Nigel Lawson – 1988 Autumn Statement

The Autumn Statement read by Nigel Lawson, the then Chancellor of the Exchequer, in the House of Commons on 1 November 1988.

With permission, Mr. Speaker, I should like to make a statement.

Cabinet today agreed the Government’s public expenditure plans for the next three years. I am therefore taking the earliest opportunity of informing the House of the contents of the Autumn Statement: that is to say, the public expenditure plans for the next three years, and the expected outturn for this year; proposals for national insurance contributions for 1989–90; and the forecast of economic prospects for 1989 required by the Industry Act 1975.

The main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I have sat down. They will also appear in the printed Autumn Statement, which will be published next Tuesday.

I turn first to public expenditure. For the current financial year, 1988–89, the public expenditure planning total now looks likely to amount to some £153½ billion, or some £3¼ billion less than was allowed for in the last public expenditure White Paper. In other words, only around £¼ billion of the £3½ billion reserve I provided for is in fact likely to be needed.

The main reasons for this shortfall are an extra £1 billion in privatisation proceeds, a reduction in social security spending of almost £1 billion as a direct result of the sharper than expected fall in unemployment and a saving of some £¾ billion largely due to extra housing receipts under the right-to-buy programme. Taken together with the strong growth in the economy this year, and the containment of debt interest now that the Budget is in surplus, this means that total public spending this year, even excluding privatisation proceeds, will be less than 40 per cent. of national income—the first time this has happened for over 20 years.

Not so long ago, the share of national income spent by the state seemed to rise inexorably. Over the past six years, that trend has been decisively reversed. Since 1982–83, public expenditure, excluding privatisation proceeds, expressed as a share of national income has fallen by seven percentage points—the largest and longest sustained fall since the wartime economy was unwound. Over the whole decade since this Government first took office, from 1978–79 to 1988–89, public expenditure has grown by under 1½ per cent. a year in real terms. This is exactly half the rate at which it grew over the whole of the immediately preceding decade.

Looking ahead, Cabinet agreed in July that public spending over the next three years should keep as close as possible to the existing planning totals, and should continue to fall as a share of national income. The plans I am about to announce meet both those objectives.

For 1989–90, the planning total published in the last public expenditure White Paper was £167 billion. It will remain at £167 billion. This important outcome has been made possible, despite the many claims for increased public spending, by a rigorous reassessment of priorities, coupled with the continuation of two of the factors that have contributed to this year’s shortfall; that is to say, benefit savings from lower unemployment and increased receipts from council house sales.

For 1990–91, however, though these two factors will persist, the planning total has been set at £179½ billion, some £3¼ billion more than the previously published figure. For 1991–92, the planning total has been set at £191½ billion. These totals all include the same level of reserves as in last year’s plans; that is to say, £3½ billion in the first year, £7 billion in the second year, and £10½ billion in the third. They also incorporate an unchanged estimate of privatisation proceeds of £5 billion a year.

Over the three survey years as a whole, the real growth in spending on programmes will be over 3 per cent. a year. This can be afforded only because of the fall in the burden of debt interest brought about by the dramatic improvement in the Government’s finances from Budget deficit to Budget surplus. As a result, overall public spending, excluding privatisation proceeds, will rise by less than 2 per cent. a year, well within the prospective growth of the economy as a whole. In other words, total public spending, excluding privatisation proceeds, will continue to decline as a proportion of national income. At the same time, substantial additional funds have been made available for the Government’s most important public expenditure priorities.

The figures which I am about to give all represent increases over the plans in the last public expenditure White Paper.

First, health. An extra £1¼ billion—£1¾ billion—is—[Interruption.] An extra £1¼ billion—[Interruption.]

Mr. Speaker

Order. This is a very important statement, and I am sure that the House wishes to hear it.

Mr. Lawson

An extra £l¼ billion is being provided for the National Health Service in England in 1989–90—[Interruption.] The Opposition may not be interested in the National Health Service, but we on this side of the House are interested in it and are providing a lot more money for it.

An extra £1¼ billion is being provided for the National Health Service in England in 1989–90, and an extra £1½ billion the following year. There will be corresponding increases in Scotland, Wales, and Northern Ireland. On top of that, health authorities are expected to receive an extra £100 million a year from sales of surplus land. Continuing the rate of cost improvement savings achieved in recent years will produce an extra £150 million in 1989–90 and an extra £300 million the following year.

In addition, the Government are accepting the recommendation of the Government Actuary, in a report published today, that NHS employers’ superannuation contributions in England and Wales should be reduced, which will save the Health Service a further £300 million a year.

In total, the increases for the Health Service in the United Kingdom as a whole will be over £2 billion in 1989–90 and over £2½ billion in 1990–91. These are by far the largest increases the Health Service has ever received. Comparing next year with this year, the increase in real resources for the NHS should amount to some 4½ per cent.

Second, roads. An extra £220 million is being provided next year for building and repairing motorways and trunk roads, and for strengthening bridges, with a further £250 million the following year.

Third, housing. Gross provision for public sector housing investment is being increased by around £440 million in 1989–90 and £340 million the following year. But thanks to the success of the Government’s right-to-buy policy, this is more than financed by extra receipts.

Fourth, law and order. An extra £290 million has been made available in 1989–90 and £430 million in 1990–91, principally for a further expansion in the prison building programme. This will provide a further 3,000 places by 1991–92. Provision for local authority spending on the police has been increased by £240 million.

Defence spending is to be increased by £150 million in 1989–90 and by £600 million in 1990–91. These significant increases are designed to provide a firm framework for the next three years within which our defence programme can be planned with confidence.

So far as the massive social security budget is concerned, lower unemployment has saved more than £1½ billion in both 1989–90 and 1990–91. But substantial increases in planned spending on other benefits, particularly for the disabled, mean that the social security programme will be only marginally reduced in 1989–90 compared with previous plans, and some £1·7 billion higher in 1990–91.

On science and technology, we have altered the balance of public support within an increased total. In particular, provision for spending by the Department of Education and Science has been increased by £120 million a year, with the DES science budget up by 16 per cent. in 1989–90 compared with 1988–89. This reflects the importance the Government attach to basic and strategic research.

The new plans imply an overall increase of £2¼ billion in public sector capital spending in 1989–90. This includes extra investment in hospitals, housing, prisons, and roads. There is provision, too, for higher investment by the nationalised industries, including further anti-pollution investment by the water authorities.

That the Government have been able to strengthen their priority programmes within an unchanged planning total for 1989–90 is, in large measure, a reflection of the success of their policies. The improved performance of the economy has eased pressures on a number of programmes, giving the Government more scope than ever before to shift resources where their own priorities, rather than circumstances, dictate. The details of these and other changes are provided in the material in the Vote Office and more details will be published in the printed Autumn Statement next week.

I turn next to national insurance contributions. The Government have conducted the usual autumn review of contributions in the light of advice from the Government Actuary on the prospective income and expenditure of the national insurance fund, and taking account of the statement on benefits which my right hon. Friend the Secretary of State for Social Security made last week.

The lower earnings limit will be increased next April to £43 a week, in line with the single person’s pension, and the upper earnings limit will be raised to £325 a week. The upper limits for the 5 per cent. and 7 per cent. reduced rate bands will also be increased, to £75 a week and £115 a week respectively. The upper limit for the 9 per cent. rate for employers will be raised to £165 a week.

Over recent years, we have steadily reduced the Treasury supplement, the taxpayer’s contribution to the national insurance fund. From 18 per cent. in 1979, it now stands at 5 per cent. My right hon. Friend and I now propose to carry this policy to its logical conclusion and to abolish the supplement altogether. The necessary legislation will be introduced early in the new Session.

However, because of the healthy state of the national insurance fund, this decision will not require any increase in contribution rates. Thus, the main class I contribution rates will remain unchanged at 9 per cent. for employees and 10·45 per cent. for employers.

Finally, I turn to the Industry Act forecast. Growth this year looks to be turning out at 4½ per cent. compared with the 3 per cent. growth forecast at the time of the Budget. Investment is particularly strong, growing twice as fast as consumption, with manufacturing investment expected to show the biggest rise of all, at 18 per cent. Indeed, it is striking that total investment has grown almost twice as fast as total consumption over the whole of the past five years.

The continuing vigour of the British economy is testimony to the transformation that has taken place in the supply side of the economy, a transformation which has enabled the seven years to 1988 to record a combination of strong and steady growth unmatched since the war.

As a result, unemployment has been falling rapidly. Since the middle of 1986, it has fallen by very nearly 1 million—the largest fall on record.

Over the past year, unemployment has fallen faster in the United Kingdom than in any other major country.

Inflation, as measured by the retail prices index, is likely to be a little over 6 per cent. in the fourth quarter of this year. Part of the rise in recorded inflation reflects the impact on mortgage payments of the higher interest rates needed to tighten monetary policy and thus get inflation firmly back on a downward trend. Excluding mortgage interest payments, the RPI in the fourth quarter is likely to be around 5 per cent., compared with the 4 per cent. rise in the RPI forecast at the time of the Budget.

Exports have continued to perform well, with manufactured exports up 7½ per cent. over the past year. Over the past seven years, the United Kingdom’s share of world trade in manufactured goods has remained steady after decades of decline. However, with investment booming, and consumer spending increasing fast, total imports have grown even faster than exports, rising by 13 per cent. in the year to the third quarter. This has led to a substantially greater current account deficit than forecast at the time of the Budget. For 1988 as a whole, this now looks like turning out at some £13 billion, equivalent to 2¾ per cent. of GDP. The stronger than expected economic growth this year means that total tax revenues are likely to exceed the Budget forecast by £3½ billion. Both income tax and VAT have been particularly buoyant.

In the Budget, I set a public sector debt repayment—or PSDR—for 1988–89 of £3 billion, equivalent to around ¾ per cent. of GDP. With higher than expected Government revenues and lower than expected public expenditure, this year’s PSDR now looks likely to turn out at some £10 billion, equivalent to over 2 per cent. of GDP.

This will be the second successive year of debt repayment, something that has not hitherto been achieved since records began in the early 1950s. Moreover, this year, the Budget would still be in surplus, by some £4 billion, even if there had been no privatisation proceeds at all. No other major economy has such sound public finances.

Looking ahead to 1989, the economy is forecast to grow by a further 3 per cent., with domestic demand also up by 3 per cent. Once again, investment is expected to grow considerably faster than consumption, and once again unemployment is expected to fall.

The slower growth forecast for 1989 inevitably implies a marked deceleration during the course of the year, particularly so far as domestic demand is concerned. Thus, comparing the second half of next year with the second half of this year, overall growth is forecast at 2½ per cent., and growth in domestic demand at only 1½ per cent.

The current account deficit is likely to fall only slightly, to some £11 billion, or 2¼ per cent. of GDP.

Inflation, while it will inevitably continue to edge up for some months to come, is forecast to peak at some point in the middle of next year before falling back again to 5 per cent. by the fourth quarter.

In short, after two years of unexpectedly rapid expansion, growth next year is forecast to return to a sustainable level, and one which compares well with the economic performance of the 1970s, while inflation will resume its downward path.

The public finances are in substantial surplus and will remain so, with public spending on priority programmes continuing to increase, while overall public spending continues to fall as a share of GDP, to a level in 1991–92 not seen for a quarter of a century.

The prospect that lies before us is yet further testimony to the success of the policies we have been pursuing these past nine and a half years and will continue to pursue, and to the economic transformation that those policies have wrought.