Economic Report #1: April 2010

Issue date
29 Apr 2010

Economic Report

Number 1 April 2010

This is the first edition of our bi-monthly Economic Reports, which will provide an overview of key economic indicators as well as considering key economic policy issues. In this first Report, we give specific consideration to the labour market policies outlined in each of the recently published party manifestos.

Part One: Economic data overview

Key economic indicators are outlined below:

Indicator

Date

Most recent data

GDP, first estimate

1st quarter of 2010 (first estimate)

0.2 per cent (quarterly growth)

ILO unemployment level

Dec 2009 -Feb 2010

2,502,000 (+43,000 on the quarter)

ILO unemployment rate

Dec 2009 -Feb 2010

8 per cent

Claimant count

March 2010

1,543,800
(-32,900 on the month)

Average Weekly Earnings (total pay)

Feb 2010

2.3 per cent growth on the year (three month average)

Consumer Prices Index (CPI) inflation

March 2010

3.4 per cent (annual increase)

Retail Prices Index (RPI) inflation

March 2010

4.4 per cent (annual increase)

Public Sector Net Borrowing (PSNB)

April 2009 – March 2010

£152.8 billion

The economy grew by 0.4 per cent in the fourth quarter of 2009, with stronger than originally estimated service sector and manufacturing growth during December 2009. During 2009 as a whole, GDP contracted by 4.9 per cent, compared with growth of 0.5 per cent in 2008.

In their estimate of monthly GDP, published in April, NIESR estimated that output grew by 0.4 per cent in the three months ending in March after a similar figure for the three months ending in February. They believed that as growth was achieved in spite of both the cold January weather and the VAT increase, the actual rate was probably greater than 0.4 per cent.

The official first estimate of GDP growth in the first quarter of 2010, however, showed growth falling back to 0.2 per cent, compared with the last quarter of 2009.

As usual, the figures vary for different industries with quarterly growth of 0.7 per cent in manufacturing and growth also recorded in post and telecoms and business services and finance. Output in Construction and in distribution, hotels and restaurants however was 0.7 per cent below that for Q4 2009.

Compared with the first quarter of 2009, GDP was 0.3 per cent lower in Q1 2010. GDP is still about 6 per cent lower than it was in the first quarter of 2008. The following chart shows how GDP, indexed to 2005, has been affected by the recession - a significant gap remains before we return to pre-recession levels of output.

graph


Since the second quarter of 2008, the UK economy has lost around £160 billion in output.

The labour market

  • In Dec 09 - Feb 10, there were 2,502,000 people who were unemployed using the ILO definition. This is 369,000 more than the level 12 months before.
  • On the other hand, the claimant count showed substantial falls in 2010 months - 40,000 between Jan and Feb, and 32,900 between Feb and Mar.
  • A revision to last month's ONS data has shown that between Dec 09 and Jan 10 the claimant count increased by 16,200. It may be this rise in unemployment is reflected in the most recent ILO figures.
  • Employment has fallen recently but, significant numbers of jobs have been created since 1997. Between Q2 97 - Q4 09 the number of people in work increased by 2,391,000.
  • In contrast, from Q2 79 to Q1 97 the total number of jobs in the economy only increased by 1,223,000.
  • As a report from the Centre for Economic Performance at the London School of Economics noted, 'unemployment is much lower than we would have expected given past performance.'

Business conditions

On 21 April, the Bank of England published their monthly summary of the reports on business conditions from their regional Agents. This month's edition strongly suggested that the Treasury is right to worry that demand is still very weak. The Agents reported retail sales growth and spending on consumer services had eased off, possibly because the change to VAT had increased sales in the last quarter of 2009 at the expense of the first quarter of 2010. They expected tax increases to depress consumer spending and house buying was depressed by 'the lack of mortgage finance, particularly at higher loan to value ratios.'

Business investment was being suppressed by the large amount of spare capacity, tight credit and uncertainty about future demand. Demand was growing in Asia, which represents only a small share of UK exports, but remained subdued in the USA and the Euro area - our main trading partners. There had been an improvement in demand for professional and financial services and manufacturing output was recovering slowly, construction output remained depressed.

Given the subdued prospects for demand and output it is not surprising that businesses' employment intentions were 'stable' - not many businesses were planning to recruit workers but the major redundancy programmes had been completed.

Average weekly earnings

Across the economy average weekly earnings rose sharply: in the year to February, total pay grew by 2.3 per cent, compared to an increase of 0.8 per cent in the year to January.

At 4.4 per cent in the year to February, pay growth in manufacturing was very strong. There was also strong growth in the financial services sector, where the annual increase (single month) was 12.7 percentage points, though this may reflect delayed bonuses.

Public sector pay changed less, with an annual rate of 2.5 per cent, compared with 2.6 per cent in January. In their most recent analysis, Incomes Data Services have noted that, while the proportion of pay freezes in the private sector may be falling, a higher proportion of public sector awards are pay freezes. [2]

Inflation

The latest inflation figures show a sharp rise in both the RPI (up 4.4 per cent in the year to March) and CPI (up 3.4 per cent in the year to March) measures. The indices calculate average change from month to month in the price of consumer goods and service bought in the UK, with the key differences between them being the exclusion of housing costs (including council tax) from the CPI. ONS analysis shows that there is significant variation in the inflation rates for different components of the indices. For example, over the last 12 months there has been a 17.3 per cent increase in the motoring costs included in the RPI measure, compared with a 1.9 per cent increase in housing costs and a 4.4 per cent drop in fuel costs.

The different components of each index are however weighted (according to an annual analysis of the contribution that each makes to household spending), meaning that the respective contributions they make to the overall rate show a similar pattern, but less variation. For example, 2.14 percentage points from the total 4.4 percentage point annual rise in RPI can be accounted for by motoring expenditure, and 0.44 points by housing.

Between February and March, the greatest contribution to the increase in RPI came from housing costs (0.38 points), followed by fuel and light (0.15 points). For CPI, the largest contribution came from housing and household services (0.14 points), followed by transport (0.11 points). The contributions of different components to monthly change in the inflation rates are shown below.

CPI main contributions to change in all-items 12 month rate, Feb - Mar (0.4 point increase)

graph

RPI main contributions to change in all-items 12 month rate, Feb - Mar (0.4 point increase)

graph


Public spending

Budget 2010 noted that as tax receipts were higher than expected, public sector net borrowing (PSNB) in 2009-10 is forecast to be £11 billion lower than forecast in the Pre-Budget Report 2009. The better than expected labour market results have also improved the fiscal outlook. Borrowing in 2009-10 is therefore estimated to be £167 billion (compared to £178 billion at the Pre-Budget Report).

2010 was the first Budget to be affected by the Fiscal Responsibility Act, which requires the Treasury to ensure:

  • public sector net borrowing goes down each year for the next five years;
  • by 2014, it is at least half its 2009-10 level; and
  • public sector net debt as a percentage of GDP starts to go down by the end of financial year 2015 - 16.

Predicted public spending, per cent of GDP (Budget 2010)

Outturn

Estimate

Projection

2008-9

2009-10

2010-11

Current expenditure

39.3

43.0

44.0

Net investment

3.3

3.6

2.7

                                Projections

2011-12

2012-13

2013-14

2014-15

Current expenditure

43.2

42.1

40.9

39.8

Net investment

1.9

1.6

1.3

1.3

In total, existing Government proposals appear to involve savings of £20.4 billion by 2011-13, which is still some way off the £38 billion of spending cuts that they state will be required. The IFS have calculated that, given the projections set out in the Budget, Department Expenditure Limits will have to fall by an average of 3.1 per cent annually in real terms between 2011-12 and 2014-15. They also note that as the Government is committed to various protections of expenditure in overseas development, health and education this could mean real terms cuts of around 14 per cent in 'unprotected' departments by 2012-13, and of 19.5 per cent by 2014-15.

In addition, should the economy grow less during future years than Budget 2010 has forecast or should 'efficiencies' not be fully realised then the extent of spending reductions will have to increase if the Government's target is to be met. Sharper reductions would also be required should the next Government chose to attempt to reduce the deficit over a shorter time.

The latest edition of the International Monetary Fund's World Economic Outlook noted that the global recovery has so far relied upon intervention by governments and that there is a risk of that recovery stalling if this stance is not maintained. The IMF argues that there is a need to develop credible medium-term strategies for paying off public debt and reducing deficits, but that 'regarding the near term, given the fragile recovery, fiscal stimulus planned for 2010 should be fully implemented, except in countries that are suffering large increases in risk premiums ...'

Part Two: Policy Briefing

Labour market policy in the manifestos

While unemployment has started to stabilise much earlier than could have been predicted at the start of the downturn, it remains 865,000 higher than early 2008, and employment rates are at their lowest since September 1996. Clearly, tackling unemployment and promoting new employment opportunities should be key priorities for the next Government. In this section, we therefore consider the policies proposed in each party's manifesto.

Conservatives

An Invitation to Join the Government of Britain, the Conservative manifesto, sets out a 'plan for economic recovery and growth', whose central propositions are 'a programme of public spending control that will deal with Labour's debt crisis and stop the Labour jobs tax that would kill our economic recovery.'

The key section on employment and unemployment, entitled 'Get Britain Working Again,' emphasises the importance of youth unemployment. The manifesto highlights the risk of creating a 'lost generation.' At the same time, a 'tidal wave of worklessness is making it hard for many families to make ends meet' and the numbers in severe poverty have risen.

There are three key manifesto proposals relating to welfare-to-work. One is to reassess everyone currently receiving Incapacity Benefit; those 'found fit for work will be transferred onto Jobseeker's Allowance.'

The second is to 'scrap Labour's failing employment schemes and create a single Work Programme for everyone who is unemployed, including the 2.6 million people claiming Incapacity Benefit.' It is not clear whether the third of a million people on Employment and Support Allowance would also be covered. The Work Programme has already been widely publicised by the Conservatives and the manifesto has few surprises.

One of the key features of the programme is that it would be 'delivered through private and voluntary sector providers, which will be rewarded on a payment by results basis for getting people into sustainable work.' In a speech on the day the manifesto was launched, Theresa May added that social enterprises and voluntary sector and private organisations wishing to take part but unable to afford the initial investment would be eligible to apply for start-up capital through a new 'Big Society bank' also being proposed in the manifesto.

The manifesto confirms previous Conservative proposals that the Work Programme would apply 'straight away for those with serious barriers to work and at six months for those aged under 25.' Previous descriptions of the Party's proposals have indicated that unemployed people with 'solid' employment experience would be 'transferred' to the Programme after 12 months' unemployment. The manifesto also confirms previous indications that the Work Programme would be linked to a number of 'Service Academies', offering pre-employment training for various industries and to local 'Work Clubs', which seem to be a version of the Job Clubs established in the 1990s.

The manifesto also confirms Conservative plans to require long-term benefit claimants to join 'work for the dole' community work programmes, that the Work Programme is intended to be compulsory for JSA claimants and that 'people who refuse to accept reasonable job offers could forfeit their benefits for up to three years.'

Support for small businesses that comes under the welfare-to-work heading includes 'Work for Yourself', a planned new programme offering mentoring and loans to help unemployed people become self-employed, not requiring businesses to pay NI Contributions for the first ten workers they hire during the first year of a Conservative government and 400,000 work pairing, apprenticeship, college and training places.

Labour

Labour proposes a range of measures to support unemployed people and increase employment levels. These include:

  • Introduce a Job Guarantee for all unemployed jobseekers.
  • A guarantee that everyone moving from benefits to work will be £40 better off
  • Increase the size of the Future Jobs Fund so that it provides 200,000 jobs.
  • Migrate all those claiming incapacity benefits to Employment and Support Allowance.
  • Provide additional support to enable lone parents to move into work.

The manifesto also contains a number of commitments on education and skills:

  • Every young person guaranteed education or training until 18, with 75 per cent going on to higher education, or completing an advanced apprenticeship or technician level training, by the age of 30
  • Raising the education and training leaving age to 18
  • Retain Educational Maintenance Allowances
  • Introduce new skills accounts for workers
  • Expansion of technician led apprenticeships and an entitlement to an apprenticeship place in 2013 for all suitably qualified 16-18 year olds.
  • Expansion of 70,000 advanced apprenticeships a year

Recognising the importance of childcare in enabling families to balance work and care, Labour further commit to:

  • An expansion of free nursery places for two year olds and 15 hours a week of flexible, free nursery education for three and four year olds.
  • Increased spending on Sure Start
  • Allowing mothers and fathers to share the mother's maternity leave entitlement after the first six months.
  • A father's month of flexible paid paternal leave
  • A new Toddler Tax Credit of £4 a week from 2012 to give more support to all parents of young children

In practice, many of the specific Labour manifesto announcements were made the week before, in considerably more detail, in the Government's command paper 'Building Bridges into Work'. This paper committed the Government to the introduction of a new Job Guarantee for adults aged 25 and over who have been claiming JSA for two years or more (i.e. those who have completed Flexible New Deal but have not found work).

While the paper stated that the 'design of the Guarantee will be subject to the next Spending review' it highlighted that in principle it would involve one-to-one support provided by Jobcentre Plus and access to options including the Future Jobs Fund (subsidised jobs paid at least the minimum wage in the public or voluntary sectors and lasting for at least six months); internships; volunteering or tailored work experience (with each of the latter three options lasting for 13 weeks). Participation will take into account the 'individual needs of each jobseeker' including those with health conditions or caring responsibilities.

If participants do not take up an offer after three months, they will be required to undertake mandatory work experience for 13 weeks. While compulsory, efforts will be made to tailor placements to individual preferences - workers will not simply be forced to take part in a pre-determined placement.

Non-participation in the mandatory scheme will incur a benefit sanction, as is currently the case for non-participation in other programmes (while the manifesto states that 'benefits will be cut' this language is likely to be deliberately harsher than more nuanced policy proposals set out in the Command Paper).

TheLabour manifesto also sets out a number of proposals that aim to support job creation. This includes creating 'UK Finance for Growth', - a new investment bank which will bring £4 billion together to provide capital for growing businesses and invest in the growth sectors of the future. The manifesto states that Labour expects that with Government support for new growth sectors (including low carbon, digital and creative industries and life sciences) one million more skilled jobs can be created by 2015.

Liberal Democrats

The Liberal Democrat manifesto begins with a description of a country 'struggling to emerge from a long and difficult recession' where 'millions are unemployed, and millions more have taken pay cuts or reduced hours to stay in their jobs.' Underlying the current situation are 'deeper problems' one of which is that Britain 'is still too unequal and unfair.'

The manifesto lists four priorities that will 'change Britain for the better,' one of which is 'a fair future, creating jobs by making Britain greener' and a large section is devoted to this subject. The Liberal Democrats' plans for 'an economy that is based on innovation' begin with 'a one-year economic stimulus and job creation package.' The manifesto also describes a £3.1 bn 'green stimulus plan' to create 100,000 jobs, including:

  • £400 m spent refurbishing shipyards in Scotland and the North East of England to produce offshore wind turbines.
  • An 'Eco Cash-Back' scheme, offering £400 to install double-glazing, replace a boiler or install micro-generation.
  • Improvements to the energy efficiency of schools.
  • Loans to refurbish empty homes.
  • A bus scrappage scheme to subsidise new low carbon buses.

Other plans include 15,000 extra Foundation Degree places, a commitment to meet the up-front costs of adult apprenticeships and an increase in the Adult Learning Grant to £45 a week for 18-24 year olds. The manifesto also pledges a new work placement scheme offering 800,000 young people £55 a week for up to 3 months; whether this scheme would replace the Future Jobs Fund or operate alongside it is not clear.

The manifesto includes a page on 'fair treatment at work for everyone.' This deals with helping the victims of 'discrimination on the grounds of gender, sexuality, age, race, religion or disability.' The measures include a section on 'practical help' for disabled job seekers, 'using voluntary and private sector providers as well as JobCentre Plus services.' The manifesto also promises to reform the Access to Work scheme 'so disabled people can apply for jobs with funding already in place for equipment and adaptation that they need.'

Greens

Specific measures that the Greens propose to tackle unemployment are:

  • Increase earnings disregards for people on benefits to the equivalent of 6 hours work at the minimum wage
  • Oppose workfare and restore the link between state benefits and earnings.
  • Reduce the working week to 'help share out work' and support a just transition to a low carbon economy.

The Greens also focus on making work more family friendly, promising more generous maternity and paternity leave and £1bn extra a year on expanding Sure Start.

Creating more jobs is a key part of the Green's strategy for improving labour market performance. They propose the creation of a million new jobs and training places within a year of their major investment plan, the Green New Deal (costing as much as £20bn over the next parliament), becoming fully operational.

Within this, specific commitments include:

  • Creating 80,000 jobs in installation and equipment manufacture (linked to a free home instillation programme).
  • Expanding social housing, mainly through conversion and renovation, creating 80,000 jobs.
  • Supporting generous feed-in tariffs for micro-generation, creating 40,000 jobs in the installation industries.
  • Investing in sustainable flood defences and sustainable drainage systems, creating 20,000 jobs
  • Investing in public transport, creating 160,000 jobs
  • 80,000 jobs in instillation and manufacture of renewable energy generation equipment
  • 60,000 jobs by almost doubling spending on recycling and waste disposal.

They also propose to create jobs though increased investment in Sure Start (10,000 jobs) and adult social care (120,000 jobs).

Plaid Cymru

'Think Different. Think Plaid', the Plaid Cymru manifesto, argues that tackling the deficit must be combined with the 'duty to protect the most vulnerable in society.' Plaid Cymru's approach to tackling the deficit involves cancelling ID cards and Trident, asking 'the very wealthy to pay a little extra' and removing tax loopholes. The party's manifesto argues for 'redistributive economic policies', including a new 50% tax rate for people earning over £100,000 and a £1,000 increase in the income tax personal allowance.

The manifesto argues that the lack of childcare is 'one of the biggest barriers to employment' and promises 'affordable and high-quality childcare for every family in Wales that wants it.' The manifesto explicitly opposes the Welfare Reform Act, arguing that 'benefit sanctions for those unable to meet unfair and unrealistic government demands ... will simply result in a vicious cycle of people who live between in-work and out-of-work poverty.' The party's criticisms extend to 'the privatisation of back-to-work services' and the use of sanctions against people with severe mental health problems. The manifesto concludes with the proposition that 'unemployed people must be supported into work, consistent with their abilities, capacity and their individual circumstances.'

SNP

The SNP promote themselves as the party that will be best able to protect Scotland from any forthcoming public spending cuts. They therefore set out a number of ways in which SNP MPs at Westminster would seek to secure Scotland's recovery, including urging an acceleration of capital spending to support 5,000 Scottish jobs and provision of a further economic stimulus. They also propose that Scotland should be able to borrow from the markets independently of the UK, as a means to allow additional investment in infrastructure and jobs, and that the Scottish Government should have increased responsibility for employment policy.

The SNP further aim to increase low carbon employment in Scotland by 60,000 by 2020, and propose various policies to support this aim, including release of additional funds for Scotland, and Scotland's inclusion in the first phase of high speed rail. They oppose the Government's proposed national insurance rise, claiming it will cost Scotland 10,000 jobs.

UKIP

The UKIP manifesto does not give any specific mention to policies designed to tackle unemployment. It attributes the problem of long-term unemployment to the welfare state, which it believes has fostered social breakdown and has been a major factor in the creation of 'a parasitic underclass of "scroungers", which represents both an unreasonable tax burden on the working population and is a factor in many social pathologies such as crime, anti-social behaviour and educational under achievement.'

On job creation, the manifesto commits UKIP to reducing public sector employment levels to those of 1997, effectively cutting 2 million jobs. UKIP would aim to 'exchange' these positions for 'at least one million additional jobs created as a result of lower personal taxes and reduced business taxation and regulation' and 'one million new skilled jobs in manufacturing and related services'.

UKIP's proposed creation of one million manufacturing jobs depends on increasing public expenditure, with specific commitments including:

  • a 10-year enhanced defence equipment programme with £4 billion funding annually in addition to current expenditure projections;
  • £3.5 billion annually on building nuclear power stations to meet future electricity demand;
  • £3 billion annually on flood protection and coastal defences (over ten years).

The TUC View

This Economic Report is published in the middle of the general election. For all its excitement, the story of this election has had something missing. Jobs should be far more prominent in the coverage of each day's campaigning and politicians from all the parties should be pressed much harder on how they plan to tackle unemployment.

The longer unemployment persists, the greater the costs to society of lost output, increased benefit spending and lower tax receipts. The price for individual unemployed people will be worse; as our report on The Costs of Unemployment revealed, they will be more likely to be poor, to be in debt, to be victims of crime, to suffer family breakdown, to have a mental illness and to have a serious chronic physical condition.

Every leading politician should recognise the importance of unemployment and make it the centre-piece of the economic policies they put to the voters at the next election. In concrete terms, this means that they should give unemployment the highest priority in designing their broad economic policies. This Report has highlighted the fragility of the recovery - it would be all too easy to throw away the relatively strong labour market performance of the last six months. As a recent letter to the Times by a group of leading economists remarked, 'this is not the time for such a destabilising action.'

In 1992, when unemployment was last at a high point, the TUC was the first institution to call on politicians to put full employment at the centre of their economic plans. Today we insist again that that is its rightful place.

Prioritising unemployment also means finding resources for large and effective employment programmes. It does not mean schemes like work pairing or National Insurance holidays: tinkering with the system will not match up to the scale of the challenge.

A proposal that does indicate a serious approach is to offer unemployed people 'job guarantees' - temporary jobs, created by the government, offering real wages and the chance to contribute to projects of genuine community value. Job guarantees offer a higher income than Jobseeker's Allowance and a chance to maintain one's dignity and self-respect.

An important step in this direction has already been made with the Future Jobs Fund, which offers participants six months' work, paid at least the national minimum wage. Parties that plan to end the Future Jobs Fund or replace it with a low quality workfare programme are not taking the challenge of unemployment seriously.

Workfare is unfair and inefficient: it forces people to work at hourly rates well below the minimum wage and studies have repeatedly shown that workfare programmes reduce an unemployed person's chances of moving into employment.

Job guarantees, on the other hand, offer unemployed people what they want: a real job. As Richard Layard and Paul Gregg have argued:

'When jobs are scarcer, it will be difficult to maintain the pressure on unemployed people to get work. But negative attitudes can be prevented (in Jobcentre Plus and among job-seekers) if we offer an ultimate guarantee that a job will be there.'

In this election, the parties need to answer two questions about their commitment to helping unemployed people:

  • Will their economic policies strengthen demand and reduce unemployment?
  • Will their employment programmes match the scale of the challenge?

Notes