Labour's strategy revealed

On March 17th, Chancellor Gordon Brown unveiled the first full scale Budget under a Labour Government for almost 19 years.

Announcing this "once in a generation" opportunity to fundamentally reform the tax system, he described it as the task of modernising "not just taxation but the entire tax and benefits system". Its theme was to advance the ambitions "not just of the few but of the many" by encouraging enterprise; rewarding work; and supporting families.

Surprisingly the Chancellor underplayed the strongly redistributive effect of his Budget. Most of the 1980s and 1990s Budgets were very redistributive - favouring the well paid and hurting the poor - in the name of work incentives. This one was different. The incentives now are tilted towards the less affluent - the poorest 20% of households with children will gain almost £600 per year in disposable income compared with about £250 for the richest 20%. For the poorer households with children, this represents almost a 5% boost to their incomes compared with 1% for the richest.

But the most impressive measures in the Budget were the centrepiece "welfare to work" reforms: the Working Families Tax Credit, a childcare tax credit, changes to the entry level rates for National Insurance contributions and increases to both Child Benefit and to children’s allowances under income-related benefits. The Budget’s theme was to ‘make work pay’ and the mix of tax credits, tax reductions and benefit hikes will mean that the "welfare state, instead of trapping people in poverty, provides opportunity for all."

In addition, Brown announced further "New Deal" programmes to extend the New Deal Gateway, to help older and longer term unemployed people, lone parents, the partners of unemployed claimants (who have never been eligible for government programmes) and further help for disabled people to enter the labour market and to safeguard their benefit entitlement if a job does not suit them long term. On top of the first waves of New Deal announced in the July 1997 Budget, there will be a wide and varied range of help available to almost all categories of unemployed people and others who are disadvantaged or excluded from the labour market.

Meanwhile, employers will see reductions to their National Insurance contributions which may encourage them to recruit at the lower end of pay rates. Whilst this might encourage employers to hire more people at lower earnings, the Chancellor has pledged that every family with at least one employed adult will be guaranteed a take-home wage of at least £180 per week.

The Government’s welfare-to-work approach has three main planks. Firstly a pattern of stable economic growth to ensure a steady supply of new jobs; secondly the wide range of benefit and tax reforms and programmes; thirdly efforts to improve the nature and security of employment.

It is this last area that is still to be delivered. In due course, the Government’s implementation of the Social Chapter will improve the balance of power between employers and employees whilst the National Minimum Wage will underpin the labour market by outlawing low wages. But more needs to be done to make the labour market fairer, work more secure and attractive, and to encourage more people into lifelong learning. In short, the Government needs to think how it can help under-write the risks that individuals take in the labour market - especially if they are leaving benefits for re-entry level jobs and want to avoid the statistical probability of becoming unemployed again.

Are there any other risks ahead for the Government’s strategy? In the short term, there remains a threat to jobs growth. Interest rates are nearly double their equivalents in the major European economies. And the value of Sterling continues to dampen the prospects for exporters in most sectors. Since November, projections of growth for 1998 in the manufacturing sector have been revised from a likely maximum of 1.75% to just 0.5% which is substantially lower than productivity growth - which inevitably means job losses. Indeed the whole economy growth projections have been revised downwards by the Treasury from a maximum of 2.75% down to 2.5%.

This may not sound like much of a change, so recall that the annual growth rate between 1994 and 1997 averaged almost 3.5% whilst a boom like the mid 1980s saw GDP growth pushing 5% annually. Indeed the Treasury estimate of growth for 1999 - even at the higher end of their estimate range - will show the weakest growth since the recession ended in 1992.

Clearly, interest rates need to come down with a consequential decline in the value of Sterling. Because if jobs growth tails off, the whole premise to a successful strategy of welfare-to-work is going to fail. You cannot get the jobless into work unless there is more work.