Financial Statement

Orders of the Day — Ways and Means – in the House of Commons at 11:30 am on 21st March 2007.

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Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means 11:30 am, 21st March 2007

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 them in the Vote Office.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer 12:31 pm, 21st March 2007

In this, my 11th Budget, my report to the country is of rising employment and rising investment, continuing low inflation, and low interest and mortgage rates. This is a Budget to expand prosperity and fairness for Britain's families, and it is built on the foundation of the longest period of economic stability and sustained economic growth in our country's history.

I am told that in the past two centuries only one Chancellor before now has delivered 11 Budgets, and then a 12th. That was when Mr. Gladstone combined the positions of Chancellor and Prime Minister, something no one should ever contemplate doing again.

As I report on the economy and public finances and the progress that we have made, let me thank for their hard work and, on occasion, forthright advice the civil servants—should I say the comrades?—with whom I have worked on Budgets present and past.

This Budget will set out the long-term reforms that we must now make to meet the global challenges ahead, and to build a Britain of high aspiration and high achievement for the years to come. I can report that the British economy is today growing faster than all the other G7 economies. Growth is stronger this year than in the euro area, stronger than in Japan, and stronger even than in America. After 10 years of sustained growth, Britain's growth will continue into its 59th quarter—the forecast end of the cycle—and then into its 60th, 61st and 62nd quarter and beyond. Before 1997 we were bottom in the G7 for national income per head. We were seventh out of seven, behind Germany, Italy, France, Canada and Japan. Now we are second only to America and ahead of all those other countries.

Every country has faced a trebling of oil and commodity prices, but while inflation peaked at 4.7 per cent. in America and went as high as 3.3 per cent. in the G7, here in Britain, inflation has never gone beyond— [Interruption.] Here in Britain, inflation on the same index has never gone beyond 3 per cent. While on that index it was 4.7 per cent. in the United States, it has fallen from 3 to 2.8 per cent. in Britain, and will fall further this year to 2 per cent.

Our forecast, which is also the consensus of independent forecasters, agrees that looking ahead to 2008 and 2009 inflation will also be on target. Since 1997, inflation has averaged 1.5 per cent.; it is half that of the previous decade. After examining the historical records, it is Britain's best inflation performance for a century. By holding firm to our commitment to maintain discipline in public sector pay, we will not only secure our 2 per cent. inflation target but create the conditions for maintaining the low interest and mortgage rates that since 1997 have been half the 11 per cent. average of the previous 20 years. We will not return to the old boom and bust.

In the last year, investment has grown by 6 per cent., and business investment by 7 per cent., with inward investment up 10 per cent. Ten years ago and for decades before, Britain's economy was held back by chronic under-investment; we had the lowest investment of the G7 countries. Now, alongside North America, Britain has the G7's fastest growing business investment—it has risen in real terms by 48 per cent. since 1997—and overall investment is now 17½ per cent. of our national income. This year, business investment is forecast to rise again by more than 7 per cent., and the figures that we are publishing today show that as a result of that sustained growth and investment we have closed the productivity gap with Japan and Germany, narrowed it with America, and halved it with France. From a platform of high investment, we can now equip ourselves as a country for the next challenge of the global economy: to raise the quantity and quality of investment in physical capital but also in human, scientific and intellectual capital.

I can also report that in the last year employment has risen, with 220,000 more men and women in work. It is now almost forgotten that in past decades Britain suffered higher unemployment not only than America and Japan but than France, Germany and the rest of Europe. But today, with unemployment falling and with 2.6 million more people in work, Britain has a higher proportion of men and women in employment than America, Japan and all our major European neighbours. The next stage in this Budget is to do more to equip British people with the new skills for the new jobs in the decade ahead.

With consumption forecast to rise in each of the next two years by 2¼ to 2¾ per cent., and investment and exports by more than 3 per cent., we expect that next year also, in 2008, alongside North America, our growth will again be the highest in the G7—between 2½ and 3 per cent., with the same rate of growth also in 2009. Under this Government, with stability in this as in every Budget the foundation of all we do, we have sustained growth year on year.

Just as our monetary discipline is the foundation for economic strength, fiscal discipline is the foundation of the strength of Britain's finances. Our first fiscal rule is that over the economic cycle Government current expenditures are paid by tax revenues. In this economic cycle, not only have we balanced current spending and revenues but I am able to report a surplus of £11 billion, demonstrating that for the first time in four decades Britain has met the golden rule. This contrasts with the economic cycle from 1977 to 1986, when the first fiscal rule, under the previous Government, was not met with a surplus of £11 billion but missed with a deficit of £140 billion; and in the previous cycle, from 1986 to 1997, the golden rule was missed by the previous Government with a deficit of £240 billion.

Our forecasts of the current balance from 2007-08 to 2011-12 are affected by one major change in the last year—the sharply lower levels of production and yet higher costs in the North sea, which have this year reduced tax revenues from £13 billion to £8 billion and for each year into the future cut them by an average of £4 billion a year. Even with this reduced revenue, we are on track in the new cycle to meeting the golden rule, with figures from 2007-08 of minus £4 billion, plus £3 billion, plus £6 billion, plus £9 billion and plus £13 billion surpluses for the years to come. And we have also met our second fiscal rule—that debt should be at a sustainable level—enabling us over the cycle to borrow to meet the country's investment priorities.

Debt is actually 44 per cent. of national income in America, 50 per cent. in the euro area and 92 per cent. in Japan, but in Britain, we expect debt from 2007-08 to 2012 to be 38 per cent., 38.5 per cent., 38.8 per cent., 38.8 per cent. and 38.6 per cent. in successive years—at all times meeting our second fiscal rule. That contrasts with a debt level of 44 per cent. that we inherited when we came to power, but we have both kept debt low and at the same time more than doubled capital investment in schools, hospitals and infrastructure from just £18 billion a year in 1997 to £43 billion of investment a year today.

Britain's net borrowing, which in the early 1990s went as high as 8 per cent. of our national income is this year just 2.7 per cent. In future years, it will be 2.4 per cent., falling to 2 per cent. and then falling to 1.8 per cent., 1.6 per cent. and just 1.4 per cent. Compared to a deficit equivalent to over £100 billion in a single year in the early '90s, the figure for this and future years will be just £35 billion—£1 billion less than forecast at the pre-Budget report—then falling to £34 billion, £30 billion, £28 billion, £26 billion and £24 billion. That means borrowing therefore over the economic cycle not for current consumption, but for essential investment in the future of our country. So having met both our fiscal rules, we can now take forward the final work for the next spending round to take us to 2011.

With interdepartmental reviews on youth services, disabled children, mental health, employment and the future of our regions and localities all nearing completion, we will now—in advance of the final expenditure allocations, which will be published in the autumn—set in place a national, regional and local consultation to discuss and debate issues that arise from the work in the reviews under way to build a shared national consensus around future priorities for our country. But I am also able to announce now reforms that will release resources for priority services.

In the pre-Budget report in December, I said that from now to 2011 asset sales would release £18 billion for front-line services, but because I can announce today the sale of the spectrum, a £6 billion sale of the student loan book and further financial and corporate sales at home and overseas, asset sales will rise from £18 billion to £36 billion. I have agreed with Departments savings in administrative costs worth £1 billion a year by 2011, which will also release money for front-line services. The same front-line services will benefit from below-inflation spending review settlements for the Department for Work and Pensions, Her Majesty's Revenue and Customs, the Cabinet Office, the Treasury, the Department for Constitutional Affairs and the Attorney-General's Department. That will release for front-line services £2 billion, and with efficiency savings of 3 per cent. a year, we release, in total, £26 billion a year by 2010 for front-line services.

Just over a decade ago, when unemployment and debt were high and as much as three quarters of all new public spending went to pay for debt and social security costs, it left only one quarter of new spending for health, education, transport, defence and policing. But because of our success in cutting debt by a quarter and claimant count unemployment by a half, those front-line services will, in the coming spending round, receive not 25 per cent. of all new spending as in the past, but 75 per cent. of all new spending.

In this new spending round, our aim has also been—in line with the Gershon report and with continuing reform—to ensure that resources for improving the front-line services, our service priorities, will continue to grow at the 4 to 4.5 per cent. yearly rate of this spending round.

These four major levers of change—better use of assets, cutting administrative costs, efficiency savings, lower debt and lower unemployment—will allow me to release new money for front-line priorities, and I can now set out total expenditures for each year to 2011.

In 1997, capital investment stood at just £18 billion. It will rise from the £43 billion of this year to £48 billion next year and then in successive years to £52 billion, £55 billion, £57 billion, and then £60 billion of capital expenditure—more than three times what it was in 1997—as we invest in our future. Consistent with the figures set out in the 2005 and 2006 Budgets and the most recent pre-Budget report, I can announce that total expenditure, which is £552 billion this year, will rise by £34 billion next year to £587 billion, and then rise in 2008 by £29 billion to £615 billion, rise in 2009 by another £29 billion to £644 billion, and then in 2010 by an additional £29 billion to £674 billion, as we continue year after year to invest in the future.

For the year to come, I can also allocate money to security and defence. At all times, as the Prime Minister and the Home Secretary have emphasised, we will put the security of the country first. So for the coming year, intelligence and counter-terrorism will receive an additional £86 million. Our budget for security and intelligence, which was just £1 billion in 2001, will now be for 2007-08 £2¼ billion. We owe a huge debt of gratitude to our armed forces. To support those who serve us with courage and distinction in Afghanistan, Iraq and in other demanding international commitments, I am allocating the Secretary of State for Defence an additional £400 million for this year alone.

For the coming year starting next month in April, I can also confirm that the money available for investment and reform in the NHS in England will be £8 billion more than this year. It is the biggest cash increase ever. It is a cash rise of 10 per cent.—7 per cent. in real terms. For the future years from 2008 to 2011, allocations will be made in the spending review later this year, but taking the whole of the United Kingdom together, I expect total additional expenditure on the NHS from April this year to be almost £10 billion above last year—also a 10 per cent. rise in national health service expenditure.

I have examined a proposal to introduce what is called a third fiscal rule, but I can tell the House that it would require us to cut spending this year alone by £21 billion, and I have therefore rejected that rule.

In setting the right balance between tax, spending and the stability of the economy, we will not take risks with or break from the stability essential to our long-term economic performance. Let me be absolutely clear: with the economy now growing strongly, faster than any other major economy, this is not a time for a fiscal loosening, and the changes that I make today will be broadly neutral for the public finances and overall, which is the right decision for Britain at this time in the economic cycle.

But it is also right to proceed today with major reforms and modernisation that will prepare and equip Britain for all the long-term challenges ahead—reforms that are now possible because they build on the higher employment, investment and the greater stability of the last 10 years, and reforms that focus on the three major priorities vital to our future. The first is to promote long-term investment and environmentally sustainable growth. That is necessary now and in the future to Britain's success in the global economy. The second is to encourage work and to reward savings, which is vital to the week-to-week prosperity of every family in the country. The third is to support and strengthen families. That is essential to the welfare of parents and children and the stability of family life.

First, to lead in global competition—and particularly to secure our place in the high value-added, investment-driven growth sectors of the future, from modern manufacturing and the creative industries to business and financial services and the City—Britain must champion open markets, flexibility, free trade and an open and inclusive globalisation, not protectionism. Here the right policy for industry is to combine the most modern and flexible competition regime—including, as announced today, the further extension of risk-based regulation, into employment tribunals—with the most effective incentives and support for British investment and innovation.

My view is that, in all the advanced industrial economies, public and private investment in the great new drivers of growth—innovation and education—will need to rise towards 10 per cent. of national income. As part of our plan to double investment in science, I can announce that in the next four years public investment in science will rise from £5 billion this year to £6.3 billion by 2010—a 25 per cent. cash increase in the science budget of our country.

The Secretary of State for Trade and Industry is also announcing today a £100 million competition for Britain to lead in high-tech innovation, challenging universities and businesses to come together, from medical research to environmental transport, to convert British scientific breakthroughs into British commercial successes and jobs.

In 1997, I cut corporation tax from 33p to 31p and then to 30p. Having continued to look carefully at the requirements for a modern corporate tax system for the global economy, I propose the following changes that reflect the increasing importance in investment decisions of research and development, skills, intellectual property and environmental innovations. I propose to modernise the system of capital allowances —many of which were first introduced for the needs of the post-war economy—by simplifying them to just two categories based on how long an asset will last. I will provide more generous relief for long-life assets, raising the relief from 6 per cent. to 10 per cent., at a cost to the Treasury of £380 million in 2009; I will phase out the relief worth £230 million originally intended for industrial buildings but now poorly targeted; and I will align allowances for plant and machinery with the economic rate of depreciation at 20 per cent.

I will increase the value of the main R and D tax credit by an extra £100 million, and expand the scope for business to draw on environmental capital allowances by an extra £40 million, while leaving the overall tax rate for North sea companies unchanged. From April 2008, for all businesses, I will put in place a new annual 100 per cent. investment allowance of £50,000.

Because our goal is and will continue to be the most competitive business tax regime of the major economies, I have decided to cut mainstream corporation tax from April 2008 from 30p down to 28p—a rate lower than America, Germany, France, Japan, and all our major competitors—making Britain's corporate tax regime the lowest of all the major economies.

Changes that I will announce in this Budget will also improve the position of the self-employed. But I need to act to deal with individuals artificially incorporating as small companies to avoid paying their due share of tax—a practice that, if left unaddressed, would cost the rest of the tax-paying population billions of pounds. I will take action in a way that will not raise the tax burden on the self-employed and small businesses overall.

To reduce the tax difference between self-employment and small company incorporation, I will raise the small companies rate in three stages from 20p this year to 22p. I will recycle all those revenues to legitimate small businesses investing for the future. Small firms will be able to claim the new 100 per cent. relief for new capital investment up to £50,000, a 175 per cent. tax credit for R and D, and the new tax credit for environmental investment. A small company with profits of £150,000 and investing £50,000 of that will effectively pay tax of just 15 per cent. A firm investing the same from profits of £100,000 will pay tax of 11 per cent.—lower than today.

I have one further announcement on business. When the Secretary of State for Northern Ireland and I meet all the Northern Ireland parties tomorrow morning, we will announce details of a new Northern Ireland innovation fund, a new fund for industry and jobs to be available for the restored Executive that we all want to see.

Six months ago, when we published the Stern report, we set a framework for environmental action that combined a call to personal and social responsibility with European and international co-operation. Since then, we have secured support for a strengthened European carbon trading scheme on the road to a global scheme, and a new agreement for 2020 on cutting European emissions by at least 20 per cent. and potentially 30 per cent. I can also report that we have agreed bilateral partnerships with China on clean coal, Brazil, Mozambique and South Africa on biofuels, India on clean energy investment, Mexico on carbon markets, and Norway on carbon capture and storage. The Secretary of State for Trade and Industry is announcing today that Britain will launch a competition to go ahead with our first full-scale carbon capture and storage demonstration.

Britain will also lead the way in helping developing countries to address climate change. I can announce financial support of £50 million for a path-breaking 10-country initiative across central Africa to prevent the destruction of the second largest rain forest in the world. Led by Nobel prize winner Wangari Maathai, it will help 50 million people in those 10 countries whose livelihoods are now under threat.

Environmental action also requires us to co-operate internationally in new ways. To help meet our commitment to international poverty reduction through environmental protection, I will allocate to the environmental transformation fund, jointly run by the Secretaries of State for International Development and for Environment, Food and Rural Affairs, a total of £800 million for the coming spending round.

At home and abroad, the test that we must apply is what is the most environmentally effective, economically efficient and socially equitable way of reducing emissions: first, through better information and incentives; secondly, through higher standards and investment.

Homes account for one quarter of carbon emissions: our objective is for low-carbon homes benefiting the climate through lower emissions, and consumers through lower bills. Having already announced measures to speed up home insulation and to design out energy-wasting products, we have been consulting the banks and building societies and encouraging them to create a new market of mortgages for immediate capital investment in energy efficiency that would cut consumption and bills and, in the end, not only pay for itself but increase the sale value of the home.

To play our part, we are offering grants of £300 to £4,000 for pensioners and others installing insulation and central heating. From next month, we will increase by 50 per cent. microgeneration grants for homes. I can confirm that until 2012 all new zero-carbon homes up to £500,000 will be exempt from stamp duty. I have asked the Office of Gas and Electricity Markets to examine how green homes can benefit more from the prices paid when they become not just sources of clean energy for themselves but sell energy back to the grid.

I am placing in the Library of the House of Commons the representations that the Foreign Secretary, the Minister for Europe and I are making to European Ministers for a Europe-wide decision that would reduce the rate of VAT from 17.5 per cent. to 5 per cent. on energy-saving and environmentally friendly products in the home.

Business accounts for 40 per cent. of emissions: our objective is that we have not only the most economically competitive but environmentally sustainable companies too. Since 1997, business and Government together have achieved a 25 per cent. reduction in the carbon intensity of the economy. To complement the new environmental tax credit that I have just announced, the advice, support and incentives available from Business Link and our regional development agencies to small businesses for environmental improvement, innovation and energy audits of their work will rise from £140 million this year to £240 million in the coming year.

To encourage recycling and to reduce landfill, the landfill tax will, from April next year, rise by £8 each year to 2011. To reduce the environmental impact of quarrying, the aggregates levy, which has been frozen since its introduction, will rise in April 2008 from £1.60 to £1.95 per tonne. Those measures, our membership of the European emissions trading scheme and the inflation increase that I propose from next April in the climate change levy, will together each year contribute 16 million tonnes of carbon reductions.

As recommended by the Barker report and today by the Lyons report, and in line with representations from the Federation of Small Businesses, commercial property lying empty should not continue to be given such generous business rate relief, particularly because that leads to higher rents in the areas with highest demand. To encourage the better use of commercial premises, I will restrict the relief available for empty industrial properties to six months, and for empty offices and retail to three months. There will be special exemptions for charities.

Transport accounts for a quarter of emissions: our objective for Britain is the lowest carbon cars using the least polluting fuels. Average new car emissions are around 167 g of carbon dioxide. A medium-term objective is 100 g per kilometre. We want Britain to lead in developing the next generation of low and no-carbon vehicles and fuels. The Secretary of State for Transport and I have invited Sir Nicholas Stern and the vice-chancellor of Aston university, Professor King, to report to us on the energy saving potential of innovation in this area.

Renewable transport fuel obligations mean that biofuels will, by 2010, account for 5 per cent. of all fuel in road vehicles, and by 2020 potentially 10 per cent. So I am extending to 2010 the biofuels duty differential worth 20p per litre—a fuel duty discount of 40 per cent. I am also extending to 2012 the biogas incentive, worth 40p per litre—a discount of more than 60 per cent. For this year I will maintain the differential for rebated oils. I can also announce that we will triple our funding for targeted enforcement against unfair competition from haulier companies from outside the United Kingdom.

We inherited a one-band system of vehicle excise duty in 1997. Britain now has environmentally graduated bands. That is one reason why the proportion of least polluting cars on our roads has risen by 30 per cent., while that of the most polluting cars has fallen. So there are potential gains from enhancing the incentive. In addition to maintaining a zero rate for the lowest band, aligning petrol and diesel rates at the diesel rate and raising the rates by £5 each year for the next three years, and for band F by £10 this year, I propose an immediate 30 per cent. cut in band B from a top rate of £50 down to £35 for the most fuel-efficient cars. That will be matched by moving the top band 30 per cent. higher to £300, and then again to £400 next year. Taken together, those measures will cut vehicle emissions since 1997 by 2 million tonnes. For the coming year I will set fuel duty rises at 2p a litre, for 2008 at 2p, and for 2009 at 1.8p, but I will defer this year's annual fuel duty increase by six months to October.

I have had representations to put VAT on airline tickets—a 17½ per cent. rise in the cost of airline travel. I have investigated the detail of that proposal. It gives me no pleasure to have to tell the House that the substance of the measure has not been properly thought through. It would apply only to domestic flights, business would be able to claim back the VAT, and even by 2020 it would save just 50,000 tonnes—fewer savings in one year than achieved by the climate change levy in just one week. So I have rejected the proposal in favour of the 6 million tonnes of carbon saving achieved by the fairer and more environmentally efficient measures that I am outlining in the Budget today.

I propose only the normal indexation of alcohol duties, with one exception. From midnight on Sunday, beer will rise by 1p a pint, cider by 1p a litre, wine by 5p a bottle and sparkling wine by 7p, but for the 10th Budget in a row I will freeze duty on spirits. While I will go ahead from 6pm tonight with the annual inflation rise on a packet of 20 cigarettes—of 11p—I want us to do more to support the health advice campaign initiated by my right hon. Friend the Secretary of State for Health, with a new incentive to encourage people wishing to give up smoking. For a year from 1 July, for nicotine replacement and other products that help smokers to quit I am cutting VAT to the lowest I can, from 17½ per cent. to 5 per cent. I propose to align the bottom two rates of gaming duty at 15 per cent., and for the largest casinos to set a 50p rate.

Our culture of volunteering and giving defines Britain as a fair and compassionate society. To help small local community organisations, my hon. Friend Edward Miliband, the Parliamentary Secretary, Cabinet Office and Minister for the third sector, is announcing for the years to 2011 a new fund for local communities worth £80 million. Hundreds of millions of pounds worth of giving is eligible for tax relief through gift aid, but is not currently claimed. My right hon. Friend the Chancellor of the Duchy of Lancaster and I will consult the charitable sector on measures that we will fund to increase take-up of gift aid, and in the run-up to the spending review my right hon. Friend the Secretary of State for Culture, Media and Sport and I will examine the help we can give the churches and heritage buildings that are at the heart of so many of our communities.

I turn to the tax incentives with which we propose to help more people into jobs, and to make work pay. More than 1½ million low-income workers in Britain receive the working tax credit, worth to them on average £48 a week. In making work pay, we ensure that people on low incomes get more benefit from the working tax credit than either the minimum wage or any other tax measure, whether it be the 10p rate or personal allowances.

If I invested a billion pounds in helping low-income workers by raising personal allowances, they would be only 68p a week better off. If I used the same money to lower the 10p rate, they would be just 67p a week better off. But the use of the same money to extend the working tax credit means that they are £7.10 a week—£370 a year—better off. That is a clear incentive to take jobs, to gain skills, and to work your way up from a lower-paid to a better-paid job.

This Budget will invest over £1 billion a year in raising the value of the working tax credit, so that—building on the minimum wage of £5.52 from October—for the parent in full-time work with one child it will rise to £7.70 per hour. Because of the working tax credit, that is £290 for a 35-hour week.

Since 1997, lone-parent employment has risen from under 45 per cent. to over 56 per cent., and 300,000 more lone parents are now in work. In addition to helping them by increasing the working tax credit, I will extend the £40 a week in-work bonus paid for their first 12 months in work. In London the bonus will be extended to £60, and for up to 50,000 workless parents undertaking training we will extend access to free child care.

With this additional support to make work pay and our new conditionality, announced by my right hon. Friend the Secretary of State for Work and Pensions a few days ago, and building on the successful employment partnerships in the new deal, we are now able to announce a partnership for jobs with our major retail companies—Tesco, Sainsbury's, Asda, B&Q and Marks and Spencer—and the British Retail Consortium: an agreement that in every part of the country, unemployed men and women who successfully pass work trials or induction courses will be considered for jobs by those leading firms. It is a new and innovative partnership that will, across the sector over the coming five years, help create 5,000 jobs in Wales and 10,000 in Scotland. In total, for Britain it will help 100,000 men and women to find employment in our country.

Since 1997, the number of 16-to-24-year-olds in full-time education, employment or training has increased from 5.2 million to 5.8 million. For those who have fallen through the net, over the next spending period we will do more. We are setting aside new funds today, so that 50,000 out-of-work 16-to-17-year-olds who sign activity and learning agreements will now receive a training wage in return for gaining skills. For small companies that take on an employee needing to acquire the most basic skills, we will also offer £2,000 training help per employee, and in some cases £3,000 for training.

There are 125,000 employees who, through no fault of their own, lost their work pension when their employer became insolvent,. My right hon. Friend the Secretary of State for Work and Pensions is announcing that he will extend the financial assistance scheme from its present budget of £2 billion to a total of £8 billion. Every one of those 125,000 workers will now receive help. Reporting later this year, my right hon. Friend will also investigate in full the assets within the affected schemes, and how those funds can also now help those who have lost their pensions.

In meeting our objectives to support families and children, I have also received representations for the return of the married couples allowance, and for a transferable tax allowance between husbands and wives with children under five. On closer inspection, I have discovered that such a proposal would penalise 3 million widows and their children who would be denied the allowance, and would also penalise wives or husbands who had been left by their spouses. I have also discovered that the transferable tax allowance earmarked for families with children under five would be available to just under 1 million married couples. I can tell the House that, far from rewarding marriage, it would exclude the vast majority of the 11 million married couples in this country, and 11 million children would be excluded and left out of this help.

Marriage is not supported by penalising most married couples and 11 million children. It is right to recognise marriage in the tax system, but in ways that do not penalise children through the arrangements that we make for assets to be transferred free of tax between husband and wife in inheritance tax and capital gains tax. I can announce that the annual tax exemption for capital gains will rise from £8,800 to £9,200, and will be £18,400 for married couples. I can announce that the inheritance tax allowance, which is £285,000 today, will rise in each year and will in 2010 be increased to £350,000, ensuring that 94 per cent. of estates do not pay inheritance tax.

I am also today making changes in VAT, which will especially help grandmothers and grandfathers living with their sons and daughters. I can announce that for a specified list of alterations to housing, to support the needs of older people I will again reduce the rate of VAT, from 17.5 per cent. to 5 per cent.

For many families, especially young couples, the major concern is affordable homes. To further our ambition for this Parliament and the last one of 2 million new owner-occupiers, the Secretary of State for Communities and Local Government is launching the first stage of a new shared equity competition that will bring homes within the reach of first-time buyers.

I also want to send a signal about the importance we attach to encouraging savings, so while maintaining our savings rate at 10p, I will extend for the 17 million men and women with ISAs—individual savings accounts—the amount of cash that can be saved tax-free from £3,000, raising it by 20 per cent. in April next year to £3,600.

After independent taxation was introduced by the previous Government on income, there has been general agreement that the best way to help the income of families with children is to raise child benefits and to help all children. For the first child of all parents, child benefit was £11 a week in 1997. This year it is £17.45. I can announce today that we will raise child benefit annually for the first child in three successive stages to 2010—raising child benefit by a total of 15 per cent. to £20 for the first child. So child benefit, which was £575 a year in 1997, will by 2010 be more than £1,000. For 6 million families on both child benefit and child tax credit—that is the vast majority of families—the minimum payment, which was just £11 in 1997, will rise to £31; that is a rise from £575 a year to £1,600 a year.

I can also do more to help those who need it most. Help for the poorest children, which in 1997 was £28 a week and is today £61, will now rise in three successive stages by more than 25 per cent. to £75 a week, almost three times the 1997 level. That measure will, with others, lift out of poverty 200,000 more children. With children's credits offsetting income tax liabilities, the effective point at which a family with two children starts paying income tax, which was £16,000 in 1997 and which is £22,500 now, will be £24,250 in April 2009—tax credits therefore effectively wiping out income tax liability until earnings of £450 a week.

We will match financial support for children with more help for parents to do the best by their children. I have set aside today funds for expanding ChildLine, Parentline Plus and the services parents and children use and rely on. We now know the importance of early-years learning in developing the talents of children and the significance of investment early to determine the qualifications and success that they have later. So the Secretary of State for Education and Skills and I have today made available the funds for each of the years to 2010 to honour our promise that there will be six children's centres in the typical constituency, and 3,500 children's centres in total. We have also set aside funds for the years to 2010 so that we can expand the numbers of hours of free nursery education, meeting our promise to raise nursery hours for every three and four-year-old from 12½ hours to 15 hours a week. Also, to encourage the community use of schools sports facilities we will remove the VAT restriction and enable academies to make their sports facilities available to their local communities.

I am also able today to take several hundred thousand of today's pensioners out of income tax. When we came to power, elderly citizens started to pay income tax when their income exceeded £5,200. Today, no tax is paid before an income of £7,280. For those under 75, the tax-free allowance will rise in three stages from £7,280 to £8,990 to £9,500 and then to £9,770 in 2011—a tax-free allowance of almost twice as much as in 1997. For those over 75, the tax-free allowance will rise annually from £7,400 to, by 2011, £10,000. Couples under 75 will have a tax-free married allowance up to £19,540, and for a couple over 75 up to £20,000. Measures in this Budget mean that we will lift out of income tax a total of 600,000 pensioners in this country. For elderly people with either no works pension or small works pensions, I can confirm we will raise the pension credit guarantee from £114 a week this year to £119, rising to £130 in 2009-10. The pension credit will be raised by earnings as we move towards our commitment to link the state pension to earnings.

I have focused support on families by raising child benefits and child tax credits and taken 200,000 more children out of poverty. I have done more to support pensioners by raising the level of tax-free allowances. I have improved work incentives for lower income families with children by raising the minimum income from work to make work pay—to, for many, almost £300 for a 35-hour week. My aim in all measures today is a fair system for pensioners and families with children.

Having put in place more focused ways of incentivising work and directly supporting children and pensioners at a cost of £3 billion a year, I can now return income tax to just two rates by removing the 10p band on non-savings income. I can also announce that the point at which people start paying top rate income tax will from April 2009 be an annual income not of £38,000, but of £43,000; and I will align the income tax system with the national insurance system, with its ceiling set at the same threshold of £43,000, thereby creating a tax system for income that has just two rates and two thresholds. As a result of today's measures, 58 per cent. of pensioners over 65 will not pay income tax; 6 million out of 7 million families with children are better off; and the incentive to work is increased by, for many, up to £350 a year.

With the decisions that I have made today, I am also able to announce that we will invest more in our schools and education. Separate announcements will be made later for Scotland, Wales and Northern Ireland. Education spending in England, which was £29 billion in 1997 and is £60 billion this year, will be £64 billion next year, rise to £67 billion and then £70 billion, and then rise in 2010 to £74 billion. There will be average rises of 5 per cent. cash each year for the next three years, enabling us to provide one-to-one tuition for 600,000 children, do more to double apprenticeship numbers to 500,000, increase higher education student numbers to 1.2 million, and make every school an extended community school. Also, cash-spending per pupil, which was £2,500 in 1997, will from now to 2010 rise by a further 20 per cent.—10 per cent. in real terms—to £6,600 per pupil, thereby continuing to narrow the gap in investment per pupil between state and private schools. Education spending will rise as a share of national income from the 4.5 per cent. that we inherited in 1997 to 5.6 per cent. in 2010. Also, as the Secretary of State for Education and Skills will set out, by changing the education leaving age we will for the first time in our country's history make education a right for every young person until the age of 18.

I have taken 600,000 pensioners out of tax, raised child benefit in three stages to £20, cut corporation tax from 30p to 28p and increased education spending to the highest level ever. This is a Budget for Britain's families; it is a Budget for fairness; it is a Budget for the future; and I have one further announcement. With the other decisions I have made today, we are able to hold to our pledge made at the election not to raise the basic rate of income tax. Indeed, to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p, the lowest basic rate for 75 years. I commend this Budget to the House.