We must lock in stability, not for a year or two but for a generation

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

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

The purpose of this Budget is to lock in, for Great Britain, an economic stability that can and will endure. And it is a sign of the stability Britain has already achieved, and a tribute to the dynamism and hard work of the British people, that even after the creation since 1997 of 1.8 million new jobs, 1.3 million in the private sector, and over 100,000 extra businesses, today and every working day another 600 new businesses are starting up, 25,000 men and women each and every day are finding new jobs and an additional 10,000 new vacancies are each day being advertised - with new jobs being created at three times the rate of the 1970s, 80s and early 90s.

For decades after 1945, Britain repeatedly relapsed into recession, moving from boom to bust. But since 1997 Britain has sustained growth not just through one economic cycle but through two economic cycles, without suffering the old British disease of stop-go - with overall growth since 2000 almost twice that of Europe and higher even than that of the United States. Indeed in the pre-Budget report I told the House that Britain was enjoying the longest period of sustained economic growth for more than one hundred years. Mr Deputy Speaker, I have to apologise to the House. Having asked the Treasury to investigate in greater historical detail, I can now report that Britain is enjoying its longest period of sustained economic growth for more than 200 years ... the longest period of sustained growth since the beginning of the industrial revolution.

And with Britain not only more stable but better off than seven years ago, it is time for us to make the right long-term choices and reforms to achieve excellence in education, science and enterprise.

Mr Deputy Speaker, last year we forecast growth for 2003 of between 2 and 2 1/ 2 per cent. When I made that forecast a year ago the Opposition said that it was not just incautious and wrong but - and I quote - "a deliberate misrepresentation" of Britain's economic prospects and not to meet it "destroyed credibility". I can now report to the country that our growth in 2003 has indeed met our forecast. The British economy grew in 2003 by 2.3 per cent. And now having come through the world downturn and as trade strengthens, the challenge for British industry is to make the most of the new opportunities of the world upturn. We expect domestic demand to grow by 3 1/ 2 per cent this year and by 3 1/ 4 per cent in 2005 as consumer spending moderates and growth becomes more balanced. Manufacturing output is expected to grow in Britain by just under 2 per cent this year and 2 per cent next year. And imports and exports are both expected to grow by more than 5 per cent this year. So, overall, I can report a British economy strengthening through 2004. While always vigilant to the risks, growth in 2004 is expected to be: 1.7 per cent in France, Germany and the euro area; 2.8 per cent in Japan; but between 3 and 3 1/ 2 per cent in Britain; with, of the G7 countries, Britain and America again growing fastest. And I can confirm that under our new target, inflation is expected to be just 1.75 per cent this year, and 2 per cent next year and the years after. I can forecast growth in Britain in 2005 to be 3 to 3 1/ 2 per cent and in 2006 to be 2 1/ 2 to 3 per cent as the economy returns to trend.

Looking further forward, the challenge is to strengthen the British model for stability and our objective must be to lock in that stability - not just for a year or two, or for an economic cycle, but for a generation.

Last week Professor David Miles recommended a more transparent and competitive market in mortgage finance, which will now be considered by the Government and the Financial Services Authority. The report by Kate Barker published today concludes that the supply of new homes consistently lags behind demand and that the numbers of houses built - currently 175,000 a year - must rise substantially if we are to reduce house price inflation and increase the number of affordable homes for people wishing to buy and rent. The Government today accepts the Barker recommendations for British real estate investment trusts to improve the supply of rented property; for the release of more public sector land; for - in each region - one body responsible for housing and planning; and, in principle, for extending the contaminated land credit in brownfield areas.

Last year we identified the housing market, housing finance and other inflexibilities in capital, product and labour markets as barriers to meeting two of our five tests for euro membership. Today we are publishing, alongside the Budget, a detailed report on flexibilities in Britain and Europe - and I can inform the House today that while the Government does not propose a euro assessment be initiated at the time of this Budget, the Treasury will again review progress at Budget time next year and report to the House.

Our first fiscal rule is that over the cycle we balance the current budget. Having accumulated surpluses at the start of the economic cycle, we meet our first rule, the golden rule. Indeed we have an average annual surplus over the whole cycle - an overall margin or surplus of £11bn. The average current budget for the first four years of the next cycle is not just in balance but in surplus. So having met our rule in this cycle, we are also on track to meet it in the next.

I can report that debt this year is just 33 per cent of national income. Our rule is that debt should be kept below 40 per cent of national income and in future years it will be 34, 35, 36, 36 and 36 per cent. This compares with debt of 44 per cent in 1997.

I turn to net borrowing. Compared with 8 per cent 10 years ago, and an average of 6 per cent over the early Nineties, net borrowing this year and future years to 2008-9 is, as a percentage of GDP, 3.4, 2.8, 2.5, 2.1, 1.9 and 1.6 per cent of GDP, with, for this and future years, the cash figures £37.5bn, £33bn, and then £31, £27, £27 and £23bn. Net borrowing adjusted for the economic cycle is just 2.4 per cent this year and in future years 2.1, 2.3, 2.1, 1.9 and 1.6 per cent of GDP.

Our deficit is now lower than all our major competitors of the industrialised world. As a percentage of GDP the deficit in 2004 is: 3.7 in Germany and France; 5.1 in America; 6.8 in Japan; but the comparable British figure is just 2.8 per cent. Net debt is now 45 per cent of national income in France, in America 50 per cent, in Germany 55 per cent, in Japan 86 per cent and in Italy 94 per cent - but this year in Britain just 34 per cent.

And it is because of this that I am now able in this Budget to afford all our existing commitments including our commitments in Iraq, Afghanistan and in the fight against terrorism amounting to £6bn; and to have in addition the flexibility and freedom in this year's Budget and the Spending Review to release extra resources for the nation's priorities.

So I am able in this Budget - with a strengthening economy and a strong and sustainable monetary and fiscal position - to set out the Government's choice on how to allocate these extra resources.

One option - having secured, in recent years, the gain from stability and sustained growth - would be to cut borrowing or taxes. But on borrowing, both debt and deficits are lower than our major competitors, much lower than in the past and well within our fiscal rules. And on tax, whilst I have raised national insurance to pay for the National Health Service, I have already cut long-term capital gains tax for business assets from 40p to 10p, introduced a 10p starting rate for income tax, and in previous Budgets since 1997 cut the basic rates of income tax, corporation tax and small business tax.

I have examined rates of corporation tax and capital gains tax. I have no need to raise them, so I propose to freeze rates. On air passenger duty, on insurance premium tax, on vehicle excise duty for cars and lorries, I propose to freeze rates. On the climate change levy, I will freeze rates and extend the number of businesses who can benefit from 80 per cent discounts.

On betting duties, I will freeze rates - and I will review the tax treatment of betting exchanges and their clients. I will freeze stamp duty. On inheritance tax I will not only freeze rates but I will exempt more estates from inheritance tax, raising the starting point for tax to £263,000 - 95 per cent of estates will pay no inheritance tax at all.

Today the Government is accepting and will implement the Lyons Review for the relocation of Civil Service jobs. We will relocate out of Whitehall a total of 20,000 public service jobs ... creating new employment opportunities in the regions and nations of our country.

I propose to transfer the available reliefs for British-made films with budgets below £15m from the third parties, a minority of whom have abused them, and to pay reliefs directly to the film-makers themselves. The new relief will be set at a new and higher level of 20 per cent.

I will delay, for the second year running, the annual rise in fuel duty for nearly six months.

From next Monday I will implement the normal annual inflation rise of 1p on a pint of beer, 4p on a bottle of wine. But I will freeze duties on cider and sparkling wine. And for small breweries, I will not only continue the successful tax relief scheme but extend it further and double the volume of beer production that is eligible for relief. I have also decided - for the seventh budget in a row - to freeze spirits duty. My decision on cigarettes is, for public health reasons, to go ahead with a rise, but only the annual inflation rise of 8p a packet.

The choice in this Budget was whether to cut tax rates or to continue our programme of rising public investment in order to meet the priorities of delivering stability, security and economic strength. I will report in the Spending Review on individual departmental plans but I can announce three decisions today. The Department for Work and Pensions is able to unlock savings in back-office administration and at the same time move resources to the front line. The Secretary of State for Work and I have agreed a reduction, by 2008, in the DWP budget of in excess of 5 per cent in real terms. And the Secretary for Work is announcing today for his Department a gross reduction of 40,000 staff posts, a redeployment of 10,000 posts to new priorities and thus an overall reduction over 4 years of 30,000 posts. Staff numbers will fall from 130,000 now to - by 2008 - 100,000.

We are also announcing that as a result of the O'Donnell review, we will merge Her Majesty's Customs and Excise and the Inland Revenue. Business will now deal with a single tax service, which, because of the investment we have made in new technology, can make large savings in back-office costs.

And the Government has also decided that in the Spending Review all departments will cut, by 2008, their administration budgets by at least 5 per cent in real terms. As part of his efficiency programme, the Secretary of State for Education is announcing today a 31 per cent reduction in headquarters staff by 2008, which will enable him to direct more funds straight to schools and spend more cash per pupil in the classroom. By cutting in real terms the administrative budgets of departments, by reforming procurement both nationally and locally, by unlocking productivity gains from technology and workforce improvements, departments are to achieve annual efficiency savings of 2.5 per cent a year, boosting effective front-line service delivery by £20bn a year by 2008.

Having made these reforms I can now set the guidelines for overall public spending and investment to 2008. I have already allocated money for 2005-6 and I propose to confirm that allocation.

I have also allocated funds to the National Health Service through to 2008. I can now confirm that as previously announced the NHS will receive, each year to 2008, a 10 per cent cash rise, a 7.2 per cent rise in real terms.

And having made these allocations, I am still able to release substantial resources while meeting all our fiscal rules.

In the years 2006-7 and 2007-8, current spending will rise by 2.5 per cent - in line with the our cautious view of the trend growth of the economy - and investment will rise to 2 1/ 4 per cent of GDP, as we make up the backlog of investment whilst meeting our fiscal rules.

This means we have in 2006-07, for Departmental and Annually Managed Expenditure, after our health allocations, additional resources available of £20bn rising by 2007-8 to an extra £40bn a year as a result of gains from growth, falling unemployment and low debt interest. And in this Budget and later in the Spending Review I will allocate these resources.

I believe it essential that as skills, knowledge and technology become more central to our future prosperity, now is exactly the right time to raise investment in British science and British education. And this is our Budget choice.

Mr Deputy Speaker, we cannot be a strong economy if we are weak in education and science. So first on science and innovation, we will work with the scientific community and our science-based companies so that we can raise the level of science funding as a share of national income, with one purpose: to make Britain the best and the most attractive location for science and innovation in the world.

Our capital investment allocations will ensure that by 2015 every secondary school can be refurbished or rebuilt with world-class technology in every school and the best state of the art learning support in every classroom.In line with our commitment to get resources to the front line, the settlement for education I am announcing today will ensure more money goes direct to the school and the headteacher. And for the year 2005-6 there will be a payment in the typical primary school direct to the headteacher of over £55,000, and in the typical secondary school payments direct to the headteacher of £180,000.

And to fund our further school reforms and a rising number of teachers and teaching assistants, I can announce, for England, the educational settlement in full for the years to 2008: that there will be a real terms rise averaging, after inflation, 4.4 per cent a year. In 1997 England spent just £2,500 per pupil, today it is £4,500. By 2007-8 it will be £5,500 per pupil - more than twice the 1997 figure, and £1,000 more per pupil between now and 2007-8.

I have one final announcement. I understand the difficulties today faced by older pensioners on fixed incomes, especially the over-70s. The evidence shows that their council tax bills take a higher share of their income than the rest of the population. So for this year for those over 70, on top of the winter fuel payment, we will pay an additional £100 to each household.

Mr Deputy Speaker - our foundation: economic stability; our achievement: sustained growth; our choice: more investment, not less. Our prudence is for a purpose. And I commend this Budget to the House.