2004 Budget Introduction
The Chancellors BUDGET REPORT was delivered on 17 March 2004 - Budget Analysis 2004 THE STRENGTH TO TAKE THE LONG-TERM DECISIONS FOR BRITAIN: SEIZING THE OPPORTUNITIES OF THE GLOBAL RECOVERY The Pre-Budget Report, delivered by the Chancellor of the Exchequer Gordon Brown, sets out how the Government is meeting its long-term economic goals and taking advantage of the opportunities presented by the global recovery. Key Pre-Budget Report announcements include: - confirmation that economic growth has strengthened, in line with the Budget 2003 forecast, and that the Government is on track to meet its fiscal rules over the economic cycle; - setting out reforms which will promote business and enterprise across the UK, by improving access to finance for small business, reducing red tape and promoting a culture of enterprise; - taking further steps to extend employment opportunity for all, through measures which focus help on disadvantaged groups and deprived areas; - tackling child and pensioner poverty, raising the Child Tax Credit by £180 per year and providing further help with childcare, and ensuring security in retirement; - promoting fairness in the tax system by ensuring that everyone who is able to do so contributes to the extra investment in public services; - introducing further measures to improve the environment, including proposals to tackle climate change, reduce waste and protect Britain's natural resources.
MAINTAINING MACROECONOMIC STABILITY At the start of 2003, global uncertainties weighed heavily on short-term prospects for the world economy. Confidence and demand in the global economy were affected by geo-political tensions, continued volatility on international financial and exchange rate markets and uncertainty regarding growth prospects in the major economies. As an open economy, the UK is inevitably affected by these global developments. On 9 June 2003, the Chancellor announced that he intended to change the basis of the inflation target in the remit for the MPC. This Pre-Budget Report confirms that the operational target for monetary policy will switch to a target based on the harmonised index of consumer prices, which the National Statistician has named the Consumer Prices Index (CPI) for the UK.
The level of the new CPI inflation target is being set at 2 per cent and the switch to the new target will apply from today. The new target is 0.5 percentage points below the previous RPIX-based target, reflecting differences in the way that CPI and RPIX inflation are measured. The level of the new target is set to be consistent with the old target in two years' time - the typical forecast horizon for monetary policy. The domestic stability delivered by the Government's macroeconomic frameworks has enabled the UK economy to cope well in a challenging global economic environment. Demand and activity have strengthened and GDP grew by 0.6 per cent in the second quarter and 0.7 per cent in the third quarter of 2003. While risks remain, there are now clear signs that world economic activity is strengthening. Sound fundamentals mean the UK economy is expected to build on recent positive developments with GDP accelerating into 2004: - GDP is forecast to grow by 2.1 per cent in 2003 and by 3 to 3½ per cent in 2004 and 2005, in line with the Budget 2003 forecasts; - CPI inflation is expected to rise slowly from early next year to reach its 2 per cent target in 2005 as the effects of recovery in the global economy and this year's depreciation of sterling feed through to higher import prices.
The interim projections for the public finances included in this Pre-Budget Report showing that the Government is on track to meet its strict fiscal rules over the economic cycle: - the average annual surplus on the current budget over the whole cycle up to 2005/06 is around 0.2 per cent of GDP, equivalent to a margin or surplus in this cycle of £14 billion. The Government is therefore on track to meet the golden rule - public sector net debt is projected to stabilise at 35½ per cent of GDP by the end of the projection period - £64 billion below the 40 per cent level and comfortably meeting the sustainable investment rule. This includes the commitment to carry forward the £2 billion unallocated special reserve into 2003-04 and add a further £500 million.
A further £300 million will be added in 2004-05 to ensure the Government is able to meet its international commitments in Iraq and elsewhere in the war against terrorism. MEETING THE PRODUCTIVITY CHALLENGE Productivity growth, alongside high and stable levels of employment, is central to strong long-term economic performance and rising living standards. Productivity growth requires a flexible economy that promotes enterprise and entrepreneurship. The Government's long-term goal is that Britain will achieve a faster rate of productivity growth than its main competitors, through boosting enterprise and by promoting greater flexibility in labour, product and capital markets. A strong entrepreneurial base is an essential driver of growth and prosperity in a modern economy. The Government's vision is that anybody with the talent, potential and drive to succeed in business should have the opportunity and support to do so, regardless of their background. Measures to enhance enterprise and boost productivity announced in the Pre-Budget Report include: - reforms to reduce the regulatory burden on enterprise, including improvements to the VAT flat-rate scheme, to ensure more growing businesses can benefit fully from compliance savings; - measures to overcome barriers to raising finance for small business, including a pathfinder round of Enterprise Capital Funds and enhancements to Venture Capital Trusts and Enterprise Investment Schemes; - launching an independent review of the Small Firms Loan Guarantee, to ensure its effectiveness; - measures to support regional growth, including details of the Local Authority Business Growth Incentives scheme, which will boost the role of local authorities in promoting growth and, in Enterprise Areas, a Business Premises Renovation Allowance; - a new, clearer and more accessible R&D tax credit definition which will promote the development of science and innovation; - measures to promote a step change in the UK's enterprise culture, including supporting a national campaign by Enterprise Insight; - an extension of Employer Training Pilots for a third year, to encourage skills training for a third year, and to cover over a third of the country; - publication of the interim report of the Barker Review on the factors affecting housing supply in the UK; and consulting on the most appropriate structure for tax transparent property investment trusts, as recommended by the Barker Review. INCREASING EMPLOYMENT OPPORTUNITY FOR ALL The Government's long-term goal is employment opportunity for all - the modern definition of full employment. It aims to ensure a higher proportion of people in work than ever before by 2010.
Worklessness, particularly on a long-term basis, is a constraint on the economy's growth potential and a major cause of poverty and deprivation, entailing costs for individuals, households and society as a whole. Delivering full employment requires that everyone should be able to take advantage of the opportunities offered by a stable, enterprising economy. To pursue its aim of full employment, the Government proposes: - extra support to help the unemployed by piloting mandatory short intensive work-focused courses at the after 6 months on JSA; - enhanced help for lone parents, increasing the number of work-focused interviews that lone parents with children aged 14 or over are required to attend; - using mandatory action plans; and for all lone parents who have found a job through the New Deal for lone parents, helping with childcare costs; - continued reform of housing benefit, beginning flat-rate Pathfinders in the social sector as soon as it is practical and aligning some of the rules of Housing Benefit and tax credits; - improving work incentives in London by extending pilots of a £40 per week in-work credit to parents, including lone parents, who have been on certain benefits for a year or more; - additional help for those on benefits to enter self employment; - an extension of eligibility for the enhanced New Deal for partners to those in a family in receipt of the Working Tax Credit, who are either not working or are working less than 16 hours a week; - an extension of back to work help for those aged 60 or and on the Pension Credit by October 2004 through improved access to the help available through existing employment programmes; - extra support for long-term sick and disabled people, enabling Jobcentre Plus personal advisers to provide additional voluntary support to Incapacity Benefit customers who want to return to work; - two additional Action Teams to be introduced in Wear Valley and Barrow-in-Furness from April 2004.
BUILDING A FAIRER SOCIETY The Government is committed to promoting fairness alongside flexibility and enterprise so that everyone can take advantage of opportunities to achieve their full potential in a modern, flexible economy. The Government is putting into practice the principle of progressive universalism, with support for all, and more help for those who need it most, when they need it most. This Pre-Budget Report sets out the next steps the Government is taking to support these aims, including: - increasing the child element of the Child Tax Credit by £180 to £1,625 a year from April 2004, equivalent to a weekly increase of £3.50. As a result the Government is on track to meet or exceed its PSA target to reduce the number of children in low-income households by a quarter by 2004-05 on a before housing costs basis; - promoting the provision of employer supported childcare, with new measures to be implemented in April 2005, as part of the Government's ongoing commitment to help people balance their work and family lives. Further details are available on the Inland Revenue website; - consulting further on detailed proposals to simplify the taxation of pensions and promoting the take up of thePension Credit, providing increased financial security for pensioners on low or modest incomes and helping to tackle pensioner poverty; - bringing all Sandler stakeholder medium-term and life insurance products into the stocks and shares component of ISAs from 2005; and taking action to protect direct and indirect tax revenues and modernise the tax system. In addition, the UK's work on implementing and enforcing UN financial sanctions has led to a transfer of £112 million to the Development Fund for Iraq.
This contribution represents the frozen financial assets of the former Iraqi regime that were held in the UK. The Government's second consultation document Simplifying the taxation of pensions: The Government's proposals, published alongside this Pre-Budget Report, sets out how the simplified regime would work if introduced, and proposes a number of modifications following the consultation. In response to concerns expressed during the consultation so far, the Government will ask the National Audit Office (NAO) to consider, in light of the proposals set out in this document: - whether it is factually accurate that the £1.4 million lifetime allowance is, using a factor of 20:1 to calculate the capital value of a defined benefit pension, equivalent to the maximum pension available under the current occupational pensions regime which includes the earnings cap; - whether it is reasonable for the Government to estimate that around 5,000 people will have pension funds in excess of the £1.4 million at 5 April 2003; - whether it is reasonable for the Government to estimate that around 1,000 people a year may be affected by the lifetime allowance who would not have been affected by the earnings cap. The NAO will report in advance of Budget 2004, in order to allow an announcement to be made in the Budget on whether or not the Government will introduce the simplified regime. If it is decided to proceed, the measures will be in the 2004 Finance Bill and will be introduced in April 2005.
Otherwise, the current eight different regimes will remain in place. DELIVERING HIGH-QUALITY PUBLIC SERVICES The Government's goal is to build a stronger, more flexible economy and a fairer society. World-class public services are crucial to achieving this goal. A healthy and educated workforce, modern and reliable transport network, and adequate supply of affordable housing promote productivity and flexibility and help to ensure opportunity and security for all.
The Government's strategy is to deliver improvements in public services through sustained investment and reform to ensure that taxpayers receive value for money. The Pre-Budget Report describes how the Government is working to deliver reform of public services, through: - setting out the key issues which will guide the 2004 Spending Review, which will lock in the step change in funding delivered in previous Spending Reviews. New resources will be rigorously targeted where they will have the greatest impact on delivery.
The outcome of the Review will reflect a renewed focus on efficiency in the public sector; - reporting on progress on the Reviews established in Budget 2003 to consider key issues in the run-up to the 2004 Spending Review, including the Lyons Review of public sector relocation, the Gershon review of public sector efficiency and the Devolved Decision Making Review.
PROTECTING THE ENVIRONMENT Sustainable development is vital to ensure a better quality of life for everyone, today and for generations to come. Economic growth and social progress must be balanced with action to protect and improve the environment. The Government has made significant progress in using economic instruments to tackle environmental challenges. The Government believes that economic, social and environmental progress must go hand-in-hand, and policies should take account of the relationship between these different objectives.
In order to develop the Government's environmental strategy, the Pre-Budget Report announces: - the establishment of an Alternative Fuels Framework to guide the duty regime for alternative fuels; a gradual increase in the duty rate of Liquefied Petroleum Gas to a level which better reflects its relative environmental benefits; - and a commitment to provide rolling three years' certainty on duty differentials for all alternative fuels; - the extension, subject to state aid approval, of relief from levy for aggregate used in Northern Ireland; plans, subject to state aid approval, for extending the eligibility criteria for climate change agreements that will provide better incentives for businesses to encourage energy efficiency; - how the Government proposes to recycle landfill tax revenues to businesses; - a consultation in early 2004 on tackling diffuse water pollution, including a consideration of the pros and cons of economic instruments.