Chancellor's speech: 'We must reduce the rate of growth in public spending'

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Mr Speaker, today's pre-Budget report takes place at a critical time for our economy and for our country. The task today is to secure the recovery and promote long-term growth.

This time last year in an unprecedented move, I cut VAT to 15 per cent for a year. This countered the impact on businesses of the global credit squeeze. I can confirm that VAT will return to 17.5 per cent on January 1 as planned. I have no other changes in VAT to announce....

Such a deep global recession was always going to have a damaging impact on employment. Past recessions have had a very damaging impact on young people. 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. We will (also) ensure the over-50s receive specialist and tailored support, to equip them with the confidence and skills needed to get a job....

As well as investing in clean and low-carbon technologies, we must become more energy efficient, to cut emissions as well as household bills. Each inefficient boiler adds over £200 to household bills and one tonne of carbon to the atmosphere a year. Building on our successful car scrappage scheme, I will help up to 125,000 homes replace the most inefficient boilers with new models. From April, people with a home wind turbine or solar panels who plug their excess power into the national grid, will receive on average £900 a year. I intend to make this payment tax free.

To help boost the number of electric cars on our streets, I have decided to exempt them from company car tax for five years. And I can also announce a 100 per cent first year capital allowance for electric vans.

Supporting growth is vital to provide the future revenue to halve borrowing over four years. But it requires us to take tough decisions on tax now. The banks last year made collective losses of £80bn in this country alone. This would have been much higher without the unprecedented level of support from the taxpayer. This should be a time for banks to rebuild their capital base and become stronger. A tax on profits, as has been suggested, will prevent them from doing this. So I have decided against a windfall tax.

However, there are some banks who still believe their priority is to pay substantial bonuses to their 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. Anti-avoidance measures will be introduced with immediate effect.

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 paying income tax at 40 per cent for one year....

In 2010-11 total public spending will increase by £31bn, 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.

But once the 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.

Today I am able to announce £5bn of savings from spending programmes, including 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.

Public pensions need to be broadly in line with those offered in the private sector. So by 2012 contributions by the state to public service pensions for teachers, local government, NHS and the Civil Service will be capped – saving around £1bn a year. Public sector workers will make a greater contribution to the increasing value of pensions, with those earning over £100,000 paying more....

The whole House 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 next year, I can announce that a further £2.5bn will be set aside for military operations in Afghanistan.

Mr Speaker, our top priority is to protect those services which are absolutely essential to the health of our society and the strength of our economy. This 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 a per cent from April 2011.... This will raise £3bn a year from 2011-12. As a result, Mr Speaker, I am today able to offer guaranteed minimum real-terms increases in spending on front-line NHS and schools for two years from 2011.

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. I commend this statement to the House.

This is an edited version of the Chancellor's pre-Budget speech