The Chancellor’s statement responds to the Office for Budget Responsibility’s ‘Economic and fiscal outlook’, published at 1pm on 29 November 2010. In his statement the Chancellor announces a Growth review and a plan for Corporate Tax reform. Find out more about each of these:
Mr Speaker, I would like to make a statement regarding the Office for Budget Responsibility’s first Autumn Forecast.
I will also inform the House about further measures that the Government is taking to support economic growth, including the new Growth Review launched today and a far-reaching programme of reforms to our corporate tax system.
And following yesterday’s announcement by European finance ministers I would like to take the first opportunity to update the House about the Irish situation and the UK’s involvement.
First, the OBR’s Autumn Forecast.
Copies of their report were made available in the Vote Office earlier today.
Mr Speaker, we should take a moment to recognise the significance of this occasion - and the practical demonstration of this Government’s commitment to transparency and independent forecasting.
Today is the first time that members of this House will engage in debate about an autumn forecast produced by the independent Office for Budget Responsibility, rather than conjured up by the Chancellor of the Exchequer - and available to read two hours before this statement.
This is also the first forecast by the new independent Chair of the OBR, Robert Chote, with the other members of the Budget Responsibility Committee, Stephen Nickell and Graham Parker, whose appointments were approved by all Treasury Select Committee members from both sides of this House.
The country can have full confidence in the independence of these numbers.
The OBR report published today includes some 150 pages of information, an unprecedented level of detail and transparency, much of it of the kind available to previous governments but never published.
So I would like to thank the Budget Responsibility Committee and the staff of the OBR for their hard work in putting together this autumn forecast, and I hope we now entrench this major improvement in the making of fiscal policy by passing the legislation currently before Parliament.
While today’s figures are of course independent, these are still just forecasts, and we must treat them with the degree of caution one should treat any forecast.
Indeed, the OBR are explicit about this, illustrating the uncertainty surrounding any economic forecasts with the use of fan-charts, rather than claiming the infallible certainty my predecessors asserted when they provided their forecasts.
Indeed the only thing that was infallible and certain was that those political forecasts were wrong.
With that caution in mind, Mr Speaker, let me turn to the forecast.
After the deepest recession since the war, the greatest budget deficit in our peacetime history, and the biggest banking crisis of our lifetimes, recovery was always going to be more challenging than after previous recessions.
But the message from the Office for Budget Responsibility is that Britain’s economic recovery is on track.
The economy is growing. More jobs are being created. The deficit is falling.
Their central forecast is for sustainable growth of over 2% for each of the next five years and employment rising in each and every year.
And at a time when markets are gripped by fears about government finances across Europe, today we see that the Government was absolutely right to take the decisive action to take Britain out of the financial danger zone.
Britain is on course both to grow the economy and balance the books - something some people repeatedly said would not happen.
Mr Speaker, let me take the House through the detail of the forecast.
The forecasts for the economy are broadly in line with those produced for the June Budget, despite the more challenging international conditions.
I would also like to point out that they are also very similar to the European Commission forecast for the UK, which is also published today.
They forecast that Britain will grow faster over the next two years than Germany, France, Japan the United States of America and the average for the eurozone and the EU.
The OBR forecast real GDP growth of:
- 1.8% this year;
- 2.1% next year;
- 2.6% in 2012;
- Then 2.9% the year after that;
- Then 2.8% in 2014;
- And 2.7% in 2015.
Growth this year is now expected to be considerably higher than was forecast in June.
In the OBR’s judgement some of this improvement is likely to be permanent, and some of it a temporary impact of stock building.
As a result they forecast that the rate of growth next year will be 0.2 percentage points below the forecast the OBR made in June.
They also predict above-trend growth for the four years after that.
The level of GDP - or the overall size of our economy - is forecast to be around ½ a per cent higher next year than was forecast in June, and indeed higher throughout the whole forecast period.
Mr Speaker, some have made predictions of a so-called “double dip” recession.
While the OBR point out that “that growth has been volatile as this is a common characteristic of post recession recoveries”, their central view is that there will be no double-dip recession.
Their forecast is for growth next year of more than 2%, and they expect that the slowest quarter of growth, in the first quarter of next year, will be 0.3%, rising back up to 0.7% by the last quarter of next year.
They also forecast that CPI inflation will fall from 3.2% in 2010 to 1.9% in 2012, once the short-term effects of the VAT rise and other temporary factors fall away.
Crucially, Mr Speaker, the OBR forecast a gradual rebalancing of the economy as we move away from an economy built on debt to an economy where we invest and export.
Again, something some people said would not happen.
They expect more demand to come from business investment, which is set to grow by over 8% for each of the next four years, as well as exports, which are expected to grow on average by over 6% per year.
This new model of sustainable economic growth will rebalance the economy towards investment and exports and away from an unhealthy dependence on private debt and public deficits.
Bringing to an end the unsustainable situation which saw families save less and less year after year so that they ended up, in the words of the OBR report today, “effectively borrowing money to purchase increasingly expensive houses”.
Mr Speaker, the OBR also publish today a full forecast for the labour market.
Something, I would like to point out, previous chancellors chose not to publish.
Employment is forecast to grow in every year of this Parliament.
Total employment is expected to rise from 29.0 million to 30.1 million - that is over 1million additional new jobs.
On unemployment, thanks to faster than expected growth in the economy, the OBR now expect the rate to be slightly lower this year at 7.9 per cent instead of 8.1 per cent.
And their forecast for the unemployment rate for next year is unchanged from the June Budget at 8.0 per cent.
For future years the OBR predict a gradual decrease in unemployment, with the rate falling every year.
By the end of the Parliament the OBR forecast it will fall to just above 6% - that is a about half a million fewer unemployed people than at the beginning of this Parliament.
The trend in the claimant count is similar to that for the internationally recognised labour force survey measure of unemployment, however the level is expected to be higher.
The OBR explain that this revision is mainly due to a change in the way that flows from Employment and Support Allowance on to Job Seeker’s Allowance as a result of the new Work Capability Assessment are modelled.
In other words more people are assumed to be flowing off ESA and on to JSA
This is a key part of our reforms to create a welfare system that encourages people to seek work and reduces costs for the taxpayer - in short, we will stop hiding people who can work in the incapacity statistics.
Crucially, in each year fewer people are expected to be on both of these out-of-work benefits combined than in the June forecast.
I can also tell the House that, following the Spending Review, the OBR have now recalculated their estimate of the reduction in headcount in the public sector.
In June the OBR forecast a reduction in headcount of 490,000 over the next four years.
In their latest forecast this estimate has come down to 330,000, a reduction of 160,000.
The bulk of this revision results from the action we have taken to cut welfare bills rather than cut public services.
Our difficult choices on child benefit, housing benefit and other benefits - each of which opposed by the party opposite - mean that fewer posts will be lost across the public sector.
Those headcount reductions that still need to take place will happen over four years, not overnight.
And the OBR forecast is that private sector job creation will far outweigh the reduction in public sector employment.
As they say, “a period of rising total employment alongside falling general government employment is in line with employment trends during the 1990s” when total employment increased by 1.3 million over six years while general government employment fell by around ½ a million.
But the most important point is this - the lesson of what is happening all around us in Europe is that unless we deal decisively with this record budget deficit then many thousands more jobs will be at risk - in both the private and the public sector.
Mr Speaker, let me summarise the forecast for the public finances - which shows that Britain is decisively dealing with its debts.
Borrowing this year is expected to be £1billion less than was forecast in June.
The OBR forecast that public sector net borrowing will fall from £148.5billion this year to just £18billion in 2015-16.
Government debt as a share of GDP is projected to peak just below 70% in 2013-14, and then fall to 67% by 2015-16.
So the debt ratio is now expected to peak at a lower point compared to June - just below 70% instead of just above it.
On the OBR’s central forecast we will meet our fiscal mandate to eliminate the structural current budget deficit one year early, in 2014-15.
And the same is true for our target to get debt falling as a percentage of GDP.
Indeed, to use the OBR’s own words, “the Government has a slightly wider margin for error in meeting the mandate than appeared likely in June”.
For the first time the OBR have also tested the resilience of the fiscal mandate to two alternative scenarios for the economy that critics have put forward.
In both cases the mandate is met.
Mr Speaker, it is clear that our decisive actions have proved to the world that Britain can live within her means.
This Government has taken Britain out of the financial danger zone and set our economy on the path to recovery.
That is not only the judgement of the OBR.
It is the judgement of the IMF, the OECD, the European Commission, the Bank of England and all the major business organisations in this country.
And already our efforts are paying off.
Today’s forecasts show that the cost of servicing the government’s debt has come down.
Compared to the June forecast, the OBR predict that we will save £19 billion in interest payments between now and the end of the forecast period.
That is £19billion that will no longer be paid by British taxpayers to private bond-holders and foreign governments.
That is £19billion that would have been wasted and will be saved instead.
Mr Speaker, this is an uncertain world but the British recovery is on track.
Employment is growing.
One million more jobs are being created.
The deficit is set to fall.
The plan is working.
So we will stick to the course.
That is the only way to help confidence to flourish and growth to return.
And I urge those who seriously suggest that, when they see what is happening to our neighbours, I should abandon the decisive plan we are following, and borrow more and spend more, to think again.
What they propose would be disastrous for the British economy.
It would put us back in the international firing line we have worked so hard to escape from.
It would mean higher deficits and jobs lost. And we should reject that path.
Mr Speaker, stability is a necessary pre-condition for growth - but it is not enough.
Our economy’s competitiveness has been in decline for over a decade, undermining its ability to create jobs and grow.
That is why:
- We have already announced four annual reductions in corporation tax,
- Axing the jobs tax,
- Cutting the small companies rate,
- Expanding loan guarantees,
- Simplifying health and safety laws,
- Investing in science and apprenticeships,
- And promoting exports through major trade missions.
Let me set out some of the other things that my RHF the Business Secretary and I are announcing today to support growth and a rebalancing of our economy.
At the Budget, I set out a plan to reduce the main rate of corporation tax to 24 per cent, its lowest ever rate, demonstrating our commitment to tax competitiveness.
I can now tell the House that today we are publishing the most significant programme of corporate tax reforms for a generation, for consultation with the business community.
We propose to make the UK an even more attractive location for international business and investment, by reforming our outdated and complex rules for Controlled Foreign Companies.
We have seen a steady stream of companies that have left the UK in recent years.
This Government, unlike the last one, is not content to sit by and watch our competitiveness leach away and our corporate tax base undermined.
Another tax issue of crucial importance to our corporate sector is the tax treatment of income from intellectual property.
For a long time we have argued that we should increase the incentives to innovate and develop new products in this country.
So to encourage high-tech businesses to invest in the UK and create high-value jobs here, we can confirm that we will introduce from April 2013 a lower 10 per cent corporate tax rate on profits from newly commercialised patents.
We have been consulting with the business community.
And I can tell the House that as a result of this measure, GlaxoSmithKline will today announce a new £500m investment programme in the UK, to:
- Manufacture a newly developed respiratory device at Ware in Hertfordshire;
- Launch a new £50m Venture Capital Fund to invest in healthcare research;
- Construct a new facility at the University of Nottingham to develop ‘green chemistry’ technology;
- And build Glaxo’s next biopharmaceutical plant in this country - with sites in Northern England and Scotland being considered.
In total they estimate that 1,000 new jobs will be created in the UK over the lifetime of these projects.
Mr Speaker, today we also launch a cross-government Growth Review.
This will be a determined, forensic examination of how every part of Government can do more to remove barriers to growth and support new growth opportunities.
Too often the natural inclination of Government is in the opposite direction, creating new regulations, putting up new barriers, making life more difficult for entrepreneurs and innovators.
We are starting to turn the super-tanker around.
Together with the Business Department, the Treasury will lead an intensive programme of work, involving all parts of Government and using evidence provided by the business community, reporting by next year’s Budget.
We will identify cross-cutting reform priorities that can benefit the whole economy. Specific priority will be given to:
- Improvements to the planning system and employment law;
- More support for exporters and inward investors;
- And reforms to the competition regime;
At the same time we will begin a new sector-by-sector focus on removing barriers to growth and opening up new opportunities.
Some of the resulting changes will be substantive on their own, others will in very specific ways help particular industries.
Some may be controversial if they confront vested interests.
But brick by brick we will remove the barriers that are holding Britain back.
Finally, Mr Speaker, I would like to update the House on the international assistance package for Ireland.
I attended the Europeans meetings in Brussels yesterday.
We agreed a three-year package for Ireland worth €85billion, which “is warranted to safeguard financial stability in the euro area and the EU as a whole”.
Of that €35billion will be used to support their banking sector, with €10billion going towards immediate bank recapitalisation.
And €50billion will be used for sovereign debt support.
Ireland themselves will contribute €17.5billion towards the total package.
And the remaining €67.5billion will be split, with one third coming from the IMF, one third from the European Financial Stability Mechanism and one third from bilateral loans and the eurozone facility.
The terms of the IMF loan will be determined over the coming weeks.
In principle our bilateral loan is for £3¼billion - and we will expect the loan to be denominated in sterling.
The rate of interest on the loan will be similar to the rates levied by the IMF and the eurozone.
This loan to Ireland is in Britain’s national interest.
It will help one of our closest economic partners manage through these difficult conditions.
I should also tell the House that the eurozone finance ministers, without me present, discussed a permanent financial stability facility.
I have made it clear in the subsequent ECOFIN meeting that the UK will not be part of that.
The President of the Eurogroup made it clear that the UK will not be part of the permanent bail-out mechanism, and that the European Financial Stability Mechanism, agreed under the previous Government in May, and of which we are part, will cease to exist when that permanent eurozone mechanism is put in place.
Mr Speaker, when we came into office Britain was in the financial danger zone.
Our economy was unstable, our public finances out of control, our country on the international watch-list to avoid.
We took decisive action.
Now the independent Office for Budget Responsibility have confirmed that the British recovery is on track, our public finances are under control, a million jobs are set to created, and our economy is rebalancing.
Today we take further measures to secure growth and create prosperity.
We do so based on the foundation of stability we have now secured.
Britain is on the mend.
And I commend this statement to the House.