4

Increasing employment opportunity for all

INTRODUCTION

4.1 The Government's aim is employment opportunity for all - the modern definition of full employment. Macroeconomic stability is a prerequisite to achieving this aim. But macroeconomic stability is not enough to secure job opportunities for all. It needs to be backed up at the microeconomic level to ensure that individuals throughout the country are able to compete effectively for jobs, that there is a secure transition from welfare into work, that employment is financially rewarding and that people are able to secure progression in work. The Government has introduced radical reforms of the tax and benefit system backed up by active labour market policies to achieve this aim.

Achieving high and stable levels of employment across Britain

4.2 The past few years have seen a substantial improvement in Britain's labour market. Employment currently stands at a record level, with 800,000 more people in work than in spring 1997. As Chart 4.1 illustrates, employment in the UK is also high by international standards. This reflects a combination of stable economic growth, successful employment policies such as the New Deal and the rapid rise in female employment over the last few decades. Chapter 2 set out how macroeconomic stability is being achieved through a credible monetary and fiscal policy framework, which includes discipline and responsibility in wage bargaining. The Government's long-term employment ambition is that a greater proportion of people should be in work than ever before. Box 4.1 sets out this ambition.

Chart 4.1: Employment rates

4.3 Unemployment is currently at a 20-year low. At 5.9%, ILO unemployment is at its lowest level since the series began in 1984. The claimant count currently stands at 1.15 million, down by half a million since spring 1997. Alongside these falls in unemployment, the stock of unfilled vacancies at Jobcentres is also at record levels: the ratio of jobseekers to vacancies currently stands at just over 3 claimant unemployed people to each Jobcentre vacancy, compared to around 10 people to each vacancy a decade ago.

4.4 Whereas the recovery of the late 1980s was largely confined to the South of England, this time every region of Britain has seen falling unemployment and rising levels of vacancies, creating a more balanced and sustainable recovery. Unemployment has fallen fastest, and vacancies have risen fastest, in those regions that were hit the hardest in the 1980s. Within regions, however, there remain pockets of high unemployment and inactivity. But the problems of Britain's most deprived areas are not necessarily a lack of jobs - in almost every case, these areas sit alongside, and within travelling distance of, labour markets with high levels of vacancies. People need to be equipped to take advantage of these opportunities.

Tackling the underlying causes of deprivation and increasing opportunity

4.5 While unemployment is at its lowest level since the 1980s, and is low in comparison to most other European countries, the UK continues to have a high proportion of workless households. Although the number of households with no-one in work has fallen by 106,000 since spring 1997, many groups remain excluded from the labour force in large numbers - lone parents, disabled people and partners of unemployed people all have high rates of inactivity. Around 6.7 million people below pensionable age - 4.5 million adults and 2.2 million children - live in households where no-one is in work: twice as many as 20 years ago. This combination of high employment and large numbers of workless households has come about because worklessness has become increasingly concentrated within households. These concentrations of worklessness are now the most important cause of poverty among working-age people and their children. Two-thirds of working age households on low incomes have no-one in work, and about half of all children in poverty are in households where no-one is in work.

4.6 Long periods of unemployment, or inactivity, can have long-term damaging effects on future employment prospects and earnings potential. Getting a job, keeping a job and progressing up the earnings ladder are the key to improving opportunities. For 8 out of 10 people in the bottom fifth of the income distribution between 1991 and 1995, getting a job moved them out of low income. By ensuring that employment opportunities are open to all, the Government is tackling one of the most important underlying causes of poverty.

A strategy for achieving employment opportunity for all

4.7 The Government's strategy for ensuring employment opportunity for all comprises the following key elements:

• helping people to move from welfare to work, through the New Deal;
• easing the transition into work, by removing barriers to working and ensuring that people are financially secure when moving from welfare to work;
• making work pay, through reform of the tax and benefit system; and
• securing progression in work, through lifelong learning.

WELFARE TO WORK

4.8 There are currently 1.15 million unemployed people claiming Jobseekers' Allowance (JSA), but every year there are over 3 million new claims for JSA. The labour market is dynamic and most of these claims end relatively quickly, with over 50 per cent of people moving off JSA within 13 weeks. There are a further 3.8 million people of working age receiving other out of work benefits, including sick and disabled people and lone parents. Disabled people are more than three times as likely to be inactive as people without a disability. Over 50 per cent of lone parent households have no-one in work, compared to only 7 per cent of couples with children. But many of the economically inactive say that they would like to work. That is why the Government is providing intensive support - combining rights with responsibilities - to help people to move from welfare into work through policies including ONE and the New Deal. The Government wants to ensure that there is work for those who can, and security for those who cannot work.

Forging a new culture - putting work first

4.9 The Government's new ONE service combines a one-stop shop for benefits and employment advice, a personal adviser service to help people back into work, and work-focused interviews for all new benefit claimants: one place for work and benefits. It aims to forge an entirely new culture which puts work first, and provides a modern, integrated and flexible service for all. ONE is currently running in 12 pilot areas, including 4 using call centre technology and 4 led by the private and voluntary sectors.

4.10 ONE represents a fundamental shift in the way that the Government supports people - away from a system that asks simply "what money can we pay you?" to one that says "how can we help you become more independent?". While it is too early to draw any firm conclusions, the early signs in the ONE pilot areas are encouraging. From April 2000, new claimants in ONE pilot areas will be required to take part in an interview to talk about their prospects of finding work and about the help that is available both to move into work, and to ensure that work pays.

4.11 To deliver support for people of working age, during 2001 a brand new, modern agency will be established with a clear focus on work. The new agency will draw together the Employment Service and the parts of the Benefits Agency which support people of working age. It will deliver a single, integrated service to benefit claimants of working age and employers. The agency will continue to develop the partnership approach to working with the private and voluntary sectors which the Government has adopted in implementing its welfare to work policies.

The New Deal

4.12 Through the New Deal, the Government is ensuring that people do not become detached from the labour market. The New Deal provides help and support for people moving into work to ensure that they are well equipped to compete effectively in the modern labour market. Over 750,000 people have participated in the New Deal and around 260,000 of them have already moved into work. Budget 2000 builds on the success of the New Deal to date, by:

• strengthening the New Deal for 18-24s by introducing nationally an Intensive Gateway for young people on the New Deal from June 2000;
• extending the New Deal for 25 plus to provide a more intensive programme based on the principles of the New Deal for 18-24s on a national basis from April 2001;
• introducing Action Teams in areas with the highest unemployment, to help match unemployed people to vacancies;
• providing more choices for lone parents who are considering work; and
• developing plans for extending the New Deal for disabled people nationwide and introducing rehabilitation and retention pilots to test different ways to help disabled people move into and remain in work.

New Deal for 18-24 year olds

4.13 Long-term youth unemployment has fallen by 70 per cent since May 1997. The New Deal for 18-24 year olds helps young unemployed people to secure jobs as the most effective way of enhancing their earnings, increasing their skills and securing their future economic independence. The New Deal for 18-24 year olds includes:

• a Gateway of up to 4 months, including help with job search, careers advice and guidance from a personal adviser;
• for those who do not find unsubsidised employment, a period of mandatory full-time activity through one of four options (subsidised employment, full-time education and training, work on the environmental task force or work with the voluntary sector), to help improve their employment prospects; and
• follow-through to ensure that clients are helped to build on their experience and move into employment.

4.14 Over 400,000 young people have joined the New Deal since it was launched nationally in April 1998 and over 185,000 have found jobs. In addition, over 116,000 young people have gained work experience and training through the other New Deal options. Independent analysis by the National Institute of Economic and Social Research estimates that the New Deal for 18-24 year olds has reduced long-term youth unemployment by nearly 40 per cent relative to what it would otherwise have been. Box 4.4 presents some of the evaluation results to date.

4.15 As set out in the Pre-Budget Report, the Government plans to expand an Intensive Gateway approach from June 2000, building on the lessons learnt from the 12 pilots launched last year. The Gateway is designed to prepare young people more effectively for work and provide them with a greater impetus for their jobseeking activity. It will include:

• a full-time course involving job-search activity and addressing "soft" skills, such as punctuality, team working and communication skills; and
• more intensive personal adviser help with job search before and after the course.

4.16 The Intensive Gateway will benefit those young people whose job search activity would gain from an injection of further pace and purpose. As announced in Budget 99, the final month of the Gateway has been intensified for all New Deal for 18-24 year old participants to prepare them for the New Deal options and to emphasise that remaining on benefits is not an option.

4.17 The Government's New Deal Innovation Fund backs good ideas generated at the local level for improving the effectiveness of the New Deal. The Pre-Budget Report outlined the Government's intention to provide further funds from the receipts of the Windfall Tax to extend the Innovation Fund beyond 2000. £9.5 million will be allocated to extend the Innovation Fund over the next three years - £5 million of which will be ring-fenced for measures within inner cities to explore the use of intermediaries in getting disadvantaged people into jobs.

New Deal for 25 plus

4.18 Since June 1998, people aged 25 and over who have been unemployed for two years or more have been eligible for the New Deal for 25 plus. This includes access to a personal adviser service and, alongside a range of options for long-term unemployed people, a £75 per week wage subsidy and opportunities to undertake full-time education and training. By December 1999, around 216,000 long-term unemployed people had started on the programme and over 34,000 had found jobs. Since November 1998, a more intensive approach has been tested in some areas, and at earlier durations of unemployment, building on the principles of the New Deal for 18-24s.

4.19 As announced in the Pre Budget Report, from April 2000, participants in the New Deal for 25 plus will benefit from enhanced gateway provision with more intensive contact with their New Deal personal adviser and greater access to support services, as well as improved job search facilities being put in place across the Employment Service this year.

4.20 The Pre-Budget Report also set out plans to intensify and extend the New Deal for 25 plus on a national basis from April 2001 - along the lines of the New Deal for 18-24s - incorporating lessons learned from the innovative New Deal 25 plus pilots. A comprehensive set of measures aimed at helping all unemployed people aged over 25 will come into effect nationally from April 2001. For people aged over 25 who have been unemployed for 18 months, there will be a step change in New Deal provision, heralding a stronger emphasis on rights and responsibilities, similar to the approach pioneered in the New Deal for 18-24s, comprising:

• a structured gateway provision, including help with job search, careers advice and guidance;
• for those who do not find unsubsidised employment during the Gateway, full-time activity including flexible access to a period of subsidised employment, support for self-employment, work-focused training, or a programme to improve key work skills to enhance their employment prospects, which could include work trials with an employer or work with the voluntary sector; and
• follow-through to ensure clients are helped to build on their experience and move into employment.

Enhanced provision for jobseekers

4.21 The Government has also announced that more resources will be provided to intensify contact between the Employment Service (ES) and jobseekers aged 25 and over who have been on Jobseekers' Allowance for 6 months or more. From April 2000, the Employment Service will:

• introduce an extended and more intensive Restart interview for jobseekers to provide more support, encouragement and help with job search, thereby improving their chances of finding work;
• provide more intensive Fortnightly Jobsearch Reviews around the 6 and 12 months of unemployment points, to check progress and discuss the jobs available; and
• introduce pilots to explore how best to match jobseekers to vacancies, and telephone them regularly through ES Direct to offer them jobs.

4.22 The Pre-Budget Report announced a significant new programme of investment to modernise the Employment Service. This involves harnessing the full potential of new technologies to bring about a radical improvement in its services to employers and to jobseekers. During 2000, the Government will:

• launch a new jobs and learning bank, accessible through the internet;
• begin to expand access to the jobs and learning bank from public places and through a network of touch-screen jobpoints in Jobcentres;
• enhance and deepen its links with the BBC and other potential partners to ensure that the full potential of interactive digital television is used to help bring together jobseekers and employers; and
• put in place a nationwide network of job-broking call centres which, as well as providing a single point of contact for employers and jobseekers, will enable jobseekers to be informed of vacancies for which they might be suitable.

New Deal for 50 plus

4.23 The employment rate of men aged over 50 has fallen dramatically in the last 20 years. At the same time, women over 50 have not experienced the marked increases in labour market participation that younger women have enjoyed. Budget 99 announced the New Deal for 50 plus, which was launched in nine Pathfinder Areas in October 1999. The New Deal for 50 plus will be rolled out nationally in April 2000 and provides: personal advice; help with job search; an employment credit of £60 a week for full-time and self-employment and £40 for part-time employment for one year; and training support. This support is available on a voluntary basis to people aged over 50, where they or their partner have been on benefits for more than six months, to help them return to work.

Worklessness in deprived areas

4.24 While the aggregate labour market is stronger than at any time in the last 20 years, pockets of low employment and high unemployment remain across the country, especially in Britain's inner cities. Meeting these challenges requires a multi-faceted strategy. Following the Social Exclusion Unit's September 1998 report on neighbourhood renewal¹, the Government established 18 Policy Action Teams to help to develop a coherent national strategy. The Policy Action Team on Jobs² identified four principal reasons why people living in the most deprived neighbourhoods might fail to obtain the jobs on offer nearby:

• lack of skills and aptitudes, especially self-confidence and inter-personal skills;
• inadequate matching between employers and jobless people;
• worries about making the transition from benefits into work; and
• racial discrimination against ethnic minorities.

4.25 A separate Treasury paper, The Goal of Full Employment: Employment Opportunity for all Throughout Britain, published on 29 February, describes this patchwork of areas of prosperity and deprivation. The paper shows how Britain's most deprived areas sit alongside, and within travelling distance of, labour markets where vacancies are going unfilled. It is not enough just to ensure that there are job opportunities everywhere - the challenge is to ensure that people in Britain's most deprived communities are equipped to take advantage of vacancies arising in nearby areas.

4.26 The New Deal for 18-24s is already addressing this challenge for young unemployed people throughout the country. The Pre-Budget Report announced that through the New Deal Innovation Fund, money would be made available to provide additional support for private and voluntary sector intermediaries in around 11 inner-city areas which can add value by linking long-term unemployed people to employers with vacancies to offer. The Pre-Budget Report also announced enhancements to job matching services for unemployed people over the age of 25, as set out in paragraph 4.21. Budget 2000 announces further enhancements to the New Deal to ensure that people can compete effectively for the jobs created in Britain's dynamic labour market, and to support this it also announces more targeted support to tackle barriers to employment in areas of deprivation.

Employment Zones

4.27 From April 2000, Employment Zones will be introduced in 15 areas in England, Scotland and Wales that suffer from particularly high levels of unemployment. Employment Zones are a new and innovative approach that aim to help around 50,000 long-term unemployed people aged over 25 back into work. They will offer the opportunity of tailoring programmes specifically to people's needs, with jobseekers and their personal advisers being able to set up Personal Job Accounts to use, more flexibly, funds that are available for support. Employment Zones will be provided by a combination of public, private and voluntary sector organisations. Like other welfare to work policies, they will be evaluated to discover best practice that can be shared in future developments.

Action Teams

4.28 Action Teams will be set up in 20 of Britain's communities with the highest unemployment and lowest employment, along with additional support in the 15 Employment Zone areas. They will have access to a £40 million fund to work with long-term unemployed people in the most deprived areas, to identify suitable vacancies in neighbouring areas and to bring the two together. These Action Teams, bringing together the Employment Service and private and voluntary sectors, will use this additional funding to tackle barriers to employment, including funding for transport to enable people to access nearby vacancies. The Action Teams will operate initially for one year from autumn 2000 and will be extended on the basis of their effectiveness at getting people into work.

New Deal for lone parents

4.29 The Government is determined to help into work both those who are unemployed, and those who are outside the labour market but who would like to find work. Balancing work and family responsibilities is often difficult for parents, particularly when they are the sole carer of a child. But taking long periods out of the labour market while caring for children can put families at greater risk of poverty and can be damaging to long-term earnings potential. Lone parent households are far less likely to work than married or cohabiting couple households. This lower labour market participation puts lone parent families at greater risk of low income and a lack of opportunity - 1 in 4 children live in families headed by a lone parent, yet children in lone parent households make up almost half of all children in poverty. But most - 9 out of 10 - lone parents say that they would like to work at some point. The Government wants to provide genuine choices for lone parents, to help them to balance work and family life, and to tackle the barriers to work that they face.

4.30 The New Deal for lone parents (NDLP) was launched nationally in October 1998. It provides the opportunity for all lone parents to meet a personal adviser and receive help and support to improve their prospects and living standards by taking up, and increasing, paid work. From the national roll-out of the NDLP to the end of December 1999, over 103,500 lone parents had participated and more than 35,000 had already moved into employment.

4.31 Building on the success of the NDLP to date, a package of improvements was outlined in the Pre-Budget Report, increasing the choices and opportunities available to lone parents considering work. The package, which will be introduced this year, includes more intensive support for lone parents soon to move onto JSA as their children reach age 16, access to specialised resource centres to help with preparation for work and job search, and an extension of invitations to participate in the New Deal to lone parents on Income Support with children from the age of three. Innovative pilots, run by private and voluntary sector organisations, have begun testing new approaches to help lone parents into work, including mentoring, work experience and training. An in-work training grant will also be piloted later this year, helping lone parents to gain qualifications once they move into work through the New Deal.

4.32 From April 2000 in the 12 pilot areas of ONE, all lone parents making a new benefit claim will be required to meet with a personal adviser to discuss options for work and training. To ensure that lone parents are able to consider all of the choices available to them, starting this autumn in pathfinder areas and nationally from April 2001, lone parents on Income Support with children over the age of five will be required to meet with a specialist lone parent personal adviser to guide them through these choices. The Government recognises that for some lone parents, particularly those with young children, choices are constrained. Providing information about opportunities to work, study or care for their children full time, will help lone parents to plan for their future. The choices on offer to lone parents will include:

• work of 16 hours or more, to move lone parents onto the Working Families' Tax Credit;
• the choice to try some work under 16 hours; and
• the opportunity to undertake education and training.

These choices will be offered on a voluntary basis. Chapter 5 sets out in more detail the overall strategy for abolishing child poverty and for ensuring security for lone parents and their children, particularly when their children are young.

4.33 A personal adviser will be able to guide lone parents through these choices, and help them to prepare for their future as their children get older. Lone parents who would like to move into work of 16 hours or more, and onto the Working Families' Tax Credit, from April 2001, will receive a guaranteed minimum income of £155, or £214 at 35 hours a week, and help with childcare costs through the childcare tax credit. They will also receive help to make the transition into work through the Income Support run-on and from April 2001, lone parents with mortgages who are moving into work will be eligible for a 4 week Income Support for Mortgage Interest (ISMI) run-on and a 1 year linking rule to help them to feel and be more secure when making the transition into work (see paragraph 4.44). Lone parents will also be provided with help to prepare for, and to move into, work through NDLP.

4.34 For those lone parents who want to work for less than 16 hours, the first £20 of their earnings will be disregarded against their Income Support or JSA. Lone parents who are childminders can gain even more - two-thirds of their earnings from childminding are ignored, with the remaining third subject to the £20 disregard. From April 2002 lone parents on Income Support will see up to £10 a week extra of any maintenance paid to them, through a new maintenance premium introduced under the reformed Child Support Agency. Personal advisers will also be given access to resources to provide help with childcare for lone parents in jobs of less than 16 hours.

4.35 Those lone parents who would like the opportunity to prepare for some work in the future will be eligible for free access to Further Education courses and help with childcare through access funds. They will also be eligible to apply for a means-tested Childcare Grant for lone parents in Higher Education which will be fully disregarded for benefits purposes. Help to train for work through the New Deal for lone parents will also be provided and from April 2001, lone parents undertaking training and education will be eligible for a £15 per week premium on top of their Income Support to help them cover the additional costs of studying.

New Deal for partners of unemployed people

4.36 Where one partner is unemployed, the chances of the other partner being in work are much lower. This is especially the case for women: where the male partner is unemployed, only 40 per cent of female partners are employed. In contrast, where the male is employed, 75 per cent of female partners are employed. The large increases in female employment over the past 20 years have come in households where the partner is already in work. The New Deal for partners of unemployed people was launched in three pathfinder areas in February 1999 and was rolled out nationally in April 1999. It provides a personal adviser service aimed at helping partners of unemployed people to move into work. Partners aged 18-24 are eligible to receive help through the New Deal for 18-24s.

New Deal for disabled people

4.37 Disabled people are among the most disadvantaged in the labour force: in any year, only 5 per cent of those receiving incapacity benefits return to work. The Government has therefore set aside £195 million from the receipts of the Windfall Tax specifically to assist this group. The New Deal for disabled people has been testing a range of approaches - a personal adviser service, innovative schemes and benefit changes to find out what really works. To date, over 2,500 people have been helped into work by the New Deal for disabled people pilots.

4.38 Budget 2000 announces the first stage of work in developing a nationwide service to help disabled people find work. The service will continue to be exploratory, testing and evaluating different approaches in order to develop the most effective policies for disabled people.

4.39 Budget 2000 also announces that the Government intends to test the effectiveness of helping people when they become ill in work, with job retention and rehabilitation pilots. These pilots, beginning from 2001, will test the effectiveness of early work-focused help with health, employment and other services.

Funding Welfare to Work

4.40 The Welfare to Work programme is funded from the receipts of the one-off Windfall Tax on the excess profits of the privatised utilities. The Windfall Tax raised a total of £5.2 billion. Table 4.1 sets out the latest estimates of the allocation of Windfall Tax receipts between programmes.

Table 4.1 Allocation of the Windfall Tax receipts

¹ Rounded to the nearest £10 million (except for Ufl and ONE). Constituent elements may not sum to totals because of rounding. Outturns for 1997-98 and 1998-99, projected outturns for 1999-00 and allocations for 2000-01 onwards.

² Includes £20 million for 18-24 year old childless partners of unemployed people.

³ Includes £10 million for skills development fund. Includes an indicative allocation for enhancements from April 2001, yet to be finalised.

⁴ Includes £10 million in 1999-00, an element of the November 1998 announcements on Welfare Reform.

⁵ Capital spending on renewal of school infrastructure, to help raise standards - announced in the 1997 Budget.

⁶ Includes £30 million for out-of-school childcare. The costs of the 1997 Budget improvements in childcare support through Family Credit are included from April 1998 until October 1999, when the measures were incorporated in the childcare tax credit within the Working Families' Tax Credit.

⁷ Start-up and development costs. Other costs of the UfI are funded from within departmental expenditure limits.

⁸ Funding for repeat interviews. Other funding comes from the Invest to Save budget.

EASING THE TRANSITION TO WORK

4.41 For many people, especially those who have been out of work for long periods, the transition back into work can be a difficult period. Although they would be better off in work, the associated risks, especially managing until the first pay cheque, can make many people prefer certain, but lower, benefit levels. The problems of dealing with a short-term transition into work can leave people trapped for long periods on benefits. There are currently a number of schemes intended to ease the move into work, but each is narrowly targeted, often discretionary and with complex rules. Evidence suggests that the system is little understood, with schemes simply providing an unexpected windfall rather than giving people the security to make the move into work. To provide that security, the system needs to be made simpler and more automatic. The Government also recognises that some groups require additional support to overcome specific barriers to work. In particular, families with children can be constrained by the cost and availability of childcare. The Government has therefore implemented a number of reforms to help families with children to make the transition into work.

Job Grant

4.42 The Government will introduce from spring 2001, a Job Grant of £100 for people who move from welfare into work. This builds on the Income Support run-on for lone parents announced in Budget 99 which lone parents will continue to receive. All others who move into work of more than 16 hours a week, expected to last 5 weeks or more, and who have been claiming Jobseekers' Allowance, Income Support, Severe Disablement Allowance or Incapacity Benefit for at least 52 weeks will be eligible. The Job Grant will replace the discretionary and narrowly-targeted Jobfinder's Grant and Jobmatch, providing a single transitional payment, available much more widely, and without the complex eligibility criteria of previous schemes.

Simplifying extended payments in Housing Benefit

4.43 Housing costs are a particular concern to many people moving back into work. Although Housing Benefit can be paid in work, the time taken to process claims can lead to rent arrears building up. Housing Benefit can already be paid, at out-of-work rates, for the first four weeks in work under the Housing Benefit Extended Payments scheme for recipients of Income Support and JSA. But again, complex rules mean that take-up is low. To address this, the Government will simplify the rules of the Housing Benefit Extended Payments scheme from April 2001 to ensure that payments are as near-automatic as possible.

Income Support for Mortgage Interest run-on

4.44 The Government also intends to provide help with housing costs for homeowners going back to work. Homeowners who have been out of work and on Income Support or Jobseekers' Allowance for nine months or more receive help in paying the interest on their mortgage through Income Support for Mortgage Interest (ISMI). This support currently stops as soon as they take a job, at just the point where they may also need to start paying back built-up arrears. Alongside the extended payment of Housing Benefit, from spring 2001 the Government will provide a four week ISMI run-on for those entering work. It will also improve the existing linking rules so that everyone getting ISMI will be able to requalify for it directly if they return to benefits within 1 year of taking a job.

National Childcare Strategy

4.45 The £470 million National Childcare Strategy was launched in 1998. It has three key strands: to make childcare more accessible and available to every community; to improve and maintain the quality of childcare; and to make childcare more affordable.

• by the end of December 1999, 62,000 more childcare places had been created, on top of the nursery places for 3 and 4 year olds;
• from September 2001, the registration and inspection of childcare providers will be unified under OFSTED to ensure a single quality standard. The Qualifications and Curriculum Authority have already completed the first stage of the review of the early education and childcare qualifications framework; and
• the new childcare tax credit in the Working Families' Tax Credit is already making childcare more affordable: there are nearly twice as many families benefiting from the childcare tax credit than were benefiting under Family Credit.

Childcare tax credit

4.46 The childcare tax credit component within the Working Families' Tax Credit and the Disabled Person's Tax Credit provides generous and direct support for childcare costs for the first time. The credit is worth 70 per cent of eligible childcare costs up to a limit of £100 a week for a family with one child and £150 a week for families with two or more children. It is particularly beneficial to low earners compared with the childcare disregard within Family Credit and Disability Working Allowance. This extra financial support tackles another barrier to work and underpins the increase in childcare places being delivered by the National Childcare Strategy.

Encouraging employers to provide childcare

4.47 To encourage employers to help employees with childcare, all provision in kind will remain exempt from employer Class 1A national insurance contributions (NICs) when these are extended to other employee benefits from April 2000. This employer NICs exemption will apply to direct provision, childcare vouchers and payments under contracts between employers and third party providers.

Moving people into the formal economy

4.48 Some people who are unable to manage the transition into work choose to take the short cut and undertake work in the informal economy which they do not declare. The informal, or hidden economy, is estimated to cost taxpayers billions of pounds each year in unpaid taxes, and around half a billion pounds in benefits fraudulently claimed by people who are carrying out work which they do not declare. Following a report by Lord Grabiner QC (see Box 4.5), the Government is introducing a number of new measures to encourage people to make the transition into legitimate jobs and to tackle those who persist in the hidden economy.

4.49 The Government will make it easier for those in the benefits system to try out work. From April 2001, it will increase the amount of earnings disregarded in Income Support and JSA by £5 to £20 for those groups facing restricted work choices, such as lone parents, carers or disabled people. In future these groups will be able to keep £20 per week of any earnings without losing any benefit. This will boost their income and help them progress in work and move off benefits. From April 2002, the Government will also suspend Income Support and JSA claims for 12 weeks rather than close them when people leave benefit, to streamline the process of re-claiming if a job falls through within that period. The Government will also consider the case for introducing a similar arrangement in Housing Benefit. This should encourage benefit recipients to report starting work which may be temporary or insecure and help ensure that they are not deterred by the normal claim procedure. Together, these measures will reduce the barriers to trying legitimate work.

MAKING WORK PAY

4.50 For the vast majority of people, there are clear financial rewards to work. But people are often understandably reluctant to move into jobs where the financial gain is small or non-existent - the unemployment trap. Evidence also suggests that some individuals can experience repeated short spells of low paid work and non-employment without ever moving up the earnings ladder - the low pay, no pay cycle.

4.51 Moreover, people in employment are often discouraged from working longer hours or taking a better job because their work is penalised by high marginal deduction rates³ - the poverty trap.

4.52 Policies aimed at re-attaching individuals to the labour market, such as the New Deal, therefore need to be complemented by measures that reward work, reduce in-work poverty and provide incentives to move up the earnings ladder. It is against this background that the Government has undertaken a number of reforms to ensure that work pays.

National Minimum Wage

4.53 The National Minimum Wage, introduced in April 1999, ensures fair minimum standards of pay and underpins the Government's tax and benefit reforms. The introductory rates were:

• £3.60 an hour for adult workers aged 22 and over;
• £3.20 an hour for trainees (workers aged 22 and over in the first six months of employment and receiving training leading to a recognised qualification); and
• £3.00 an hour for workers aged 18-21 inclusive, rising to £3.20 in June 2000.

4.54 In February 2000 the Government published the Low Pay Commission's Second Report, which assessed the initial impact of the National Minimum Wage. The Report found that the National Minimum Wage had been a success, and has not had any adverse effects on employment or the wider economy. In the light of this assessment, the Government has announced that it will increase the rate for adult workers aged 22 or over to £3.70 an hour from October 2000. The Government has asked the Low Pay Commission to continue to monitor the impact of the National Minimum Wage, and to report its findings by July 2001.

Income tax

4.55 Budget 99 introduced a 10p starting rate of income tax from April 1999. The 10p rate has halved the marginal tax rate for 1.9 million low paid workers. As also announced in Budget 99, from April 2000 the basic rate of income tax will be reduced to 22p - the lowest level for 70 years.

National Insurance Contributions

4.56 Jobs at the lower end of the earnings distribution now pay following the Government's reforms to national insurance:

• the entry fee on employee NICs was abolished in April 1999; and
• as announced in Budget 99, the threshold above which employees pay NICs will be increased to £76 a week in April 2000 and will be aligned with the income tax personal allowance in April 2001. This will move around 1 million people on earnings of less than £87 out of NICs altogether, while maintaining their entitlement to contributory benefits.

4.57 The Government has also reduced the NICs burden on employers through the introduction of a single employer rate. In April 1999, the point at which employers began to pay NICs was aligned with the personal tax allowance. In addition, as set out in the Pre-Budget Report, employer NICs will be reduced by 0.3 percentage points from April 2001, thereby ensuring that all revenue from the climate change levy is recycled back to business. This Budget announces that the revenues from the aggregates levy will be recycled through a further reduction in the rate of employer national insurance contributions of 0.1 percentage points from April 2002 (see Chapter 6 for details of the climate change levy package and the aggregates levy).

Working Families' Tax Credit

4.58 The Working Families' Tax Credit was introduced in October 1999. It will make work pay for up to 1.4 million low and middle income working families with children, half a million more than would have received Family Credit. Payment through the wage packet, from April 2000, will underline the message that work pays and for many will end the need to pay tax and receive in work support separately. The childcare tax credit component of WFTC, as detailed in paragraph 4.46, will help many families to whom the costs of childcare are a barrier to employment.

4.59 Chapter 5 describes further increases to the WFTC credits for children under 16 from June 2000. These, combined with the increase in the minimum wage to £3.70, will guarantee a minimum income of £208 from October 2000 and £214 from April 2001 for a family with children, with someone in full-time work.

Chart 4.2: Net tax rate paid by a family with two children

4.60 Together these tax and benefit reforms mean that by 2001 the tax burden on a family on average earnings with two children will be the lowest since 1972. As Chart 4.2 shows, the net tax rate on a family with two children will be negative (they will pay less in income tax and NICs than they receive in tax credits and child benefit) until their income reaches nearly £16,000 a year. A family on the minimum wage with two children will have their income topped up by 90 per cent.

Disabled Person's Tax Credit

4.61 The Disabled Person's Tax Credit (DPTC) was also launched in October 1999 to give disabled workers a better deal. By October 2000, the Disabled Person's Tax Credit will boost the incomes of 32,000 working people, nearly twice as many as were receiving the Disability Working Allowance (DWA), by on average £25 a week. The Disabled Person's Tax Credit is open to people who work for 16 hours or more a week, have an illness or disability which puts them at a disadvantage in getting a job, and who are either receiving one of a range of incapacity or disability benefits at the time of their application, or have been receiving certain benefits within the previous 6 months. From October 2000 a new fast-track to DPTC will be introduced to help people who have been sick for 20 weeks or more, but can do some work, to remain in their job. This is based on evidence suggesting that those that become disabled whilst working are most likely to find employment with their existing employer and that the longer these people remain out of work the harder it is for them to return to employment.

The effect of the Government's package to make work pay

Tackling the unemployment trap

4.62 These reforms are addressing the unemployment trap, so that work pays. The gap between in and out-of-work incomes has increased while security for those out-of-work has been maintained.

4.63 Evidence suggests that unemployed people may resist taking a job that leaves them less than £40 a week better off in work than remaining on benefits. As a result of this Government's measures to make work pay the amount required to be £40 a week better off in work, for a couple with two children under 11, has fallen from £260 to £160. This amount is very close to the average wage this group would command when moving into work.

Chart 4.3: Net income for a single earner family with two children aged under 11, before Budget 1998 and after Budget 2000

4.64 The Government's making work pay package highlights clearly the rewards of work over welfare and by April 2001 guarantees:

• a minimum income of £214 a week for a one earner family with someone in full-time work, over £11,000 a year;
• a family with one part-time worker a minimum income of £155 a week;
• that working families with an income of less than £255 a week will not pay any net income tax; and
• under the Disabled Person's Tax Credit, a minimum income of £246 a week (£12,800 a year) for a family with children and someone in full-time work.

Tackling the poverty trap

4.65 The overall incidence of multiple tapers and very high marginal deduction rates has been greatly reduced by the Government's tax and benefit reforms. Low income families now keep more of each additional pound that they earn.

4.66 Table 4.2 illustrates the estimated number of families facing high withdrawal rates before and after the Government's reforms.

Table 4.2: Combined effect of Government's reforms on high marginal deduction rates

¹ Cumulative figures for working households.

² The before and after figures are based on 1997-98 and 1999-00 caseload and take-up estimates respectively.

4.67 In 1997, nearly ³/₄ million families lost over 70 pence of each additional pound of earnings. As a result of previous Budget measures, around half a million fewer families will face effective tax rates of over 70 per cent, significantly reducing the poverty trap for low earning families.

Employment tax credit

4.68 The introduction of the National Minimum Wage and the Working Families' Tax Credit have for the first time guaranteed a minimum income for families in work. As illustrated in Chart 4.3, much has been done to make work pay for families with children.

4.69 The Government has introduced the Disabled Person's Tax Credit and the Employment Credit component of the New Deal for 50 plus, extending the scope of in-work support to people without children. There is a strong case in principle for extending this more widely. The Government is committed to introducing an integrated child credit - a seamless system of child support paid to the main carer from 2003. As set out in Chapter 5 this new system of support, for those in and out of work, will be complemented by an employment tax credit administered by the Inland Revenue and paid through the wage packet. The employment tax credit, which will broadly replicate the adult support in the Working Families' Tax Credit, will be introduced for families with children from 2003. The Government is considering how far to extend the employment tax credit to those without children.

4.70 The National Minimum Wage and tax reforms have increased the gain to work for all workless households. However, the gains to work from low-paid jobs for those without children, are still not large. Currently, the gain to full-time work at the National Minimum Wage for a couple without children is around £15, assuming an average rent. This is much less than the Working Families' Tax Credit delivers for families with children.

4.71 An employment tax credit could increase gains to work for other low paid workers and relieve in-work poverty in working households without children. To maximise the effectiveness of an employment tax credit it may be appropriate to pay a higher rate for couples than single people. For those without caring responsibilities, or a disability, there may be a case for restricting support to households with someone in full-time work.

4.72 Decisions on how far to extend this support to those without children will be taken nearer the time. If an employment tax credit were based around the adult credit in the Working Families' Tax Credit, and were made available to single people and couples with someone over the age of 25, a 30 hour eligibility rule, and with a higher rate for couples, it could reach between 300,000 and 400,000 households without children. Such a credit would:

• deliver a minimum income guarantee of around £165 a week for couples without children and with someone in full-time work;
• double the gain to work for couples in rented accommodation at the minimum wage, and increase it by a third for single people; and
• increase the incomes of the poorest households in work by on average around £20 for couples and £15 for single people.

4.73 An employment tax credit could provide a clearly understood generalised platform for in-work support alongside the National Minimum Wage and the New Deal, demonstrating the benefits of work over welfare and providing additional financial support to people in low paid work. More detail about the employment tax credit is set out in the accompanying Budget paper Tackling Poverty and Making Work Pay - Tax Credits for the 21st Century⁴

SECURING PROGRESSION IN WORK

4.74 Moving from welfare into work is the first step in moving out of poverty. But the Government also wants to enable people to progress up the earnings ladder once in employment. The Government has introduced lifelong learning to ensure that everyone in work is equipped with the training and skills necessary to progress in work.

New Deal providing skills

4.75 Both the New Deal for 18-24 year olds and the New Deal 50 plus offer a £750 in-work training grant. In addition, similar grants are being piloted for lone parents through the New Deal. The New Deal 25 plus offers long-term unemployed people education and training opportunities as well as assistance with associated costs such as childcare, travel and equipment. This access to training through the New Deal programmes helps people develop their skills, thereby providing opportunities for people to climb the earnings ladder.

4.76 Programmes to equip people with the specific skills they need to enter a particular industry, and to progress once in work, are also being run within the New Deal. A customised gateway to train people to enter the construction industry is being trialed in Manchester, and the Government is exploring the possibility of extending this on a national basis. A sector specific strategy for the engineering and manufacturing and hospitality sectors are also being developed. As mentioned in Box 4.2, the Government has been exploring, with sector based intermediaries, how they might help New Deal participants into jobs, with an initial focus on the financial and IT sectors.

Lifelong learning

4.77 In order to gain the vocational skills businesses require for higher paid work, many people first need to upgrade their basic skills. This can only be done by building a new culture of lifelong learning. The new Learning and Skills Council will work in partnership with employers, Regional Development Agencies and the Small Business Service to deliver the right skills to progress in work.

4.78 The Government has also invested £25 million to make opportunities available for up to 50,000 more people to get the ICT skills they need to increase their employability, and if they need it, to improve their basic literacy and numeracy. This measure complements the ICT learning centres announced in Budget 99. Nineteen pilot projects are testing innovative ways of enabling people to overcome barriers to their acquisition of basic ICT skills. The first tranche of up to 1,000 ICT learning centres will be announced in September 2000.

4.79 Lifelong learning is not just about basic skills. There will also be increased means through individual learning accounts, and increased opportunities through the University for Industry (UfI) for individuals to take responsibility for their own futures, and to continue to increase their knowledge and skills, thereby improving their employability.

4.80 UfI Limited is currently piloting 24 different on-line courses covering IT and business management through its consumer brand 'learndirect' in over 70 development centres across the UK in easily accessible locations such as shopping centres, community centres and churches in the run-up to its full launch in the Autumn (see paragraph 3.69).

¹Bringing Britain Together: a national strategy for neighbourhood renewal, report by The Social Exclusion Unit, 1998 [back]

² Jobs for all, national strategy for neighbourhood renewal, Department for Education and Employment, 1999 [back]

³ Marginal deduction rates measure the proportion of any marginal increase in income lost through reduced benefit entitlement and increased taxation. [back]

⁴ Tackling Poverty and Making Work Pay - Tax Credits for the 21st Century, The Modernisation of Britain's Tax and Benefit System, No. 6, March 2000, available from the Treasury Public Enquiry Unit on 020 7270 4558, or on
http://www.hm-treasury.gov.uk [back]