The UK Government's 1998 Budget, presented in March, was expected to contain radical reforms aimed at improving the opportunities for investment and work, especially for the lower paid. This feature assesses the main elements of the Budget, especially as it relates to employment, and the reactions of the social partners.
The Chancellor of the Exchequer, Gordon Brown, presented the Labour Government's 1998 Budget to Parliament on 17 March 1998. Below, we examine the key points of the Budget and then go on to look at the responses of trade unions and employers.
For the Government, the stated main task of the Budget is to modernise the entire tax and benefit system in order to encourage enterprise, to reward work, to support families and to advance the ambitions "not just of the few but of the many". In order to overcome the deep-seated structural weaknesses in the economy - instability, underinvestment and unemployment - the Government is aiming to build a "national economic purpose" around four new ambitions - stability, enterprise, welfare reform and strong public services.
The Government is concerned to end the "stop-go" economic cycles of the past and instil stability, especially in the face of inflationary pressures. Fears over renewed pressures of this sort have been fuelled in the last few months by rising wage settlements, even in some parts of the manufacturing sector where a strong GBP is making matters difficult for exporters. Even so, the Government feels that its inflation target of 2.5% will be achieved by 1999. Also, if its "Welfare to Work" (UK9707143F) reforms can be complemented by "responsibility" across the economy, the Government feel that a growth rate of 2.5% could be achieved in 1998. However, the Chancellor believes that if wage bargaining proceeds in the same "short-termist" way of the past, then 1998 growth could slow to 2%.
In terms of the public sector borrowing requirement (PSBR), the five-year deficit plan put into place by the Chancellor in July 1997 is being achieved more quickly than expected, so that by 2000 the budget is forecast to be balanced.
As well as being "tough-minded" concerning the achievement of stability, the Government is equally determined to raise the level of productivity in the UK through a medium-term strategy for growth.
To help larger businesses invest and grow, the Budget puts in place a number of reductions to corporation tax, including the abolition of advance corporation tax and the reduction of the main rate from 31% to 30%. Similarly, five major changes are made to assist small to medium-sized enterprises:
As well as encouraging investment, the main message of the Budget is that the tax and benefit system should be changed to reflect the value that is placed upon the responsibilities and rewards of work. Therefore, the Chancellor argued that it is now time to "reward the efforts of those who want to work their way up". This is to be achieved largely through the Welfare to Work programme, as follows.
On top of creating new opportunities for work, the Government announced changes to the tax system in order to cut the costs of hiring employees at the wage levels where most new jobs are created. A "tax and benefits taskforce" headed by Martin Taylor of Barclays Bank has recommended what is sees as a much simpler, fairer and employment-friendly national insurance system. It proposes setting the rate of employers' national insurance contributions at 12.2 % of pay, but only after the first GBP 81 per week. The Government has accepted these proposals and has retained the right to social security benefits of all those employees earning between GBP 64 and GBP 81 per week. These changes will cut the costs to business of employing 13 million lower-paid employees.
The aim is that, while Welfare to Work constitutes stage one of the reform of the welfare state, the Budget puts in place stage two - ensuring that work pays more than benefits and raising the rewards from work.
The Government will introduce a starting rate of income tax of 10% "when it is right for the economy", while the Budget announced a tax cut through the introduction of a new "working families tax credit" from October 1999. Instead of the state paying out benefit through the social security system to working families on low incomes, in future they will receive cash directly through the tax system. Families will be able to choose to whom the credit is paid and whether it is to be paid directly or through the pay packet. By tackling the "unemployment trap" whereby some families have to pay back more than one GBP for every extra GBP they earn, the working families credit will ensure that work will pay more than benefits. The Government says that it is people's responsibility to seek out work, while the Government will guarantee that if they work, then this work will pay. In cash terms this means that:
A new tax credit system will also be introduced to make it easier for people with disabilities to enter the workforce
For spending on childcare of up to GBP 100 per week for the first child and GBP 150 for two or more children, a new tax credit will cover as much as 70% of the cost. Additionally, the Budget announced that from April 1998 universal child benefit will raise by 20%, increasing it by GBP 2.50 per week.
The table below shows the net gains in households incomes from the Budget.
| Households | All households | Households with children | Working households |
|---|---|---|---|
| Poorest 20% | 2.1% | 4.4% | 4.3% |
| Richest 20% | 0.2% | 0.3% | 0.2% |
| Average | 0.5% | 1.1% | 0.5% |
Source: Trades Union Congress.
The Government remains prudent over public spending but the Budget did provide extra money for improvements in the areas covered by three of the Labour Party's main election manifesto commitments - transport, education and health
The Confederation of British Industry (CBI) director general, Adair Turner, said that the organisation gave a broad welcome to the overall Budget package, especially the overall fiscal balance and the prudent approach to public spending. The CBI also welcomed what it called a useful range of measure to help small businesses and said that the integrated set of measures to improve incentives for work at lower income levels is a sensible complement to the setting of the forthcoming national minimum wage (UK9712190N) at a level modest enough to avoid destructive effects.
The Trades Union Congress (TUC) was not so optimistic about the Budget's effects on growth and jobs as the Government. It projects that up to 100,000 jobs are at risk, and says that there is still a risk of an economic downturn for three main reasons:
However while the TUC felt that the overall Budget stance was "tight", it still stated that the Chancellor was nonetheless able to present a Budget for the low-paid and for families - the TUC's priorities.
The Budget has been described as reformist, part of a complex array of measures designed to create the right incentives to bring unemployed and economically inactive people back to work. Yet after all the work carried out by civil servants in the Treasury and by the army of taskforces appointed by the Government to examine many aspects of economic reform, anything less than a reformist budget would have been considered disappointing. The Budget, however, had been expected to be even more radical in its measures towards the lower-paid and there was speculation that the Prime Minister, Tony Blair, may have intervened to tone the Chancellor's budget down - though this speculation was vigorously denied.
While most welcomed the Budget, there were obvious areas of concern. In the public sector, trade unions such as UNISON called for more investment, while the Manufacturing, Science, Finance union (MSF) called for a dampening down of the current strength of the GBP. While the Treasury says that the strength of the GBP will not damage the economy in 1998-9, the independent pay analysts, Incomes Data Services, point out (IDS report 758, April 1998) that both the Engineering Employers Federation and the TUC do not share this view and have warned of job losses in future months. (MW Gilman, IRRU)