Pocket Budget

The Budget sets long-term ambitions for Britain by:

securing economic stability based on low inflation and sound public finances;
encouraging work and making work pay, by extending the New Deal, tackling skill shortages and reforming tax and benefits;
promoting enterprise through a range of tax incentives to boost investment, small firms and research and development;
creating a fairer society and protecting our environment through fairness in tax and spending.

Ambitions

The UK economy faces major challenges in the 21st century including:

responding to globalisation and increasing global competition;
raising skills so we benefit from modern communications and the information revolution;
securing growth and fairness by raising long-term growth and tackling social exclusion.

Structural weaknesses

There are key structural weaknesses which need to be tackled:

1 in 5 working age households has no-one in work;
accumulated investment per employee is lower in the UK than in other leading economies like Japan, Germany and the USA;
research and development lags behind our major competitors.

Main business measures at a glance

Income Tax

Lower, basic and higher rates are unchanged at 20p, 23p and 40p. As usual, income tax allowances will be raised in line with inflation, with the lower rate limit raised by £200 to £4300, and the basic rate limit raised by £1000 to £27100. The Government remains committed to introducing a new 10p rate of income tax when it is economically right to do so.

National Insurance Contributions

In 1999 all employees paying National Insurance Contributions (NICs) will get a tax cut of £66 a year. Also, from 1999, reform of employer NICs will cut the cost of employing workers on low and middle incomes.

Children

Child benefit will be increased by £2.50 a week for the eldest child from April 1999. Child premium for children under 11 on Income Support and Family Credit will be increased by £2.50 a week from November 1998.

Working Family Tax Credit

A radical package of tax and benefit reform will encourage work and opportunity. A new Working Families Tax Credit will help those on lower incomes keep significantly more of what they earn and will provide new help with child care through the tax system.

Corporation Tax

From April 1999 the main rate of corporation tax will be cut by 1 per cent to 30 per cent and the small companies rate of corporation tax will be cut by 1 per cent to 20 per cent.

Extra money for health and education

A £500 million package for health and a £250 million boost to education and skills is being made available in 1998-99.

New Agenda

The Government took swift action when it came into office to stop a return to boom and bust and to get inflation back under control. But more needs to be done to raise long-term economic and employment growth and to meet the challenges facing the UK.

A Budget for economic stability

Economic stability is vital for high levels of growth and employment.

Low inflation and sound public finances will enable people and businesses to plan and invest for the long-term which is vital if Britain is to prosper in the 21st century.

The Government will legislate for a Code for Fiscal Stability to complement earlier reforms to the Bank of England and to the conduct of monetary policy.

The Code will require fiscal policy to match up to clear principles, detailed reporting arrangements and modern accounting methods. It will ensure a more disciplined, open and accountable approach to managing the public finances. These changes put Britain at the forefront of economic policy reform.

From now on all governments will need to live up to tough standards of fiscal practice. Assuring that public finances are managed in a responsible and prudent way helps reinforce economic stability.

Tough rules are already in place to deliver the five year deficit reduction plan. Progress in reducing public borrowing has been faster than expected.

A shared economic and social vision

The recent G8 Conference on Growth, Employability & Inclusion held in London, in February 1998, showed that the Government's vision for the future is increasingly shared by the other major leading industrial countries.

A Budget to encourage work and make work pay

There is a three-part package to encourage employment: extending the New Deal to new groups; radical tax and benefit reform measures which, along with the minimum wage, will help to make work pay; and a skills package to improve on IT and other skill shortages.

Extending the New Deal

Under the New Deal an extra £50 million is to be made available to help the most disadvantaged out of work young people. The New Deal will also be extended through £100 million of pilot initiatives to help 70,000 long-term unemployed people aged over 25. There will also be new help for lone parents, non-working partners of the unemployed, and disabled people, to help them back to work. Also, a New Deal for Communities will target help for some of the most deprived housing estates.

Making work pay

A radical package of tax and benefit reform will encourage work and opportunity. A new Working Families Tax Credit (WFTC) will help those on lower incomes keep significantly more of what they earn. WFTC will:

be introduced from October 1999, replacing Family Credit. It will provide around £5 billion of in-work support and benefit nearly 1½ million families;
guarantee working families a minimum income above and beyond the minimum wage. A family on £200 a week with two young children will be £23 a week better off as a result of the Budget;
reduce the tax burden on families, raising the effective point at which they begin to pay income tax to the highest level since the 1960s.

In 1999 all employees paying NICs will get a tax cut of £66 a year. Also, from 1999, reform of employer NICs will cut the cost of employing workers on low and middle incomes.

The Budget and household income

A budget to promote enterprise

The Budget contains a comprehensive package of measures to promote enterprise, encourage investment, and reward risk-taking.

Corporate tax system

the main rate of corporation tax will be cut by 1 per cent to 30 per cent from 1 April 1999;
Advanced Corporation Tax will be abolished from 6 April 1999;
large companies will pay tax quarterly.

Promoting investment by small and medium sized enterprises (SMEs)

small companies corporation tax will be cut by 1 per cent to 20 per cent from 1 April 1999;
small and medium sized companies will be exempted from quarterly payments of corporation tax;
extended enhanced allowances will be given to small and medium sized businesses for investment in machinery or plant. Allowances will be set at a new rate of 40 per cent from 1 July 1998, for one year.

Encouraging dynamic and innovative businesses

capital gains tax reform for business assets will mean long-term gains are taxed less heavily than short-term gains;
an Enterprise Investment Scheme will encourage the provision of equity capital for small higher risk companies;
a new University Challenge Fund will help universities turn good ideas into good business by creating £50 million in venture capital.

Reducing burdens on business

the Contributions Agency will transfer to the Inland Revenue in April 1999 to help reduce compliance costs for employers;
an extended payroll assistance scheme will reduce costs for new employers.

Creating a fairer society for all

Families and children

Child care will be made more affordable and barriers to work will be removed. Child benefit for the eldest child will be increased by £2.50 a week from April 1999.

Health

A £500 million package for health in 1998-99 will bring to £2 billion the extra amount committed in the first two years of the Government to reduce hospital waiting lists.

Education

There will be a £250 million boost to education and skills in 1998-99. Additional funding for the University for Industry will ensure it spearheads the skills revolution, helping both businesses and individuals.

Environment

The tax system will be fair to future generations and the world in which we live. Greenhouse gases and local air quality will be tackled.

Transport

A £500 million package over the next two years will improve public transport. This includes £50 million a year specifically for rural transport.

Savings

From April 1999 a new savings account will spread the savings habit to those on low incomes and encourage long-term saving. This 10 year savings scheme will allow up to £5000 a year (up to £7000 in the first year) to be saved tax free. PEPs held before April 1999 will continue on the same tax free basis but with no further contributions. TESSAs will be available until April 1999 and contributions allowed to continue for the full 5 - year life.

Avoidance

A further range of measures to curb tax avoidance, close tax loopholes and remove unfair tax advantages will save £1.5 billion over three years.

Other budget measures at a glance

Married couple's allowance

Tax relief for married couple's allowance and linked allowances will be restricted to 10 per cent from April 1999. People aged 65 and over, on modest incomes, will be protected.

Alcohol

Spirits duty is frozen. Beer and wine will increase in line with inflation from 1 January 1999, equivalent to 1p on a pint of beer and 4p on a bottle of wine.

Tobacco

Duty will be increased by 5 per cent more than inflation from 1 December 1998, equivalent to about 21p on a packet of twenty cigarettes.

Road Fuels

There is a commitment to raise duty by 6 per cent more than inflation. Tax will increase immediately by 4.9p a litre on leaded and 4.4p a litre on unleaded petrol and ultra low sulphur diesel. Ordinary diesel will go up by 5.5p a litre. Road fuel gas duties are frozen.

Company cars

A 20 per cent increase over indexation will be introduced in scale charges for employees provided with free fuel for private use.

Stamp duty

This will increase from 1½ per cent to 2 per cent on properties between £250,000 and £500,000 and from 2 per cent to 3 per cent above £500,000.

Vehicle Excise Duty

This will be frozen. Consultation will follow on graduating VED for cars with potential lower rate of £100 for least polluting cars.

Travel expenses

Relief will go to employees for full costs incurred in travelling on work duties.

VAT

There will be a reduction from 17½ per cent to 5 per cent on the installation of energy savings material under certain grant schemes from July 1998.

Summary of the economic forecast

per cent
	1996	1997	1998	1999	2000
Growth of the economy¹	2½	3	2-2½	1¾-2¼	2¼-2¾
Inflation²	3¼	2¾	2¾	2½	2½
Public borrowing³	22¾	5	3¾
¹ GDP ² Q4, retail prices less mortgage interest payments ³ PSBR £billion, excluding windfall tax receipts and associated spending (financial years)

Economic background

By 1997 the economy had largely used up its spare capacity and was growing at an unsustainable rate, putting upward pressure on inflation.

Growth

The policy actions taken since last May have put the economy on course to get back on track for more sustainable growth. The forecast ranges show how responsible wage bargaining, combined with the Government's Welfare to Work measures, offers the chance of higher levels of prosperity over the next few years.

Inflation

Underlying inflation is forecast to rise to around 3 per cent in the middle of this year, before falling back to the 2½ per cent target by the end of 1999.

Public Borrowing

Excluding windfall tax receipts and associated spending, public borrowing (PSBR) is forecast to fall from £22¾ billion in 1996-97 to £5 billion in 1997-98, and £3¾ billion in 1998-99, consistent with the Government's five year deficit reduction plan.

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