The government’s Budget 2012 has just been revealed. The headlines have focused on the so-called 'Granny Tax', but what will the budget mean for unemployed and economically inactive people?
The first phrase the Chancellor used when presenting to parliament provided a flavour of the changes to come. ‘This Budget rewards work’ he said, and some of the subsequent tax changes reflected this. The increase in the personal tax allowance means those who move from unemployment or economic inactivity in to work will have a slightly smaller financial step to overcome, and will be allowed to keep more of their earnings. This is particularly valuable to those who receive the minimum wage, although tax credit reductions earlier in the life of this government mean most of the lower paid will still be worse off than before these changes took place.
A package of growth measures includes some direct government support for infrastructure, including rail upgrades, airport expansion, house building and regional support, while also providing some assistance to SMEs with access to finance and help to export. These measures should provide jobs both directly – through those who will work on infrastructure projects – and indirectly, through the expansion of businesses requiring more staff due to expansion, although any increase in employment resulting from this is likely to be some time off.
Britain’s technology infrastructure will receive some improvements, including high speed broadband in ten of our largest cities, and better rural mobile phone reception; along with tax benefits for creative industries this appears to support a little more job creation.
The government’s aim is for 100 Megabits per second broadband speed in the ten ‘megacities’. But according to experts, systems being put in place in Moscow and Paris support even faster access, potentially up to 1,000 Megabits per second, and some Asian systems also out-perform the proposed British system.
The creation of a more entrepreneurial culture should be helped by the opportunity for young people to receive business start-up loans as an alternative to student loans. This is supported further by a cut in corporation tax to 24%, with a reduction to 20% likely to be only a few years away. There is a question mark over whether countries should be competing in a ‘race to the bottom’ on corporation tax to encourage international businesses to move there, but this measure may provide a reason for some international businesses to base themselves in the UK.
Many people would like to see more direct methods used to create work. Some commentators have suggested that a reduction in or abolition of employer’s National Insurance, for small companies at least, would provide an incentive to take on more staff. The cost of this could be offset by the additional tax these staff would pay and savings in their benefits payments.
In fact, the job creation element of the Budget has received a thumbs down from those private sector employers who are charged with actually providing the jobs. In The Telegraph (22 March 2012) a group of business leaders have criticised the decision not to increase funding for apprenticeships or the Youth Contract, which comes in to force next month. John Longworth, director-general of the British Chambers of Commerce, said: "We are disappointed that the Chancellor did not announce additional measures to incentivise businesses to employ more young people.
While the freeze in the youth rate of the National Minimum Wage is a welcome step [announced on Monday], an extension of the Youth Contract would have encouraged more companies to take on and train young people seeking to break into the world of work."
So, a mixed picture on growth, with some encouragement but many opportunities missed. But apart from the headline increase in the personal allowance detailed above, what about the personal finances of unemployed and economically inactive people?
The overall financial picture for those on low incomes looks challenging to say the least. Those in the bottom 20% of households by income will see the greatest reduction in living standards of any group according to the figures released with the Budget, as demonstrated by the BBC’s Home Correspondent:
The bottom 20% of households is likely to include the vast majority of unemployed and economically inactive people. Of particular importance to Unemployed Net’s users is the reduction in both benefits and tax credits since this government came to power. Benefit reductions make life on benefits even more difficult, and tax credit reductions make entering work more unaffordable, trapping unemployed and economically inactive people in a no-win situation.
The Budget announcement of a potential additional £10b of reductions in benefits over the next few years (dependent on the level of deficit reduction required) will hit Unemployed Net’s users hard; the lack of a proper investment strategy for businesses or the country is likely to ensure the economy does not improve quickly, meaning the potential £10b benefit reduction is likely to turn in to a definite £10b benefit reduction.
The figures released with the Budget for growth in the economy demonstrate the problem with withdrawing government investment as quickly as it has been. Last year the Office for Budget Responsibility (OBR) predicted that growth in the UK economy would be 2.5% in 2012; yesterday it revised this figure to 0.8%.
The OBR’s Budget forecast that unemployment will peak this year at 8.7% of the workforce, or 2.8 million people, before falling next year, may well be over-optimistic. This history of over-estimating growth looks like it may be continuing, with the average prediction of economists for 2013 1.6% against the OBR’s 2.0%. Without this growth the UK economy is unlikely to create the jobs that are needed.
Budget 2012 was consistent in that it stuck to the path the government has set out over its first two years, with deficit reduction prioritised at the expense of everything else. The reductions in growth that have followed, together with the specific targeting of benefits before the Budget and likely further reductions in entitlements, are likely to mean the conditions and opportunities available to unemployed and economically inactive people get worse before they get better.