Gordon Brown – 1999 Speech to the IFS on Modernising the British Economy

The speech made by Gordon Brown, the then Chancellor of the Exchequer, on 27 May 1999.

Let me start this evening by congratulating the IFS on 30 years of outstanding work in their field. Born under a previous Labour government, its reputation built initially from work on corporation and capital gains taxes, its sponsors as varied as the Economic and Social Research Council and Marks and Spencer, the IFS has – in just three decades – under distinguished directors and excellent staff – established itself as an indispensable British institution. And as every government finds sometimes to its cost, an institution that is rigorous in research, proudly impartial and objective in analysis, forward- looking in the causes it adopts and fiercely independent – yielding to no-one, friend or foe, on its way.

When we came into government, we set as our central economic objective the 1944 White Paper aim of high and stable levels of growth and employment together.

I want to talk tonight about how in the 1990s, the Government is seeking to meet these same objectives in completely transformed circumstances.

And I want to describe the new role for the Treasury, working with other departments, to meet these goals.

Of course, the first task for Government must be to deliver a platform of stability based on low inflation and sound public finances.

But, as I made clear in a speech on the role of the Treasury as we prepared for government in 1996, I do not believe that in the modern world you can have a successful Ministry of Finance unless it plays its proper role in successfully equipping British people and British companies to succeed.

Indeed, it is only by equipping people for change and strengthening the supply-side of the economy that we can put past instability behind us.

So our task now as a government is to use this platform of stability that we are creating to fulfill our long-term ambitions for our country – delivering higher levels of sustainable growth, employment opportunity for all and creating a fairer society.

Some seek to claim that the best government is the least government – that there is nothing Government can do to improve our productivity performance, get people back to work or tackle the cycle of poverty and deprivation that has been a feature of Britain in the last 20 years.

Others have argued that delivering high growth and full employment can be done simply by old-style demand management. And that the only answer to poverty is to compensate the poor for their situation rather than tackling the underlying causes.

I reject both these approaches. And tonight I want to set out what these long-term challenges demand of modern government and the Treasury – a long-term commitment to stability, to raising the trend growth rate, to delivering employment opportunity for all, and by tackling child poverty ensuring everyone has the chance to realise their potential.

Stability

When we came into government, we faced the prospect of another inflationary spiral, derailing the British economy – what would have been yet one more damaging episode in the repeated cycles of boom and bust that have marked British macroeconomic policy management in the last 30 years.

In these circumstances, the first thing that the Treasury had to do was to get inflation and the public finances under control and break decisively with the short-termist, secretive and unstable record of macroeconomic policy-making of the past two decades by setting a credible framework.

We took early action to put in place a framework for economic stability – not only making the Bank of England independent but putting in place a new long-term monetary framework based on clear rules and open procedures. And as a result of the decisions that we took, inflation has been brought down to historically low levels.

We also took the same tough action to tackle the fiscal deficit which we inherited: not just cutting public borrowing in our first two years by £31 billion, but also putting in place a long-term fiscal framework, underpinned by legislation, with clear rules that, over the cycle, there is a current budget balance and prudent levels of debt.

This platform of stability, as I set out to the CBI last week, is founded on clear rules: first setting out long-term policy objectives; second, the certainty and predictability of well-understood procedures for monetary and fiscal policy; and third, on an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

We have also brought stability to our relations with Europe. For the first time we are committed in principle to economic and monetary union. We are working with our European partners to make sure EMU is a success. The UK has also been working with our international partners to help create the conditions for stability, prosperity and poverty reduction throughout the world.

Some said, when on our first weekend in office we gave responsibility for interest rate decisions to the Bank of England, that the Chancellor and the Treasury would have nothing to do.

But I was clear then that we were only putting in place the foundations that would provide a platform of stability from which we could build to achieve our objectives of high and stable levels of growth and employment.

In other words stability is a necessary pre-condition to deliver our objectives for growth and employment, but it is not sufficient. An economy cannot fly on only one wing.

Indeed the experience of the last twenty years shows that simply trying to control inflation alone without tackling the underlying causes of sluggish productivity growth and inflationary pressure has proven to deliver neither stability nor the high and stable levels of growth and employment that we set as our central objective on coming into government.

Raising our growth rate

So let me turn first to raising our long-term growth rate.

Some people argue that governments cannot affect the trend growth rate of the British economy. I reject this pessimistic view. Our task as a government is to raise the sustainable trend rate of growth of our economy from the low level we inherited. That is our ambition and in the next decade we will achieve it in new ways.

Fifty years of our economic history from 1945 was marred by a succession of sterile and self defeating conflicts between state and market, managements and workforce, public and private sectors.

We need a new national purpose based on an end to short-termism and an understanding of the need to take a long term view, government, industry and the financial community:

government – by ensuring lasting stability and removing the barriers to growth;
industry – by investing for the long term; and
the financial community by refusing to resort to the short-termism and stop-go attitudes which have bedevilled us since the war.

So our analysis suggests that we must combine our strategy for stability with major structural reforms of our product, capital and labour markets.

One measure of productivity is output per worker. On this basis when we came into government, we inherited an economy with productivity gap approaching 40 per cent with the United States and 20 per cent with France and Germany, and a trend rate of growth which meant that a substantial productivity gap was set to remain.

Alternatively you can measure productivity as output per hour worked rather than on the basis of output per worker. Because a UK worker works fewer hours than in United States but more than in Europe, we do better against the us, but even worse against Europe. However there is still a considerable gap with the us of about 25 per cent.

The IFS have suggested that we should measure productivity as total factor productivity, a measure which strips out the contribution from capital and labour intensity. On this basis the UK’s productivity gap narrows to 10-20 per cent compared to the US and to Europe. Although this is a useful measure it does not reflect the chronic under-investment in physical capital in this country over decades. It is that low level of investment that has led to lower levels of labour productivity.

In every year since at least 1960, the UK has invested a lower share of GDP than the OECD average and capital stock per hour is much lower in the UK than for our competitors – 31 per cent higher in the US, 36 per cent higher in France, 55 per cent higher in Germany. Raising productivity per worker in the UK requires a period of sustained high investment so that we can close the gap in capital stock per worker with our competitors.

Of course, how the extra investment is used, its effectiveness, is just as important as the volume of investment which is why the productivity agenda is so important.

So I do not believe that any of us – analysts, employers, employees, politicians – can wish away the productivity challenge that Britain faces. While 30 years ago governments responded to the productivity challenge with top-down plans, and tax incentives and grants primarily for physical investment, today it is more complex – involving the modernisation of capital and product markets, the encouragement of innovation and an enterprise culture open to all, and the building of a modern skills base.

Enterprise, investment and risk-takers

First, we moved decisively in our first two budgets to encourage new businesses with a cut in the small companies’ tax from 23p to 20p. To encourage start-ups we have introduced a new 10p rate of corporation tax for small companies and a new 10p rate of income tax which will help the self-employed. And to encourage growth we have provided 40 per cent investment incentives for small businesses and medium sized businesses; provided additional support for venture capital; and reformed the capital gains tax system with a long term rate of 10 per cent to promote and reward long-term business investment.

Recent work by the OECD has highlighted the problems which small businesses face in raising finance where they have little track record.

As part of this reform of capital markets the challenge for Britain is to create a stronger venture capital industry and to make sure there is enough venture capital for hi-risk, early stage and start-up companies.

Some argue that the capital gains tax system is too blunt an instrument to encourage long term investment by individuals. They also argue that companies and investors will not respond to tax incentives to encourage investment. But these are often the same analysts who are quick to point out the power of incentives in our tax system to tax avoidance. Our shared task is to ensure we put in place incentives to encourage long term improvements to productivity not short term tax avoidance.

We are putting in place measures to encourage investment in early stage, high technology companies, through a new £20 million Venture Capital Challenge run jointly with the private sector; and will be introducing incentives to promote corporate venturing.

And next year we will introduce a new Enterprise Management Incentive measure to provide help where it is most needed to smaller companies with potential for rapid growth which are seeking to recruit or retain key personnel by offering equity remuneration. So the scheme will allow tax relief for incentives of up to £100,000.

But we need to give all who create wealth a greater stake in the wealth they create.

There is clear evidence that giving people a genuine stake in their company’s future delivers real improvements in performance and productivity. One study from the US has shown that in 73 per cent of cases, firms significantly improved their performance in the five years after establishing an employee share ownership scheme. And on average, these firms increased sales and employment by 5 per cent more than similar firms without schemes. In this country, the value of employee share ownership is widely agreed.

We are introducing a new programme of shares for all, in which employees will be able, for the first time, to buy shares in their own companies from their pre-tax income. Every employer will be able to match, tax-free, what each employee buys. The only condition is that the scheme must be offered across the company’s entire workforce.

Innovation

Second, we need to do more to turn scientific inventions in Britain into jobs for Britain by honouring the spirit of invention, facilitating the exploitation of invention and encouraging the commercialisation of invention. Higher productivity in part depends on inventions which are created in Britain being developed and manufactured in Britain.

The seedbed is basic science so we are investing an extra £1.4 billion in basic scientific research.

And we are putting in place a new R&D tax credit to encourage small business investment in R&D. Work by the OECD suggests that R&D investment contributes to productivity growth and tax credits will encourage more R&D investment by the private sector. We expect the R&D tax credit to benefit over 3,000 companies and help support at least £700 million of R&D spending.

Our University Challenge Fund is designed to help turn British inventions into businesses here, and the new British Institutes of Enterprise will provide management skills and advice on commercial expectations to ensure the innovations that are developed in the UK are turned into products manufactured in the UK, creating good paying jobs in the UK.

Competition and regulation

Third, the sharpest spur to innovation, efficiency and improvement is competition. Work by Steve Nickell at the Centre for Economic Performance indicates the positive effect of competition on productivity. It is competition which drives companies to invest in people and equipment, to match the best in management and marketing and to innovate in process and products.

This requires reform of our product markets – tackling vested interests, exposing management to international best practice and bringing down unnecessary market barriers to new entrants and new ideas.

So Steve Byers is now proposing as fundamental a long term reform of competition policy as we have achieved for monetary policy – a new long term framework with clear objectives and rules, free of political interference.

We have rewritten this country’s out-dated framework of competition law. We have given the Office of Fair Trading new powers and new money to police anti-competitive practices which damage businesses and consumers alike. This is one of the most important legislative reforms of this Parliament. Now we will be consulting on the next stage, withdrawing ministers from the decision process on merger cases.

And we have launched a major independent review of competition in our banking sector in which Don Cruickshank is working with the banks to examine the obstacles to firms getting the finance they need to start and to grow.

The future agenda

We have made progress on a number of areas but there is more to be done.

With the help of Lord Haskins we are considering ways of reducing the impact of regulation on productivity and growth, we are looking at improving the efficiency of the planning process, at meeting ambitious targets for electronic commerce to help make the UK the best place to trade electronically by the end of this Parliament, establishing Regional Development Agencies and considering how urban policy can improve economic competitiveness in our towns and cities.

The drive to improve productivity is an ongoing task which the Treasury has a responsibility to help meet, including through the work of the new Cabinet Committee on Productivity at which Cabinet Ministers from a range of key government departments are represented.

We are also continually looking at ways to improve public sector productivity including through public private partnerships and in public sector procurement. We have set tough targets for outputs from every department in our public service agreements. And we are learning from the Public Services Productivity Panel – a new advisory committee of outside experts from the private sector. Leading businessmen and women, bringing into the public sector, expertise of managing change in large complex organisations.

In Europe too we need to pursue a strategy of structural reform; reforming labour markets to create jobs; reforming product and capital markets to raise investment and build dynamic economies. We welcome the initiative for an employment and economic reform pact of EU countries to further European commitment to create the conditions for high and sustainable levels of employment and growth.

To those who say the Government’s approach to productivity is piecemeal, I would respond that nobody is claiming there are simple solutions, silver bullets. None of the economists and business people I have spoken to have suggested there are. This is not a challenge which can be met by one budget alone, or one single new act of Parliament can meet and beat. It is a long-term challenge for every department and for all of us working together.

Employment

Achieving the 1944 aims in the new global economy and changed labour market also requires an employment policy that equips people to succeed by being adaptable, flexible and educated. Our aims are high and stable levels of growth and high and stable levels of employment. The key insight of the 1990s is that the modernisation of the economy can be achieved only by spreading opportunity more widely in employment, earning power and education.

Some argue that the only role for government is further deregulation of the labour market – that we can never strike the right balance between minimum standards and open markets.

They argue instead for a deregulated labour market underpinned by a minimalist welfare state which acts only as a safety net.

Others have argued that tax and benefit reform cannot improve the working of the labour market and expand opportunity, and argue instead for more regulation at work and for a more generous – but unreformed – welfare state which still only compensates people for poverty and lack of opportunity.

We must be more ambitious and tackle the underlying causes of deprivation.

Our approach is to build a new and modernised welfare state around principles – that, in addition, to its traditional and necessary function of giving security to those who cannot work, for those who can work, the welfare state should promote work, make work pay and give people the skills they needed to get better jobs.

The modernisation of our approach to the welfare state, which we argued for in Opposition and have been implementing in Government, is necessary because of the transformation of the labour market in the preceding two decades:

Women are now working in far greater numbers than ever before.

The return to skills in today’s labour market is qualitatively greater than ever before and correspondingly, the penalty for lack of skills greater.

It is a measure of the challenge we face that nearly fifty percent of people with no qualifications are either unemployed or outside the labour market.

The labour market is characterised by part-time working and self-employment as never before.

And we face a problem of structural unemployment – large sections of the population excluded from work – as never before.

When we came into office, four and a half million adults lived in households where nobody worked, double the level of 20 years ago.

Nearly 1 in 5 children were growing up in households where no-one is working, twice the rate of France and four times the rate of Germany.

And the reason that this issue of worklessness poses a particular challenge for this government is that it is now the primary cause of poverty in Britain today.

Whilst 20 years ago, it was pensioners who made up the largest section of those in poverty, today it is those living in workless, working age households.

And two thirds of working age households on persistently low incomes have nobody in work, with eight out of ten having no full-time work.

The best form of welfare for these groups is work. Simply compensating people for their poverty through benefits is not enough, the task must be to deal with the causes of poverty. We must give people the chance to work, if they can.

Indeed, the Treasury paper we published earlier this year, tackling poverty and extending opportunity shows that over the period 1991-95, 80 per cent of the bottom quintile who moved into work moved out of the bottom income group.

And our strategy has been to tackle the barriers that people face to getting into work – the lack of work opportunity, the unemployment and poverty traps, the lack of necessary skills.

And our measures must recognise that different groups have different needs – lone parents, less than 50 per cent of whom are in work; young people, among whom the unemployment rate was 13 per cent at the time of the election, approaching double the rate for the population as a whole; partners of the unemployed, only half as likely to move back into work as those with partners in work; the long-term sick and disabled, one million of whom are without work but say they want to work; and the over 50s, among whom nearly 30 per cent of men are either unemployed or inactive.

First, providing opportunities to work.

Unemployment when young is more likely to mean persistent periods of unemployment when older.

On average, men who before the age of 23 have been unemployed for 12 months or more will in the following decade spend 15 times more time out of work than those who were never unemployed.

Research now shows that while people without skills are more likely to become unemployed, long-term unemployment also erodes people’s skills and employability.

Once long-term unemployment is entrenched, it requires much more than traditional demand management to solve it.

By increasing the effective supply of labour – the pool of employees and skills able to compete for work in the economy – we can increase the sustainable level of employment, consistent with low inflation.

So I do not accept that there are a fixed number of jobs in the economy and micro-economic policies have no effect on this.

Since we came into Government, employment has risen by well over 400,000, unemployment has fallen substantially on both the claimant count and the ILO measure and record numbers of people are moving out of economic inactivity.

But our aim is to deliver employment opportunity for all – the modern definition of full employment.

If we are to maximise the effective supply of labour, it is clear that labour market programmes must be oriented to getting people back into work before they lose touch with the labour market – matching new opportunities with new responsibilities for the unemployed to take up the opportunities.

Matching rights with responsibilities is at the heart of the new deal programme. And it is why we have made our biggest investment in the New Deal for young people.

And while it is early to come to firm conclusions about the scale of the New Deal’s success, I think it is clear that it is showing very encouraging results.

Already over a quarter of a million young people have joined the New Deal and over 95,000 have found jobs – the vast majority sustained jobs. A further 64,000 are gaining valuable experience on New Deal options. And 47,000 employers have signed up to the New Deal. Since the election, long-term youth unemployment has halved.

One of the most important innovations of the New Deal, in my view, is the system of personal advisors – so that every individual is designated an adviser with the knowledge and skills to advise them on what work options are open to them.

We have extended this approach to the long-term sick and disabled, partners of the unemployed, lone parents and soon, to the over 50s.

Furthermore, with the single work-focused gateway – “ONE”, we are moving towards a situation where nobody who signs on for benefit will simply be written off, without advice and support about how they can get back into work.

Second, making work pay

When this Government came to power, with no minimum wage in place and the tax and benefits system unreformed, many of those without work faced an unemployment trap, where work paid less than benefits, and the low-paid in work faced a poverty trap which meant that they faced marginal tax and benefit rates of 80, 90 or even over 100 per cent.

Now there are some who argue that improving work incentives at the bottom end of the labour market will not make a difference to the number of people moving into work.

This fails to appreciate the new dynamism which is developing in the modern labour market – there are now over 3 million moves every year from unemployment or inactivity into employment.

The Canadian self-sufficiency project examined the effects of a time limited in-work payment for lone parents and suggested that it doubled the likelihood that they would move into full-time work.

In addition, new research by Gregg, Johnson and Reed co-ordinated by the Institute of Fiscal Studies, examines the actual employment decisions made by 12,000 people over a 15 month period.

It suggests that every £10 increase in the return to work increases the likelihood of moving into work by around 2 percentage points for women and half that for men.

The evidence is increasingly that incentives do matter at especially at the low-income level of the labour market.

That is why, just as we have ruled out penal tax rates at the top of the labour market, we are taking action to make work pay and tackle poverty traps at the bottom.

As the foundation of this strategy, we have introduced the National Minimum Wage.

Because we are determined that this commitment to making work pay is consistent with our central objective of high employment, the minimum wage has been set at a sensible level which will not damage employment.

And it is right that the youth minimum is set at a prudent level, thereby ensuring that our New Deal strategy is not put at risk.

But our commitment to making work pay and to high levels of employment can only be met by combining a sensible and prudent minimum wage with a generous and fair system of in-work support.

The old tax system set a personal allowance that failed to ensure that work paid, and also made thousands pay tax even as they claimed benefits.

Our goal for the new tax system, is that those who work will be guaranteed a minimum income, and by step-by-step integration of tax and in-work benefits this minimum income will be paid through targeted tax cuts and tax credits. No-one who is in work should, in future, have to go to the benefits office to receive a living income.

There will be some who say that the use of the tax system in this way disturbs the aim of a simplified tax system.

Let me take this view head-on. The problem with the old tax system was not simply that it was complex. It was characterised by reliefs and subsidies not based on or justified by clear aims and objectives.

We have acted to remove reliefs in the personal and corporate tax system which although no longer justified had remained for too long. Whether it be taking the decision to end Mortgage Interest Relief and Married Couple’s Allowance, or Advance Corporation Tax or introducing a Climate Change Levy, I believe that people will look back at the first budgets of this Government as a period when major tax reform was enacted.

I believe that the tax system is about more than simply raising revenue in the simplest way, it must also help us to work towards our wider goals – of encouraging work as well as promoting enterprise and supporting families.

That is why we are introducing measures to support those in work.

From October of this year, the Working Families Tax Credit will mean that every working family with someone working full-time will be guaranteed a minimum income of 200 pounds a week, more than 10,000 pounds a year. No net income tax will be paid until earnings reach 235 pounds a week.

The building blocks of this new system are therefore the minimum wage which sets a rate below which no employer can pay, and building on this a Working Families’ Tax Credit which, even this year, delivers an hourly income of £6 an hour or more.

For those receiving this minimum income guarantee through the wage packet, the rewards from work will be far clearer than ever before, the duplication of receiving benefits and at the same time paying tax will be eradicated and the damaging polarisation between taxpayers and benefit claimants will be removed.

The next step is to extend the principle of the WFTC.

Of course, barriers to work across the workforce are different for different groups – for families with children, those without children, older workers and single people.

Our long-term aim is an employment tax credit, paid through the wage packet, which would be available to households without children as well as households with children.

As a first step in the Budget, we began the move towards an employment credit with a minimum income guarantee for over 50s returning to work.

Nearly 30 per cent of men over 50 are outside the labour force, twice as many as 20 years ago.

For those unemployed for six months or more, we will create a new employment credit which will guarantee a minimum income of 9,000 pounds a year, for their first year back in full-time work, at least 170 pounds a week.

So to make work pay we have introduced the minimum wage and a new system of in-work tax credits. We have also reduced taxes to reward work and encourage job creation.

The new 10p starting rate of tax, reform of employees’ national insurance to eliminate the perverse entry fee and align the starting point for national insurance with that of income tax and reforms to employers’ national insurance to help create entry-level jobs.

This is a radical and long-overdue streamlining of the income tax and national insurance systems. It will halve the income tax bills for nearly 1.5 million low-paid workers, take 900,000 people out of National Insurance and tax altogether and remove substantial distortions in the labour market.

And we have cut the numbers facing marginal deduction rates over 70 per cent by two-thirds.

A further step in this better deal for work is to include help with housing costs, not just help with rent but also help for homeowners going back to work. Taking a job should not put people in danger of losing their homes.

And the Government will be producing a Green Paper on Housing later in the year.

Third, opportunities for skills

We recognise that bringing out the best in people – by policies that ensure opportunities for skills – is the best route to prosperity in the modern world.

That is why we are committed to widening opportunities in education and training: higher standards in our schools and lifelong learning.

And in order to raise staying on rates at schools and colleges, we are piloting Educational Maintenance Allowances, which are available at a higher level to those who need them most, thereby enabling us to more effectively target resources.

About 80 per cent of people in employment today will still be in the workforce in 10 years time. And yet only a fraction of today’s workforce are upgrading their skills – while their skills are all the time becoming obsolete.

It is because experience shows that training while in work is more valuable than training while waiting for work that we are emphasising the starter job, getting back to work quickly and encouraging people to work their way up the skills ladder.

Our proposals for Individual Learning Accounts and a University for Industry recognise the new reality that not only should people upgrade their skills throughout life but they should be encouraged to take responsibility for doing so.

Breaking the cycle of poverty

Our aim is not just to deliver high and stable levels of growth and employment today but for the future. We must recognise that our economy can never reach its full potential unless everyone in our country has the opportunity to develop their talents to the full.

Children are, rightly, the responsibility of the families in which they grow up. But they are more than this – invest in our children and we invest in the future of our country.

We say – indeed we all agree – that every child should have the best possible start in life. And this Government sees it as a national goal. This is why Tony Blair has said we will abolish child poverty over 20 years.

It is not enough to tackle absolute poverty and simply prevent destitution.

We should do more. It is not fair that children should be disadvantaged from the start of their lives because of who their parents are, what school they go to and where they live.

Ensuring each child has good start in life takes more than just money but cannot be done without money. We must ensure that children grow up in surroundings which enable their needs to be met.

So Government must play its part by using its system of child support to tackle the disadvantages that come from low incomes and poor parental support.

The truth about Britain today is that millions of children are born into poverty.

The facts of child poverty in Britain in 1997 are that: over four million children – more than a third of all children – lived in low income families. And very many of them will remain poor for a large part of their childhood – up to a quarter of all children are persistently in low income families.

The problems of poverty and deprivation start with the very young. Babies born to fathers in social class five are more likely to be low birth-weight. And low birth-weight is a key fact in a child’s subsequent development and opportunity.

Furthermore, poor children are less likely to get qualifications and to stay on at school. They start to fall behind their better-off peers from a very young age – the evidence shows that class differences in educational development are apparent by 22 months.

Recent research commissioned by the Smith Institute shows that class background had as strong an impact on the academic achievement of children born in 1970 – and reaching adulthood in the late 1980s – as those born in 1958.

The son of an educated professional father on average achieved qualifications two and a half levels higher than the son of an unskilled father who left school at sixteen. And the results for the 1970 generation are roughly the same as for 1958.

All of us have a part to play in a partnership to tackle child poverty and help all our children fulfil their potential and we are determined to tackle that vicious cycle of poverty, inadequate opportunities, and low aspirations.

The evidence on child poverty shows the need for early intervention to give very young children the best start in life and it shows the need not only for financial support but for proper support services to help families.

So we are investing £540 million over the next three years in the new Sure Start programme providing integrated services for children under four and their families to promote the child’s physical, intellectual, social and emotional development.

On the birth of a child we know that parents face particularly heavy financial burdens, so in the Budget I announced a new Sure Start maternity grant at double the rate of the old maternity payment, benefiting around 250,000 families. And to encourage good healthcare at an early age the additional amount is linked to contact with a healthcare professional.

And in both of the last two budgets – alongside our commitment to getting people into work and making work pay – we have also taken steps to increase direct financial support for children provided through the benefits and tax system.

Our approach is based on two principles: we must substantially increase support for families with children and we must do so in the fairest way.

As our manifesto promised, child benefit itself will remain as it is, paid to all mothers, and rising annually with inflation.

As a recognition of its role, we have raised the level of universal child benefit from 11.05 pounds a week for the first child to 14.40 pounds today and 15 pounds from next April.

The new Children’s Tax Credit, replacing the Married Couple’s Allowance, will provide more help for families when they need it most – when they are bringing up children.

But because of our commitment that substantial extra resources for children should be allocated in a fair way, the Children’s Tax Credit will be tapered for higher rate taxpayers.

And with the Children’s Tax Credit added to Child Benefit, families who were receiving 11 pounds a week in 1997 for their first child will, by April 2001, be receiving 23 pounds a week, 1,200 pounds a year.

Finally, for the poorest families in work and out of work, we are substantially increasing the rates of support for all children under eleven.

When we came to office, parents on income support received 8 pounds a week less for a child under eleven than a child over eleven. But there is no justification for this differential, particularly as families with younger children are more likely to live in poverty.

So, with the measures we have taken in successive budgets, from next April the under-eleven rate will have been raised to the level for 11-16 year-olds, an increase in support of over 400 pounds a year for each child under eleven for all families on income support

The maximum support for the first child will be 40 pounds a week, 2,000 pounds a year for families when they need it most.

Our measures so far lift one and a quarter million people out of poverty – 700,000 of them children.

Taking all our reforms together – Working Families Tax Credit, Children’s Tax Credit, rises in Child Benefit and other tax changes – a family on 13,000 pounds a year will gain up to 50 pounds a week, 2,500 pounds a year.

However, building upon the foundation of universal child benefit, we want to and will go further in improving child support and tackling child poverty.

We are examining, for the longer-term, the case for integrating the new Children’s Tax Credit with the child premia in income support and the working families tax credit- an integrated child credit. This could allow families entitlement to income-related child payments to be assessed and paid on a common basis.

A single seamless system, without disruptions in financial support, would provide a secure income for families with children in their transition from welfare to work. Such an integrated credit, for those in and out of work, could be paid to the main carer, complemented by an employment tax credit paid through the wage packet to working households.

Again as I said before, our approach is based on two principles: we must substantially increase support for families with children and we must do so in the fairest way.

Where we pay families an income-related benefit for children, it makes sense to take into account the circumstances of the family when we provide the support.

In all our reforms we will honour the important principles of independent taxation: that we will never allow the wife or partner to be regarded as the chattel as was the case until the late 1980s; everyone should be treated equally in the tax system and everyone should have the right to their own personal allowance whatever their household status.

Child poverty is unacceptable and these measures show our determination to help all our children fulfil their potential.

Conclusion

I said three years ago that a new Treasury under Labour would take its responsibility for the modernisation of Britain seriously.

That it would, be the guardian of the public finances and the guarantor of monetary stability, but that a Labour Treasury would need to be not just a Ministry of Finance, but also a Ministry working with other departments to deliver long-term economic and social renewal.

To achieve this, it needed to be innovative rather than obstructive; open rather than secretive; creating new ideas and not stifling them.

Above all, that we would underpin our economic policy with a proper understanding of the challenges of the global economy and the modern relevance of our values by putting a radical commitment to equality of opportunity at the centre of our mission. Fulfilling the 1944 White Paper aims of growth and employment and doing so to the benefit of all our citizens.