The Rt. Hon. Sir John Major KG CH

Prime Minister of Great Britain and Northern Ireland 1990-1997

1995Prime Minister (1990-1997)

Text of the 1995 Budget – 28 November 1995

Below is the text of the 1995 Budget, held on 28th November 1995 and presented in the House of Commons by the Chancellor of the Exchequer, Kenneth Clarke.

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. Kenneth Clarke): I have already said publicly that I have been looking forward to this year’s Budget. I am enjoying each Budget a little more as I get nearer to my aims – [Interruption.] My aims are very worth while.

The British economy has now been growing for almost four years. The recovery has created more than half a million new jobs. We have more of our people in work than any other major country in the European Union. Inflation is enjoying its best run for almost 50 years. All the major western economies have slowed down this year, but our recovery remains stronger than most. The International Monetary Fund has forecast that, next year, we shall be joint top, with Germany, of the G7 growth league table.

Few Chancellors have delivered their Budget against a background of such strong economic fundamentals. But getting this far has not been easy. It has required tough decisions on tax and spending over the past three years. This Budget builds on the hard-won gains that this Government have made and keeps Britain on course to be the enterprise centre of Europe: a Britain that creates more jobs and generates the greater wealth and personal prosperity in which all can share; a Britain in which everyone can keep more of what they earn or save to spend as they choose, not as the state chooses; and a Britain where more money is spent on the things that everyone cares about – our schools, our hospitals, our police. [Hon. Members: “Oh.”] Yes.

The people of this country believe in those goals. Only this Government are committed to the means of achieving them. We are keeping inflation low. We are keeping control of public spending. We are keeping Government borrowing on a downward path. And we believe in the policies of low taxation, which all countries must follow if they want to be world-class economic powers.

These are the people of Britain who are hard working and take responsibility for themselves and their families. They are the people who want to get on in life, who run their own businesses and who create jobs. And they are the people with that great British virtue – a social conscience – [Interruption.] – people with a real social conscience, who want to see a successful economy first earn the wealth, in order to give the weak and the less fortunate a helping hand.

This Budget addresses the aspirations of the people of this country in an economically and socially responsible way. It controls public spending overall while shifting more money towards schools, hospitals and the police. It keeps Government borrowing on a clear downward path and fiscal policy tight so that the recovery will be sustained. And it cuts taxes. For all those reasons, that is why I have been looking forward to this year’s Budget.

The Recovery

Before moving on to specific tax and spending measures, let me deal briefly with the economic background. In 1994, the economy grew by around 4 per cent., fuelled by the success of British exporters overseas. No mature industrial economy could easily sustain those rates of growth without risking a rise in inflation. That is why towards the end of last year I raised interest rates. In the event, slower growth in the world economy has reduced the growth of British exports. British exporters are well placed to compete in markets overseas. For example, we now have a current account surplus with the so-called tiger economies of south-east Asia. But our key markets in America and Europe are growing by less than they were in 1994.

The growth in this country will be sustained because the fundamentals of the economy are strong as a result of our economic policies. We have low inflation, sound public finances and more competitive businesses. The change in the pace of growth this year is not unique to Britain and has been seen in the United States, Germany and elsewhere. No recovery ever proceeds at a constant rate of growth throughout. In fact, this recovery is proving to be the steadiest seen in Britain for a generation.

Many commentators confidently predicted that the higher tax and lower public spending of the last three Budgets would knock the recovery off track. They were wrong. Consumer spending has been on a firm upward trend since the recovery began. With the necessary tax increases behind us, consumer spending should grow further next year and the year after.

Businesses have responded to the economic recovery by investing for the future. Manufacturing investment has grown by 12 per cent. over the past year. The conditions for further increases in investment – low inflation, low interest rates, low corporate tax rates and healthy company balance sheets – remain in place.

For the economy as a whole, the forecasts, which I am publishing in the Red Book, are for growth of 2.75 per cent. this year and 3 per cent. next year.

My last two Budgets have strengthened the foundations of the economy and put the recovery on to a secure footing. I have reduced public spending and borrowing plans to create more room for the wealth-creating part of the economy to grow. I have helped businesses. And I have improved the workings of the labour market.

The decisions I took and the policies I pursued in those Budgets have helped to reduce pressure on me to increase interest rates further, without jeopardising my inflation target.


We have got inflation under control. Inflation has picked up over the past year as the impact of last year’s worldwide increase in commodity prices has fed through the price chain. Those cost pressures are now steadily easing. Underlying inflation may be close to its peak and should resume its downward path during the course of next year. It remains on course to meet the Government’s target of 2.5 per cent. or below by the end of the present Parliament. The House might care to remember that last August was the 20th anniversary of inflation in this country reaching a staggering 26.9 per cent.

The Public Finances

We have got inflation under control. We have also got the public finances under control. The Government have delivered last year’s tough public spending plans. Indeed, we expect to undershoot them. However, tax receipts have come in lower than expected this year. That is partly due to lower inflation and to lower growth. The public sector borrowing requirement is the difference between two enormous numbers, so that forecasts for public borrowing have always been notoriously difficult to make – under whatever party. I have therefore been cautious and prudent this year in setting out the latest projections for the PSBR. I now expect the PSBR to be £29 billion in the current financial year. That will be £7 billion less than last year and £16 billion less than two years ago. I am determined to follow a consistent course and I have taken more public spending decisions to keep it that way.

I have no intention of throwing away the gains we have made in recent years in getting public borrowing down. We will keep on track towards balance in the medium term because I do not want the future strength of the recovery put at risk. Overall, our decisions on public spending and the tax measures I shall describe shortly will be broadly neutral in their impact on the downward path for the PSBR over the next three years.

That downward profile for Government borrowing sets the overall framework for my Budget this year. I am not prepared to take any action that would put at risk my fiscal target of moving towards balance in the medium term. I had to make the difficult judgments and decisions about the balance between the levels of taxation and public spending. This year, as in previous years, I have made those judgments and taken those decisions with the dominant priority of improving the long-term health of the British economy. Our tax and spending policies must promote our aim of becoming the enterprise centre of Europe.

Public Spending

In each of my three Budgets, I have reduced public spending plans substantially. This year, I have once again kept a firm grip on public spending, helped by my right hon. Friend the Chief Secretary. My right hon. Friend and I have at least three things in common. We have both been in charge of big spending Departments, so we are both poachers turned gamekeepers. Neither of us could be described as adopting the slash and burn approach to public spending. But we are both convinced that the share of national income taken by the state in public expenditure must be reduced to below 40 per cent. if we are to remain competitive in today’s world. It is essential to give the private sector more room to generate the jobs, the investment and the wealth that will make people and their families more prosperous.

That goes hand in hand with our commitment to a modern welfare state. In the rapidly changing world of technological advance and a more flexible labour market, the British people need to be prepared and equipped to embrace change in a flexible way. They will be more willing to do that if they know that high-quality schools, health care and a safety net for the unemployed, the disabled and the old are there if and when they need them. That is why we are modernising the welfare state so that it underpins the British economy, and does not undermine it. We are changing the welfare state to ensure that it serves the needs of today, not of 40 years ago; that it serves those who genuinely need it; and that it is affordable to the taxpayer.

Those objectives are being achieved in the face of huge pressures for higher public spending that come rolling in year after year. But this Budget proves that we can have good-quality public services and spending control. Unlike our critics, we understand that good services depend not only on how much one spends, but on the way that one spends it.

That realistic but socially responsible approach has guided me this year. I have limited the growth of spending overall. But I have also provided more money for the public services that the British people care about most – schools, hospitals and the police. To pay for that, my right hon. Friend the Chief Secretary and I have found savings elsewhere from our continuing drive to modernise government.

Let me deal first with the priority areas where I have been able to increase spending plans.

Mr. Dennis Skinner (Bolsover): Having cut them last year.

Mr. Clarke: None of them was cut last year. That was an ill-thought-out and inaccurate interjection.

I shall turn to what we are doing to the national health service. This Government are committed to the national health service. I am proud that since 1979 spending on the NHS has increased by more than 70 per cent. in real terms. We are continuing to deliver our commitment to increase spending on the NHS in real terms. That is what we said that we would do, and we are doing it.

Public spending on the national health service will increase by over £l billion next year. In addition, patients will benefit from improvements in efficiency, including reductions in NHS management costs. All those savings – around £650 million next year – will be ploughed back into patient care. Privately financed projects will bring nearly £700 million of extra investment over the next three years without in any way undermining the fundamental principle that health care should be free at the point of service. It is no good the word “private” producing curls on the lips of Labour Members. The money is on top of the additional £1 billion of public expenditure, and it all represents additional resources for our free national health service.


The Budget allows for spending on schools to rise next year. We have already increased spending per pupil by some 50 per cent. in real terms since 1979. We devote a higher proportion of our public spending to education than Japan, Germany or France.

Our achievements have been impressive. Post-16 staying-on rates have risen dramatically, from 42 per cent. in 1979 to 72 per cent. now. Almost one in three young people go on to higher education, up from one in eight in 1979. We have a higher graduation rate than any other major European country. We have achieved many improvements in our schools: introduction of the national curriculum, more rigorous schools inspection, measures to tackle failing schools, greater choice for parents, better vocational education and extension of free nursery education. That is not just good for our children; it is good for our future and good for our economy.

Our reforms have delivered better standards of education for each pound that we spend – but we are also spending more pounds. The plans that I am publishing today allow for an increase in spending on schools of £878 million. Within that, over £770 million will be channelled through the local authority settlement. Parents will rightly expect local authorities to carry that funding through to school budgets, and they should ask their local authorities how the extra money for schools will be spent on their children.


Since 1979, spending on our police has almost doubled even after allowing for inflation. Next year, the resources available to fight crime will be increased again. Money is being provided for an extra 5,000 police officers over the next three years. That is on top of the 32,000 increase in the police service since 1979. The plans also allow for an extra 10,000 closed circuit television cameras in town centres and elsewhere.

I have found those extra resources for important programmes because we are changing government to ensure that it meets the needs of people today, not those of 20, 30 or 40 years ago. We are cutting Government bureaucracy, cracking down on fraud, getting Government out of activities in which they need not be involved and using private sector skills and finance to provide better public services. That is the hallmark of a Government who are looking to the future needs of a modern industrial state.

Running Costs

We are now making spectacular efficiency gains as a result of our civil service reforms of recent years. I remind the House that in my last Budget I cut provision for central Government running costs by 10 per cent. in real terms over three years. This year, I will go much further on top of that. The cash cost of Whitehall will be £860 million lower in three years’ time than it is today. In real terms, that represents total savings of 12 per cent., which is equivalent to a saving of nearly £2 billion a year. But we must never delude ourselves that more resources for schools, hospitals and police as well as tax cuts can be paid for just by eliminating waste in the public sector. Life is not that simple. We have also had to look elsewhere.

Three years ago, before my right hon. Friend the Secretary of State for Social Security very skilfully put in place a programme for long-term reform, we were expecting social security spending to grow by more than 3 per cent. each year in real terms. We now expect real growth in planned spending of around 1 per cent. per year over the next three years. That reduction in growth will build up year on year to a cash saving of huge proportions. The changes that we have made and that we are making are an assurance for future generations. We are going to leave our children a welfare state that works and a welfare system that they can afford.

My right hon. Friend the Secretary of State for Social Security will announce the details of this year’s settlement to the House tomorrow. I shall set out just the main points. Increases in social security spending next year will be well within the growth of the economy. We will ensure that all that spending represents legitimate spending on people in genuine need. That is why my right hon. Friend will give details of a further intensive campaign against fraud. He will also announce measures that will mean that people who apply for asylum on arrival in the country will cease to receive benefits after an unfavourable adjudication.

My right hon. Friend will announce steps to close the gap between single parents benefit and those paid to other families. The right approach to single parents is neither to penalise them nor to favour them. The costs and responsibilities of having children are the same for couples as they are for single people.

We intend to build at the same time on our previous measures to help more mothers move from benefit dependency into work. My right hon. Friend will announce a package of measures to encourage work, including a further increase in the child care allowance in family credit from £40 to £60 each week.

Next is housing benefit. The housing benefit system should not be an inducement for young people to leave their families before they need to. My right hon. Friend will announce measures to restrict the amount of housing benefit paid to single people under the age of 25 to a maximum that more sensibly reflects their circumstances. The benefit system should offer a real incentive to young people to rent within their means, improving their incentives to work rather than dependency on the social security system. [Hon. Members: “Nonsense.”] Opposition Members are so predictable. It is by restricting spending in those areas that we can protect people in greatest need and stand by our pledges on pensions and child benefit. Others apparently claim to be thinking the unthinkable. I have yet to see evidence of their thinking at all.

This Government have acted decisively to put in place policies to bring social security spending under better control. Let no one underestimate what we have achieved. The measures that I have announced in my three Budgets will reduce planned social security expenditure by £5 billion each year by the end of the century.

Social security is a good example of how more money can be found to be spent on areas that we care most about, by trimming back elsewhere. We have applied that principle to most other programmes. When hon. Members examine the full details of our spending plans, they will find that, in practically every Department of Government, we have found significant savings while protecting the front line of public service delivery.

Let me give two examples. We have found further efficiency savings in defence, but we maintain fully our commitment to a strong front line and, in a tight public spending round in the Foreign Office, the planned allocation for bilateral aid is likely to be little changed from that set out in last year’s departmental report. British bilateral aid is internationally recognised for its high quality and for the substantial share going to the poorest countries in Africa and Asia, and that will continue.

We are also doing more to get the Government out of activities that they simply need not be involved in. My right hon. Friend the Secretary of State for Defence is today announcing his intention to transfer ownership of the Ministry of Defence married quarters estate to the private sector. That will improve the management of the estate, which will be good for the services, and good for service families. We plan to privatise the Housing Corporation loan book, and to encourage the banks to provide student loans.

Private Finance

There are many services that the Government have a duty to ensure are provided as public services, but where private sector management skills and expertise can improve delivery to the public. That is where the private finance initiative comes in.

Under the private finance initiative, the public sector does not simply sign a contract to buy a prison, a train or a computer system. It pays to have specific services supplied at guaranteed levels of performance – available prison places, trains running reliably on the Northern line, national insurance records kept up to date. [Interruption.] The Opposition had better make up their mind whether they agree with that policy or not. It rather depends which day of the week it is or which spokesman is speaking, as far as I have been able to see. The Government choose the quality services that the public require, and then go out and acquire those services from private companies with the finance and expertise to deliver.

The key point is that the initiative delivers infrastructure projects of higher quality at a lower overall cost to the British taxpayer. That is because the private sector puts its own money at risk and brings its own management skills to bear.

The initiative means that better public services will be provided by better private means. The service remains a public service and the taxpayers get a better deal. No wonder some of our critics have decided to copy our innovative policy. [Interruption.] We are now, as the deputy leader of the Labour party demands, far beyond the stage of simply identifying projects. The money is starting to flow. We expect actual capital spending under the private finance initiative to be around £2 billion per year and rising over the next three years. We expect to have agreed contracts worth at least £14 billion by the end of 1998-99.

That money is replacing old-style public sector capital spending and it can deliver big gains in value for money for the taxpayer. In the past, cost overruns and delays were typical of public sector capital projects. The private finance initiative is delivering better-quality projects. To take two well-known examples, the PFI contract for Northern line trains specifies reliability levels that are nearly four times above the best fleet currently operating on London Underground. The service that we shall get from the new national insurance records system could have cost up to twice what we shall pay under the privately financed deal that we have struck. As a result of those flows of private finance, we have been able to find savings in publicly financed capital while maintaining overall high levels of investment activity and high-quality investment.

Let me just illustrate progress with another four projects that demonstrate the extent to which the private finance initiative is spreading to all parts of Government activity. First, I can announce a huge new package of privately financed roads, five new projects with a capital value totalling £500 million. Secondly, my right hon. Friend the Secretary of State for Health has announced today that a £35 million deal is going ahead to modernise two hospitals for the South Buckinghamshire NHS trust. Thirdly, we are tendering for the refurbishment of Lowdham Grange prison, a £50 million project to add to the two new prison building contracts at Bridgend and Fazakerley, which will be signed shortly. Finally, full bids will be due on 5 December for the £45 million water project in Inverness and Fort William. My hon. Friend the Financial Secretary to the Treasury will be publishing more details tomorrow on the real progress of the private finance initiative.

In the 1980s, our privatisation programme brought enormous benefits to the British economy. Our private finance initiative can and will do the same in the 1990s and beyond.

Challenge Funding

We are also rapidly developing our innovative idea of challenge funding. Challenge funding invites groups to compete for public funds to improve local services. That is another way in which the quality and value for money of public services is improved.

The first single regeneration budget challenge fund bidding round ensured that every £1 of public money attracted another £1 of private funding. Some £250 million has been made available for the third and fourth bidding rounds for the single regeneration budget challenge fund. That will help to regenerate many areas, including inner cities. More than £300 million of challenge funding will be made available to speed up the transfer of deprived housing estates to housing associations and other private landlords.

Challenge funding has enormous potential for projects of all kinds. My right hon. Friend the Secretary of State for the Environment is considering more challenge funding for a wider range of local authority capital provision, and he will be making an announcement in this debate later this week. Challenge funding ensures that the best possible projects get the money, while fostering genuine local commitment to the project.

Budget Strategy

Public spending as a share of national income varies from year to year, but under this Government’s policies – and I have described our policies, which are policies of change and of priorities – over the past 16 years, the trend has been downward.

In the mid-1970s, when public spending peaked, it did so at 47.25 per cent. of national income. The next peak reached 45.5 per cent. in the early 1980s and the last peak was 43.5 per cent. in the recession of the early 1990s. I now expect total public spending to be 42 per cent. of national income this year.

When I became Chancellor two and a half years ago, I said that we should aim to push the ratio below 40 per cent. and keep it there. The decisions I am announcing today will achieve that aim. The ratio will be below 40 per cent. from 1997-98 onwards. That is far below the ratio in any other major European country. Controlling public spending is crucial to our goal of making the economy more successful and the enterprise centre of Europe.

I have now taken £53 billion out of projected public spending in my three Budgets. I judged that necessary to reduce Government borrowing following the international recession of the 1990s. Even with the extra money for schools, the extra money for hospitals and the extra money for the police, I now expect total planned public spending to be kept broadly unchanged in real terms over the next three years.

When we first set out our public spending control totals three years ago, most of the pundits did not believe that we would stick to them. The doubters have been proved wrong.

Not only have we stuck to our plans, but I have managed to reduce them again, for the third year running. Next year, the control total will be £3.25 billion below the level that I set in last year’s Budget. That is £12 billion below the level we expected it would be for that year when I was first appointed Chancellor.

Having carefully reviewed the latest projections for public borrowing in the light of those decisions, I have concluded that we can now return to the task of starting to cut taxes again. [Interruption.] I hope that some Labour Members begin to understand that there is a correlation between the two in a well-managed economy. I am able to make tax cuts broadly equivalent to the spending reductions, with Government borrowing still falling to zero by the end of the decade.

After the Budget measures are taken into account, I expect the PSBR to continue to fall at roughly the rate we have now achieved in the past two years. I expect it to fall from £29 billion this year to £22.5 billion in 1996-97 and £15 billion in 1997-98. Broad balance should be reached after a further two years. The financial deficit is now expected to be close to the Maastricht reference level of 3 per cent. of GDP in 1996-97 and to fall well below it in subsequent years.

So fiscal policy will remain tight. That is why the measures in this year’s Budget are economically and socially responsible. I have made it clear all along that every Budget I deliver will be dominated by the long-term interests of the British economy. Let me now turn to my tax proposals.


I have had to consider carefully where tax cuts might fall. Since 1979, this Government have shifted the tax burden away from direct taxes, which fall on income and employment, and towards indirect taxes on spending and consumption. That is the best way to encourage enterprise and investment and it is the best way to improve the long-term performance of the British economy. Before moving on to direct tax, let me run through my proposals for indirect taxes.

Landfill tax

Last year I proposed a new landfill tax, which is a charge on the disposal of waste in, for example, tips and old quarries. That will come into effect on 1 October 1996. It will be charged at a standard rate of £7 a tonne and a lower rate of £2 for inactive waste.

That is a tax on waste in order to enable me to reduce the tax on jobs. The money raised by the landfill tax will allow for a matching cut in the main rate of employers’ national insurance contributions by a further 0.2 per cent. to 10 per cent. from April 1997. That will cut the cost of employment by half a billion pounds and will make it cheaper for businesses to create new jobs.

Road fuel

Next, I intend to stick to my commitment to raise road fuel duties by at least 5 per cent. on average in real terms. From 6pm this evening, tax on petrol and diesel will rise by 3.5p a litre. I also plan to increase the tax on super-unleaded petrol by a further 4p next May. That reflects its higher emission of pollutants such as benzene and the dangers to the Revenue of switching to super-unleaded from leaded petrol. Despite those increases, petrol prices in this country should remain lower than in any other major European country.

Last year I froze the duty on gas used in road vehicles, that is, liquid petroleum gas and compressed natural gas, pending further work on their impact on the environment. Studies since then have confirmed that those are relatively clean fuels. The Government would like to help to encourage further use of those fuels, and I propose to reduce the duty on them by 15 per cent.


We expect emissions of most pollutants from vehicles to fall over the next few years, but emissions of some pollutants may remain at high levels, so the Government now intend to look into ways of using vehicle excise duty to encourage low-emission vehicles. [Interruption.] I am glad that someone welcomes it.

This year, the tax disc for cars will rise by £5, but I am freezing the rates for lorries for the sixth consecutive year.

Honest motorists are irritated by tax disc evaders. The Secretary of State for Transport and I are publishing today a revised proposal on continuous licensing, which will make it easier to enforce the collection of vehicle excise duty, but we shall not be requiring licences for vehicles when they are kept off the road. To make sure that the new system does not penalise vintage and classic car enthusiasts, many of whom run their cars on the road only occasionally, we shall be exempting from duty all cars and motor cycles over 25 years old, taking 150,000 historic vehicles out of tax. [Hon. Members: “Well done.”] My parliamentary private secretary is not the only hon. Member who approves of that.


The national lottery has been an outstanding success and over £1 billion has been raised for good causes over the past year, but its success has affected other parts of the gambling industry in Britain.

I am satisfied that the industry’s concerns are genuine and I propose to cut general betting duty by 1 per cent. The benefits should be spread between the betting industry and horse and greyhound racing. If satisfactory agreement can be reached quickly, the duty cut can take effect from 1 March.

The pools companies have also been affected by the success of the national lottery. I propose to reduce pool betting duty by a further 5 per cent. from 3 December on top of a similar cut that I made last year. I am willing to reduce pool betting duty by another 1 per cent. from 5 May, if the pools companies will agree to pass on that extra 1 per cent. equally to the Football Trust and the Foundation for Sport and the Arts. That reduction will help the trust and the foundation to continue their valuable work, and I am sure that it will be welcomed – indeed, it has been – on both sides of the House.


In my 1993 Budget, I gave a commitment to raise duty on tobacco by at least 3 per cent. a year in real terms in future Budgets. I thought then that that was the most fair and effective way of backing up health warnings on smoking and I remain convinced of that today. From 6pm this evening, the tax on a packet of 20 cigarettes will increase by 15p, on a packet of small cigars by about 6p and on a 25 g packet of pipe tobacco by about 8p. I intend to freeze duty on hand-rolling tobacco this year because it is proving to be by far the easiest product to smuggle.


Next is alcohol. Cross-border shopping and the smuggling of alcohol is a serious problem for the retail drinks industry in Britain and it affects Government revenue, although our total revenue is still rising. Shopping abroad is one of the greater freedoms gained for consumers in the European single market. But smuggling is a crime that we will continue to fight.

Our duty levels are higher than those of our continental neighbours. Each member state must retain its freedom to set its own tax levels and we accept the downward competitive pressures on tax in a single market. We therefore have to address the legitimate concerns of the British drinks industry, but at the same time minimise losses of revenue that would otherwise have to be raised by other taxes.

This year I propose to freeze the duty on beer and wine. Tax as a share of the cost of a pint of beer will be the lowest that it has been in this country for more than 20 years.

There are two changes that I propose to make to other duty rates here at home. Very strong cider is at present under-taxed compared with other drinks and I intend to raise its duty by 8p a pint from next October, without disturbing the rate for ordinary ciders.

High rates of duty at home have made it difficult for the Scotch whisky industry to press its excellent case for lower duty rates in other countries. Scotch is one of our most important exports. Spirits duty will therefore be reduced by 4 per cent. from 6 pm today. That is equivalent to 27p off a bottle of whisky. [Laughter.] I have just had the last sip of the expensive stuff.


Windfall Tax

I turn now to the utilities. My right hon. Friend the President of the Board of Trade will speak about the regulatory regime that protects consumer interests in his speech in the Budget debate on Thursday. I have been looking at the case for a windfall tax on the utilities. I have been told that it has many splendid qualities. It is a one-off tax, often described as if it hurts nobody. It is claimed that it has no impact on the economy and apparently can be used to pay for up to 10 public spending proposals which cost far in excess of the amount of tax that it actually raises. What a potential pot of gold; an elixir to cure all the ills of some people.

Of course, a windfall tax is nothing of the kind. It would damage investment and threaten the quality of customer service. It is an illusion that a windfall tax is paid by the company. It is paid by its shareholders, including many small shareholders and pension funds, and it would mean higher future prices for customers. The whole point of privatisation is to benefit consumers, not simply the Exchequer. I have no intention of introducing such a tax. [Interruption.] If that decision is meant to be a help to the Labour party, heaven help it. I do not think that it can make much of that.

Redundancy Payments

Let me turn to some other proposals that I do not intend to make. I have no plans and I never did have any plans to change the rules that allow the first £30,000 of redundancy payments to be received free of tax. I also never contemplated any increase in insurance premium tax, nor air passenger duty. Those ideas were inventions of the newspapers that wrote about them.

Tax law has become too long and complicated. That campaign is certainly well founded. Some experts have described tax law as incomprehensible. The Inland Revenue will shortly be publishing a report on tax simplification. We shall propose that the Revenue tax code is rewritten in plain English – a major task. The House has a duty to set out clear legislation, which in that area we have not done. We in the House will need to look at our procedures, to see how that tax rewrite can be sensibly handled.


The Government’s commitment to home ownership remains as strong as ever. Today there are 16 million homes in the United Kingdom occupied by their owners – 40 per cent. more than when we came to power in 1979. All surveys show that the vast majority of people still want to own their own homes.

We therefore have a target in our housing White Paper of a further 1.5 million home owners over the next 10 years. I reaffirm that mortgage interest relief will remain unchanged for the lifetime of this Parliament.

We have already introduced measures for mortgage lenders to make it easier for people with negative equity to move home, and the Finance Bill will pave the way for housing investment trusts, which will encourage investment in private rented housing.

I have considered very carefully the case urged upon me for special measures to revive the housing market. Many housing experts, sadly and reluctantly, are forced to the same conclusion as I am – that none of the affordable proposals would actually make any difference.

The problem at the moment is not the cost of house purchase to the purchaser. There have never been such bargains on the market. An average mortgage costs only around £180 per month, far less than renting an equivalent property, and houses are more affordable than they have been for years.

I remain convinced that what the housing market needs above all is steady growth in the economy and low inflation. That is what this Budget delivers. This Budget will reinforce my ability to keep interest rates and mortgage costs down. That matters most of all to the housing market. All the major lenders expect prices to start to rise next year, and as confidence grows I expect the market to start to move soon.


I now turn to my proposals for direct taxation. I want to do four things this year. I want to give people more security by ensuring that their needs will be met in old age. I want to help people to have a greater personal share in the prosperity and success of the businesses for which they work. I want to encourage enterprise, particularly small businesses. And I want to allow people to keep more of the money that they earn, or that they save, to spend as they choose, not as the state chooses. That is essential in a modern dynamic economy.

Long-term Care

In this Budget I shall be helping people who are earning and people who are saving. But I also want to help the people who have worked and saved all their lives. Some of them may be unfortunate enough to need care in residential or nursing homes in their old age. If they do, they may find their savings eaten away quickly to pay for that care. Of course, that is one of the rainy days for which people save. But the balance between the state paying and the family paying must be right. If it is not, many prudent people will complain that they are being treated unfairly compared with those who were unable or unwilling to save at all.

To help people who have already put money aside, it was recently decided to exempt from VAT some forms of care provided in someone’s own home. I now have two important further proposals.

First, I intend to exempt from tax the benefits from a range of insurance policies that provide long-term care benefits. We should encourage, not penalise, people who decide to take more responsibility for themselves.

Secondly, at present only people with assets worth less than £3,000 are not asked to make any contribution from their capital towards the costs of residential or nursing home care. People with assets worth more than £8,000 receive no financial support from the Government. When applied to care in residential and nursing homes, those limits are far too low.

From April, and sooner if practicable, we shall more than treble the lower threshold, from £3,000 to £10,000, and double the upper threshold, from £8,000 to £16,000. That means that people in residential care who have worked hard and saved will now keep more of their own money. It will give many elderly people and their families more financial security and greater peace of mind. But we also want to find more ways of helping people who are now in work or recently retired and want to plan ahead to prepare for their old age.

We shall be consulting shortly on an innovative range of proposals to encourage people to make provision for long-term care. We are studying in particular the concept of so-called partnership schemes. The essence of those schemes will be that individuals who plan ahead to meet a proportion of long-term care costs themselves will be able to retain more of their assets above the £16,000 capital threshold.

State-funded care will, of course, still be there for all those who need it, but those who have provided for themselves will be able to keep more of their savings. The partnership approach combines state provision for the needy with reward for the thrifty who make provision for themselves.

In addition, I have asked the Inland Revenue to consult on the possibility of extending to members of occupational pension schemes the option to take a variable pension. That could provide a larger pension in later years, when people are more likely to need long-term care, in exchange for a smaller pension earlier on. For future generations, long-term care will be a growing problem for the finances of many families. The Government have put in a lot of work to put together a package to meet their concerns. We shall now go out and consult and explain our ideas in detail.

For all retired people living on their savings, the pensioners bonds that I introduced have proved a very popular National Savings product. The House will recall that I introduced them two years ago. I am today announcing that we are reducing the qualifying age for purchases of those bonds from 65 to 60.

Taken together, this package of measures covering the big problems of savings and long-term care for the elderly is the mark of a Government who care about our elderly, their families and their sense of security. It also shows yet again that we are a Government who look to the long term in all those difficult areas of social policy.

Employee Share Ownership

I am proud of our record of wider share ownership, which has seen the number of shareholders in this country treble. There are now 10 million shareholders in Britain. Thanks to our policies, shareholding is no longer a minority interest.

All the old-fashioned distinctions between employee and employer, between capital and labour, are being broken down in our modern enterprise economy. Most employees understand that their rewards depend on the success of the businesses for which they work. Most businesses believe that the best way to motivate staff is to let them share in the rewards of success. The public’s willingness to embrace and understand those principles has been a major culture change over the past 16 years.

An important part of that change has been the spread of employee share ownership, which is one of the most attractive features of what has become known as popular capitalism. Holding shares in the company for which they work gives people a stake in the company’s future success. Nobody in the House has advocated the cause of performance-related rewards and employee share ownership more than I have over the years, and I started doing so well before those ideas become fashionable.

We have two tax-privileged schemes to encourage share ownership for all employees: save-as-you-earn schemes that encourage share ownership through share options linked to savings plans and profit-sharing schemes that allow employees to receive free shares. There are around 1 million people in each scheme. I want to build on those successes by improving both schemes.

The minimum period for saving under a SAYE scheme will be reduced from five years to three and the minimum contribution will be halved to £5 a month. The holding period under profit-sharing schemes will also be reduced from five to three years. Those changes will increase significantly the attractiveness of those employee share-owning schemes. But I am going to do more.

In July, I withdrew the tax privileges attaching to some so-called “executive” share options. The overwhelming majority of companies used those options for their more senior employees. I approved of such options so long as they were linked to genuine performance, but I did not see any justification for maintaining their tax privileges.

The resulting debate brought out the fact that there was a demand for a third type of wider share ownership scheme, to provide a more flexible basis of granting options to lower-paid employees. I am, therefore, introducing a new tax relief that will enable companies to grant options, under a scheme approved by the Inland Revenue, up to a limit of £20,000.

The conditions for the new relief will be similar to the conditions that applied for the old one. The relief will also be available to schemes in existence at 17 July 1995, which qualified under the old rules subject to the £20,000 limit.

Those changes go further than ever before in creating a climate in which employee share ownership can become the norm. I hope that companies will offer all their employees, not just their executives, the chance to enjoy the economic benefits and the sense of ownership that shareholding can bring.

Helping Business

I have said several times in this speech that the Government’s aim is to turn Britain into the enterprise centre of Europe. [Interruption.] That is where we are going. We are encouraging more innovation, investment and growth. That means allowing people to keep more of the income that they earn, and I shall have more to say about that in a moment. It means encouraging people to save more, to invest more and to build up more personal wealth. It also means helping small businesses. The backbone of our modern, dynamic, successful economy is an active small business sector. Small businesses are the seedcorn of our future prosperity.

I have some important measures this year to help businesses, and small businesses in particular.

Business Rates

First is help with business rates. Many businesses faced lower rates bills following the five-yearly revaluation of rateable values, but many others faced higher bills. To help that group, I announced in last year’s Budget that real terms increases in rates bills would be capped to a maximum of 10 per cent. a year. I have looked at that cap again and I no longer consider it to be low enough. For 1996-97, the maximum real terms increase in rates bills for all businesses will be reduced from 10 per cent. to 7.5 per cent. Small businesses will get extra help. The maximum increase for small properties will be 5 per cent. instead of 7.5 per cent. One million two hundred thousand business properties will benefit from those changes, including 870,000 small properties.

Capital Gains Tax

Investment is important for prosperity. Investment depends on capital. We want to reduce taxes on capital to encourage and reward the investment that the millions of people who work for private businesses depend on. We remain committed to abolishing capital gains tax when resources allow.

The starting point must be help for those who have built up their own businesses and want to be sure that they can sell up and enjoy the rewards of their own hard work in managing the business that they own. Tax relief for the owners of businesses selling up on retirement was substantially increased in 1991 and again in 1993, so that capital gains of up to £1 million now benefit from that relief. This year I am going to extend further the relief for owners who have worked hard and created their own businesses by reducing the qualifying age from 55 to 50.

That will reward the success of more of those who own and manage their own business. It will increase incentives for those who are going to work in their own business in the future. It is the mark of a Government who back enterprise. [Interruption.] If I repeat it often enough, the Labour party might eventually at least discover how to spell it. At the moment, it is not up to speed on it in any other way.

Inheritance Tax

It is not just businesses that create wealth. Thanks to this Government’s policies, ordinary hard-working people have a bigger personal stake in the wealth of this country than ever before. In our property-owning democracy, more and more people have the opportunity to own their own homes, have occupational or personal pensions, invest in TESSAs and PEPs, build up other savings and own shares. Those benefits are now being enjoyed by the many and not just the few.

Many people who do not consider themselves rich work hard and save for their families throughout their whole lives. They pay their taxes when they work. They want to pass on their family capital without having it taxed again when they die. Many people want to pass on an inheritance to their children and their grandchildren to give them a better start in life than they had. That is a natural instinct in families. Inheritance is now an issue for middle Britain. It is to help middle Britain that we aim to abolish inheritance tax as soon as we can afford to do so.

It is a myth that inheritance tax is paid only by the very rich. In fact, the very rich are well placed to dispose of their wealth in their own lifetime. Most people hit by inheritance tax are those who would not consider themselves rich at all. These are people who bequeath not much more than the present tax-free allowance of £154,000. They may be people who own their home and a few modest investments. There are many more people like them who fear that their assets will be hit by inheritance tax. I therefore propose to increase the tax-free allowance substantially to £200,000. The number paying inheritance tax will be reduced by one third and only one in 45 estates will now pay that tax.

Inheritance tax can also have a direct effect on enterprise. A family company, for example, may have to be broken up when the owner dies. We already recognise that problem through the existence of business property relief for qualifying unquoted companies. I now propose to remove the problem altogether by extending 100 per cent. relief to unquoted shareholdings, whatever their size.

Income Tax

Finally, I turn to my proposals for income tax payers. In the post-war era, when Britain went into comparative economic decline, Britain had high rates of taxation on income. Those rates damaged the economy and stifled prosperity. We had a tax policy that was based on envy.

When this Government came to power, the basic rate was 33 per cent. The top rate on earnings was 83 per cent. Rates on so-called unearned income were as high as 98 per cent. There was nothing fair about taxation before we started to make it fairer. During the past 16 years, we have cut the basic rate by around one quarter to 25 per cent. and abolished all rates of income tax above 40 per cent.

But the income tax burden is about more than just tax rates. Tax allowances matter as well. I propose to increase allowances for married couples and people receiving related allowances by £70, in line with indexation. It is a myth that the tax system penalises marriage and that single people are better off than married couples within the British taxation system. Any young couple contemplating living together and starting a family will pay less tax by getting married.

As the economy continues to grow and create jobs, more people, as they return to work, will find themselves earning more than the tax threshold. I believe that we should relieve as many of the lower-paid as possible from the burden of income tax. I therefore propose to increase the basic personal allowance by £240 – that is £100 more than indexation. That will provide an incentive to work to those at the bottom of the income scale. More than 200,000 people will be kept out of tax, compared with indexation of allowances.

People who do not consider themselves rich now find that their incomes may bring them into the top rate of tax. That has a lot to do with the growth of the economy over 16 years and the growth in personal incomes. I do not want more people to be taken into the 40 per cent. band next year. I therefore propose to raise the higher rate threshold by £1,200 – that is £200 more than indexation.

But in the longer term, of course, we have a clear and achievable goal for income tax – moving to a basic rate of 20 per cent. as soon as we can. This year, I can move much faster towards that goal. I propose to increase the 20 per cent. band by a further £700 – that is £500 more than indexation. That will bring an extra 1 million people into that band. That means that around a quarter of all taxpayers – that is, over 6 million people – will pay tax on their income at just 20 per cent.

There were many who doubted the credibility of our goal of a 20p basic rate when we first set it out in 1992. We are now making big strides towards achieving it. Some people are even having to resort to trying to outbid us, I discovered in recent debates. But widening the lower rate band is not the only route to 20p. I want to make progress on another front. I therefore also propose to reduce the rate of tax on all savings income for all basic rate taxpayers to just 20 per cent. That will apply to the tax deducted from interest on bank and building society accounts, for example, and it is equivalent to an increase in interest rates for savings income. Around 14 million savers will gain from that tax reduction and they will see the income from their savings increase. As a result of that measure, people will gain an extra £5 from every £100 they receive in interest from their building society account.

Many of those who benefit will be pensioners, who will gain £75 a year on average. Some could stand to gain £500 a year or more. So, again, those who have earned and saved will be able to keep more of their own money and benefit more from their own money; and the measure is another and decisive step to a 20 per cent. basic rate for all income.

I propose to reduce the small companies rate of corporation tax to 24 per cent. The reason I am able to reduce the small companies rate of corporation tax is that the small companies rate has for many years been pegged to the basic rate of income tax. My final proposal in this Budget is therefore to reduce the basic rate of income tax by one penny to 24p in the pound. [Interruption.] It is no good laughing. That was the shortest smile, on the face of the hon. Member for Dunfermline, East (Mr. Brown), that I have seen even from him in a very long time, because these three steps – widening the 20p band, a 20p tax rate for savings income and a penny off the basic rate – move us much closer to a 20 per cent. base rate of tax for all income. We have a clear commitment – [Interruption.]

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

Mr. Clarke: We have a clear commitment to the 20p basic rate. We believe in it and we can achieve it. As a result of the measures in this Budget, a married couple with only one earner on average earnings with two children will pay £190 less tax, but overall, their real take-home pay after tax will rise by around £450 next year. They will be £700 a year better off than they were at the time of the last election, and that is extra money for families to spend as they wish.

My Budgets of the past two years have kept us on the course that we said we would follow. We have cut taxes, we are cutting taxes and, when we can afford it and when it is in the interests of the economy, we will cut taxes again. Good economics is good politics.

This Budget puts Britain on course to be the enterprise centre of Europe; a Britain that creates more jobs and more wealth in which all can share because business can flourish here in a secure climate of low borrowing, low taxation, deregulation and free trade. That is why this Budget controls overall public spending while shifting more money towards schools, towards hospitals and towards the police. That is why this Budget keeps Government borrowing on a downward path and that is why this Budget cuts taxes. I have achieved that hat trick – controlling spending, downward borrowing and cutting taxes – only because the Government have followed a consistent economic policy.

Only we, in this House, have clear objectives and we know how to achieve them. We are aiming at borrowing falling to zero; public spending below 40 per cent. of national income; inflation below 2.5 per cent; and a 20 per cent. basic rate of income tax. This Budget puts us on a path to meet all those goals and I commend it to the House.