Government sticks to its strategy despite slowdown

The Chancellor’s Pre-Budget Report on 27th November showed that the Government is sticking to its strategy. This consists of concentrating on making work pay through tax credits, of tackling economic inactivity, and of raising the skill levels of the adult population. Despite economic slowdown across the world, the Chancellor expects the UK economy to escape recession and grow at a pace ‘temporarily below the trend rate’ of recent years. Some of the steadiness to growth will come from increases to public expenditure that were unveiled in the March 2001 Budget. The Chancellor has now announced a further £1bn of health service spending.

The global economy slowed more sharply in 2001 than the Chancellor predicted in his March budget - and at pace not seen since the mid-1970s - with growth slowing in almost every region of the world. In the UK labour market, this has caused rapidly increasing job losses, with trading partners such as the US and Japan entering recession alongside the very weak growth in Europe. According to the Treasury, the 11th September events in the US have ‘dramatically weakened demand, delayed the global recovery and intensified the risks to global growth.’

Nonetheless, the Government says it remains committed to its main strategic goals which are to combine a ‘stronger, more enterprising, economy with a fairer, more just, society’. It intends to achieve this by:

• delivering long-term economic stability with low inflation and a faster growth in labour productivity than the UK’s main competitors;
• increasing employment opportunity for all by sustaining a higher proportion of people in employment than ever before, seeking to ensure full employment in every UK region and boosting labour productivity;
• eradicating poverty experienced by children and amongst pensioners;
• delivering high quality public services, concentrating on raising standards in education, improving healthcare and transport, and tackling crime.

The Treasury now forecasts that GDP in the G7 countries is expected to increase by only 1% in 2001 compared with 2% forecast in March of this year. Growth in world trade is expected to slow to just 1¼% this year compared with a 6¾% forecast and 11½% recorded in 2000. Consequently, UK export growth is now predicted to slow down dramatically - to just 1% in 2001 compared with 6% forecast in March 2001 and 11¼% recorded in 2000.

However, the Treasury believes that the UK will be cushioned from the worst of global slow-down with GDP expected to increase by 2¼% in 2001. With global recovery likely from the middle of 2002, the economy is expected to grow by between 2% and 2½% in 2002 and by as much as 3¼% in 2003. Meanwhile inflation (retail prices minus mortgage costs) is likely to ‘remain close to the Government’s 2½% target’ with Britain ‘continuing to experience its longest period of sustained low inflation since the 1960s’.

Despite planned increases to public spending and modest reductions in revenue, the Treasury expects a current budget surplus of £10¼bn for 2001-02, compared with £16bn predicted at the time of the March 2001 Budget. The surplus is expected to fall to just £3 billion in 2002-03 before rising again as global conditions improve.

The Government has now decided to launch an experiment with ‘transitional employment’ and utilise the expertise of long standing projects funded by regeneration and European sources. Pilots will draw on the experience of Intermediate Labour Markets and other measures designed to raise the employability of those who have not been successfully helped by mainstream programmes. To be launched from April 2002 onwards, these ‘StepUp’ pilots will have a budget of £40 million over 2 years, be active in 20 areas and offer a guaranteed, waged job to some of the hardest to help clients. This programme is looked at elsewhere in this issue.

The Government has also broken new ground by deciding to help improve the position of ‘precarious workers’ whilst in employment. Over ‘the next three years’ demonstration projects will be run to learn more about improving job stability and advancement among low paid workers - helping people to remain and progress in work. The Pre Budget report acknowledges that ‘retaining a job and advancing in work can be particularly difficult’ for those who have moved into work from benefits - particularly women, lone parents and people without qualifications. Of those who move from Jobseeker’s Allowance into work, 25% return to benefits within three months, and 40% return within six months. Their wages are also usually lower than for those already in work.

Accepting that "some people experience a ‘low pay-no pay’ cycle" moving from a low-paid job into unemployment, and re-entering work only into another low paid job, the Government argues that repeated lengthy spells of unemployment have a permanent effect on earnings. Keeping people in work is therefore a precondition to their achieving wage progression and avoiding a return either to unemployment or to the low pay-no pay cycle. The Government also hopes to improve the position of low skilled workers by increased effort to reduce basic skill deficiencies and pilot projects to increase the number of adults in the workforce with level 2 skills.

The Chancellor has also acknowledged some of the pressures and changes in the labour market by deciding to enhance the Job Transition Service. This provides support for communities affected by large-scale redundancies, focusing on the needs of individuals, and working closely with employers who may be able to offer new jobs. £6 million extra is being provided for the Job Transition Service, and the service is also being brought together with the Rapid Response Fund (administered by Regional Development Agencies) which funds skills training for people affected by the large-scale redundancies.

One of the more significant features of the pre-budget speech and documentation is the publication of a joint Treasury-DWP document entitled ‘The changing welfare state: employment opportunity for all’.1 This publication takes the Government’s position forward from the Green Paper ‘Towards Full Employment in a modern society’ published in March 2001.

The Government’s analysis, in this report, is based on employment rates being at a high level, although employment levels could be higher particularly in some highly disadvantaged localities. The number of claimants of Jobseeker’s Allowance is low by the standards of the 1980s and 1990s, though not by the standards of the 1950s, 1960s and even the 1970s, when unemployment rose.

ILO unemployment figures (which have only been collected for a little over twenty years) are at low levels. The major development which has taken place in the labour market is that the composition of economic inactivity has completely changed, within an overall percentage of economic inactivity which has changed little. There are now more than three million households in which there is no-one in employment, more than 16% of all working age households.

More women, largely drawn from those households already with someone in employment, have moved into the labour market. This has resulted in an increase in the numbers of work-rich households (where all adults are in employment) to nearly 11 million, or 57.5% of all working age households. The remainder, 26.2% of working age households, conform to the ‘traditional model’ of a single earner in a couple household, or include one non-earner in a multi-adult household.

There are more older men no longer in employment. Many are not classed as unemployed because they do not believe work is reasonably available and so have ceased to look for it. The great majority of these have some form of health condition which renders them less likely to be taken on by an employer.

The Government has now accepted, in this report, that economic inactivity is strongly concentrated in geographic areas in which the demand for labour is weak. The report includes two charts showing the linkage between, on the one hand, the unemployment rate in a local authority area and the rate of benefit receipt by people with an illness or disability, and on the other, the unemployment rate and the rate of benefit receipt by lone parents. In both cases, where the unemployment rate is high, the rate of benefit receipt for illness or disability, or by lone parent benefit receipt, is also high.

Where the unemployment rate is low, the rate of benefit receipt for illness and disability, and for lone parents, is also low. A similar relationship for the employment rates for people with health problems and over 50s has been demonstrated in a previous issue of Working Brief.2

The policy response to this recognition has been a number of area-based initiatives such as; Employment Zones, which only deal with Jobseeker’s Allowance claimants; Action Teams, which are aimed at all the non-employed; the new StepUp pilots, which are aimed at those who have not found employment from completed spells on New Deal, and regeneration initiatives.

At the same time, the report draws on other research to show that a very similar relationship holds between employment rates and low qualifications. It shows that, in 1999, areas with employment rates above 78 per cent had inactivity rates among less skilled men nearly half that in areas with employment rates below 70 per cent, 15 per cent compared to 28 per cent. For less skilled women, inactivity rates were at 39 per cent compared to 26 per cent, one and a half times higher in low employment areas than in high employment areas.

This shows that the lower the employment rate, the more it is the case that lower skilled people are economically inactive. It is important to bear in mind that these figures relate to the lower skilled, not to those with basic skills needs. This has implications for the Government’s response to the PIU report on Workforce Development. This concentrated on basic skills, while retaining progression to level 2 for all of working age as a longer term aspiration.

Elsewhere in the report, the analysis charts the increase over time in the inactivity rate for the least qualified quarter of people, by age. Using the least qualified quarter means that while the oldest age-group all have no qualifications, the youngest include those with level 1 qualifications.

For men, inactivity rates have risen since 1993 for each of the three age-groups analysed, 16-24, 25-49 and 50+. In contrast, the inactivity rates for men with higher qualifications have remained broadly constant. For women, inactivity rates for those aged 16-49 initially increased but later declined, so that at the end of the period inactivity rates were no higher than they were in 1993. However, inactivity rates were falling throughout the period for higher qualified women.

Therefore, for both men and women, and across age-groups, inactivity rates showed worse trends for the lower qualified than for the higher qualified. This is due to a significant decline in the demand for lower skilled workers relative to skilled workers. As projections see no reversal of this trend it would seem to be necessary to raise the skill levels of the least qualified quarter of the population to at least level 2 to provide them with a basis for labour market participation. This would be an expensive programme for which there is as yet no commitment, at least in the shorter term.

The Chancellor’s report stresses that a central part of the Government’s economic strategy depends upon increasing the sustainable rate of productivity growth. Alongside high levels of employment, growing productivity is ‘essential to deliver rising living standards, and to achieve the Government’s objectives to tackle poverty and improve public services.’

A landmark report from the Cabinet Office’s Performance and Innovation Unit (PIU) - published alongside the Pre Budget Report - proposes a strategy for the Government to increase skill levels.3 Commissioned by the Prime Minister, the PIU report examines the balance of responsibilities between individuals, employers and Government. It identifies ways of stimulating demand for vocational learning by firms who must adapt to increasingly competitive markets and for individuals who need to update existing skills and learn new ones, ‘rather than seeing education as something that happens just once’. The report concludes that a more ‘demand-led’ system is required - in which the needs of employers and employees determine the content and patterns of learning provision.

It concentrates on two key aspects of skills deficiency where Government effort should be targeted:

• the estimated 20% of adults who lack basic literacy and numeracy skills;
• the 36% of working age adults (almost 13 million individuals) who are not qualified to level 2

The report acknowledges that levels of attainment of young, new entrants to the labour market have been rising, but they are not keeping pace with those of other industrialised countries. However, it argues that the main problem is a large number of low-skilled adults in the workforce and proposes that tackling basic skills should be the Government’s top priority. But its long-term aim should give all adults the opportunity to achieve a level 2 qualification. It argues that, above level 2, the gain to individuals through increased earnings should provide ‘a greater incentive for individuals and employers to invest in skills’. Below level 2, the Government needs to tackle the time and cost inhibitions that prevent individuals taking up learning

Action

In line with these proposals, the Pre Budget Report confirms that the Government is considering a range of measures that could include:

• financial support for employers whose staff take time off to train to acquire basic literacy, numeracy and ICT skills and to progress to level 2;
• free learning provision and accreditation for employees without level 2 qualifications, to work towards recognised qualifications in areas which could raise productivity, up to level 2;
• a minimum statutory entitlement for all employees who have not attained basic skills or level 2 qualifications to paid time-off each year to train towards the standard;
• extended information, guidance and support for employers and individuals taking part in, or considering taking part in, any new system (among other possibilities, these could include arrangements along the lines of Union Learning Representatives).

Specifically, the Chancellor announced pilots to test improved access to training and enable employees to attain basic and level 2 skills. These Workforce Development pilots will start in September 2002 and are budgeted to cost £40m - over 2 years - of which £25m will come from the Windfall Tax, with the remaining £15m from DfES budgets. The pilots will test a number of elements:

• the level of financial support needed to compensate employers for the time their employees spend on training - different pilots will offer compensation of up to 150% of wage costs for small employers, with less than 100% of wage costs for the largest employers;
• the amount of time low-skilled employees would be entitled to devote to training on full pay. The pilots will test periods of between 35 and 70 hours of paid time off each year;
• incentives and rewards for successful completion of courses;
• up to 100% subsidies for course and accreditation costs.

The PIU report also recommends a longer term strategy in which the demand for skills and vocational learning is increased by empowering individuals and employers through ‘placing purchasing power directly in their hands’, and by helping employers, particularly small ones, to develop business strategies that drive up demand for skills.

Additionally, it argues that suppliers of vocational learning need to improve their quality - ensuring that it is responsive to the needs of individuals and businesses - with Government helping to build capacity and ‘ensuring comprehensive audit and inspection procedures’. Government’s role should also be to support this demand-led system, with appropriate incentives and safeguards:

• excellent labour market intelligence to ‘enable employers, individuals and providers to make informed decisions’;
• a range of financial incentives - including both public expenditure and taxation instruments;
• sufficient funding flexibility to meet the needs of different local labour markets
• a more flexible qualifications system.

By March 2002, the Learning and Skills Council will devise a national strategy for workforce development whilst the PIU will publish a second report by July 2002 setting out in detail, alongside the 2002 Spending Review, how the Government’s policy will be taken forward.

The Pre-Budget Report confirms that the Government will implement proposals - first announced in July 2001 - to create a new Community Investment Tax Credit (CITC) to encourage private investment in not-for-profit and for-profit enterprises in under-invested communities. The primary element will be a tax credit set against investors’ tax liabilities worth 25% of investment, spread evenly over five years. The credit will be available to individual investors as well as corporate lenders and it will apply to both debt and equity investments.

Investment that qualifies for the tax credit will be raised by new intermediaries - Community Development Finance Institutions - which will be accredited by the Small Business Service. The Government aims to legislate in the 2002 Finance Bill with the scheme starting shortly afterwards.

The Government will also help establish a Community Development Venture Fund to provide finance for firms operating in disadvantaged areas. Due to start ‘by the end of the financial year’, this will be a partnership with the venture capital industry in which the Government has committed £20m in matching funding to a £40m fund.

The UK’s ‘most disadvantaged areas’ will also benefit from a stamp duty exemption on both residential and commercial property transfers up to £150,000. Taking effect from 30th November 2001, this exemption is expected to boost local enterprise and employment and the Government plans to either ‘raise the £150,000 limit significantly’ or abolish stamp duty altogether for all non-residential transfers in these areas in 2002.

Lastly, pilot projects for ‘City Growth Strategies’ will draw on experience from the USA to strengthen the links between enterprise and urban renewal and ‘put business creation and development at the heart of regeneration in towns and inner cities’. Focusing on their ‘competitive advantage rather than their social disadvantage’, the pilot projects will be in Nottingham, Plymouth, St Helens and a number of London Boroughs.

Immediately following the Pre Budget Report, the Department of Work and Pensions announced the 2002-03 rates for benefits and the Treasury confirmed the Working Families and the Disabled peoples, Tax Credits (WFTC and DPTC) rates and income thresholds. The Tax Credits Bill was published on 29th November setting out the framework for the new Working Tax Credit and integrated Child Tax Credit which should be introduced in 2003 and build on the principles of the WFTC. The Child Tax Credit in particular provides several key benefits:

• a secure stream of income for families with children which does not depend on the employment status of the parents, creating a stable income bridge when families move into work;
• some parents who are not in work, like students and student nurses, become newly eligible;
• all support for children is paid directly to the main carer, in line with Child Benefit.
• a more transparent system which brings together all income-related child payments into a single, payable tax credit administered by the Inland Revenue;
• greater flexibility, enabling families to access support for children from one system, even as they move into or out of work;
• a common framework for assessment, so that all families are part of the same administrative system and poorer families do not feel the stigma associated with more traditional forms of support.

The Treasury is expected to publish, before Christmas 2001, a paper outlining the Government’s strategy for tackling child poverty. It will set out the progress already made and outline a range of issues to inform Budget 2002 and the 2002 Spending Review. This should reiterate that tackling child poverty is at the centre of the Government’s agenda, and it is intended to make sure that Government policy addresses poverty, both the causes and the consequences, across departments.

The Treasury has also published a document ‘Delivering Saving and Assets’ setting out the responses to the Government’s proposals on the Child Trust Fund and proposing a new ‘Savings Gateway’. The Child Trust Fund, which is intended to ‘spread the benefit of asset-ownership to all’, is a proposal for a universal account, with endowments paid to all children at birth and at ages 5, 11 and 16.

Children from the poorest families would receive the most State help but parents, family, friends, and children themselves could make contributions to the account. The Government is now consulting on two detailed proposals for delivery.

The ‘Saving Gateway’ is a proposed savings account targeted at individuals from low-income groups, and the Government now intends to launch a number of pilot projects. The Gateway would target individuals from low-income groups, providing a Government-funded match for all money saved, up to a limit. It would offer individuals a valuable and transparent financial incentive to develop a regular saving habit and provide tailored financial information to inform saving choices.

The Government is also introducing new permitted work rules for people on Incapacity Benefit. From April 2002, people on IB will be able to try small amounts of work (12 months, of up to 16 hours a week and earning up to £66) without affecting their benefit entitlement. In addition, a series of regional Retention and Rehabilitation pilots will be launched from 2002 to support disabled people already in employment.

Welfare to work programmes have been mainly funded by the £5.2bn Windfall Tax. Budget 2001 in March this year had expected to see this exhausted by the end of 2003-03 and the Employment Opportunity Fund, mainstream departmental money, take on the Government’s welfare to work expenditure commitments. Despite new, commitments funded from the Windfall Tax, the Pre Budget Report now expects to have a ‘margin’ of £170m still remaining by the end of 2003-04.

Comparing the funding levels that were published in the March 2001 Budget with the latest estimates, we see that all the main programmes experience a sharp cut in expenditure that is funded from the Windfall Tax by 2003-04. The New Deal 18-24 and New Deal 25+ both drop to £50m from £280m and £180m respectively. Funds dedicated to the New Deal for Lone Parents decline from £250m to just £20m whilst the New Deal for Disabled People declines from a planned contribution of £70m to just £10m. Action Teams however will receive more funding than was planned in March of this year - during the current spending year, rising from £40m that was planned nine months ago to £60m that is now expected.