TUC Budget Assessment

Budget 2006

Economic outlook and the public finances

The Budget contained no surprises on the economic growth forecasts. As expected, the Treasury stuck with the same forecasts published in the December Pre Budget Report. GDP growth in 2005 is expected to be between 2 to 2.5 per cent, increasing to between 2.75 and 3 per cent in 2007.

Our own assessment is also unchanged. We expect GDP growth in 2006 to be around 2.5 per cent, at the top end of the Treasury forecast. However we would be more confident in this forecast if the Bank underpinned the recovery with a modest cut in interest rates.

The public finance forecast was also close to that set out in the December Pre Budget Report. In 2005-2006 estimated net borrowing has come in almost exactly the same at just over £37 billion or 3 per cent of GDP. Public borrowing is forecast to fall to 1.5 per cent of GDP by 2010-2011.

The Budget forecasts on tax revenues suggest that overall revenues will be stronger than previously forecast from 2007-2008 onwards, mainly reflecting higher equity prices feeding through into high capital and capital tax receipts.

However, the Budget projections still imply a very tight public current spending outlook compared with previous years. In order to meet his fiscal rules the Chancellor plans to return to surplus on current spending in 2007-2008 and build the surpluses in subsequent years to reach £12 billion by 2010-2011.

As a result, the current projections show public spending falling as a share of GDP from 39.4 per cent in 2005-2006 to 38.9 per cent in 2010-2011. This projected decline is partially offset by a slight increase in the share of net public investment in GDP over the same period, from an estimated 2.1 per cent of GDP in 2005-2006 to 2.3 per cent in 2010-2011.

With the Chancellor clearly signalling that education and health remain key priorities, the implications are for real terms cuts in other areas of public spending. As we show below, these constraints are already being signalled with ambitious new targets for efficiency savings in some central government departments.

Industry

The TUC is concerned that business investment has stagnated in recent months. The Budget projects business investment to rise by only 1 to 1.5 per cent this year, rising to 4.5 to 5.25 per cent in 2007 and 2008. Manufacturing output is forecast to rise by just 0.5 to 1 per cent this year, rising to 1.75 to 2.25 per cent in 2007 and 2008.

There are a number of measures to support business, contained in the Budget, that we welcome. Additional research and development tax credits to companies with 250-500 employees, as recommended by the Cox Review, was expected but is, nevertheless, a move that the TUC supports.

We also welcome the forthcoming five-year strategy for a step-change in the Government's drive to market the strengths of the UK economy internationally. The focus on high growth countries of strategic importance, such as India and China, and on innovative and R&D intensive sectors, is essential. Furthermore, as a first step towards implementing its new strategy, UK Trade and Investment will build on the findings of the Asia Task Force and will allocate further resources to increasing trade activities between the UK and these emerging markets. This responds to the concerns set out in the TUC's recently published Industrial Strategy, which highlighted the fact that the UK's trade balance with China worsened between 2000 and 2003, whereas Germany, France and Italy improved their trade balance with China during these years.

The TUC supports the setting up of the International Business Advisory Council for the UK, to advise on the challenges and opportunities of globalisation. Bringing together the bright and the best from industry will aid good government decision-making in this crucial area. However, given the importance of globalisation for workers, we are disappointed that a senior trade unionist has not been invited to join the IBAC.

Childcare

The continuing focus on childcare and childcare support is particularly welcome. From this April, the childcare element of the Working Tax Credit will be increased to cover up to 80% of childcare costs (up to a maximum of £240 per week), which will be of particular benefit to low to middle income families. Furthermore, the Chancellor has recognised that employers have a role to play in supporting the childcare needs of their workforce and the TUC welcomes the introduction of capital grants for SMEs to provide workplace nurseries. The recent focus on childcare vouchers has seen some workplaces shut their on-site childcare support and replace them with vouchers. This initiative may help to reverse that trend.

The TUC is concerned that the Chancellor's plans to increase the amount of salary an individual can sacrifice in return for childcare vouchers (rising from £50 to £55), will mean that more people - and especially women - will not be making National Insurance Contributions on a larger proportion of their salary. Many of today's women pensioners are already experiencing poverty in retirement because of a lack of NI payments during their working lives, and we are concerned that the Chancellor will be enabling tomorrow's pensioners to face the same dire prospects.

Energy and the Environment

This is one of the Chancellor's greenest Budgets, yet a central issue for the Treasury is that the UK's carbon emissions are once again increasing, as Tuesday's report from the Environmental Audit Committee pointed out.

The TUC warmly welcomes the key green initiatives, particularly the new Energy & Environment Research Institute announced today, supported by a £1 billion fund from Government and private business investment; £50 million to support microgeneration in 25,000 schools and housing trust homes; and inflation-proofing industry's Climate Change Levy from 2007.

• Introduced in 2001, the Climate Change Levy has contributed to a cumulative cut of 16 million tonnes of carbon emissions from industry. The levy rates have been frozen since their inception, and the Chancellor's decision to inflation proof the CCL rates from 2007 is timely.

While industry is playing its part in tackling energy efficiency and fossil fuel consumption, transport is not and this urgently needs to be recognised in Government policy. Overall greenhouse gas emissions from road and air transport continue to rise rapidly.

The efficiency of new cars bought last year was worse than in previous years, as the Energy Savings Trust has shown, especially as more private car buyers opt for 4x4 "gas guzzlers". Raising Vehicle Excise Duty by £40 to £210 (the price of half a tank of diesel) is unlikely to change hearts and minds. Rather than using the revenue to reduce other car owners' rates of VED, the income generated should be used to fund road transport energy saving initiatives.

• Similarly, annual greenhouse gas emissions from aviation rose by 10 per cent last year. The Chancellor has to be mindful of the important contribution air transport makes to the economy, but freezing the Air Passenger Duty for a further year may send the wrong environmental signals to the industry. A freeze in the duty is, in effect, a tax cut in real terms. Moreover, as a result overall APD revenues have fallen.

The TUC would have preferred a more comprehensive Treasury assessment of the economic instruments needed to address our challenging Kyoto targets. We trust that the final report from the Stern Review will help embed a more comprehensively green, Kyoto-oriented Budget in future years from 2007.

Public Services

We welcome the proposal to initiate a national debate on future priorities for public spending and public services, to inform the next Comprehensive Spending Review. This debate provides a good opportunity to discuss future levels of spending and set out a long-term vision for public services, which we hope will include a wide range of stakeholders including trade unions, service users, managers and professionals, experts and front-line workers. The government should use the exercise to take stock of its reforms implemented so far, including those which have introduced competition and choice into public services. The impact of other programmes, which have set out to improve value for money and efficiency on the quality and sustainability of public services, should also provide a focus for this vital debate.

• The TUC is deeply sceptical that five per cent falls, in real terms, for three years in the Departmental Expenditure Limits of the Department for Work and Pensions, HM Revenue and Customs, HM Treasury and the Cabinet Office, can be achieved without affecting the quality of the service given by those departments. We believe it is simply not possible to take £1.8 billion in total out of the budgets of these departments without affecting the quality of the service provided. Nor do we accept the distinction between front-line services and back office staff. In most cases, the two work together and these cuts will be felt by users, such as benefit claimants.

We welcome the proposal to undertake a review into the future role of the third sector in social and economic regeneration. It is clear that the third sector has an important role to play in economic and social development in this country. The opportunity to examine the role the sector currently plays and its possibilities for the future, especially in public service delivery, is a welcome and timely one. We hope that the review examines the impact of any expansion of third sector delivery on the both the public and voluntary sectors, their workforces, users, services and finances. We note that an Office of Charity and Third Sector Finance is to be established in HM Treasury and hope that this helps promote more sustainable and stable funding for the sector, without an undue increase in risk for either the public or third sectors.

The Chancellor's budget speech announced that 'we will take no risks with inflation at home. The public pay settlements will show settlements averaging just 2 ¼ per cent'. The Budget Report also places public sector pay awards firmly in the context of controlling inflation, and notes that in November last year the Chancellor wrote to the public sector pay review bodies emphasising the need to ensure that 'pay settlements are based on the achievement of the Government's inflation target of two per cent'.

It is important to note that the responsibility for controlling inflation cannot be carried by public service pay awards alone; there are many other factors that have an impact upon inflation. Nor should controlling inflation be the main policy aim of public service pay awards. In order to sustain and improve the provision of high quality public services, the basis for establishing public services pay awards needs to include:

a commitment to equal pay for equal value

the ability of the public services to recruit and retain sufficiently qualified staff to deliver quality public services, which requires that

pay settlements in the public sector broadly keep pace with those in the private sector to ensure that the progress that has been made by this Government in tackling the gap between public and private sector pay is not reversed.

The Chancellor is rightly proud of his record in replacing the boom and bust economy of the 1980s with stability and growth. However, if quality public service provision is to be sustained and improved, it is also essential to replace the peaks and troughs of public sector pay settlements with consistent pay awards that allow the public sector to compete on an equal basis with the private sector to attract sufficiently skilled and experienced staff. Stability for staffing arrangement in the public services should be an essential aim for public sector pay policy.

Despite important initiatives including Agenda for Change in the NHS, pay reforms for school teachers and pay modernisation in the civil service, recruitment difficulties in the public services remain. The public services cannot afford to allow staff wage levels to grow at a slower rate than the rest of the economy; the consequence will be a return to under-staffed and struggling public services.

At a time when the all-items RPI in the year to January 2006 stands at 2.4 per cent, wage settlements of 2 per cent would represent a real terms cut in income. The median pay settlement level for the whole economy and for private services for the three months to the end of February 2006 are both 3 per cent. Pay settlements in the public services should match those of the private sector.

The 2005 Pre-Budget Report announced the establishment of the new Public Sector Pay Committee (PSPC) or the Pay Gateway. The PSPC 'will set common objectives for pay across Government and will ensure that both pay awards and pay systems across the public sector are evidence based, represent value for money and are financially sustainable in the long run'. Through the Public Services Forum, the unions representing workers in the public services and the Government have agreed Pay and Reward Principles. The TUC calls on the PSPC to publicly commit itself to these Principles.

The Budget Report states that the PSPC 'will review progress on local pay'. However, it is not clear what would constitute progress in this area. The TUC believes that the introduction of local pay awards would increase uncertainty for both employers and workers, lead to competition between different regions for skilled public sector workers and poaching of key staff and add to the difficulties in reaching pay settlements. Establishing local bargaining units would escalate administrative and management costs considerably, and the TUC strongly opposes any move away from national bargaining.

Welfare Reform

The most prominent welfare announcement in the Chancellor's speech was the government's commitment to increase the child element of the Child Tax Credit at least in line with earnings until the end of this Parliament. The Pre Budget Report had already announced a £75 a year increase from April 2006, £45 higher than the increase we would have seen without this policy. On the other hand, the family element was frozen, costing families almost exactly as much as this measure gains, and the income thresholds (the level at which CTC starts to be clawed back) have been frozen.

The other major child-related policy is the government's announcement of the results of the consultation that began in the 2004 Pre Budget Report on the level of the payments into Child Trust Fund accounts that will be made when children are seven years old. This will be £250 for all children, plus an extra £250 for children from low-income families. This is a welcome measure of support for children, and extra support for the poorest children.

The Budget also saw the announcement of a number of detailed proposals on welfare-to-work policy. Some are welcome, such as the increased number of pilot projects helping low-skilled women; the introduction of strengthened Fortnightly Job Reviews for Jobseeker's Allowance beneficiaries is not. The refocused Fortnightly Job Reviews will require unemployed people to demonstrate what they have been doing to look for jobs, or face the loss of their JSA. Past experience suggests that this sort of measure forces unemployed people into meaningless activities, that have no chance of moving them into employment, but which will mean that they can hang on to their benefits.

Pensioners Travel

The TUC welcomes the Chancellor's announcement of free off-peak national bus travel for pensioners and disabled people from April 2008. This will be of major benefit to pensioners on fixed incomes, particularly for the many who use services that cross local authority boundaries, or when visiting relatives in other towns and cities.

The Skills Challenge

The report published alongside the Budget (Productivity in the UK 6: Progress and New Evidence) reiterated the link between skills and productivity, highlighting that while the UK performs well in respect of high level skills and has made some progress on low skills, there are challenges that remain, including addressing the high proportion of people with only basic level skills.

While there has been progress on many of the Government's targets, there is a long way to go. Around 27% of the workforce do not have a level 2 qualification (equivalent to five good GCSEs) and low skills are even more prevalent among jobless individuals. Another major challenge is the continuing flow of large numbers of unskilled young people into the labour market.

The interim report of the Leitch Review, published alongside the 2005 Pre-Budget Report, sets out a compelling and persuasive analysis that current targets to upskill the nation, ambitious as they are, will not be enough to secure economic prosperity and social justice over the long-term. A step change is required to ensure that the UK maximises skills and productivity.

The government's approach is quite rightly focused on addressing market failure and also building an education and training system that provides opportunities for everyone to reach their full potential and especially those who would benefit from a highly improved 'vocational offer'. The TUC has strongly supported the general thrust of the government's approach on skills, including the continued recognition and support for the role of trade unions in boosting learning and skills in the workplace.

The TUC welcomes the increased recognition and funding in today's Budget for skills and further education and looks forward to more detail on the proposals in the upcoming FE white paper.

Increased support for learners in the commitment to enable all young people up to the age of 25 to receive free funding to study up to level 3, with support available from the Adult Learning Grant is especially welcome.

The TUC particularly welcomes the measures to support low-skilled women into work in response to the Women and Work Commission. A new pilot aimed at achieving level 3 qualifications for women with low skills, additional skills coaching pilots focusing on women and funding for Sector Skills Councils to develop new ways of recruiting and training low skilled women into industries with skills shortages are helpful strategies to increase the opportunity for higher skills, higher pay and sustainable employment for women.

P rioritising the skills needs of those outside the labour market by more clearly building the link between skills and sustainable employment is also a welcome development. This approach will have a particular focus on empowering jobless individuals to acquire qualifications that will enable them to achieve sustainable employment and career progression over the longer-term.