offering more unemployed people the opportunity to undertake some form of useful work or other activity. We are therefore launching a new community action programme to allow 60,000 of the long-term unemployed to do part-time work in their local communities, organised by voluntary groups. Those involved will be paid an allowance based on their previous benefit rates plus a small premium. The scheme will start as soon as possible. Those who have been unemployed for a long time tend to lose touch with the job market, and the problem is that they find it increasingly difficult to find an employer who wants to take them on. We propose to test in pilot schemes the feasibility and effectiveness of a new approach under which, rather than pay benefit to the long-term unemployed to do nothing, payments will instead be made, for a limited period, to an employer who recruits them. Employers taking on people who have been out of work for at least two years will receive a one-year subsidy based on the benefits which would otherwise have been paid. That subsidy will taper off as the period of employment progresses. Pilot schemes using different approaches will be launched this summer in four parts of the country. If they can be made to work, I believe that they could be useful, and would lead to permanent jobs for the long-term unemployed as the economy recovers.

Finally, the establishment of training and enterprise councils throughout the country has successfully brought local business people into the design and running of training and enterprise programmes for the unemployed. I now propose to offer the TECs a new £25 million fund. My right hon. Friend the Secretary of State for Employment will invite TECs to submit competing applications to develop the most imaginative schemes to help the long-term unemployed and stimulate job creation. The degree of local business involvement will be an important criterion against which each application will be judged. These measures will cost £230 million, and will give special help to those who need it most, including disabled people. The disabled will be given priority in the vocational education initiative and in community action, helping us to build on our achievements in helping the disabled back to work. In the first nine months of 1992-93 the Employment Service found jobs for 31,000 unemployed disabled people, 25 per cent. more than in the same period of 1991-92. I am sure the House will welcome this.


Mr. Deputy Speaker, in my autumn statement I announced significant changes to the rules for the private financing of major infrastructure projects. This initiative has met with an enthusiastic response, and today I have a number of specific developments to announce.

First, hon. Members will recall that legislation has already passed through both Houses permitting the construction of a new fast rail link that will cut the journey time between Heathrow and Paddington. I can now announce that BAA plc and British Rail have agreed to proceed with this project, the Heathrow Express. This is a major new joint venture, involving private sector investment of nearly £300 million. As well as providing a substantial boost to the construction industry, this project will significantly enhance the transport infrastructure of the nation’s capital.

Secondly, there is Crossrail, a public sector project first proposed in 1989 to reduce congestion in central London. The Government remain committed to securing for London the benefits that Crossrail will bring, but we now believe it would be preferable to take this project forward as a joint venture with the private sector. The present proposals for Crossrail will therefore be re-examined. Our aims will be to maximise the participation and financial involvement of the private sector and to secure the best value for money for the taxpayer.

One of the most ambitious civil engineering projects ever conceived has been made possible by private finance. I refer, of course, to the channel tunnel. This will provide a fast link between Britain and Paris, cutting journey times dramatically, but those times could be cut still further by reducing the time taken for journeys within Britain itself. For that to happen, a new rail link will be required – from London down to the channel tunnel itself. This will be a massive undertaking – one of the largest infrastructure projects in this country since the war – but, after careful consideration, the Government have decided to make a firm commitment to the project. So I can announce today that the channel tunnel rail link will go ahead.

My right hon. Friend the Secretary of State for Transport will be inviting the private sector to come forward with bids so that the project can be taken forward as a joint venture as soon as possible. We will discuss timing with the private sector. We hope to be able to introduce a Bill as soon as the legislative timetable permits, and to see the new line fully completed around the end of the decade. The Government will make their own financial contribution, recognising the benefits that will accrue to domestic travellers from the new link. Full responsibility for the project, its management and completion will be transferred to the private sector.

Subject to the results of detailed work by British Rail over the next few months, the London terminus of the new link will be located at St. Pancras. This will provide a new lease of life for this magnificent Victorian building, which will become the gateway to London for international passengers. My right hon. Friend the Secretary of State for Transport will make a statement on the details of the route shortly.

Over the years ahead, my private finance initiatives will play an ever increasing role in the modernisation of Britain’s infrastructure. The projects I have announced today represent a considerable step forward. They will not only improve the country’s transport network; they will also create jobs. I am sure they will be warmly welcomed by the country and by the House.


I turn finally to income tax. My priority in this Budget has been to set out a clear strategy for reducing public sector borrowing over the medium term. I am therefore unable this year to reduce the basic rate of income tax. I also propose to leave the higher rate of tax unchanged at 40 per cent.

However, in my Budget last year, I opened up an alternative route for moving over time towards our ultimate objective – a 20p basic rate of income tax for everyone. The new lower rate band I announced last year at a stroke took 4 million taxpayers on low incomes down to the 20 per cent. rate, cutting their marginal rate of tax by a fifth. In this Budget, I have taken my reform a step further. The Government’s 20p pledge not only involves a reduction in marginal tax rates for 19 million basic rate taxpayers, but, also, when the basic rate is eventually brought down to 20p, tax reliefs for basic rate taxpayers will, of course, be worth 20p in the pound, too. In this Budget, I have brought forward that change by restricting three specific tax reliefs to 20 per cent., not just for basic rate taxpayers, but for all taxpayers.

First, I have reduced the tax credit on dividends to 20 per cent., to cut the rate of advance corporation tax which companies pay on dividends. Secondly, I will be reducing the rate of relief on mortgage interest payments to 20 per cent., to cut the subsidy on borrowing and to pay for a reduction in the tax on housing transactions. Thirdly, I will be restricting the tax relief for married couples to 20 per cent., to make it worth the same for all taxpayers.

All these measures are sensible reforms in their own right. When revenue has to be raised, it is far better to do this by broadening the tax base than by increasing tax rates; but, in addition, the restrictions I have introduced will also allow me to make further progress in getting income tax rates down.

I therefore propose to increase the width of the new 20p band in 1993-94 by £500 to £2,500. That will help all taxpayers currently paying tax at 25 per cent., and it means that, in the coming year, nearly 5 million taxpayers will face a marginal rate of income tax of only 20 per cent. Already, for about a fifth of all taxpayers, I will have delivered on our promise of a 20p rate in the first Budget of the Parliament, and I will have done so by a sensible and fair reform of the tax system. But I can also go further. The measures I have announced today will also allow me to make a further extension of the 20p rate in 1994-95. From 1 April next year, I propose that the 20p band should cover the first £3,000 of taxable income, £500 more than in the year ahead ; and we shall continue to widen the 20p band in the years to come – year by year, we will make our progress towards our objective : a 20p basic rate of tax for everyone.


In the first Budget of this Parliament, I have set out the Government’s economic strategy. I have cut the tax burden on business; and given help for small businesses, exports and the unemployed. I have demonstrated clearly how we will bring Government borrowing down in the years ahead. That is the only way to sustain growth and build a strong and and sound economy in the 1990s.

This is a Budget for sustained recovery and a Budget for jobs – not just for this year and next year, but right through this decade. I commend it to the House.