'There will be a step-change in capital spending'

This is an edited version of the Chancellor's statement to the House of Commons yesterday:

This is an edited version of the Chancellor's statement to the House of Commons yesterday:

Now, building on the foundation of stability and strengthened economic fundamentals, we can move to the next stage in creating a better future, to make good the damage done by a legacy of decades of under-investment in services like health, education and the police.

The aim is to close the productivity gap with Britain's competitors, to deliver full employment and halve and then abolish child poverty.

Prudent, targeted long-term investment is not only a social good, but in a changing world it is now an economic necessity. It is only by investing in education, science and the future of our children that we can equip ourselves for future economic success.

It was only by investing in health, transport, the environment and law and order that Britain could secure a more productive economy and security for all.

The first conclusion of this year's Spending Review is that prudent targeted long-term investment is not only a social good, but in a changing and often insecure world an economic necessity.

We will raise current expenditure by 2.5 per cent a year in line with expectations but there will be a step change in capital spending on education, science, police, health and transport.

It is only because we have put public finances on a sustainable footing that I can raise spending today. It is the same discipline that allows me to inform you that we have repaid £6.2bn more debt than the £11.9bn originally planned. In total a debt repayment of £18.1bn is the largest repayment in any year since the [Second World] War.

Net capital investment will more than double from £7bn this year to £18bn by 2004.

New resources will be tied to reform and results in public services, by locking in incentives, penalties and inspections. At every stage money will be tied to output and performance. We meet both our fiscal rules even on the most cautious view of trend growth of 2.25 per cent.

We will not repeat the mistakes of the North Sea oil windfall or the privatisation sales, where receipts were immediately used up in current spending. All the capital proceeds will, as with the £22bn from the first sale of spectrum [mobile phone licences auction], go to further reduce the burden of debt. As debt is reduced so too are debt-interest payments.

Second, departments and authorities will make asset and property sales of £4bn a year over the next three years. And because money is tied to modernisation, the new public-service agreements will specify agreed timetables for making necessary reforms.

As a result of efficiency targets and a fall in administration costs and total government spending, new money makes possible a substantial shift in spending to the front-line services - more nurses, doctors, teachers, classroom assistants and police.

And with this improvement comes a radical shift in the composition of public spending, Our promise was to reduce the cost of failure, the bills for unemployment and debt interest, in order to reallocate money to the public services.

While much previous spending has been directed to dealing with the consequences of economic and social failure, it is now time to invest in tackling the causes of failure - poor school results, poorer standards of public health, and low levels of economic activity.

By investing in children the Government is investing in the future of the country. The war against child poverty requires not only additional cash but the support and encouragement of all forces of care and compassion in every community.

The best education for all, from early learning to lifelong learning, is not only a time-honoured social ideal but in today's world an absolute economic necessity. That is why we have decided to make increased investment in education the priority of this year's review.

We have made our choice. It is for those who oppose our spending plans to state clearly where their cuts would fall.

New funds are being allocated to advance the Government's goal of full employment, as any potential squandered is a resource denied to the country's future. A strong civic society is built not by rights alone but by rights and responsibilities.

Britain is the best place in Europe to do business with world-class companies in science and technology.

We must put in place the long-term investment which is the precondition of a strong economy and of bridging the productivity gap with our competitors and avoid the short-termism of the past.

This Government has been prudent for a purpose. Our choice is stability, employment and sustained long-term investment, now and into the next Parliament, to create a Britain of security and opportunity for all.