Pre-Budget Report

Oral Answers to Questions — Prime Minister – in the House of Commons at 12:32 pm on 9th December 2009.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer 12:32 pm, 9th December 2009

Today's pre-Budget report takes place at a critical time for our economy and for our country. Governments across the world have taken co-ordinated steps to deal with the biggest financial crisis for over half a century. In the UK, our action has reduced the impact of this downturn on families and businesses, but there is still much uncertainty, so the task today is to ensure the recovery and promote long-term growth.

To promote growth, we need to invest in the dynamic sectors of the future-in digital, bio and low-carbon technology-and I will announce measures that will support those industries. To promote growth, we also need to invest in the skills of young people to prevent a lost generation of youth unemployment. I will announce measures to guarantee work opportunities for the young. To promote growth we also need to maintain support until the recovery is secured and to halve the deficit over four years, in an orderly way that does not threaten investment vital to our future. The choice is between going for growth and putting the recovery at risk-to reduce the deficit while protecting front-line services, or cuts that put those services in danger. The choice is between two competing visions. This pre-Budget report is about building a fairer society and securing opportunity for all.

When I delivered the pre-Budget report just over 12 months ago, we were faced with the sharpest and most widespread global downturn in generations. The near collapse of the financial system quickly fed through into the wider global economy. World trade went down sharply and unemployment sharply up across the world. Families and businesses in every continent felt the pain.

Governments around the world intervened to rescue the banking system. We supported our economies with tax cuts, increased Government spending and co-ordinated action to lower interest rates and to boost money supply. No choices were easy choices; indeed, some even argued that we should not have acted at all. But as a result of those actions, there is growing evidence that global confidence is returning. The US housing market, which triggered the crisis, is stabilising-so is the housing market here. Global manufacturing is up almost 6 per cent., world stock markets by 30 per cent.

As the world's largest financial centre, the turmoil in the banking sector has had a substantial effect on the UK. With more home owners here than in Europe, a global slump in property prices hit confidence hard in this country. As the sixth biggest exporter of goods and the second largest exporter of services, our trade has been hit. But as demand picks up abroad, as is already happening, British businesses will benefit. So I am confident that the UK economy will start growing by the turn of the year.

However, across the world, there remain risks to recovery. Oil prices are volatile. Recent market reaction to financial problems in Dubai highlights just how fragile world confidence remains. So while I am confident that the UK economy is on the road to recovery, we cannot be complacent. We must continue to support the economy until recovery is established. To cut support now could wreck the recovery. That is a risk that I am not prepared to take.

This time last year, we recognised the exceptional trading difficulties that businesses here were facing. In the past, inaction by Government to support firms led to widespread-and avoidable-business failure. I was determined that we did not repeat that mistake. So in an unprecedented move, I cut VAT to 15 per cent. for a year, to put more than £11 billion into the pockets of consumers and retailers. That countered the impact on businesses of the global credit squeeze and the collapse in consumer demand when it was needed most. I can confirm that VAT will return to 17.5 per cent. on 1 January, as planned. I have no other changes in VAT to announce.

To ease problems with cash flow and access to bank lending, we deferred tax rises and extended tax allowances for businesses. Because we chose to intervene, the rate of business insolvencies is far lower than would have been expected. In the recession of the early 1990s, proportionally twice as many businesses went under. While some measures such as the VAT cut and the working capital and trade credit insurance schemes are finishing, it is right to extend others while uncertainty remains. The time-to-pay scheme has helped more than 160,000 businesses spread their tax payments over a timetable that they can afford. They can get additional time when they need it most and, because firms continue trading, the likelihood of companies paying the tax owed increases, so I have decided that the scheme will be extended for as long as it is needed.

Last year, I temporarily increased the threshold for empty property relief to help small businesses. I can announce that it will be extended, so that for 2010-11, empty commercial properties with a rateable value below £18,000 will be exempt from business rates. Seventy per cent. of all empty properties will continue, therefore, to be exempt. I have one further announcement to help small businesses. I have decided to defer the increase in corporation tax for smaller companies. That will leave the 2010 rate unchanged for 850,000 small businesses, helping them until the recovery is secured.

In the early 1990s, hundreds of thousands of families lost their homes. I did not want to see that repeated, so we introduced a range of measures to allow families to stay in their homes and to help young couples on to the housing ladder. As a result, repossessions are now running at around half the rate of the recession of the early 1990s. By the time the stamp duty holiday finishes at the end of this month, I expect 240,000 home buyers to have been helped. But with unemployment still likely to rise, it would not be right to withdraw all support now for home owners.

Last year I improved the scheme giving support for mortgage interest, to provide better cover for mortgage interest payments for those who had lost their jobs. More than 220,000 people have been helped so far. I have decided that that additional support will be extended for a further six months. There will, of course, be a cost to that and other continued Government support, but the cost to families of losing their home would be immense, and it would be a false economy for the country. The more successful these measures are in restoring confidence to the housing market, the lower the cost will be to the Exchequer.

The best way of avoiding repossessions is to help people to stay in work or re-enter the labour market quickly. Such a deep global recession was always going to have a damaging impact on employment. The bleak news last week that Corus is to shut its Teesside plant underlined the fact that the reduction in global demand will have an impact on jobs for some time to come. That is why, yesterday, I agreed with the Secretary of State for Business, Innovation and Skills to provide £30 million from within existing resources to help industry in Teesside.

No Government, even during times of the strongest economic growth, can prevent every job loss. Unemployment has risen in the UK and will keep rising for some time, but it remains lower than it was in France, Canada, the United States and the euro area. In fact, even now, there are some 2.5 million more people in work than there were in 1997. Because of our values of fairness and opportunity, promoting employment has always been, and remains, a top priority for this Government. Unemployment can never be a price worth paying.

As the global recession hit our country, we responded by bringing forward investment in vital infrastructure projects to protect jobs, and finding an additional £3 billion to help people to find new work more quickly. We expanded the Jobcentre Plus network and offered support through the rapid response service to staff in 3,000 firms hit by redundancies. Help including training, volunteering and recruitment subsidies has been offered for those still unemployed after six months.

It is clear that we are making a difference. Unemployment has increased much less than expected by independent forecasters. If we had seen the same rate of job losses, relative to GDP, as we saw in the early 1990s, four times as many people would have lost their jobs. Despite the severity of the global recession, the claimant count today stands at 1.6 million, compared with the 3 million reached in 1985 and 1992. Our comprehensive support means that a short spell in unemployment is not turning into a lifetime on benefits, as happened in the recessions of the '80s and '90s. Indeed, more than 3 million people have been helped off the claimant count in the past year.

Despite this support, there are groups who need more help. Past recessions have had a very damaging impact on young people, who should have been starting their working lives, but instead were unemployed. Our package of support for the young already includes a place for every 16 and 17-year-old in education or training. I intend to provide funding so that this guarantee will be available to school leavers again next September. In the Budget, I went further and announced that every 18 to 24-year-old would be guaranteed work or training after 12 months out of work. I do not want them to have to wait that long, however, so I am going to bring that forward. I have decided that, from next month, no one under 24 needs to be unemployed for longer than six months before being guaranteed work or training.

In the past, older people were allowed-indeed, often encouraged-to drift into permanent unemployment, but we cannot afford to write off their experience. So we will ensure that the over-50s receive specialist and tailored support to equip them with the confidence and skills they need to get a job. We also want to encourage those who want to stay working part-time after they reach retirement age, and to make work pay for everyone, regardless of their age. To make it easier for those over 65 to receive the working tax credit, we will reduce the minimum number of hours they need to work to be eligible.

We chose not to let people sink when they lost their jobs, but to intervene to help them to stay afloat. That is good for the individuals and their families, and also for the wider economy, boosting spending and, in turn, creating new jobs. The more successful our targeted support, the more likely that the rise in unemployment will be lower than expected and therefore cost the country less, as has already happened. Government action has made a real difference.

The worldwide recession has had an impact on all families, and it is often the most vulnerable who are affected the most, including those on modest incomes who have been put on shorter hours. The Government's flexible tax credits system has risen to the challenge of the downturn, delivering substantial support to families to compensate for that loss of pay. I can tell the House that so far this year, because of tax credits 400,000 families whose income has fallen have benefited from that extra help-on average by £37 more per week. For those who doubt the value of tax credits, here is the proof that they work.

The recession has also had other effects. For the first time in half a century, the retail prices index has been negative for much of the year. That helps families with the cost of essential goods, but many benefits and tax credits are also linked to the September RPI. RPI inflation last September was minus 1.4 per cent. That would have meant no increase in those benefits in April. I do not believe that such a freeze would be fair, so I can confirm that the basic state pension will not be frozen, but will rise by 2.5 per cent. in April-a real-terms increase of nearly 4 per cent.

I can also tell the House that, from the time of the Budget, I will cut bingo duty from 22 to 20 per cent.- [Interruption.]Obviously a popular measure. I also want to help families in receipt of other benefits linked to the inflation figures, such as child benefit and some disability benefits, so those benefits will rise by 1.5 per cent. in April.

We are committed to helping people back into work, and making work pay. I have decided to roll out across the country a guarantee that anyone in work will always be better off than they were on benefits. If that is not happening already, they will be guaranteed extra money from the Government, making sure that work really does pay for everyone and encouraging more people to re-enter the labour market. So we are continuing to provide targeted support for people and businesses, as we secure the recovery.

Across world economies, the first half of this year saw a sharper deterioration than had been expected. That was also true here in the UK. Up to the third quarter of this year, the global recession has meant a cumulative economic contraction of 3.2 per cent. in the United States, 5.6 per cent. in Germany, 5.9 per cent. in Italy and 7.7 per cent. in Japan. Over the year as a whole, the UK economy is expected to have contracted by 4.75 per cent. this year, but as I forecast at the Budget, I expect a return to growth in the fourth quarter.

Next year, I forecast growth of between 1 and 1.5 per cent., as I said in the Budget. Because of the underlying strength of our economy, the pick-up in world demand and the substantial spare capacity opened up by the recession, my Budget forecast, broadly in line with that of the Bank of England, of growth of 3.5 per cent. in 2011 and 2012 remains unchanged. This growth, however, will come from more varied sources and not depend as much on the financial sector, which will, of course, remain an important part of our economy. Growth will be driven by fresh opportunities to export as the global economy expands and by investment by businesses in the key industries of the future. It is growth that I am determined to support in this pre-Budget report.

Partly because of the reversal of the VAT cut, consumer inflation will rise from 1.5 per cent. to around 3 per cent. early next year, before falling back. The Bank of England expects inflation then to fall below target and reach 1.5 per cent. by the end of next year.

The global recession has had an impact on the public finances in every country, with tax revenues falling and spending increasing to support the economy. Here in the United Kingdom, the financial sector, which provided over a quarter of all corporate tax revenues, has been hard hit. Revenues from stamp duty and income tax are sharply down and it will take time for tax revenues to recover.

Our steps to maintain stability in the banking sector have also had an impact on the public finances. At the Budget, given the extreme uncertainty at the time, I made a provisional £50 billion estimate of the possible taxpayer losses from our interventions in the financial sector. Those risks have now significantly diminished because of the successful intervention of Governments to support the global financial system. Lloyds Banking Group, for example, has been able to raise capital from the markets and is not receiving Government support in the asset protection scheme. We have also restructured RBS's participation in that scheme, so there are no expected losses for the taxpayer. Other banks are also in a much more stable situation. As a result, I can revise down my provision for any potential impact on the public finances from £50 billion to around £10 billion, but our objective remains to get all the taxpayers' money back, on top of the fees charged for supporting banks through this crisis.

I have made clear that support during the downturn must go hand-in-hand with steps to rebuild our fiscal strength once recovery is firmly established. Backed by legislation introduced today, the Government will ensure that public sector net borrowing as a share of GDP falls every year and is more than halved by 2013-14, and that net debt as a share of GDP is falling in 2015-16. I believe that that is a sensible timetable. To consolidate too soon, too quickly or too indiscriminately, as some have proposed, would risk delaying the recovery and threatening a longer recession. When Japan tightened prematurely in the 1990s, it pushed the economy back into recession, making debt and deficits higher, not lower.

Taken as a whole, this pre-Budget report secures a fall in borrowing each year until 2013-14 to meet our deficit reduction plan. In the Budget, I forecast that public sector net borrowing would be £175 billion this year and would then fall to £97 billion in 2013-14. Because of the severity of the recession, my forecast for this year's borrowing is £178 billion. Next year it will fall to £176 billion. As the economy recovers and the deficit reduction plan starts to take effect, it will fall to £140 billion and then to £117 billion, and will reach £96 billion in 2013-14-a slightly lower level than I forecast in April-before falling to £82 billion in 2014-15. As a share of GDP, borrowing will be 12.6 per cent. this year, 12 per cent. next year, then 9.1 per cent, then 7.1 per cent., and 5.5 per cent. in 2013-14. It will fall to 4.4 per cent. in 2014-15. If we exclude public sector investment, or capital spending, and take the economic cycle into account, the budget deficit is expected to fall to 1.9 per cent. at the end of the forecast period.

Public sector debt has increased in every G20 country as a result of this global recession. Net debt as a share of GDP is expected to reach 82 per cent. in Germany, 83 per cent. in France, and 85 per cent. in the United States. As a result of the lower provision for possible losses in our financial sector this year, I can forecast that net debt will reach 56 per cent. of GDP. It will then rise to 65 per cent. next year, and to 78 per cent. by the end of the forecast period in 2014-15. However, net debt as a share of GDP will fall the year after that. Even at its peak, debt will be in line with the average for the other G7 economies.

I believe that we have made the right choices to help the country through the recession when we could have chosen to do nothing. We also need to make the right choices to reduce the deficit. In the Budget, I set out how we would do that by encouraging growth now and in the future, with fair tax increases and with tighter control of public spending. I now want to set out further details of how we will achieve this deficit reduction plan.

The combination of the talents of the British people and today's low inflation and low interest rate environment provides us with a strong platform to meet our ambition of long-term sustainable growth-so does having the most flexible labour market in Europe, the lowest rate of corporation tax in the G7, and a competition regime that is among the best in the world. That is why ours is judged to be one of the best locations in which to do business and attract inward investment. I am determined to build on those strengths today by maintaining our leadership in the low-carbon sector, boosting investment in our national infrastructure and skills, and supporting our world-class high-tech industries.

In line with the overall neutrality of this pre-Budget report, two thirds of the targeted measures that I shall now announce come from within existing budgets. If businesses are to expand and grow, they need access to credit. Following the intervention by the Government, total bank loans to businesses today are above where they were when the crisis hit in 2007. We have seen over £50 billion in new business loans from RBS and Lloyds alone. But unsurprisingly, at the same time other businesses have reacted to the uncertainty by repaying existing loans, which is why net lending as a whole is down. I am very aware that some small and medium-sized businesses still encounter difficulties in obtaining loans. As recovery gets under way, we shall need to ensure that SMEs obtain the credit they need. We must work with the banks to ensure that that happens. We are also working to secure a contribution from major banks towards a £500 million growth capital fund which will invest specifically in small businesses. We will announce further details shortly.

In January we launched the enterprise finance guarantee, which has already offered Government guarantees on bank loans to over 6,000 businesses. Today I have decided to extend the scheme for a further 12 months, which will guarantee a further £500 million of loans to small businesses.

This week sees the start of the UN conference on climate change, an historic opportunity for the reaching of a universal agreement to tackle global warming. We can be proud that the UK has led the way: on meeting Kyoto targets, introducing carbon budgets, and recognising that developing countries need help to reduce their own emissions. Tackling climate change will bring new opportunities for new low-carbon industries, and that will create the high-skilled, high-paid jobs that are crucial to our future prosperity.

Today I can redirect existing funding and invest in wind power, renewable energy and other green industries. Through the innovation investment fund and the Carbon Trust's venture capital scheme, we will support at least £160 million of public and private investment in low-carbon projects. We will also invest £90 million in the European Investment Bank's new 2020 fund, which will enable €6.5 billion of finance to be made available for green infrastructure projects. I can also tell the House that we will double our commitment to finance four carbon capture and storage demonstration projects, which will make us world leaders in that vital area.

As well as investing in clean and low-carbon technologies, we must all become more energy-efficient and cut emissions as well as household bills. The roll-out of smart meters, which will be completed in 2020, will help families to identify how to become more energy-efficient. Improving home insulation is key. A quarter of all the country's emissions come from households. Already 235,000 homes have benefited from the Warm Front scheme to provide more efficient heating and insulation for the most vulnerable. Today I can announce an additional £200 million, from April, to help with energy efficiency. An extra 75,000 households will benefit from an extension of the scheme. That will go alongside further requirements, amounting to up to £300 million overall, for the energy companies to provide discounts on energy bills for a further 1 million low-income households.

Inefficient domestic boilers add over £200 to household bills and 1 tonne of carbon to the atmosphere each year. I therefore want to build on the successful car scrappage scheme. I want to help 125,000 homes to replace those inefficient boilers with new models. I can also announce changes to the climate change levy, company car tax, and fuel benefit charge.

I have three more targeted measures to announce. From April, people with home wind turbines or solar panels who plug excess power into the national grid will receive, on average, £900 a year. I intend to make that payment tax-free. To help to boost the number of electric cars on our streets, I have decided to exempt them from company car tax for five years. I can also announce 100 per cent. first-year capital allowances for electric vans.

A key component of our growth strategy is investment to keep goods and people moving. The Government have made huge strides in rebuilding the national infrastructure following years of neglect. Continued public investment here is essential to growth. This year public sector investment reached a 30-year high, and has delivered more than 70 road and motorway schemes and improved journey times across the rail network. Work is now under way on Crossrail, the Thameslink project and, from this month, the upgrade of the M1. All that work will continue; so will the rail electrification programmes for the Great Western main line and the north-west that were announced in July.

I have given the go-ahead to further plans for rail electrification between Liverpool, Manchester and Preston. My right hon. and noble Friend the Secretary of State for Transport will announce further details shortly. The Government will also respond, early next year, to the proposals for a new high-speed rail line from London to the west midlands and to the north and Scotland.

Since 1997, we have helped millions of people gain qualifications or training. The number of apprenticeships has doubled. New advanced apprenticeships will meet the skills needed in key growth areas, such as advanced manufacturing, low carbon, digital technologies, and the biosciences. We also want to break down informal barriers that close off some careers to undergraduates, particularly from poorer backgrounds, so I can announce that we will offer financial support for up to 10,000 undergraduates from low-income backgrounds to take up short-term internships in industry, businesses and the professions. This will give them a taste of careers that they may not otherwise have considered. We will announce further details shortly.

We are modernising the UK's digital infrastructure and, in the process, creating thousands more skilled jobs. We have provided funding to help extend the opportunities of the broadband network to more remote communities. We now want to go further, so that we can provide the next generation of super-fast broadband to 90 per cent. of the population by the end of 2017. That will be funded through a duty of 50p a month on landlines, which will be included in the Finance Bill.

The oil and gas industry is an essential part of our economy. To encourage further investment, I am today relaxing the criteria of the field allowances, to support the development of up to eight known fields and to encourage further exploration. We will work with industry to look at how best to ensure the development of infrastructure to the west of Shetland.

We already have a tremendous track record in key growth industries. We have the leading medical biotechnology sector in Europe. Our aerospace industry is the second largest in the world. Our creative sector has increased exports by 60 per cent. since the beginning of this decade. All of that has been supported through our investment in science and our targeted tax policy. This country has a remarkable record of ideas and innovation. We have won more Nobel prizes than any other country of our size. We need to do more to support this ingenuity and ensure this creativity is harnessed by this country. I want to encourage research and development in the pharmaceuticals and biotech industries in particular. So, following consultation with business, I will introduce a new 10 pence corporation tax on income that stems from patents in the UK. This will help maintain jobs in science and technology in this country.

I also want to build on our world-class achievements in medical research. With the Wellcome Trust, Cancer Research UK and University college London, we are working on plans to establish the largest institute in Europe for research into long-term medical challenges. The new strategic investment fund, set up in April, has already agreed vital support to hi-tech projects such as Airbus in Wales and the life sciences in Scotland. We will expand this work through £100 million of redirected funds and an extra £100 million. By supporting the low-carbon sector and investing in our vital infrastructure and our world-class industries, we will secure growth, create new jobs and provide the revenue to help rebuild our fiscal strength.

Supporting growth is vital to provide the future revenue to halve borrowing over the next four years, but, as I have said, it also requires us to take some tough decisions on tax now. I am determined that any tax increases will continue to be guided by our values of fairness and responsibility. Last year, the banks made collective losses of £80 billion in this country alone. This would have been much higher without the unprecedented level of support from the taxpayer. There is no bank that has not benefited, either directly or indirectly, from this help. This should be a time for banks to rebuild their capital base and become stronger. A tax on profits, as has been suggested, would prevent them from doing that, so I have decided against a windfall tax. However, there are some banks who still believe their priority is to pay substantial bonuses to some already high-paid staff. Their priority should be to rebuild their financial strength and increase their lending, so I am giving them a choice: they can use their profits to build up their capital base, but if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer. I have decided to introduce from today a special one-off levy of 50 per cent. on any individual discretionary bonus above £25,000. This will be paid by the bank, not the bank employee, and anti-avoidance measures will be introduced with immediate effect. High-paid bank staff will, of course, also have to pay, as usual, income tax at their top rate on any bonus they receive. On a cautious assumption, which includes our expectation that some banks will rein back on bonuses, this levy is expected to yield just over £500 million. That additional money will be used to pay for the extra measures that I have already announced, such as help for the young and older unemployed to get back into work.

Under the existing rules, the highest earners benefit disproportionately from tax relief on pensions. At present, a quarter of all the money spent on pensions tax relief goes to the top 1.5 per cent. of earners. To make this fairer, I announced in the Budget that we would reduce pension tax relief for people with incomes of over £150,000. I want to do that as fairly as possible, and to treat individuals the same regardless of whether they receive their pay as current salary or as a future pension benefit, and prevent avoidance, so I have decided to include employer pension contributions in the definition of income for this tax measure. To provide certainty, I will introduce a floor so that, irrespective of the size of employer pension contributions, no one with an income below £130,000 will be affected.

I believe it is right that parents should be able to pass on savings to their children. Before the financial crisis rocked the global economy, I enabled married couples to combine their inheritance tax allowances, and this will continue. I also said then that allowances would rise to reflect inflation and the expected continued increase in house prices, but I do not believe that raising this allowance can possibly be a priority given the impact of the downturn on the country's finances, so I have decided to freeze the individual allowance at £325,000 for the next year. That will still mean that fewer than 3 per cent. of estates will pay inheritance tax.

I have decided against any further changes to income tax rates or thresholds next year, except for some changes in what can be tax-deductible. Because RPI inflation was negative in September, this will provide a real-terms benefit relative to inflation, but in April 2012 I have decided to freeze the point at which people start to pay income tax at 40 per cent. for one year. No one with income below £43,000 will be affected by this change.

It is also fair that those who should pay tax do not escape their responsibilities. I am determined to tackle activities such as avoidance and evasion, which undermine tax receipts. Since the Budget, Her Majesty's Revenue and Customs has asked for details of at least 100,000 offshore accounts held at over 300 financial institutions. This pre-Budget report sets out anti-avoidance and smaller tax measures to deliver additional revenues and protect £5 billion a year of existing revenues.

These are tough, but necessary, measures to increase tax, but I have done this in a fair way: those on modest incomes are protected; those on middle incomes will pay more, depending on their earnings; but the biggest burden will fall on those with the broadest shoulders. Today's measures, combined with those from the Budget and last year's pre-Budget report, mean that over half of the additional revenue raised will be paid by the top 2 per cent. of earners.

Fairness in tax is a crucial part of maintaining fiscal sustainability, but the majority of the reduction in borrowing will have to come from slower growth in overall public spending. We have already set out our spending plans until April 2011, but I believe it would be dangerous, as the head of the International Monetary Fund said only a couple of weeks ago, to reduce spending too soon, so to continue to support jobs and the economy, we have decided to stick to our spending plans for next year. In 2010-11, total public spending will increase by £31 billion, a growth rate of 2.2 per cent. in real terms, providing continuing strong support for the wider economy until the recovery is firmly established. Once recovery is secured, we must, as I made clear at the time of the Budget, reduce the rate of growth in public spending, and meet our ambitious target to halve the deficit.

We take these decisions from a position of strength. In 1997, our public services were in crisis. Chronic under-investment in health and education had taken its toll: hospitals with too few nurses and doctors to meet the needs of patients; schools with too few teachers, textbooks and computers. The country had failed, too, to invest in transport and national infrastructure, all of which was damaging to our economy and prosperity. That was the record we inherited and that was the record we had to deal with. We have worked to turn it around, through a combination of strong investment and far-reaching reform.

So, although the period ahead is going to be challenging, our public services are in a better state they have been for decades. However, we have to be realistic: the spending environment will be tough over the next few years. For as long as extraordinary uncertainties remain in the world economy, this is not a time for a spending review. We have already set out clear and firm departmental budgets for the next financial year, but to try to fix each Department's budget now for the next five years is neither necessary nor sensible. We can, however, set out a clear direction, based on our economic priorities and our values as a Government.

We are clear that, following the investment made over the past decade, current spending growth can be set lower than in the past and fall to an average of 0.8 per cent. a year between 2011-12 and 2014-15. That will mean cuts to some budgets, as programmes come to an end or resources are switched, and it will mean that some programmes will need to be stopped altogether. We believe that if Departments can find further savings and cuts within their existing budgets, as many are already announcing, that will release resources so that they can continue to provide services. Already individual Departments have made great strides in finding savings-£10 billion in the NHS, £800 million in education and more than £400 million in the police-but even in this much tighter financial environment we are determined to protect front-line services and sustain the improvements that have been delivered over the past decade. The pre-Budget report sets out our plan to do that while halving the deficit.

First, we must make sure that we get maximum value for every pound we spend. Between 2005 and 2008, we delivered £26.5 billion of annual efficiency savings, and between 2008 and 2011 we are delivering further efficiencies worth more than 3 per cent. of total departmental spending per year. This week, we announced plans to deliver another round of savings, amounting to £12 billion a year by 2013-14. We will abolish quangos, cut consultancy and marketing costs, improve procurement and streamline back-office functions. We will also sell those assets that can be managed better by the private sector.

Secondly, we need to focus better on those areas that make most difference to people's lives. We have begun a root-and-branch review to examine every area of Government spending to drive through efficiency, to cut waste and to cut lower priority budgets. Today, I am able to announce £5 billion of savings from spending programmes. This includes: phasing-in the roll-out of pension personal accounts; cutting back on the scope of major IT projects; reforming legal aid and outsourcing inefficient prisons; refocusing regeneration spending, so that it is spent where it is most needed; and cutting the cost of residential care by supporting older people to stay in their own homes. Those are necessary choices.

Thirdly, on public sector pay and pensions, public pensions need to be broadly in line with those offered in the private sector. So, by 2012 contributions by the state to public sector pensions for teachers, local government, the NHS and the civil service will be capped, saving about £1 billion a year. Public sector workers will make a greater contribution to the increasing value of pensions, with those earning more than £100,000 paying more. Public sector pay makes up about half of departmental spending. The senior civil service will take the lead with a cut in its pay bill of up to £100 million over three years, and any new Government appointment of someone on more than £150,000 and all bonuses of more than £50,000 will require explicit approval by the Treasury. I can announce that for the two years from 2011 we will ensure that all public sector pay settlements are capped at 1 per cent. [Interruption.]

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

As with previous pay decisions, we will recognise the special circumstances of the armed forces. There will be savings of £12 billion from greater efficiency, of £5 billion from scaling back or cutting lower priorities, and of more than £4.5 billion from reducing the cost of public sector pay and pensions. These are difficult choices, but they are essential if we are to stick to our plan to halve the deficit and protect the front line.

Our first priority today must be to ensure that our armed forces have all the resources they need. The whole House, especially this week, will want to join me in praising the dedication and valour of our troops, especially those engaged in the conflict in Afghanistan. They deserve all our support and we must match that support with resources. For the next year, I can announce that a further £2.5 billion will be set aside for military operations in Afghanistan. At the same time, we will continue to improve the effectiveness of core defence spending, reducing the civilian work force and restructuring the Department. I also want to do more to help those who have served in combat zones and are retiring from the forces, so I can announce that £5 million will be allocated from the strategic investment fund to help ex-service personnel who want to set up their own businesses.

In 2005, we led the way towards abolishing the debts of the poorest countries, and we have committed to doing more in the fight against global poverty. Spending on overseas aid remains a very small proportion of our overall budget, but it does make a huge difference to the lives of millions of people, as well as creating a fairer world, helping to build markets for our goods and countering extremism. I can confirm that we will honour our commitments, so spending on overseas aid will rise to 0.7 per cent of gross national income by 2013.

Our priority is to protect those services that are absolutely essential to the health of our society and the strength of our economy: the health service, which is crucial for our well-being; the police force, which is crucial for our safety; and our schools, which are crucial for our future. I am determined that we will protect improvements in those front-line services, on which millions of people rely. That cannot be done without a further difficult decision. I intend to increase all employer, employee and self-employed rates of national insurance by a further half pence from April 2011. But to protect those on modest incomes, I have also decided to raise the starting point from which national insurance is payable, and no-one earning less than £20,000 will pay more contributions as a result. This will raise £3 billion a year from 2011-12.

As a result, I am today able to offer guaranteed minimum real-terms increases in front-line NHS and schools spending for two years from 2011, as well as providing sufficient funding to maintain the number of police and community support officers. That means that I can confirm not just that we will increase spending as planned next year on hospitals, schools and policing, but we can pledge that spending on these crucial front-line services will continue to rise over and above inflation after 2010-11, so that we can meet the improved public service guarantees and entitlements that we have set out. There will of course be Barnett consequentials for Scotland, Wales and Northern Ireland.

I have one further announcement to make: because of my decisions today, I am able to extend free school meals to 500,000 primary school children of low-income working parents who previously would not have been eligible. Once that is fully rolled out, it will lift an additional 50,000 children out of relative poverty and will be a step towards our target of abolishing child poverty by 2020.

The decisions the Government have made have helped support businesses and families through the deepest global recession for more than 60 years. These are decisions that have been followed across the world but, of course, have been opposed by some here. The steps that I have announced today are aimed at securing recovery, reducing borrowing and, through targeted investment, providing a springboard for long-term growth. The choice facing the country is between securing recovery and wrecking it; between investment to build a fair society where all prosper or a divided society that favours the wealthy few; and between ambition driven by the values of fairness and opportunity or austerity driven by an outdated dogma. I commend this statement to the House.

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Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

Today, confronted with the biggest budget deficit in our peacetime history, the right hon. Gentleman faced a choice: would he take the tough spending decisions before the general election or would he completely duck them? We were promised a pre-Budget report and what we got was a pre-election report. The Government have today lost all the moral authority to govern. Instead, the full scale of the economic disaster that Labour has visited on this country is clear to us all: the biggest debt we have ever known; spending cut on almost everything; taxes up on anyone who earns more than £20,000 a year; Labour's new tax on jobs; and higher interest rates to pay for the higher borrowing. Every family in the country will be forced to pay for years for this Prime Minister's mistakes. At the end of their period in office, they have indeed adhered to the greatest of golden rules: "Never trust a Labour Government with your money again."

Everything that the Government have told us on the economy collapses in the face of the truth. They told us that they would be prudent, and the figures that they have produced have shown us that Labour has quadrupled the national debt while in office. They told us that Britain was better prepared than other countries, and now our budget deficit is higher than that of any other comparable country anywhere else in the world. They specifically told us-this Prime Minister told us-that Britain would lead the world out of recession, and now the rest of the world leaves Britain behind as it recovers.

We are the only G20 economy in recession, and that Prime Minister used to stand at the Dispatch Box on occasions like this and say that he had rewritten the laws of economics, that he had abolished the trade cycle, and that he had abolished boom and bust. The numbers that the Chancellor has given us confirm that this Prime Minister inflicted on us the deepest and longest recession in our modern history. No one will ever believe a word they say on the economy again.

Faced with this catastrophe, the Chancellor had three tasks today: first, to restore confidence in the Treasury forecasts; secondly, to produce at last-we hoped-a credible plan to deal with Britain's record debts; and finally, to show the world that Britain is open for business again and can create jobs. He failed on all three accounts.

First, the forecasts. Every single time this Chancellor has come to this House, he has got his forecasts wrong, and today was no different. He confirmed that the GDP figures for this year show a contraction of 4.75 per cent. That is not only a full percentage point worse than the figure in the Budget-it is almost four times worse than when he delivered the last pre-Budget report. I noticed in his speech a little sleight of hand. He gave the annual contraction figure for the UK and the total contraction figure for every other country. The total contraction figure for the UK is 5.9 per cent., the worst since the 1930s.

It would be difficult to imagine that this year's forecast for borrowing would be an underestimate, but so it turned out to be. I am told that they are having a row in Downing street: the Prime Minister wants to get his forecasts wrong on purpose, while the Chancellor prefers to get them wrong by accident. Either way, Britain is borrowing £178 billion this year and £176 billion next year. This is a figure that he did not give: £789 billion of additional borrowing over the next six years, and that is based on some pretty heroic growth assumptions in future years. Of course, a sneaky fiddling of the definition of the structural deficit was buried in the report. It all amounts to the fact that he is doubling the national debt from where it is today to £1.4 trillion-£23,000 for every child born today.

Without a hint of irony or contrition, the Chancellor publishes today what is farcically called a Fiscal Responsibility Bill-as if we needed a law to tell us that their irresponsibility has been criminal. This is what one of the Prime Minister's own appointments to the Monetary Policy Committee has just said about their law:

"Fiscal responsibility acts are instruments of the fiscally irresponsible to con the public."

The Chancellor should have introduced our plan for a proper, independent office for budget responsibility that will keep the Chancellor honest and ensure that never again can a Government fail to fix the roof when the sun is shining.

So, the Chancellor has not restored confidence in Treasury forecasts. That was his first task. His second was to set out a credible plan to deal with the debt crisis. Yesterday, as he well knows, another credit rating agency warned that that the UK was at risk of a downgrade. Even this morning, the deputy leader of the Labour party was admitting on television that markets are getting more nervous than they were about Government borrowing. The Governor of the Bank of England says that we must

"eliminate a large part of the structural deficit" over the lifetime of this Parliament. I agree with the man in charge of monetary policy in this country. Yet today the Chancellor is sticking with the same plan that he set out in the Budget-the plan that the Bank of England, the CBI and the OECD have all told him is not credible. The whole object of policy going forward as we come into recovery is to keep interest rates as low as possible for as long as possible. That is not what his recipe provides today.

As the debts have become bigger, so the Government's response gets smaller. What the Chancellor had to say to the House today on spending is just not credible. He promises more efficiency savings, but coming from the people who have just admitted that they wasted £4 billion on an NHS computer system, that rings a little hollow. As for the waste advisers who wrote those reports that the Chancellor is publishing today, they have lived up to their names by deciding that they will not waste any more time with him: they are working with us.

Then there are the proposals on bankers. We warned the Chancellor two months ago that he should try to stop big cash bonuses being paid out. I said in my conference speech that we should look at the tax system. Let us be clear: the Government are going to pay out a load of bankers' bonuses that they should not have been paying out in the first place, then put a one-year windfall tax on them and declare it a triumph. The real test of this new tax will be whether it curbs bank bonuses instead of curbing bank lending. Let us hope that it is more effective than those binding lending agreements that we once heard so much about at that Dispatch Box.

The Government say that they will use the money on youth unemployment, because instead of abolishing it, as promised, the Prime Minister has led youth unemployment to a record high. We need a real, lasting plan to get Britain working and to deal not just with the million or more people who have lost their job under Labour, but the millions more who have never had a job under Labour.

On spending, the Chancellor is prepared to tell us what he will spend money on, but he stays almost totally silent on where the real axe will fall. He is achieving the previously impossible trick of ring-fencing a black hole. He said, with understatement, that this is not the time for a comprehensive spending review. This is from a Chancellor who said that that he was acting from a position of strength! Why is it not the time for a comprehensive spending review? The Government have all the figures and they have access to all the information that they need. They had spending reviews just before the 2001 election and just before the 2005 election. Now, suddenly, the spending review has to wait until after the 2010 election. That spending review is the massive missing piece of this pre-Budget report. They have given us lavish detail on the few things that they say that they are protecting, and almost nothing on the many things that they are planning to cut. They are not being honest with the British people about the real price of their incompetence. This has got nothing to do with protecting front-line services and everything to do with protecting themselves. What we see today is not a credible plan on the debt, and the Chancellor has failed his second task.

The Chancellor's final task was to set out a real plan for growth. What does he propose? A higher tax on jobs. That is his answer to Britain's unemployment problem-higher costs for struggling businesses and more money taken from families. That is yet another thing that we could have avoided if this Government had taken the hard decisions in the good years.

Let me just say this about some of the tax measures that the Chancellor has announced in the Budget, the last pre-Budget report and this pre-Budget report. The message to aspiring families from these tax changes is pretty clear: if you want to get on in life, if you want to own your own home, save for a pension or leave something for your children, then the Labour party is not for you anymore. All that work Labour did to drag the party on to the centre ground of British politics, as well as all the effort it made to persuade the country that it was for enterprise and aspiration, is gone. Instead, it has erected a sign over the country that says, "Closed to enterprise and wealth creation," all for the sake of narrow political dividing lines. Instead of telling the country that we are all in this together, Labour now pretends that it can solve our problems by setting one part of the country against another. At the next election, it will be the few who support this approach and the many who reject it.

Instead of a plan for growth and jobs, the Chancellor's plan means higher taxes, higher taxes on jobs, higher interest rates and turning his back on aspiration and enterprise. His third and final task-failed. There is no confidence, no credible plan, no growth and aspiration is being abandoned.

Why is it that every Labour Government have taken this country to the brink of bankruptcy? Each one in turn seems to ignore the most basic rule of finance: if you keep on spending more than you earn, sooner or later you run out of money. How difficult can it be for them to remember this simple point? The country now faces a choice. There is Labour's route, which has been set out for us today: higher debts leading to higher taxes and higher interest rates; the recovery choked off; and Britain reduced again to being the sick man of Europe. Or people can choose our route, which is to face up to the problem; set out to eliminate a large part of the deficit in the Parliament for which we are accountable; expect everyone to share the burden, but protect the lowest paid; keep interest rates lower for longer; send the message out loud and clear that Britain is open for business; and transform the economy that Labour built on debt into one in which we save and invest for our future. That is not going to happen under this Government.

The Prime Minister- [ Interruption. ]

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Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

The Prime Minister always called himself the nation's bank manager, and so he has been. He bet the nation's finances on a never-ending property bubble and a City bonanza, and now, like every other failed master of the universe, he is coming to the taxpayer and asking to be bailed out, but he should remember this: most bail-outs start with a change at the top.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I have listened to the shadow Chancellor speak for the past 10 minutes or so, and there is one word that he did not mention-one word that he finds quite impossible to let pass his lips: "growth". Not once did he mention the possibility of achieving growth. He did not mention it in his conference speech, and he did not mention it today, because it is the one thing that the Conservative party seems quite incapable of realising-that we must secure long-term sustainable growth in this country. The alternative that he offered- [ Interruption. ]

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Growth is absolutely essential for our long-term future. The hon. Gentleman also barely mentioned unemployment and the need to take measures to get unemployment down. He did not say whether or not he supports the measures that I have put before the House today to get people back into jobs and to make sure that people do not find that a short spell on benefit ends up being a lifetime in long-term unemployment. He did not say where he stands on our priorities of ensuring that we protect the front-line NHS, ensuring that we have got schools for the future and making sure that we have got enough policemen on the beat. He says absolutely nothing about that.

Fundamentally, yes there is a big issue before us. Because of this downturn, we, like every other country in the world, face much higher borrowing than we would like. It has resulted in debt increases, but the question is this: at what rate and how quickly do we reduce that borrowing and debt, and how do we do that? Perhaps the hon. Gentleman should have a word with the Leader of the Opposition, who seems to be talking to himself just now. On Sunday, when the Leader of the Opposition was speaking to the BBC and was asked about our proposals to reduce the debt, he said:

"I don't think it is fast enough."

On Tuesday-another day, another audience-when he was asked about reducing deficit, he replied:

"Of course, there is a danger, if you do too much too early, you would choke off some demand."

That is precisely the argument between the two political parties. Certainly on Tuesday, the Leader of the Opposition seemed to agree with our point of view that, yes we have to reduce the deficit, but we have to do it in a way that is orderly and does not damage demand.

Of course, that comes to the heart of the problem that the Conservatives have. They cannot tell us what action they would take. Not once in the 10 minutes that he spoke did the shadow Chancellor actually say what he would do either in protecting services or in reducing debt. Indeed, all we do know is that he is committed to taking action more quickly. He gave the impression just now that he wanted to cut the deficit, perhaps in the next Parliament, but if we do that we will end up having to cut something like £25 billion more. If that is his policy, he will have to spell out where he is going to take that money from. Who would feel the brunt if that money were taken away?

The shadow Chancellor went on to criticise us for having a lack of aspiration. Both of us expect to be judged-the British public will choose-but I have to tell him that I represent a constituency in which people are aspirational. They want to get on and they want to do the best they can for themselves and their families, but they honestly do not see that the first priority in that is giving a tax break to a tiny minority of the top estates in this country. I really think it is time that he rethought his priorities. We believe that public services help many people in this country. People accept that they have to be paid for and they accept the value of hospitals and of the schools that their children go to, but they also want to make sure that as we come through this crisis, just as we had to take difficult decisions with the banks over a year ago, we take difficult decisions now but in a way that reduces the deficit but does not damage our economy at the same time. Yes, all of us need to be fully engaged in that, and all of us are. What we have heard from the shadow Chancellor today is long on politics and very short on good ideas.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I thank the Chancellor for sending me his statement, even though it was missing 43 paragraphs.

What is clear from the statement is that the economic position of the country is still very grave. We know now that we are 5 per cent. poorer than we were a year ago, and that the Government estimates of borrowing for this year and next year are higher than even they had forecast. What we needed was a national economic plan, but what we have got is an election manifesto.

There have been genuinely great Labour Chancellors in the past-Stafford Cripps and Roy Jenkins, among others-but they would not have been obsessed, as the Chancellor is today, with drawing tactical dividing lines. There are small things that one welcomes, such as initiatives on jobs for young people, on technology and on environmental policies. This is a good Budget for bingo and boilers; I think that is what it boils down to.

The underlying problem, however, is that for the past decade or more, the British Government have been over-dependent for their revenues on the fickle fortunes of the banking industry. We have had an economy that has been built on sand-on the assumption that property prices rise for ever, and on consumer borrowing-and the economy is now being rebuilt on sand, because the only signs of real recovery that we have are rising house prices and booming bank profits at a time when industry is continuing to decline.

Let me speak specifically about the banks. The Chancellor has clearly been provoked into action by the extraordinarily stupid and arrogant behaviour of the RBS board. What he has come up with, to the extent that it is intelligible, is an extraordinarily complex mechanism. Will he explain precisely how he will stop the banks converting their bonuses into basic salary? He talks about avoidance measures, but how is he going to stop that? Will he give us a worked example of what it means in reality?

Let us take as an example Mr. Bob Diamond of Barclays Capital, who has just walked away with £27 million on the back of a taxpayer guarantee. How would that be affected by the Government's proposal? Surely it makes more sense, as I think the Prime Minister entertained when he went to the G20 summit, not to try to tax bankers separately from other high earners, but to have a levy on bank profits because the banks depend on a taxpayer guarantee. Until they can be broken up and can stand on their own two feet, they have to pay for the insurance that the taxpayer provides.

The heart of the Chancellor's statement was about the borrowing requirement and the long-term problem of the structural deficit. What we needed was a clear, long-term way of dealing with this problem. What we had, to the extent to which we can understand the early statement that he made, was that there is an increase in tax-approximately £6 billion to £7 billion a year-much of which will be in the form of national insurance. Let us be clear about what will now happen. Any worker earning more than £7,000 a year will pay 32 per cent. marginal income tax and 12 per cent. national insurance contributions. All the money raised in additional tax will go to public spending, and none will be used to pay down the borrowing requirement and the deficit. That is a complete distortion of the priorities that the Government should surely have.

In respect of timing, it is obviously right that we heed the advice of the Governor of the Bank of England and others that, if the economy is continuing to stagnate, it makes no sense to embark on rapid cuts in public expenditure and reducing the deficit. That is the problem that the Conservatives have got themselves into, but it is also right that, if there is rapid growth, the Government must get on with dealing with the deficit. What the Government have assumed today is that there will be high rates of economic growth-3.5 per cent. in 2011-but what is the basis for that assumption?

It is a little like the old story of the economist who is given a tin of food to eat and says, "Let's assume the existence of a tin opener." The Government are saying, "Let's assume economic growth." Why? Have they made any estimate of the very real risk that the economy will revert to a double-dip recession or continue to stagnate? What is the risk of those things happening-is it one in 10, one in five, or one in two? Surely we cannot operate on the basis of a single-line forecast that is based entirely on optimism and very little else.

To the extent that we can understand what the Government are doing about cutting public spending growth, it comes down to two items. Perhaps the Chancellor will confirm that. One of the items involves hitting low-paid workers by cutting the proposal for personal allowances, which I understand has been postponed or deferred. The other is the approach adopted to public sector pay. On the assumption that the Government have made, a 1 per cent. increase for a low-paid manual worker is a real cut. Of course, it is worth 10 times as much for a permanent secretary on £150,000 a year as it is to a worker on £15,000 a year. If there is to be restraint-and we have argued for it-surely it should be a flat sum across the board. We have argued that it should be £8 a week for everyone. That is the heart of the issue of fairness, which the Chancellor claimed was at the heart of his statement.

Of course it is right that we should be concerned with fairness in the tax system and in public spending priorities. Mr. Osborne keeps saying that we are all in this together, but that is simply not right: we are not all in this together, as some people have done much better than others.

The Government's claims to fairness are absolutely bogus. The Chancellor's big, totemic step of the last year was to introduce a 50 per cent. tax rate, but he has delivered a gift-wrapped invitation to tax avoidance by keeping capital gains tax at 18 per cent. He had an opportunity today to deal with that, but he has done absolutely nothing about it. Unless there is fairness, the public will not accept the fact that, for the next five years or longer, there is going to be a real hard slog for the economy. The Chancellor has not set out the way forward that we need.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I disagree with the hon. Gentleman. We have set out a plan to reduce the country's deficit over a four-year period, and I believe that that will be done in a sensible way that will not damage public services or the fabric of the economy. Yes, the settlement will be tighter and it will be difficult, but I am surprised that the hon. Gentleman did not set out some of his proposals in relation to universities, for example.

I think that choices will have to be made, but I believe that people will recognise that, with public spending having grown over the last 10 years, we can proceed with a much tighter settlement than we have had in the past. However, as I said earlier, I believe that we can protect front-line services at the same time.

I listened to what the hon. Gentleman had to say about tax. He did not say what he would do, but that is one of the luxuries of being on his Benches. I think that using national insurance is a fair approach, and I said I would take steps to make sure that people earning under £20,000 would not be affected.

The hon. Gentleman asked about growth. I have set out my forecasts, which are not dissimilar to those of the Bank of England. Indeed, I remember that after the last Budget he and many others criticised my forecast that the economy would grow by between 1 and 1.5 per cent. next year, whereas the consensus among most commentators now is that that is broadly right.

The hon. Gentleman asked about the financial services industry. Yes, it has been a major part of our economy. I am not sure where he stands on these things nowadays, but I believe that it will remain an important part of the economy. It employs 1 million people in this country and, properly supervised and regulated, it is important. However, I think-and I think the hon. Gentleman thinks so too-that people responsible for banks should bear it in mind that they have had a lot of public support, directly or indirectly, and that their priority should be to rebuild the banks' capital. He asked how the system would work. He seemed to hint that he would have imposed a windfall tax on the banks. I think that would be a mistake, because it would amount to telling the banks to build up their capital position while at one and the same time taking the money away from them. Some of the banks that might be affected by such an approach are those that, arguably, did a little bit less to contribute to some of the problems in the first place.

The way that the system will work is quite simple-there will be a levy of 50 per cent. on bonuses of more than £25,000, and there will be anti-avoidance measures. The hon. Gentleman asked what will happen if people get the money paid in income, and the answer is relatively simple-they will pay income tax on it. That is how the system operates and, unless he is saying that there should be an incomes policy for all bankers, which would be difficult to operate, I disagree with him.

The hon. Gentleman said that I was searching for tactical dividing lines; I have rarely been accused of doing that. I think that the divisions between us and the Conservatives, and between us and the Liberal party, are perfectly there to be seen. We do not have to go looking for them.

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Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee

It is right for the Government to use this pre-Budget report to maintain investment in the economy. The private sector is on its knees at the moment because of the banking catastrophe that we are experiencing. It is only the Government, through the help that they are giving to business and individuals, who are keeping the economy going.

However, given the need in the future to cut the fiscal deficit, increase capital liquidity requirements for financial institutions, unwind the £200 billion of quantitative easing and eventually to move interest rates away from zero, will the Chancellor consider further developing a macro-economic framework to deal with those issues?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

My right hon. Friend is absolutely right. The priority is to deal with the aftermath of this downturn and I set out proposals for that. I will continue to take every step possible to ensure that we get the deficit down. It is absolutely a prerequisite for making sure that we have sustainable long-term growth in the future. It is something that must remain a priority for the Chancellor at all times.

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Several hon. Members:

rose -

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Photo of John Redwood John Redwood Conservative, Wokingham

Why has growth been non-existent so far, when the Chancellor's policy is meant to be about promoting growth?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

There has been no growth in the last year for perfectly obvious reasons. Because of the crisis in the banking sector that has affected this and every other country in the world, there has been a very severe downturn. I would have thought that that was very obvious.

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Photo of Hazel Blears Hazel Blears Member, Labour Party National Executive Committee

Politics is clearly the language of priorities, and I am delighted that my right hon. Friend has set out this Labour Government's priorities of supporting young people into jobs and apprenticeships. That stands in stark contrast to priorities of the Conservatives who have chosen to benefit the 3,000 wealthiest estates in the country.

Will my right hon. Friend ensure that his measures to support apprenticeships are directed to communities like mine in Salford where, in the last Tory recession, 75 per cent. of young people were without jobs and hope? We need these measures to build on our success.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Yes is the short answer. It is important that we carry on expanding the number of apprenticeships because, not just now when unemployment is clearly too high but also in the future, we will need qualified people with the skills that our economy needs.

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Photo of Edward Leigh Edward Leigh Chair, Public Accounts Committee, Chair, Public Accounts Committee

The previous Gershon efficiency savings were found, after independent audit by the National Audit Office, to be largely unproven. Given that, it is difficult to believe that these new efficiency gains will be backed by evidence. To prove me wrong, will the Chancellor pass all his assumptions and proposals on efficiency savings to the NAO for independent audit?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I do not accept the general premise underlying the hon. Gentleman's question that efficiencies cannot be made. For example, we managed to reduce the amount of money that we were paying to drug companies from the NHS. I remember from my time at the Department for Work and Pensions that we reduced the number of middle management employees to ensure that the then Benefits Agency, which formed part of Jobcentre Plus, was more efficient. So I simply do not accept the premise that underlies his question.

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Photo of Michael Meacher Michael Meacher Labour, Oldham West and Royton

Does my right hon. Friend really believe that a one-off, short-term bonus tax is sufficient to achieve his aim of permanently changing City culture? How does he justify the prospect of cutting public services and still not imposing a windfall tax on banks, when those bank profits have been fortuitously inflated by quantitative easing, by the offsetting of £80 billion of past losses against tax, by the elimination of rivals in the financial crash and by a vastly expanded market in Government bond sales?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

My right hon. Friend should bear it in mind that if-when-banks return to profitability, which must be one of the objectives in the longer term, they pay corporation tax on those revenues. On tax and bonuses, I want to try to get banks to think long and hard about paying out large sums when, frankly, they ought to be building up their strength. I have said often enough in the House that I am not against the payment of bonuses in themselves-they can be a good way to reward and incentivise people-but if banks are going to pay those very high bonuses, it is right that the taxpayer should see some benefit from that.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

How much worse off will constituents of mine who earn £25,000 be as result of the Chancellor's national insurance increase?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I said in my statement that, yes, national insurance will go up, and that is necessary because we want to ensure the services that the hon. Gentleman's constituents and mine receive. If they are unfortunate enough to go to hospital or they go to see their doctors or schools, they recognise that they get a benefit from that. I certainly do not think that they want to go back to the days of the past, when a lot of those services were very seriously run down.

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Photo of Richard Caborn Richard Caborn Labour, Sheffield Central

I welcome the statement, particularly for the wealth-creating sectors and manufacturing up north-in 1997, we inherited industrial deserts, particularly in areas such as South Yorkshire-and the investment has been made by Rolls-Royce in the Advanced Manufacturing Park. May I prevail on the Chancellor to consider the short-termism of the marketplace? Indeed, I think that everyone appreciates that the statement today tries to tackle some of the problems, but long-term investment in wealth creation and our manufacturing is not four or five years, but five, 10 and 15 years. I hope that that is borne in mind and that the Treasury and the shareholding Executive will get that change of culture.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

My right hon. Friend represents a part of the country that was at the wrong end of the 1980s recession. On many visits to his part of the country, I have found it impressive to see how former coke works and coal mining areas have been completely transformed and, on the same sites, high-tech industries and cutting-edge developments in advanced engineering employing a lot of people. He is absolutely right to say that we need to encourage that not just for the next five or 10 years, but for decades after that.

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Secretary of State for Communities and Local Government

The Chancellor applauded the flexibility of working tax credits, but no additional support has been offered to two of my constituents who work in a factory and whose hours have been reduced to a three-day week since July. They are not entitled to working tax credits, redundancy pay or jobseeker's allowance. Was it not an omission not to include support for them in the pre-Budget report?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

We have tried over a number of years to improve the help that we give to people who lose their jobs or go on to short-term working. Yes, we are always looking to see how we can improve that, but it is partly constrained by what we can do. Dr. Cable, who speaks for the Liberals from the Front Bench, rather gave the impression that he wants the Government to spend less rather than more, but the hon. Lady is absolutely right to say that we need to ensure that we help people to stay in work.

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Photo of Frank Field Frank Field Labour, Birkenhead

May I compliment the Chancellor of the Exchequer on how he has acquitted himself not only today but for the whole period that he has been Chancellor? It has served the public interest well. Given that the Bank of England will shortly cease to print money to buy Government debt and that the Government will have to go into the real world to raise that money, what will be the impact over the coming year on long-term interest rates, given what he has announced on public expenditure levels for the same period?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

First, I am grateful to my right hon. Friend. On quantitative easing, the Monetary Policy Committee will have to reach a decision on when it stops that work and then on how it unwinds what it is doing. It is very conscious of the fact that it needs to do that in an orderly way that complements what the Government are doing. Indeed, I think that I made it clear when I announced the scheme that there will be some discussion when it is wound down to ensure that that is done in the right way.

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Photo of Stewart Jackson Stewart Jackson Shadow Minister (Communities and Local Government)

The OECD believes that early and ambitious fiscal consolidation will strengthen the recovery. Why does the Chancellor think that it is wrong and he is right?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Yes, but the OECD is not arguing for going far faster and therefore damaging jobs and the fabric of the economy. I can assure the hon. Gentleman that-whether it is the OECD, or the International Monetary Fund of which 186 countries are members-none of them support the sort of approach that the Conservatives are advocating.

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Photo of Roberta Blackman-Woods Roberta Blackman-Woods Labour, City of Durham

I thank the Chancellor for listening to those of us who were pressing for an extension to the free school meals programme, because it is an important measure in helping to reduce child poverty, but does he agree that it is quite wrong for the Liberal Democrats to lecture us on reducing child poverty when the first thing that Hull, which is a Liberal Democrat-controlled council, did was to withdraw its free school meals programme?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

These things sometimes happen with the Liberal Democrats, but I am grateful to my hon. Friend for what she said about our proposals.

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Photo of Sammy Wilson Sammy Wilson Shadow Spokesperson (Education), Shadow Spokesperson (Treasury)

I fully recognise the constraints placed on the Chancellor in balancing and restoring public finances, while not damaging economic growth. One concern, however, for devolved Administrations is to have some certainty about Government spending plans for 2011 and beyond. When will he be able to give that assurance? When looking at those plans, will he bear in mind the House of Lords report that has indicated that Wales and Northern Ireland have greater needs than other parts of the United Kingdom?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I hope that, one way or another, the Government have recognised Northern Ireland's special needs, not just in the regular spending rounds but, as the hon. Gentleman well knows, in other discussions as well. As I have said, the Barnett formula will apply to the announcements that I have made today where appropriate in the usual way. All the devolved Administrations know the spending that they are getting for the rest of the spending review, but spending reviews have been fixed for three years in the past to give some certainty. I think that people will accept just now that, given what is happening, it is not possible to set out definitely what spending might be in three or five years' time, but they have that certainty for the next year, which will help them.

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Photo of Jeremy Corbyn Jeremy Corbyn Labour, Islington North

I note that the Chancellor's statement included the welcome reference to the fact that anyone who moves off benefits into work will not be worse off. Will he please explain how that will affect people who live in expensive private rented accommodation and receive housing benefit at the moment, but lose all or most of their housing benefit on going into work and thus end up considerably worse off and, in extreme cases, can even be rendered homeless as a result?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I understand that concern, and I can tell my hon. Friend that the Secretary of State for Work and Pensions will make a statement fairly shortly and give more details, but we are all very aware of his point about the withdrawal rates of benefits.

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Photo of Andrew Murrison Andrew Murrison Shadow Minister (Defence)

The Chancellor has announced increased funding for current operations, but after the increased costs of the redundancy of kit and the uplift in troops announced by the Prime Minister earlier this month, what will be left for the repair and replacement of our inadequate helicopter fleet, which is putting at risk the lives of our servicemen?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

First, as I said in the statement, we are making available further sums to the Ministry of Defence. The Secretary of State for Defence will in due course set out how the MOD is reorganising what it does to ensure that it can provide support, particularly on the front line. I have said often enough before that it is important if we send troops into Afghanistan that they are properly equipped and supported. That means some reprioritisation in the MOD. I think that the hon. Gentleman would accept that, and my right hon. Friend the Secretary of State will be able to say something about it.

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Does the Chancellor agree with the leader of the Conservative party that the problem is big Government and that there was too much regulation, or does the Chancellor agree with me that Government have a big role to play in protecting people and that the banking problems came about from too little regulation?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Despite being posed such a difficult question, I am probably more on my hon. Friend's side than the Leader of the Opposition's. The problem was partly caused by regulation that was not tough enough, but partly caused also by the fact that too many at the top of some banks clearly did not know what they were doing. There was a failure of corporate governance as well as a failure in regulation. That situation has undoubtedly had consequences, however, and every Government in the world have had to deal with those consequences. The question before us now is, how do we manage to deal with that situation in an orderly way?

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Photo of Peter Bone Peter Bone Conservative, Wellingborough

The Chancellor was incorrect in saying that when the banks return to profit, they will pay corporation tax, because there will be £80 billion of losses to set off first. Does he not think that the citizens of the United Kingdom will be amazed by the fact that banks will be making billions of pounds in profit and not paying a single penny of corporation tax?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Of course I am aware of the tax treatment of losses, but the hon. Gentleman will be aware of the way in which tax losses are treated for capital adequacy purposes, so the situation is a little more complicated than the one he describes.

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Photo of Helen Southworth Helen Southworth Labour, Warrington South

Will my right hon. Friend make sure that services to safeguard and protect vulnerable children who are at risk are a priority and receive investment?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I know that our right hon. Friend the Secretary of State for Children, Schools and Families is very concerned about that issue, as should we all be. It is very important that children who are at risk are properly looked after, and I very much hope that we can continue to do that.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

Even if the deficit falls as planned, based on pretty heroic growth forecasts, the national debt will continue to rise, on the Treasury calculation, to £1.7 trillion, which is 91 per cent. of gross domestic product. That is in the Green Book. The Chancellor is right to say that we need a budget for growth, but this was not a budget for growth. This pre-Budget statement specifically confirmed the cut announced earlier this year in both the resource and the capital departmental expenditure limit for Scotland. Why did the Chancellor not take the advice of even his own colleagues in Scotland and have a further year's reprofiling of capital expenditure to protect the recovery, instead of ensuring that the cuts come now and weaken Scotland's ability to recover?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I say this to the hon. Gentleman: yes, we did bring capital spending forward, and the situation in Scotland would have been infinitely better had the Scottish National party not turned its face against continuing to work with the private sector. The SNP had a vanity project to try to replace the private finance initiative, and as a result, as I know from my constituency and others, the only things being built under the schools building programme, for example, are schools that the previous Labour Administration authorised. The nationalists should have a long hard look at what they have done in Scotland over the past two years, because in just about every single case where they made a promise, they have failed to deliver it, partly because of dogma and partly because they have simply over-promised and overreached. It is no wonder that people are beginning to see through what the nationalists actually do.

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Photo of Dari Taylor Dari Taylor Labour, Stockton South

I warmly welcome the Chancellor's announcement of the innovation investment fund for research into the development of the green economy, which is led significantly by Teesside's chemical process industry. Will One NorthEast administer that fund, giving local companies an easy opportunity to get advice and access to it? If not, which Department will administer the fund and from what date?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I understand that the Secretary of State for Business, Innovation and Skills will make the situation clear very shortly. The regional development agency, One NorthEast, will of course be closely involved in everything that we do in relation to Teesside. It is important that Jobcentre Plus, the regional development agency and other public bodies all work very closely together, but I shall ensure that my hon. Friend is given that information by the Secretary of State.

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Photo of Richard Younger-Ross Richard Younger-Ross Shadow Culture, Media and Sport Minister

I congratulate the Chancellor on adopting the proposal that I included in an early-day motion on the boiler scrappage scheme and on also adopting an EDM proposal for an effective 75p rate on banker bonuses. However, if such a rate is to be effective, measures to stop avoidance by increasing salaries or rolling over pay to a following year will have to be in place. What proposals does he have to ensure that such avoidance cannot happen? If he cannot do that, he will be far better off sticking with the proposals made by my hon. Friend Dr. Cable.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I do not know whether the proposals from the hon. Member for Twickenham are to be found in an EDM, but it was not clear to me what his proposals actually were. Anti-avoidance measures will be introduced as part of the Finance Bill. On the other measures that Richard Younger-Ross has proposed, I cannot claim to have read the EDMs, but I am glad that he supports the policies.

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Photo of Rob Wilson Rob Wilson Opposition Whip (Commons)

Will the Chancellor confirm that manufacturing has contracted more under this Government than it did under the Thatcher Government in the 1980s?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I am glad to hear that there is common ground on this issue, because, certainly in my first 10 years in this House, it was not accepted that we lost far more manufacturing than perhaps we should have in the early 1980s. I think that manufacturing in this country, despite the downturn and despite the difficulties, is well placed for the future. We have a lot of manufacturing of which we can be genuinely proud, and in the past 10 years, through our investment in science and our support for universities, we have seen a lot more projects come out of universities and develop for the future. Much of what I had to say this afternoon was about encouraging such growth in the future. The policy of Mr. Osborne is not to reverse the situation at all, but, it seems, to make it worse.

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Photo of Adam Price Adam Price Spokesperson (Communities and Local Government; Culture, Media and Sport; Transport; Business, Innovation and Skills; Treasury; Olympics; Energy and Climate Change)

In the month when the Holtham commission, which the Labour-led Administration in the National Assembly for Wales appointed, has reported that the people of Wales are losing out to the tune of £400 million a year as a result of the Barnett formula, why did not the Chancellor use this opportunity-perhaps the final opportunity for some time for a Labour Chancellor-to implement the proposal for a needs-based formula and finally deliver justice to the people of Wales and, as we heard from Sammy Wilson, to Northern Ireland as well?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I believe that, certainly over the past 12 years, Wales has seen a significant increase in funding because of the increases in spending on health, education, science and research. Wales has benefited from that-tremendously so. If I have a disagreement with the nationalists, it is that I fail to understand what possible justification there can ever be for Welsh independence. I cannot see how on earth it could benefit that country.

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Photo of Justine Greening Justine Greening Shadow Minister (Communities and Local Government), Vice-Chair (Youth), Conservative Party

The return to growth that is forecast in later years is predicated on consumers generating more GDP growth than they have in the past. The Chancellor suggests that 2 per cent. of GDP growth will be driven by private consumption, but between 2000 and 2007 only 1.75 per cent. of GDP growth was driven by consumer consumption. Does he think that wise, given that consumers are paying down their debt? Why does he think that he should rely on consumers backtracking, when they have worked out that they have a debt crisis even if the Government have not?

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I think that many members of the public will be reducing the amount of debt that they carry, and that is a good thing. However, it is also true that people can at the same time maintain their spending, and some people increase their spending. Of course, as unemployment starts to fall and employment starts to grow, more people will be in work and more people will be able to spend their money on goods and services in this country.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central

As politicians are to blame, like bankers, perhaps the top 25 per cent. of our salaries should also be taxed at 90 per cent. However, the Chancellor mentioned in his speech a £550 million yield from the special tax levy, which is the equivalent of £1.1 billion in paid bonuses. Is he implying that the measure is a ban on bonuses? Otherwise, bankers will either redefine themselves as working for hedge funds or non-bank banks, or domicile themselves outside the UK to receive such bonuses.

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Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

The figure I mentioned is our estimate of what we will get after behavioural changes in terms of both payment of bonuses and, I suspect, people saying, "Okay, I will take my wage in salary." As I said earlier, the problem is not bonuses in themselves; the problem is when we start paying excessive bonuses or rewarding people for doing things that they really should not do. That is where we get the problems.

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