Below is the text of the 1991 Budget, held on 19th March 1991 and presented in the House of Commons by the Chancellor of the Exchequer, Norman Lamont.
Mr. Deputy Speaker : Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that, at the end of the Chancellor's speech, copies of the Budget resolutions will be available to hon. Members in the Vote Office.
The Chancellor of the Exchequer (Mr. Norman Lamont) : Like, I suspect, most Chancellors, I have found the preparation of this, my first Budget, very exciting. As usual, I have read a huge amount of speculation in the press over the past few weeks about the contents of the Budget. I have also learnt a number of interesting things. For example, I was surprised to read last Wednesday that I am almost as well known as Desert Orchid -
I have had the advantage of serving at the Treasury under two Chancellors : my right hon. Friend the Prime Minister, who last year delivered a notable Budget for savers, and before that my right hon. Friend the Member for Blaby (Mr. Lawson). If I may make a personal observation, working for my right hon. Friend the Member for Blaby was always stimulating and exciting, and I am extremely grateful for his encouragement over the years. My admiration and respect for him remain undimmed. [Interruption.]
Mr. Deputy Speaker : Order. I know that this is an exciting day in the House, but perhaps we should try to behave like the mother of all Parliaments.
Mr. Lamont : I intend to carry forward my predecessor's work. My central economic aim is to bring inflation down and keep it down. Beyond that, my objective is to encourage enterprise by creating a broadly based tax system that allows markets to do their job with the minimum of distortion and Government interference.
Although there is no scope this year for an overall reduction in taxes, my Budget today will include measures to help business through the recession in the short term and to encourage it to invest for the longer term. It will provide assistance for families. It will also further the process of tax reform and make some radical changes in the tax system.
As usual, I shall begin with a review of the economic situation and prospects. I shall then deal with monetary policy and public finances. Finally, I shall present my tax proposals.
The "Financial Statement and Budget Report", together with a number of press releases filling out the details of my proposals, will be available from the Vote Office as soon as I have sat down.
ECONOMIC SITUATION AND PROSPECTS
I refer first to international developments. The past year has brought recession to a number of major industrial countries including the United States, Canada and Australia. Growth in Germany has been sustained by reunification ; but elsewhere in Europe, activity has slowed and industrial production has fallen in recent months in Spain, Italy and France. In five of the seven leading industrial nations, industrial output is now lower than it was a year ago.
The basic cause is the same everywhere : very rapid growth in the industrialised world during the 1980s led to the re-
In the autumn, the slowdown was magnified by the Gulf crisis. Business and consumer confidence were badly dented, first, by the uncertainties and the sharp rise in oil prices that followed the invasion of Kuwait, and then the prospect of war. Travel and tourism were especially hard-
Mercifully, the war was brief and the outcome successful. Confidence is recovering and that will strengthen the economic upturn when the time comes ; and the fall in oil prices has already improved the outlook for inflation.
So although 1991 as a whole will show little growth in the seven major economies -
In itself, the rise of investment -
It is easy, with the benefit of hindsight, to say that policy should have been tighter; and, once the problem became clear, policy was indeed tightened. We ran a large budget surplus. Interest rates were raised, and they had to stay high until there were unmistakable signs that excess demand pressure had been removed. That took longer than we -
Since the middle of last year, individuals and companies have been taking steps to reduce their borrowing. Consumer spending has fallen back, and the saving ratio has risen sharply to 10.8 per cent. Firms have found it hard going. Profits have weakened, caught in the pincer of low turnover and rising costs, and the burden of debt taken on in the late 1980s has proved a heavy one.
It is not surprising, therefore, that business investment has fallen from the heights of 1989 and early 1990. Stocks are now being reduced, and companies are making strenuous efforts to cut costs. That has led to a sharp increase in unemployment during recent months, although there are welcome signs that firms are continuing to invest in skills and training. I expect output in 1991 as a whole to be about 2 per cent. less than in 1990. Much of that fall, of course, has already happened. It is largely behind us and, as I shall be explaining in a moment, the resumption of growth should not be long delayed.
The process of retrenchment has been painful, as it always is, but it has been necessary and is now producing results. The current account deficit has improved sharply -
No one can doubt that inflation is on the way down. There has already been a fall of 2 percentage points since the peak last October, and there is widespread agreement that the fall in inflation will continue through 1991 and into 1992.
The prospects are now better than they appeared at the time of the autumn statement. The February survey by the Confederation of British Industry showed that the balance of firms expecting to increase prices was at its lowest level ever. The forecast published today, taking account of the effect of the Budget measures, is for inflation to fall to an average of 4 per cent. in the last quarter of this year and below 4 per cent. in the first half of 1992. The prospect, therefore, is that we will narrow the inflation gap with Europe remarkably quickly.
In the mid-
One of the lessons that I have learnt from years of grappling with economic statistics is that it is difficult to be certain about the past, let alone about the future. It is always especially difficult to predict the timing of turning points in the economy. However, there are good reasons to expect that the recovery will begin around the middle of this year, although initially it may be slow. As we found 10 years ago, confidence revives as inflation comes down. This time, the ending of the Gulf war will give the revival an added boost. Just as falling consumer spending contributed to the onset of recession, so returning consumer confidence is likely to lead the recovery. At the same time, the reduction of stocks is likely to slow and the United Kingdom will benefit from the upturn in the United States and elsewhere in the world.
As a result, I expect output to stabilise in the next few months and then to increase by about 2 per cent. between the first half of this year and the first half of 1992. Looking further ahead, our projections show growth of about 3 per cent. a year as the economy recovers further.
The easing of demand pressures has already brought a marked improvement in our current account. As the House will have noticed, there can be lags not just between policies and their effects, but between the effects in the real world and their appearance in the official statistics. As a result of the recent revisions of the figures for invisible imports and exports, the current account deficit for last year is now estimated at under £13 billion, £2 billion less than forecast at the time of last year's Budget. This year, I expect the deficit to be halved to £6 billion, about 1 per cent. of national income.
Regrettably, unemployment is likely to go on rising for a while yet, even after the recovery has started. How far and how fast it rises will depend, in part, on the speed with which pay settlements come down -
Fortunately, a sharp fall in inflation is in prospect, and the reforms that we have introduced over the past decade have led to more pay flexibility. Some firms have already deferred pay settlements or agreed pay pauses. The more firms that follow their lead, the sooner we can reverse the trend in unemployment, and start creating jobs again.
To sum up, the prospect for the year ahead is for an end to the recession, growth of about 2 per cent. in the 12 months to the first half of 1992, and inflation below 4 per cent. This does not seem to me an unpromising outlook.
For the longer term, there is every reason to be optimistic about the United Kingdom in the 1990s. Recessions are always painful, but they are an inescapable feature of market economies -
If I may confess it, I do not believe in miracles, but I do believe that the right policies, courageously and consistently applied year by year, can produce a transformation in an economy, and that is what happened in the 1980s.
So now we can build on real achievements : a record number of new businesses, faster growth in manufacturing productivity than in any major industrialised country, and faster growth in investment than in any of those countries except Japan. These achievements have helped us over the past seven years to maintain our share of world trade, after 30 years of decline. They made the 1980s the first decade since the war when the United Kingdom grew faster than Germany and France.
There is one proviso -
The costs of even a temporary reverse are high. Squeezing out inflation means high interest rates, frustrated hopes, bankruptcies and lost jobs. But the costs of living with inflation are even higher -
Frankly, after the experience of recent years, it surprises me how many people are urging me to let up on inflation. It may not seem much of a threat for the next six or 12 months, but I am concerned with the year after that and with the rest of the decade. The Government's decision to join the exchange rate mechanism last October provides a more secure framework for combating inflation in the future. That is its real significance. Linking sterling to other currencies with a proven track record of low inflation will be an added discipline on monetary policy.
We committed ourselves to that discipline after lengthy debate, and our decision was widely supported on both sides of the House, and in the country at large. The time has now come to apply ourselves wholeheartedly to the task of making our membership a success. So far, it has been. Sterling has traded comfortably within its band during a difficult period. The sterling index is much where it was just before ERM entry, and our patient approach has meant that recent reductions in interest rates have been well received by the markets. They have recognised that they are consistent with our ERM obligations, as well as fully justified by the domestic economy. Our entry into the ERM means that I have had to reassess the role of domestic indicators in guiding monetary policy. It should go without saying that interest rates will be set to honour our commitment to stay within the ERM band, but there is still a most important role for domestic monetary targets. All the major countries within the ERM take the same view.
Over the past year, M0 -
There should be no sustained conflict between domestic monetary indicators and our ERM obligations. By far the best way of minimising the risk that conflicts will arise in the future is to build up credibility within the ERM. The policies that are necessary to defeat inflation and to sustain the exchange rate are the same.
For the time being, I have no plans to move to a narrow ERM band. That remains, of course, our longer-
PUBLIC FINANCE AND FISCAL POLICY
I come now to the public sector finances.
Over the 1980s, my predecessors transformed our public finances and made them the envy of fellow Finance Ministers throughout the world. They first reduced and then eliminated our budget deficit, and in the last three years they repaid £26 billion of debt. The ratio of public sector debt to gross domestic product has been reduced from 50 per cent. in 1979 to under 30 per cent. now, to the benefit of this and future generations.
I am not going to fritter that legacy away. The firm control of public expenditure remains at the centre of our strategy. I will continue to aim for budget balance in the medium term. It is a simple rule, which is well understood and requires the Government to finance their spending honestly.
Our entry into the ERM does not alter the requirement for fiscal policy to buttress monetary policy and play its part in curbing inflation; so sound public finances will remain central to our strategy for the 1990s.
However, it is one of the more reliable laws of economics -
Those forces go into reverse when the economy slows down. That is why the Budget surplus has shrunk over the past two years, and why we are now likely to see the temporary re-
Those cyclical swings in the budget balance can play a useful role in offsetting the swings in private sector borrowing, and in stabilising the economy. They come about automatically, without the need for difficult judgments about the state of the economy. It is entirely consistent with the medium-
For the year ahead, I judge that a deficit of £8 billion can fairly reflect the strength of cyclical influences. For the same reason, I think it will be right to tolerate a somewhat larger deficit in 1992-
Those deficits will disappear once output has returned to normal levels -
To summarise : for the year ahead, I am budgeting for a PSBR of £8 billion, 1 per cent. of GDP, and I expect a somewhat larger deficit in the following year. These deficits reflect the effect of lower activity on the public finances and are fully consistent with the aim of a balanced budget over the economic cycle.
In order to hold to this prudent fiscal stance, my Budget today will have a broadly neutral effect in the coming year, but will produce a modest increase in revenue in 1992-
I now turn to my tax proposals. In preparing this part of my speech I have been guided by great Finance Ministers of the past -
"Get up your figures thoroughly and then give them out as if the whole House was interested".
Secondly, I have perhaps been influenced by Colbert, the French Finance Minister, who said :
"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing".
In framing my tax proposals, I have also sought to address a number of the concerns which have been put to me and to carry forward the process of tax reform initiated by my predecessors. Above all, I have produced a Budget for business. I therefore begin with business taxation.
In this country, there are 50,000 large companies paying the main rate of corporation tax, nearly 1 million other companies and 3 million unincorporated businesses, many of them very small, employing a handful of people at most. We should never forget those firms. My measures are designed to benefit businesses in each of those categories.
I have been particularly concerned about businesses which are experiencing cash flow problems, often made worse by late-
My first proposals concern the value added tax regime. For 18 years, ever since VAT was introduced, the rule has been that businesses become liable for VAT when they send out bills, not when they are paid, so some traders end up paying VAT even though their customers never pay them. In his Budget last year, my right hon. Friend the Prime Minister introduced an entirely new system for giving traders relief on bad debts. That comes into effect on 1 April and extends relief to all bad debts which are at least two years old. Many business organisations have complained to me that that waiting period is too long. I now propose to reduce it from two years to one. This will enable businesses to claim relief next year on the bad debts that they incurred in 1990-
Customs and Excise will therefore be taking steps to publicise the cash accounting scheme more widely. There is another aspect of the VAT regime which I know causes concern -
I accept that the penalty in its current form is an unnecessarily blunt instrument. We will therefore undertake a thorough review so that the SMP system can be reformed in the 1992 Finance Bill. I have also asked Customs to make some immediate changes to the rules, giving traders more time to put mistakes right themselves without incurring a penalty. I do not wish to pre-
Accounting for VAT can be an onerous duty for small traders. When VAT was introduced, we exempted firms with the lowest turnovers from registration. Since then, the registration threshold has been indexed.
European Community constraints have meant that, in the past, we have not been able to increase the threshold by more than the rate of inflation. At the end of last year, however, we pressed the case with the Commission to increase the VAT threshold. It responded very positively, and I therefore feel able to go far beyond indexation and to increase the turnover limit for registration by no less than 40 per cent. to £35,000, taking it to its highest level in real terms since the introduction of VAT in 1973. This will benefit up to 150, 000 traders. The cost of raising this threshold will be £25 million in the first year, rising to £40 million in 1993-
I have two further deregulatory measures to announce, which will benefit very small businesses. At present, all employers have to pay over the pay-
I have a proposal that will reduce the burden on some 700,000 smaller employers. From May onwards, employers making PAYE and national insurance payments of less than £400 each month will pay quarterly, not monthly. This will reduce the administrative burden on firms and help their cash flow, at a one-
I have one further measure to announce to help very small businesses account for tax. Last year, for the first time, businesses with a turnover below £10,000 were allowed to send the Inland Revenue a simple three-
There is a case for making a more radical simplification of the taxation of the self-
However, one way in which we can help business men and women to reap the rewards of their efforts is to improve the relief available to them when they retire and have to realise the asset that they have created. That is why I propose to reduce the qualifying age for capital gains tax retirement relief from 60 to 55, and to raise the limits on it. From today, the first £150,000 of capital gains and half of the next £450,000 will be exempt from capital gains tax. This will be a powerful incentive to entrepreneurs to start new businesses.
I have one other important change relating to capital gains tax on small businesses. Under existing law, only companies can offset their trading losses against their capital gains. I propose to give unincorporated businesses similar treatment. This will help small businesses if they wish to sell off assets to help themselves through a difficult period.
In addition to the measures that I have announced for small business, I wish to propose some changes to corporation tax. In his Budget last year, my right hon. Friend the Prime Minister raised the profit limits that govern the corporation tax rates paid by smaller companies. He increased the ceiling below which single companies pay corporation tax at 25 per cent. from £150,000 to £200,000, and the upper limit above which they pay the full rate from £750,000 to £1 million.
I propose this year to raise the limits again by a quarter. That means a total increase of 150 per cent. in three years. As a result, companies will need to be earning profits of more than £250,000 before they are liable to pay more than 25 per cent. Companies will not have to pay the full rate of corporation tax until their profits reach £1,250,000 a year. This will benefit 30,000 companies. In 1984, my right hon. Friend the Member for Blaby made a radical reform of corporation tax. In his time as Chancellor, the main rate of corporation tax was reduced in stages from 52 per cent. to 35 per cent., thus boosting companies' post-
I believe that the philosophy behind his reforms -
I propose today to take a further step in that direction. Corporation tax rates have remained unchanged at 35 per cent. since 1986, but since then the basic rate of income tax has been reduced from 30p to 25p and the top rate from 60p to 40p. I believe that the time has come to cut the main rate of corporation tax again. However, I am also aware that cutting the rate of corporation tax only helps companies that are making a profit. Many businesses that have prospered in recent years have moved into loss this year. A cut in corporation tax does not help them and nor, in some cases, do existing arrangements for the carry-
I am taking two measures to improve company cash flow. I am cutting by 1 per cent. to 34 per cent. the main rate of corporation tax, applied retrospectively to profits earned in the financial year 1990. This will give an immediate boost to the cash flow of companies that were profitable in the year just ending. It will benefit not only companies paying at the main rate, but the 30,000 other companies with profits between the lower and upper profits limits.
To help profitable companies that have just moved into loss, I propose to extend the carry-
My main concern in this Budget is to encourage profitable firms to go on investing in Britain's future. The best way in which to do that is to increase still further the post-
The two reductions in the main rate, from 35 to 33 per cent, will together cost £380 million in 1991-
The 1980s were years of remarkable progress in our economy, but even more striking was the change in attitudes. The crucial importance of the market is now widely accepted in this country, and even more widely accepted in the House. There is a much greater acknowledgement of the fact that market forces and competition play a vital part in shaping our economy. That remarkable change in ideas and attitudes is the lasting legacy and achievement of my right hon. Friend the Member for Finchley (Mrs. Thatcher).
My right hon. Friend recognised that the key to a better performance by the economy in the long term lay in improving the supply side; and, over the past decade, that has been the aim of our tax policy, trade union and labour market reform, our competition policy, deregulation and privatisation. But, if the United Kingdom economy is to perform to its full potential, we still need a more flexible labour market and a better-
If wages are inflexible, the burden of recession falls disproportionately on jobs : it is the only way for employers to cut costs. There is a considerable prize if we can get pay to take some of the strain. In 1987, we introduced a new tax relief to get profit-
At present, half an employee's profit-
There is another way in which employees can and should enjoy a stake in the companies for which they work -
I have given serious consideration to limiting executive share schemes solely to companies with all-
I also propose to increase substantially the limits on individual participation in approved all-
Another aspect of the supply side that needs improvement is training. A well-
However, more and more individuals are also choosing to take responsibility for their own training. Employers can get relief on the training they provide as a normal business expense, yet at present the tax system generally gives no relief to an individual who decides to pay for training to improve his or her skills. That cannot be right. If we want a better trained, more flexible work force, we should encourage people who want to help themselves. I propose to do just that. I am introducing a tax relief for the fees paid by an individual for training towards most national vocational qualifications and their Scottish equivalents. From April 1992, basic rate tax will be deducted automatically from the fees for qualifying courses, so non-
OTHER BUSINESS MEASURES
Many hon. Members have pressed the case for helping two specific industries this year : shipping and films. While I sympathise with their aims, I have to say that there is a limit to the extent to which we can -
The Gulf hostilities have reminded us of the important contribution which our Merchant Navy can make to our defence. I recognise that there is a strategic case for measures to encourage shipping companies to draw their crews from seamen in the United Kingdom, who would be willing and able to serve in time of war. Towards this end, I propose a further relaxation of the rules giving tax relief to seafarers working mainly overseas. This will mean that more seafarers will be exempt from United Kingdom tax on their overseas earnings. The film industry makes an important contribution to entertainment and culture in this country. The industry has put forward a number of proposals, but having studied these carefully, I am afraid I cannot accept them. However, I remain sympathetic, and if it has any alternative proposals that it wishes to put to me over the coming year, I will very happily consider them.
I know that the tax treatment of foreign exchange gains and losses causes difficulties for many businesses. This is one of the most complex and intractable areas of the tax code. Our 1989 consultative document elicited a valuable response but no consensus on the way forward. I am publishing today a further document setting out my specific proposals for reform, which I trust will bring greater rationality to this very important and complex area of the tax system.
I have also to correct one defect in the law affecting building societies. In a recent judgment, the House of Lords concluded that regulations covering the 1986 composite rate transitional provisions for building societies were technically invalid. If I were to take no action about this, there would be a windfall gain to building societies -
I turn now to trusts. In 1988, as Financial Secretary, I announced a review of their tax treatment. Today, I am publishing a consultative document on possible changes to the income tax and capital gains tax regime of United Kingdom resident trusts. My proposals include an alternative structure of tax rates, which would bring the treatment of trusts more into line with the treatment of individuals. They would also help to streamline the administration of trusts, saving work for trustees and their advisers.
We have also been reviewing the tax treatment of non-
I turn now to charities. While people's real incomes have risen by over a third since 1979, charitable giving has more than doubled, partly as a result of the measures taken by my predecessors to encourage more giving. Tax reliefs for charities are now worth at least £800 million a year. Today I have some modest improvements to announce to the tax regime for charities.
I have two measures that should boost giving by businesses. The first is a new relief from income and corporation tax to encourage business gifts of equipment to schools and to other educational establishments.
The second concerns the gift aid scheme introduced last year. This allows companies and individuals to get tax relief on cash donations to charities up to a limit of £5 million a year, under the gift aid scheme. Company groups have found that the division of this upper limit between them prevents them from donating as much as they would like. To overcome this problem, I propose to abolish the limit altogether from today. In recent years, there has been a remarkable increase in corporate donations to charities. I hope that this further measure will encourage companies to give even more.
I also propose to adjust some existing VAT reliefs for charities and to ease the conditions for the relief from car tax for vehicles leased to disabled people.
SPORT AND THE ARTS
I now come to a proposal to benefit both sport and the arts. Last year, my right hon. Friend the Prime Minister reduced pool betting duty, on the condition that the benefit was passed to the Football Trust. Following the success of that measure, a proposal has been put to me by one of the pools promoters for a new foundation for both sport and the arts.
League football benefited from last year's Budget measure, and racing benefits from the horse racing betting levy. This new foundation is intended to provide assistance to other sports and to the arts. It will be financed by contributions collected by the pools promoters along with the weekly pools betting stakes, and should raise some £40 million a year.
On the understanding that all the main pools companies agree to participate and that the full amount would be passed on to a new trust established on satisfactory terms, I would be willing to reduce pool betting duty a final time -
I now come to excise duties. First, I propose to raise the duties on alcoholic drinks to maintain their real value. That means that the duties will rise from 6 o'clock tonight by 9.3 per cent. -
I will also be legislating to change the basis on which beer is taxed. The existing system of taxing the so-
I propose increasing all tobacco duties by 15 per cent. -
There are strong health arguments for a big duty increase on tobacco. In recent years, the duty has fallen in real terms, and cigarette consumption, having declined in the early 1980s, has since begun to turn up again. Raising the duty will help to counter this unwelcome trend.
The motor car imposes large costs on others in the form of pollution and congestion. I have decided therefore to increase the duties on petrol and DERV by 15 per cent, giving the private motorist a strong incentive to choose more fuel-
A litre of leaded petrol will rise by nearly 4p, a litre of unleaded by about 3p and a litre of diesel by just over 3p. The tax differential between leaded and unleaded will increase, giving a further boost to the take-
BENEFITS IN KIND
Many motorists do not own their own cars but drive those provided by their employers. The scales for taxing the private use of company cars have been substantially increased in recent Budgets, but many employers continue to pay their employees in cars rather than in money. I propose to increase the car scales again this year by 20 per cent. This increase will yield £190 million in 1991-
If people are paid in kind, there is no reason why they should be taxed more lightly than people paid in cash, yet our present system also gives employers an incentive to provide employees with cars rather than cash. Under our present arrangements, they avoid making any contribution to the national insurance fund on the benefit that the employee receives from private use of a car.
I propose that company cars and fuel should now become liable for national insurance contributions, assessed according to the scale charges used for taxation. My right hon. Friend the Secretary of State for Social Security will introduce a Bill to that end. Employers will pay at the main rate, but there will be no change for employees.
Employers' national insurance contributions on cars and fuel will yield an extra £610 million a year of contributions. This will reduce an anomaly in the national insurance contributions system, making it more neutral between different kinds of payment, and will widen the national insurance contributions base.
These new arrangements will take effect from April, but contributions will be collected annually in arrears, so employers will not be asked to pay their first contribution until June 1992. They are already familiar with the scale charges used for the tax so they should be able to make the necessary calculations with the minimum of extra work. They are already familiar with the scale charges.
I turn now to what I regard as one of the greatest scourges of modern life. I refer to the mobile telephone. I propose to bring the benefit of car phones into income tax and to simplify the tax treatment of mobile phones by introducing a standard charge on the private use of such phones provided by an employer. Tax will be paid of £200 for each phone for 1991-
I have already drawn attention to the imbalance between savings and investment and its effects in the late 1980s. As companies found more and more opportunities to invest, we needed more savings; but instead, the saving ratio fell. In successive Budgets, my predecessors introduced new tax incentives to save. Many forms of saving now enjoy a highly privileged tax position.
Last year in particular, my right hon. Friend the Prime Minister announced a new scheme, the tax-
My right hon. Friend also announced in his Budget last year the abolition of composite rate tax. From 6 April, non-
I propose to raise the capital gains annual exempt amount to £5,500 and the inheritance tax threshold to £140,000 this year in line with inflation.
National Savings continue to play an important role, particularly for small savers. This summer, I propose to introduce a new National Savings children's bond for children under 16. There will also be a new issue of fixed-
I am also removing the restrictions on friendly societies writing tax-
Personal equity plans remain an important means of promoting direct share ownership. Since their introduction in 1987, about 1.2 million PEPs have been taken out, and over £3 billion has been invested. I have some further changes to announce.
First, I intend to allow investment in European Community, as well as United Kingdom, shares both for individuals and for unit and investment trusts. Second, to promote the development of single-
Employee share schemes and PEPs have encouraged individuals to become shareholders, but many people have bought their first shares in big offers, mainly privatisations. The first of these to catch the public's imagination was British Telecom. The Government currently still own some 48 per cent. of the shares, and I can announce today that I intend to sell part of this holding in the coming year.
Privatisations have been a great success. The next step is to encourage people to invest in shares more generally. One problem is that, to the small investor, the stock market can seem remote, intimidating and somewhat expensive. The development of a genuine retail market for shares in high streets up and down the country would be highly desirable.
To give this the boost it deserves, the Government are considering a change in the way in which they market privatisations. For future large flotations, I am today inviting proposals from the private sector for arrangements to distribute shares directly to the public through high street retail networks.
I hope that there will be proposals both from financial institutions -
Such a high street network could be used for primary issues, not only by the Government but by private sector companies and, in the longer term, it could provide a cheap and accessible way for individuals to buy and sell in the secondary market.
MORTGAGE INTEREST RELIEF
The measures that I have just announced will encourage people to save, but there is another side to the story, for the fall in the saving ratio at the end of the 1980s was a result not of a fall in gross savings so much as an increase in borrowing, particularly mortgage borrowing.
In part, that reflected the remarkable increase in home ownership over the last decade. That has been, and remains, a key objective of policy for the Government. A less desirable development, however, was the dramatic boom in house prices during the late 1980s, which fuelled borrowing and helped boost inflation. Many first-
I recognise that some people have arranged their affairs on the assumption that higher rate relief will continue. Therefore, to reduce the amount of extra tax they have to pay, I propose to increase the starting point for higher rate tax from £20,700 to £23,700, £1,000 more than required to match inflation. That will keep the number of higher rate payers broadly stable and mean that a married man will not become liable to higher rate tax until his earnings rise to nearly £29,000.
My objective is to reduce the tax subsidy to borrowing without significantly increasing the average tax burden on higher rate taxpayers. Taking those changes with the changes to the personal allowances that I am about to announce, the typical increase in liability for a higher rate taxpayer with a £30,000 mortgage will be only around £1 a week. Of course, the main determinant of the cost of a mortgage is not tax relief, but interest rates. For a higher rate taxpayer with a £50,000 mortgage, the fall in the typical mortgage rate that has already taken place since last autumn fully offsets the change that I am making to mortgage interest relief.
I now come to income tax. Income tax is never welcome, but paying tax unexpectedly is even less so. That is the position facing employees who were working in Kuwait and Iraq at the time the Gulf crisis began. They may now become liable to pay United Kingdom tax on their foreign earnings which they had expected to be exempt. I propose that employees who had intended to work in Kuwait or Iraq for a year or more but were forced to return home earlier by the crisis should not be taxed on their foreign earnings.
I have no changes to make to either the basic rate or the higher rate of income tax. Our objective remains to move towards a basic rate of 20p, but I cannot make further progress towards it this year. Our priority must be to reduce taxes on business.
I propose this year to uprate the personal allowance in line with inflation. It will rise by £290 to £3,295. The personal allowance for the over-
However, I am not proposing to increase the married couple's allowance for couples under 65 or the allowances that are linked to it. They will stay at £1,720.
I know that there is a widespread view in the House and in the country that more should be done to help families with children. I propose to use the resources released by not increasing the married couple's allowance for that purpose.
There are some, I know, who advocate the reintroduction of child tax allowances. I have looked at that option carefully, but I am clear -
I therefore propose to increase child benefit from 7 October by £1 a week for the first eligible child in each family, and by 25p a week for other children. These rises come on top of the increase announced by my right hon. Friend the Secretary of State for Social Security last autumn, which will be paid from 8 April. This means that, in October this year, a benefit of £9.25 a week will be payable for the first child, and £7.50 for each subsequent child.
We will ensure that the increases benefit not only taxpayers but the very poorest families -
CENTRAL AND LOCAL TAXATION
The measures that I have announced today maintain a responsible fiscal policy, while giving help to industry and families. They also include some important reforms to the tax system. However, my Budget would not be complete if it did not address one other issue, which has attracted a certain amount of attention recently.
My right hon. Friend the Secretary of State for the Environment will be announcing very soon the conclusions of our review of local government. I do not propose to anticipate his statement, but there is one announcement I want to make today.
In January, we announced a £1 billion package to reduce the community charge for more than half of all charge payers. Since then, I have been considering whether the impact of local expenditure on the local taxpayer is too great for any system of local taxation to bear.
I have concluded that local taxes are being asked to bear too large a burden, and that the level of the community charge is still too high. However, if local taxes are to fall, and if the standard of local services is to be maintained, taxes elsewhere must rise. I propose, therefore, to make a substantial switch from local taxation to central taxation. This will amount to about £4 billion in the coming financial year -
We shall introduce a Bill in the next few days to authorise payments of extra grant to local authorities, and to ensure that community charge payers will reap the full benefit in reduced charges in the coming year -
The Bill will also ensure that charge payers do not have to start paying their charges until the new and lower charges have been introduced. Later today, my right hon. Friend the Lord President of the Council will make a statement about the arrangements for the Bill. The switch requires a substantial increase in central taxation. I have decided that this should be achieved by raising indirect taxes -
I am proposing, therefore, from 1 April to increase the standard rate of value added tax by two and a half percentage points to 17 per cent. VAT is a broadly based tax which falls on consumers rather than producers. Since much consumer spending is zero-
The measures I have announced are designed to meet the three main requirements of any Budget. First, they represent sound finance, and contribute to a firm counter-
This Budget is good for business, good for families, good for charge payers and good for the country. I commend it to the House.