Meeting the aspirations of the British people 2007 Pre-Budget Report and Comprehensive Spending Review October 2007 Presented to Parliament by the Chancellor of the Exchequer by Command of Her Majesty Cm 7227 LONDON: The Stationery Office £45.00 © Crown Copyright 2007 The text in this document (excluding the Royal Arms and departmental logos) may be reproduced free of charge in any format or medium providing that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Crown copyright and the title of the document specified Any enquiries relating to the copyright in this document should be addressed to: Licensing Division HMSO St Clements House 2-16 Colegate Norwich NR3 1BQ Fax: 01603 723000 E-mail: [email protected] HM Treasury contacts This report can be found on the Treasury website at: hm-treasury.gov.uk/budget2007 For general enquiries about HM Treasury and its work, contact: Correspondence and Enquiry Unit HM Treasury 1 Horse Guards Road London SW1A 2HQ Tel: 020 7270 4558 Fax: 020 7270 4861 E-mail: [email protected] This and other government documents can be found on the Internet at: www.official-documents.co.uk ISBN: 978-0-10-172272-8 Printed by The Stationery Office 10/07 379627 PU395 The Economic and Fiscal Strategy Report and the Financial Statement and Budget Report contain the Government’s assessment of the medium-term economic and budgetary position. They set out the Government’s tax and spending plans, including those for public investment, in the context of its overall approach to social, economic and environmental objectives. This Pre-Budget Report and Comprehensive Spending Review includes, with other material, updated forecasts for the economy and projections for the public finances. Subject to the usual scrutiny and approval for the purposes of Section 5 of the European Communities (Amendment) Act 1993, these reports will form the basis of submissions to the European Commission under Article 99 (ex Article 103) and Article 104 (ex Article 104c) of the Treaty establishing the European Community. C ONTENTS Page Chapter 1 Overview 1 Chapter 2 Maintaining macroeconomic stability 15 Chapter 3 Transforming public services 31 Chapter 4 Sustainable growth and prosperity 49 Chapter 5 Fairness and opportunity for all 71 Chapter 6 Stronger communities and a better quality of life 95 Chapter 7 A more secure, fair and environmentally sustainable world 113 Annex A The economy 133 Annex B The public finances 157 Annex C Public Service Agreements 187 Annex D 2007 Comprehensive Spending Review settlements 199 Annex D1 Department for Children, Schools and Families 200 Annex D2 Department of Health 204 Annex D3 Department for Transport 209 Annex D4 Department for Innovation, Universities and Skills 212 Annex D5 Communities and Local Government 217 Annex D6 Local Government 221 Annex D7 Home Office, Ministry of Justice and Law Officers’ Departments 225 Annex D8 Ministry of Defence 231 Annex D9 Foreign and Commonwealth Office 234 Annex D10 Department for International Development 237 Annex D11 Department for Business, Enterprise and Regulatory Reform 241 Annex D12 Department for Environment, Food and Rural Affairs 244 Annex D13 Department for Culture, Media and Sport 247 Annex D14 2012 Olympic Games and Paralympic Games 250 Annex D15 Department for Work and Pensions 252 Annex D16 Chancellor’s Departments 255 Annex D17 Cabinet Office 257 Annex D18 Devolved Administrations and Northern Ireland Office 260 Annex D19 England’s Regional Development Agencies 264 List of departmental groupings 269 List of abbreviations 273 List of tables 279 List of charts 281 1 OVERVIEW The Government’s objective is to build a strong economy and a fair society, in which there is opportunity and security for all. The 2007 Pre-Budget Report and Comprehensive Spending Review, Meeting the aspirations of the British people, presents updated assessments and forecasts of the economy and public finances, describes reforms that the Government is making and sets out the Government’s priorities and spending plans for the years 2008-09, 2009-10 and 2010-11, including: • maintaining macroeconomic stability, with the economy continuing to grow strongly and with the Government meeting its strict fiscal rules over the forecast period; • investing in the future, with total public spending rising from £589 billion in 2007-08 to £678 billion in 2010-11, an average increase of 2.1 per cent per year in real terms, including an addition of £2 billion to the plans set at Budget 2007 in order to take forward vital capital investment in public services; • continuing the sustained investment in the NHS, with resources increasing from around £90 billion in 2007-08 to £110 billion by 2010-11 – an average real increase of 4 per cent a year – which alongside value for money savings of at least £8.2 billion will fund the conclusions of the Darzi Review to build a health service fit for the 21st century; • further sustained increases in resources for education, science, transport, housing, child poverty, security and international poverty reduction as well as fully funding the 2012 Olympic Games and Paralympic Games; • building on the SR04 efficiency programme with at least 3 per cent value for money savings per year over the CSR07 period across central and local government, totalling £30 billion of annual savings by 2010-11; • simplifying the tax system to make it fairer, simpler and more efficient with the announcement of three simplification reviews and a package of simplification measures; • continuing to modernise the tax system through announcing major reforms to inheritance tax and capital gains tax; and • taking steps to protect the environment, including by reforms and increases to the tax regime for aviation and a new Environmental Transformation Fund worth £1.2 billion over the CSR07 period, to support the demonstration and deployment of new energy and efficiency technologies in the UK and to advance poverty reduction through environmental protection in developing countries. 1.1 The Government’s objective is to build a strong economy and a fair society, in which there is opportunity and security for all. A decade ago the Government laid the foundations for achieving this through a series of fundamental reforms to the macroeconomic framework, the public spending framework and the tax and benefit system. These have underpinned a decade of investment and reform, which has helped to achieve a sustained period of economic expansion, low unemployment and significant improvements in public services. 2007 Pre-Budget Report and Comprehensive Spending Review 1 1 OVERVIEW LONG-TERM CHALLENGES AND OPPORTUNITIES 1.2 A decade on, the 2007 Comprehensive Spending Review has provided the opportunity to undertake an extensive programme of analysis and public engagement in order to inform the Government’s response to the new challenges and opportunities facing the UK, including: • demographic and socio-economic change, with rapid increases in the old age dependency ratio and rising consumer expectations of public services; • increasing pressures on natural resources and the global climate, requiring action by governments, businesses and individuals to maintain prosperity and improve environmental care; • the intensification of cross-border economic competition, with new opportunities for growth, as the balance of international economic activity shifts towards emerging markets such as China and India; • the rapid pace of innovation and technological diffusion, which will continue to transform the way people live and open up new ways of delivering public services; and • continued global uncertainty with ongoing threats from international terrorism and conflict and the continued imperative to tackle global poverty. 1.3 These developments will have complex and far-reaching implications for government, citizens, businesses and the third sector that demand a shared sense of purpose and coordinated interventions across tax, spending and regulatory levers. The 2007 Pre- Budget Report and Comprehensive Spending Review sets out how the Government plans to respond to these challenges and opportunities in order to make further progress against its goals of: • sustainable growth and prosperity, in order to continue to improve people’s standard of living; • fairness and opportunity for all, so that everyone can make the most of their talents and share in rising national prosperity; • stronger communities and a better quality of life, enabling people to lead healthy, safe and fulfilling lives; and • a more secure, fair and environmentally sustainable world, with the UK playing a leading global role. 1.4 To contribute to the achievement of these overarching goals, the Government has agreed 30 Public Service Agreements (PSAs), that articulate the Government’s highest priority outcomes for the forthcoming period, setting out a shared vision, spanning departmental boundaries and leading collaboration at all levels of the delivery system. MAINTAINING MACROECONOMIC STABILITY 1.5 The Government is committed to maintaining macroeconomic stability as the essential foundation for achieving its priorities, as it underpins its ability to raise the productivity of the economy, reduce poverty, expand opportunity and sustain increased investment in public services. 2 2007 Pre-Budget Report and Comprehensive Spending Review OVERVIEW 1 1.6 The Government’s macroeconomic framework and promotion of flexible and open labour, product