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Budget for jobs and families

by Paul Convery

Working Brief 103, April 1999

The Chancellor's March 9th Budget was heralded as delivering "a better deal for the people of Britain by rewarding work and supporting families" - built on a presumption that economic stability can now be "locked-in".

A New Deal for the over 25s was announced - with a minimum income guarantee of 170 a week - alongside "intensification" of the New Deal Gateway for 18-24 year olds. The Budget's support to families with children was targetted at lower and middle income families, with a new Children's Tax Credit, a rise in child benefit to 15 for the eldest child and increased support for children in the Working Families Tax Credit (WFTC).

The main measures to help make work financially worthwhile were a new 10p starting rate of income tax and the basic rate cut to 22p. Meanwhile jobs growth is expected to flow from a raft of measures for small business which include a starting rate of corporation tax set at 10%.

The Chancellor also announced a boost to public spending which will have a significant reflationary effect - with extra resources for schools and the health service.

Macro-economic background

The Treasury says its strategy "continues to lock in economic stability" with its 2 main rules for public finances - borrowing only to finance investment and maintaining a stable debt ratio (the ratio of debt to GDP is expected to move below 40% next year). So the main economic features underpinning the Budget are:

New Deal for the over 50s

The Government has effectively recognised that the election-pledge New Deal for the under 25s has had an un-intended side effect. It has symbolically ignored the older unemployed - particularly the over 50s - many of whom have become disengaged from the labour market. The proportion of men aged 50-64 who are economically active has fallen from 87 percent in 1979 to 72 percent now. Over-50s face a particular problem when going back into employment. On average they start a new job on earnings that are 25% less than they were paid in their previous job a more significant cut than for younger workers. So, the Budget announced a new voluntary programme to help over 50 year-olds who have been out of work for 6 months or more and are looking for work:

The Employment Credit will be paid for up to a year and has a maximum value of 3,120. Combined with higher NI contribution thresholds and the statutory minimum wage, the credit means a minimum net income guarantee of 170 a week for the first year back in full-time work. It will be available to those on JSA (and we assume this includes those who are receiving credits of NI contributions only), those on Income Support or disability benefits and to the partners of benefit claimants in non-working households. The credit will be launched in pathfinder areas from October 1999 followed by a national roll-out in 2000. The credit is described in the Budget 'Red Book' as a "first step". In the long term the Government "is attracted to the principle" of extending the working families tax credit approach to all low-income households - single people and couples without children - through a tax credit.

New Deal for the 18-24s

The Budget announced "intensification" of the New Deal Gateway. This has two aspects:

The Government will announce pilots to test this, which will be financed for through an enlarged Innovation Fund (increased up to 5 million).

Support to families

Lower and middle income families will get more help when when they are bringing up their children with a new Children's Tax Credit worth 416 a year for lower and middle income families with children, and an increase in Child Benefit to 15 for the eldest child and 10 for subsequent children From October 1999 the Working Families Tax Credit (WFTC) will be increased - the adult credit by 2.50 a week and the credit for children aged under 11 by 4.70 a week. This will provide a minimum income guarantee for families with a full-time earner of 200 per week. No family with children will pay income tax until their earnings exceed 235 a week or more than 12,000 a year. On average, WFTC will give families an extra 24 a week compared with Family Credit. Before the Chancellor's first budget in 1997, support to a family with one child was 11.40 a week in Child Benefit.The effect of 3 budgets since then will be to double the help to 23 a week - through increased Child Benefit and the new Children's Tax Credit. The Income Support under-11 premium will be increased by an extra 4.70 with a further 1.05 from April 2000.

Tax cuts to reward work

To help lower and middle income families there will be a new 10p rate of income tax on the first 1,500 of taxable income to be introduced this April. Its effect will be to halve the tax bill for 1.8 million low-paid people and mean a gain of up to 150 a year for those on low incomes. The basic rate of income tax will be cut to 22p from April next year.

Public spending

There will be a Capital Modernisation Fund established which should contribute spending of an extra 1.1 billion over 3 years with an emphasis on schools and the health service. There will be 2,000 for every school to spend on books - 10 million new school books in total - and 410 million investment to provide access for all to computers in local communities. The NHS will get 430 million to rebuild facilities whilst community crime prevention measures get an extra 170 million investment.

Individual Learning Accounts (ILAs)

ILAs will be available from next year to support individuals in investing in their own learning. For one million starter accounts the Government will make 150 available to each account holder in return for an investment by the individual of 25. In the first year the Government's 150 contribution will be made through TECs/LECs. For all ILA holders there will be:

The existing tax relief on vocational training will be restricted to basic rate income tax from April 1999, and abolished from April 2000 when ILAs become fully operational. This effectively means that the tax relief on vocational training is transferred from an income tax measure to a corporation tax measure, with no consequences for individual tax liability as long as the employer contributes on similar terms to the ILAs of all grades of their employees. The ILAs, after the first year, will be able to be spent on eligible courses, and will provide discounts of 20% of spending up to 500 per year. For all adults signing up to improve their basic education - including computer literacy - there will be a discount of 80 per cent. Other key courses, such as computer literacy, will also attract a higher rate of discount.

Benefit changes: New Deal for Lone Parents

Income Support payments will be extended to bridge the period between leaving benefit and starting a new job. To help ease the transition, from October 1999, IS will continue to be paid for a 2 week period (for claimants who have received IS for at least 26 weeks previously. The Government says that it will "consider whether there is a case" for extending this run-on to other groups of claimants on the basis of the evidence from lone parents.

Benefit changes: mortgage help

In his speech, the Chancellor indicated that further reforms to housing benefits are to be considered. At present, only rent payers receive in-work assistance with housing costs - making the transition to work very risky. The Budget announced that over the longer term, the "better deal for work" should include help with housing costs including help for home owners going back to work. According to Brown, "taking a job should not put them in danger of losing their homes".

Tax changes: National Insurance

National Insurance changes should reduce the burden on low paid by increasing the starting point for paying NI contributions from 64 per week now to 76 per week in April 2000 and then to 87 per week in April 2001. As a result 900,000 low-paid people will no longer have to pay NI Contributions. This 25% increase over 2 years will align the starting point for NICs with income tax personal allowances. At the other end of the earnings scale, the upper limit will be increased to 575 from April 2001 thus maintaining the differential between lower and upper earnings limits. However, entitlement to contributory benefits will be protected for those very low paid part-time workers earning between the lower earnings limit and the new starting point of NICs by a new zero rate between those two points. The 1998 Budget abolished the NICs entry fee which cuts tax for all employees by 65 a year and this will take effect in April 1999.

Employers' non-wage staff costs

From April 2001, the employers' NI rate will be cut to 11.7%. This is not exclusively a recruitment incentive but a measure designed to ensure no overall impact as a result of an environmental tax on business which will be introduced in 2001.

Expansion and recruitment measures for small firms

Alongside a new 10% rate of corporation tax which should halve the tax rate for the smallest companies and benefiting about 270,000 small and growing companies with profits up to 50,000. This builds on the 1998 Budget, when the main rate of corporation tax was cut to 30% and the small corporation rate was cut to 20% from April 1999. A new Small Business Service was also announced. This will have a strong remit to deliver the advice and support that firms need to grow and bring together different parts of the DTI, Better Regulation Unit and the DfEE from April 2001. Modelled partly on the Federal Small Business Administation in the USA, the new service will provide small business with:

There will also be measures to encourage investment. The Government will extend 40% first year capital allowances for another year; together with proposals for R&D tax credits for small and medium-sized companies.