Increasing Employment Opportunity

Introduction

4.1 Budget 99 builds on the Government's strategy for achieving high and stable levels of employment, through the promotion of employment opportunities for all - the modern definition of full employment for the 21st century. Creating employment opportunities will not only promote economic growth but will ensure that the benefits of growth are shared throughout society.

4.2 The Labour Force Survey (LFS) shows that, since the last election, employment has risen by over 400,000. Unemployment has fallen by over 300,000 on the ILO definition, and by over 360,000 on the claimant definition. Long-term youth unemployment has fallen by over 50 per cent. However, there remain substantial challenges to be faced: over the last 20 years structural unemployment has risen, participation rates among certain groups have fallen dramatically, and the rewards for work for those on low incomes have not kept pace with the general increase in living standards. More is also known about the way the labour market works. In particular, the tax and benefit system can trap people into unemployment and poverty. In May 1997, for example, around three quarters of a million people faced a poverty trap whereby over 70 pence of every extra £1 they earned was lost in tax and benefit clawback.

4.3 Chapter 2 set out the need for a stable macroeconomic environment, an essential precondition for an extension of employment opportunities. However, a better macroeconomic framework alone is not enough. This Government's first two Budgets, together with the Comprehensive Spending Review, have made major steps towards extending employment opportunities. Measures in Budget 99, set out later in this Chapter, build on the Government's strategy to promote employment opportunities for all.

The challenge of a changing labour market

4.4 Since the objective of full employment was first set out in 1944 there have been major demographic and social changes, new developments in the labour market and the global economy and a rise in female and part-time employment. The traditional approach to full employment relied heavily on the levers of macroeconomic demand management to secure full-time male employment. Active Welfare to Work policies were not so important when a high proportion of those looking for work could find it relatively quickly. Skills mattered less when there were plentiful job opportunities for people without qualifications. Distortions in the tax and benefit system had a much lesser impact when work took people substantially above the level of benefits. Family-friendly work practices were less relevant when fewer women were in work and fewer people needed to balance work and family responsibilities. And it was more valid to focus only on the claimant unemployed when those outside the work force altogether were not denied the chance of employment opportunity. The new challenge facing the Government is to promote employment opportunity for all in the very different labour market of today.

Changing patterns of employment

4.5 In the UK today over 27 million people - over 70 per cent of the working age population - are in work. This is a relatively high rate of employment compared with many other European countries, although below the levels of Japan and the US. Female employment rates have increased sharply over the last few decades. In 1975, 59 per cent of working age women were in employment compared to 69 per cent today. Two-thirds of working mothers now return to work within one year of the birth of their child, compared to 38 per cent in 1979, and those who return within a year do not appear to suffer the loss in subsequent earnings faced by other mothers. The UK is also notable for providing a wide range of opportunities to fit work around personal and family circumstances, and has been relatively successful at supporting the increased participation of women in the labour market.

Structural unemployment

4.6 High structural unemployment is the most obvious sign of a failure in the labour market. Although unemployment today is lower than in many other European countries, it remains well above the levels seen in the 1950s and 1960s. Chart 4.1 shows how registered unemployment has varied since the 1950s. Unemployment in the UK fluctuated between 1 per cent and 3 per cent of the workforce from the 1950s until the middle of the 1970s, before rising to around 4½ per cent by the end of that decade. But since 1980, it has averaged around 8½ per cent. Alongside high levels of structural unemployment, the employment rate has also been very variable over the economic cycle - reflecting the swings in output there have been over the last 20 years.

Chart 4.1: Rising unemployment, the UK claimant count 1950-1998

4.7 The headline picture on unemployment hides a more complex, dynamic picture. The unemployment rate is the product of substantial labour market flows into and out of employment. Every quarter, around 2 million people move into a new job, of whom around 40 per cent were previously out of work. This means that, despite lower growth this year, millions of new job opportunities will continue to emerge. The Government's employment strategy will mean that individuals are better placed to take advantage of those opportunities.

4.8 Most people who become unemployed, at whatever stage of the economic cycle, return to work within the first few months. But a significant proportion of the labour force are at risk of repeated or prolonged periods of unemployment, amounting to a significant detachment from work. The increase in unemployment over the last 25 years is largely explained by increases in the duration of unemployment, rather than the number of people who become unemployed.

4.9 The build up of long-term unemployment associated with previous recessions was immensely damaging for individuals - destroying their connections with the labour market, their skills and employability. Typically, the long-term unemployed find it much harder to find work and those who do leave unemployment are much more likely than the short-term unemployed to move onto other benefits. The Government's strategy - through the New Deal - aims to reattach the long-term unemployed to the labour force, and give them a fair chance of competing for the available vacancies. In this way, employers are also given a wider choice of potential employees for their vacancies, and the risks which they perceive in hiring a long-term unemployed worker are reduced. The economy can then grow more rapidly without running into skill shortages and unsustainable wage inflation. The Welfare to Work programme raises the effective supply of labour, and hence can help raise the sustainable level of employment.

Rising inactivity

4.10 Many other groups of people are excluded from the labour force altogether - neither employed nor unemployed. Lone parents, people with disabilities, and the partners of unemployed people all have low employment rates. Whilst 69 per cent of mothers in couples work, only 45 per cent of lone mothers are in work. Where the youngest child is under 5, the differences are even more marked: more than twice as many mothers in couples, with a child under 5, are working, compared with lone mothers. The UK also has one of the lowest employment rates among lone parents in the developed world.

4.11 Worklessness is increasingly concentrated - about 3 million households with at least one adult member of working age have no one in work - or 17·6 per cent, compared to 9 per cent 20 years ago. People whose partners are unemployed are themselves only half as likely to move into work as people whose partner is in work. Increased worklessness is particularly acute among families with children, a major factor behind child poverty (see Chapter 5).

4.12 There has also been a particularly sharp fall in labour market participation among men over 50 which has partly offset increases in female labour market participation - see Chart 4.2. The proportion of men aged 50-64 who are outside the labour market has risen from 12·6 per cent in 1979 to 27·4 per cent today. And older women have seen much smaller increases in participation than those which have been so prominent among younger women. If the participation rate of people over 50 had followed the same pattern over the last 20 years as for those aged 25-50, there would be 700,000 more people in employment today.

Chart 4.2: Changing patterns of labour market participation

Persistent low income

4.13 Income inequality has increased sharply over the last 20 years. This is not representative of a world-wide trend: only New Zealand has seen similarly widening inequality. Alongside this has been a substantial increase in the number of people living on relatively low incomes. 12 million people, nearly a quarter of the population, live on a household income below half the national average. This is almost three times the number 20 years ago. For a couple with no children it means living on less than £129 a week after housing costs. There has been no improvement in absolute incomes for people at the bottom of the income scale either. As many people in the mid 1990s were living on the equivalent of less than £92 a week after housing costs - half average income 20 years ago - as at the end of the 1970s.

4.14 For most people low income is transitory, lasting for no more than a year. But for some people it is a long-term experience, indicative of a persistent lack of opportunity and constrained life chances. Between 1991 and 1996, one quarter of those who started in the poorest 20 per cent of the income distribution remained there for all six years, and one in ten of the whole population never got above the poorest 30 per cent during these six years.

4.15 Lack of work and low pay are the main risk factors for short-term and persistent low income. Employment and earnings changes are the most important events associated with entry and escape from low income. Changes in family structure - divorce, bereavement and childbirth - also feature heavily in relation to entries into low income. But work is clearly the most important route out of low income:

• two-thirds of working age households on persistently low incomes are workless and 8 out of 10 are not fully employed;
  
  
• around two-thirds of movements out of low income occur through people gaining work or increasing their earnings; and
  
  
• between 1991 and 1995, 8 out of 10 people on low incomes who moved from worklessness into work also moved from out of the bottom fifth of the income distribution.

4.16 Getting a job is the most effective route out of low income, but one in five low-income households remains stuck on low income even though all the working-age adults in their household have jobs. Many of these people will become caught in a low-pay, no-pay cycle. This occurs where people move between unemployment and low-paid jobs, and are not able to move up the earnings ladder.

4.17 Women are more likely to be low paid than men. Around 11 per cent of women, compared to four per cent of men, currently earn less than the National Minimum Wage. Women are also less likely to move out of low pay, up the earnings ladder. Over two-thirds of women earning below half median hourly earnings in one year will remain below this threshold in the following year, compared to around 44 per cent of men. But, the number of men who were either continuously low paid, or caught in a low-pay, no pay cycle, doubled, from seven per cent in the period 1979-83 to 14 per cent in the period 1990-94.

The Government's strategy for increasing employment opportunity

4.18 The Government has already implemented policies to reduce structural unemployment, increase labour market participation and make work pay. In addition to the New Deal programmes for 18-24 year olds and the long-term unemployed, the New Deal is offering help to lone parents, people with disabilities and partners of unemployed people to move back into work. Reforms to make work pay - including new measures in Budget 99 building on previous reforms - will make it worthwhile for those currently outside the labour force to move into employment. And extra help for the over 50s moving back into work will begin to tackle the sharp decline in participation among this group, and help to prevent them becoming the next generation of poorer pensioners.

4.19 The Government will also introduce a Single Work-Focused Gateway in 12 pilot areas, providing a personal adviser to help all benefit claimants of working age to become more independent. There will be a fundamental shift away from a system that asks simply "what money can we pay you?" to one that also says "how can we help you become more independent?". The Government is not forcing lone parents or disabled people into work, but many people who want to work are being written off as unemployable when they may have a good chance of finding a job. The Single Gateway will ensure that everyone is given the opportunity to discuss their prospects of finding work.

4.20 To build a stronger economic future, the Government will build on these reforms to provide a better deal for working people. So Budget 99 extends the New Deal, contains new measures to make work pay, and, because the Government is determined to reform the tax and benefit system to put work first, it introduces a 10p rate of income tax.

Welfare to Work

4.21 The Government is delivering its Welfare to Work programme: already, over 350,000 people have participated in the New Deal, and more than 70,000 have got jobs. The Government is committed to continuous improvement of all aspects of the New Deal. Budget 99 builds on the New Deal by:

• intensifying the gateway for 18-24s, providing extra help for those young people who need it most, and ensuring that there is no option of a life on benefit;
  
  
• a New Deal for the over 50s, providing tailored advice and support to help people over 50 return to work; and
  
  
• supporting lone parents moving into work, by continuing their Income Support payments for two weeks, to guarantee their income in the critical transition to the Working Families Tax Credit.

New Deal for 18-24 year

4.22 Men who are unemployed for more than a year by the time they are 23 spend nearly six times longer in unemployment over the following ten years than those who were unemployed for less than six months by age 23, and over 14 times longer than those who were not unemployed at all before 23. For women, the pattern is less acute for unemployment, but stronger for non-employment. The New Deal for 18-24 year olds, running nationwide since April 1998, 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.

4.23 Over 230,000 young people have joined the New Deal, initially entering a gateway where they receive intensive support from a personal adviser. And already over 58,000 jobs have been secured for young people - over 43,000, or 74 per cent, unsubsidised. In addition, nearly 50,000 young people are gaining valuable training and work experience in New Deal options.

4.24 The Government has made considerable progress in developing its continuous improvement strategy for the New Deal for 18-24s, to ensure progressively better performance in helping young unemployed people find and retain jobs. Performance by each area delivering the New Deal will be measured against a set of nine indicators including the number of people moving into jobs, how long participants remain in employment, and how well people from ethnic minorities do. League tables showing performance by each area against the first objective of getting participants into jobs have already been made available. The Government intends to publish data on the performance measures in May. It is also developing a strategy to ensure that effective and timely action is taken to tackle poor performance and to drive forward performance across the board.

4.25 As part of the continuous improvement strategy, an Innovation Fund will enable enhancements to the New Deal to be tested. In particular, some young people might gain from a more intensive initial gateway at the beginning of the New Deal, to inject greater pace and purpose into their job-seeking activities. The Government hope to announce pilots later in 1999. And for those still in the gateway after three months, their final month will be made more intensive to reinforce the message that there is no option of continuing on benefits, and to make sure every young person has the help they need.

4.26 An effective balance between rights and responsibilities is an important element of the New Deal for 18-24 year olds. The vast majority of young people have engaged enthusiastically with the New Deal and are taking full advantage of the new opportunities it offers. Given the substantial public investment involved, and the wide ranging opportunities provided by employers and by the voluntary and environmental sectors, it is right that all young people should be required to meet their side of the bargain.

New Deal for the long-term unemployment

4.27 Since June 1998, those aged 25 and over and unemployed for over two years have been eligible for a £75 per week subsidy to help them into work. So far, around 95,000 long-term unemployed people have started on the New Deal. Most participants are still in the advisory interview process. But already over 6,000 have found jobs.

4.28 The last Budget announced the extension of the New Deal through a series of innovative pilots, based on the intensive approach pioneered for 18-24 year olds. The pilots were launched at the end of November 1998. Those unemployed for over 18 months, or for over 12 months in some areas, start an intensive gateway of job search activities. Those who do not find work enter a period of full-time activity for three months. The choice of options depends on individual need, but can include work trials with employers, training, work experience, and support for self-employment. On-going support is available to those most at risk of remaining unemployed.

4.29 60,000 people are expected to enter the pilots in Great Britain. In Northern Ireland, as part of the Chancellor's Economic Initiative which he announced in May 1998, these opportunities will be open to all those who have been unemployed for over 18 months - up to 30,000 people.

4.30 The pilots will be extensively evaluated, including the use of random assignment in two areas, to yield evidence about what works and what does not. The evidence will inform the future development of the Welfare to Work programme.

New Deal for the over 50s

4.31 The employment rate of men over 50 has fallen sharply in the last 20 years, whilst women over 50 have not seen the large increases in participation that are so marked among younger women. A New Deal for the over 50s will provide personalised advice for people over 50, where they or their partner have been on benefits for more than six months, to help them return to work. The programme will be voluntary, and available to people who are economically inactive as well as unemployed. The programme will complement the new Employment Credit for over 50s (see paragraph 4.68). Pathfinders will start in October 1999, prior to national roll-out of the programme in 2000.

4.32 Many workers over 50 have skills that may have been superseded, or become rusty from a period out of the labour force. In addition to an Employment Credit, the over 50s will be eligible to up to £750 in-work training grants to help them acquire accredited training to take up and keep a new job.

New Deal for lone parents

4.33 The New Deal for lone parents was launched nationwide on 26 October 1998. It offers a personalised service combining job search help, advice and training to all lone parents on Income Support. It is the first serious national attempt to help lone parents improve their prospects and living standards by taking up and increasing paid work.

4.34 At the end of January 1999, over 39,000 lone parents had attended an initial interview with a trained personal adviser, with 32,000 of those attending a first interview deciding to participate in the New Deal. Over 6,000 lone parents participating in the New Deal have already moved into employment.

4.35 Lone parents have much lower employment rates than mothers in couples. Removing the financial uncertainty which lone parents often experience when moving into employment for the first time will encourage work and provide financial security for lone parents and their children. To help lone parents to make the transition from welfare to work, their out of work Income Support (IS) will be extended for two weeks, from October 1999, when they move into employment. Extending IS payments will help to bridge the gap between benefits and work, ensuring financial security in the transition to the Working Families Tax Credit (WFTC). The extended payments will be available to all lone parents who have been claiming IS for at least 26 weeks prior to finding work and claiming WFTC. The Government will consider whether there is a case for extending this run-on to other groups on the basis of evidence from lone parents.

New Deal for partners of unemployed people

4.36 The New Deal for partners of unemployed people was launched in three pathfinder areas in February 1999 and it will be rolled out nationally in April 1999. It will ensure that partners of people unemployed for six months or more can receive specialist advice to help them back to work. Childless partners aged 18-24 will be brought into the New Deal for 18-24s from 2000, subject to legislation, and will be able to volunteer to join it from April 1999.

New Deal for disabled people

4.37 In the past, the benefit system defined people with disabilities by what they could not do, condemning them to a life of benefit dependency and low expectations. The New Deal for disabled people offers people with disabilities the opportunity to work and achieve their full potential. In six pilot areas, a personal adviser service offers individually tailored support. A further six, run by private, voluntary and public sector agencies, will start soon. Already over 1,000 people with disabilities have benefited. Because the needs of people with disabilities have been ignored too often in the past, new strategies need to be developed and tested. Further pilot services will be launched during 1999.

New Deal for Communities

4.38 Unemployment and deprivation are often concentrated in small areas. The New Deal for Communities provides funding for the intensive regeneration of some of our poorest neighbourhoods. £800 million over three years was allocated in the Comprehensive Spending Review to help local people improve their areas, particularly by tackling worklessness, reducing crime, raising educational attainment and improving health. Already, 17 pathfinder areas are developing ideas on how to narrow the gap between their neighbourhood and the rest of the country. Further announcements, extending the programme to more areas, will be made later in 1999.

Employment Zones

4.39 Employment Zones tackle the problems faced by areas where long-term unemployment is particularly high and persistent, complementing the New Deal for Communities. The Government aims to have at least 14 Employment Zones up and running for two years from April 2000, helping about 48,000 long-term unemployed people aged 25 and over to find and keep work. A key innovation in Employment Zones will be the personal job account. It will allow the pooling of funds that would be available to individuals through, for example, entitlement to training programmes and European support and the equivalent of benefit spending. The individual and a personal adviser will agree how this can be spent most effectively and flexibly to help the individual back to work.

Rapid Response Units

4.40 The New Deal is primarily focused on those who are the most detached from the labour market. The Government is also developing new approaches to improve the service available to people when they lose their jobs. Rapid Response Units have been established to help people who lose their jobs through major redundancies. Co-ordinated by the Employment Service and bringing together a variety of local agencies, the Rapid Response Units provide assistance and guide people to the help they need to move quickly into new jobs.

Windfall Tax

4.41 The Welfare to Work programme is funded from the receipts from the one-off Windfall Tax on the excess profits of the privatised utilities. The second and final instalment of the Windfall Tax was due in December 1998 and £2·6 billion was collected. In total, the Windfall Tax raised £5·2 billion. Table 4.1 sets out the latest estimates of the allocation of the Windfall Tax receipts between programmes.

Table 4.1 Allocation of the Windfall Tax

£million	1997-98	1998-99	1999-00	2000-01	2001-02	1997-02
Spending by programme1
New Deal for 18-24 year olds2	50	300	820	690	690	2550
New Deal for over 25s3	0	30	260	110	120	520
New Deal for over 50s	0	0	10	20	20	50
New Deal for lone parents	0	40	60	50	40	190
New Deal for disabled people4	0	10	40	80	80	210
New Deal for partners of
unemployed people	0	10	20	15	15	60
New Deal for schools5	90	300	280	360	270	1300
Childcare6	0	40	0	0	0	40
University for Industry7	0	5	0	0	0	5
Total Expenditure	140	730	1490	1320	1230	4910
Unallocated						290
Windfall Tax receipts	2600	2600				5200
1 Rounded to the nearest £10 million. Constituent elements may not sum to totals because of rounding. Outturns for 1997-98,estimates for 1998-99 onwards.
2 Includes £10 million for 18-24 year old childless partners of unemployed people, subject to legislation.
3 Includes £10 million for the Small Business Service.
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 measure will be incorporated within the Working Families Tax Credit.
7 Start-up and development costs. Other costs of the UfI are funded from within departmental expenditure limits.

Making work pay

4.42 People are reluctant to take work that does not pay. Too often, the gap between in-work and out-of-work income is too small to encourage people to move off benefits - the unemployment trap. Once in work, too many people cannot improve their in-work income even if they earn more, because they simultaneously pay more tax and receive less benefit - the poverty trap. These distortions have frustrated the ambitions of people on low incomes, and contributed to family poverty. They have also contributed to high levels of structural unemployment and low levels of labour market participation. The Government is determined to make work pay by tackling the unemployment and poverty traps.

Working Families Tax Credit

4.43 Different groups of people face different obstacles to work. Those with families, in particular, can find it harder to move from welfare into work, because of the way the tax and benefit system works. That is why the 1998 Budget announced a number of reforms aimed at making work pay for families with children. In particular, the introduction of the Working Families Tax Credit, from October 1999, with its generous childcare tax credit. The WFTC will boost the incomes of low and middle income working families with children. As a tax credit, payable through the wage packet from April 2000, it will demonstrate more clearly the rewards of work over welfare. By 2001, about 1·4 million working families will be receiving the WFTC, around 500,000 more families than would have received Family Credit.

4.44 The WFTC's childcare tax credit will provide help with 70 per cent of eligible childcare costs, up to a limit of £100 per week of costs for families with one child and £150 per week for families with two or more children. In addition, there will be a full disregard of child maintenance payments for the calculation of income for WFTC, making a significant contribution to work incentives for poorer families as working families will be able to benefit from the full value of their maintenance payments.

The low paid

4.45 All low paid workers will benefit from the reform of national insurance contributions (NICs) announced in the last Budget. The old structure meant that NICs penalised the low paid and discouraged job creation at the lower end of the earnings distribution. Changes to both employer and employee NICs, in April 1999, will remove the "entry fees" and "steps" in the system, removing labour market distortions and reducing the burden on the low paid.

4.46. From April 1999 the point at which employers start paying NICs will be increased from £66 per week and aligned with the personal tax allowance at £83 per week. The complicated system of four separate rates of employer NICs will be replaced with a single employer rate of 12·2 per cent. This will remove distortions from the system and make it easier for employers to understand and administer their NICs. The NICs burdens on employers in respect of the vast majority of workers earning up to £460 per week will decline, encouraging job creation at these earnings levels. This reform was originally estimated to be revenue neutral, but on the basis of the latest economic assumptions, the Government Actuary's Department now estimate that employers will pay over £600 million less NICs in 1999-2000 as a result of the reform. And for employees, the NICs entry fee of two per cent for people earning £66 per week or more, on all earnings below that level, will be abolished. This is worth £1·32 per week in 1999-2000 for all employees. The abolition removes a major cause of marginal rates of deduction of over 100 per cent on the low paid and is a significant step towards making work pay.

The National Minimum Wage

4.47 The National Minimum Wage will help underpin the Government's welfare reforms. Together with tax and benefit reforms, the minimum wage will help to promote work incentives. It will ensure greater fairness at work and remove the worst exploitation. The National Minimum Wage will boost the hourly wage of almost 2 million low paid workers - two thirds of them women - by an average of 30 per cent. From April 1999 the following rates will apply:

• £3·60 for adult workers aged 22 and over;
  
  
• £3·20 for trainees - workers aged 22 and over and in the first six months of employment and receiving training leading to a recognised qualification; and
  
  
• £3·00 for workers aged 18-21 inclusive, rising to £3·20 in June 2000.

Budget 99: a better deal for working people

4.48 Budget 99 takes these reforms a step further. It will extend employment opportunity, and reduce the tax burden on all the low-paid, to ensure greater fairness and to make work pay. Budget 99:

• increases the minimum income guarantee from October 1999 under the WFTC to every family with children and with full-time earnings to £200 per week or £10,400 per year;
  
• ensures that no family earning less than £235 per week (over £12,000 per year) will pay any net income tax from October 1999;
  
  
• introduces a new 10p rate of tax from April 1999;
  
  
• cuts the basic rate to 22p, from April 2000, to reward work and ensure working families are better off;
  
  
• introduces a further reform of employee NICs so that the low paid take home more of their earnings;
  
  
• reforms self-employed NICs to improve work incentives for low earners; and
  
  
• further reforms employer NICs so that the cost of employing low and middle income workers falls.

10p rate of tax

4.49 To put work first in the tax and benefit system, the Government will introduce a 10p rate of income tax. From 6 April this year, taxpayers will pay only 10 pence in the pound on their first £1,500 of taxable income. This is the lowest starting rate of tax since 1962-1963, and will reduce the marginal rate of tax from 20p to 10p for 1·8 million people.

4.50 When the 10p rate is introduced, there will be three main rates of income tax - 10, 23 and 40 per cent. Basic and top rate taxpayers will gain £1·15 a week from the change. But those on the lowest incomes (below £8,835) will gain more, because the three rate structure helps to target the gains from the 10p rate on the lowest paid: 1·8 million people, of whom 1·5 million are low paid, will see their tax bill halved, and a further 300,000 people will be taken out of income tax altogether.

4.51 The new 10p band will help to ease the poverty trap whereby people on low pay are discouraged from climbing the earnings ladder. At present, around 700,000 people lose more than 70 pence for every extra pound they earn. After the implementation of Budget 99, this figure will fall by around two-thirds (see Table 4.2).

4.52 Taken with other measures announced since the Government took office, the new 10p band will help to make work pay and ease the unemployment trap. From April 2000 a number of further measures will also help to reward work.

Basic rate cut to 22p

4.53 The cut in the basic rate to 22p will take effect in 2000-2001. This is the lowest basic rate level for 70 years. Someone on average earnings of £20,000 will gain £2·72 a week from this measure alone.

4.54 By 2001-2002, the effective tax rate on a family on average earnings with two children will have fallen below 20 per cent for the first time since 1979, and be at its lowest level since 1972. These changes, alongside other reforms in Budget 99, create a modern income tax system to meet the challenges of today's labour market, and ensure fairness for all working people. They will mean the main income tax rates will be 10, 22 and 40 per cent. Further details of the impact on families are given in Chapter 5.

National insurance contributions

4.55 Employees on low earnings will find their position improved still further by the alignment of the threshold above which employees pay NICs with the single person's tax allowance. This means the threshold for paying NICs will increase from £64 per week as it is now to £76 per week in April 2000 and then to £87 per week1 in April 2001 - an increase of over 25 per cent. All employees will gain from this, but it will be particularly valuable to the low paid, many of whom currently earn too little to pay income tax, but still have to pay national insurance contributions. This move will take around 900,000 people out of NICs altogether, of whom 560,000 will be women, and will significantly improve work incentives.

4.56 The Government has undertaken to protect the benefit entitlements of those taken out of NICs by this change. So a zero-rate band of NICs will apply on earnings between the lower earnings limit and the new threshold for NICs. This will ensure that employees build up the same entitlement to benefits that they have now. However, for the longer-term, the Government believes that employers too must benefit from the alignment of income tax and NICs. The Government has already decided to bring together the organisations that administer tax and NICs: the Contributions Agency merges with Inland Revenue on 1 April 1999. The Government will look at ways to reduce the administrative burden on employers, and report back with proposals for the way forward in the Pre-Budget Report.

4.57 Historically, the upper earnings limit (UEL) for national insurance contributions has been between 6½ and 7½ times the earnings point at which NICs first become payable. With the latter being raised by over 25 per cent in two years, it is right to raise the UEL as well: to £535 per week from April 2000 and to £575 per week from April 2001.

4.58 From April 2000 the position of self-employed workers with lower profits will be improved. Following the recommendations of Martin Taylor's report on work incentives, the flat-rate Class 2 NICs charge that is currently payable once profits reach £69 a week will be reduced from £6·35 per week as it is now to £2 per week. This will continue to yield benefit entitlements for this group and remove an excessive marginal deduction rate on low earners, improving their work incentives. Self-employed people with profits of under £4,420 in 2000-2001 will pay around £240 less in NICs a year.

4.59 In addition, self-employed women will become entitled to the full rate of Maternity Allowance, which at present is restricted. Both these moves should make work a more attractive prospect for self-employed people on low earnings. The revenue lost through reducing the NICs burden on low earners will be recouped by aligning the starting point at which Class 4 contributions become payable with the income tax personal tax allowance (the equivalent of £83 per week at 1999-2000 prices) and by increasing the contribution rate to seven per cent, and by raising the upper profits limit to £535 in April 2000 and £575 from 2001. Overall these changes will align more closely the benefits the self-employed are entitled to with the amount of NICs they pay, whilst improving work incentives for low earners. Self-employed NICs will still be lower than NICs for employees.

4.60 Changes to employees and self-employed NICs continue implementation of the package of reforms recommended by Martin Taylor, which the Government began in the 1998 Budget. Chart 4.3 shows the combined effects of the Government's reforms on employee NICs for the low paid.

Chart 4.3: Helping the low paid: changes to employee NICs

Benefits in kind

4.61 As part of further alignment of the tax and NICs systems recommended by Martin Taylor, employer NICs on benefits in kind will be extended from April 2000 to cover not just cars and car fuel, as at present, but other benefits in kind which are already subject to income tax. Making this change places no additional administrative burden on employers since they already need to record and report benefits in kind for tax purposes.

4.62 Taken together with the reform described in paragraph 4.46, employers will be paying no more NICs in aggregate in 2000-2001.

Lower rates for employers

4.63 From April 2001, the rate of employer NICs will be reduced by 0·5 per cent. This will bring the headline rate down from 12·2 per cent to 11·7 per cent. Combined with reforms in the last Budget, this will cut employer NICs in respect of most workers on earnings of around £30,000 per year or less. This measure will come into force at the same time as the climate change levy, described in Chapter 5, and will ensure that the introduction of the levy entails no increase in the burden of tax on business as a whole. This shift of the tax burden from employment to environment should promote employment opportunities and the efficient use of energy.

Better off in work

4.64 This package increases the rewards to work, while targeting the benefits on the low paid. It radically improves work incentives, following the recommendations of Martin Taylor's report. The 10p rate halves the income tax bill for 1·8 million taxpayers, 1·5 million of whom are in low paid work. Reforms in Budget 99 and Budget 98 eliminate the unfair national insurance bill for around a further 900,000 people who earn too little even to pay income tax. The cut in the basic rate will reward work and ensure working families are better off. As a result of Budget 99 and Budget 98, the income of working households will rise by an average of £450 a year. For working families with children the gain is even greater - an average of £740 a year.

4.65 For a one earner couple with two young children on earnings of £200 per week, the average entry wage for men with families, the gain from work will have gone up since before Budget 98 by around £25 per week, an increase of around 25 per cent. Chart 4.4 shows the effect of the Government's reforms on the weekly net income for families on low incomes. As some examples of the combined effects of these reforms:

• a one earner couple, with two children aged under 11, working 35 hours at the National Minimum Wage of £3·60, will have an effective hourly wage rate of £6·69; and
  
  
• a lone parent, with one child under 11, working 35 hours at the National Minimum Wage, will have an effective hourly wage rate of £5·81.

4.66 In 1997 nearly three-quarters of a million people faced effective "tax" rates of over 70 per cent. The combined effect of Budget 99 and the Government's reforms since the election means that this will fall by two-thirds, significantly alleviating the poverty trap. Table 4.2 shows the effects of the Government's reforms on marginal deduction rates.

Table 4.2: Keeping more of what you earn: combined effect of the Government's reforms on high marginal tax and benefit withdrawal rates

An Employment Tax Credit

4.67 The Working Families Tax Credit will provide guaranteed minimum levels of in-work income for families with children. The Government sees a case for extending this principle to all those in work, as part of a better deal for all working people. This would be reform for the longer-term which needs to be carefully considered. The Government will explore the options and bring forward further proposals in due course.

An Employment Credit for the over 50s

4.68 In the meantime, the priority is to tackle low levels of in-work income for those over 50 moving off welfare back into work. Those over 50 face a very steep penalty if they lose their job. Their wages when re-entering work from unemployment are, on average, 25 per cent below their previous job - a much larger fall than for younger workers. Many may stand to earn so much less that they do not return at all.

4.69 As a first step towards longer-term reform, the Government will introduce an Employment Credit as part of the New Deal for the over 50s. People over 50 who return to full-time work after six months or more on benefits will be eligible for £60 per week for the first year back in work. This guarantees a minimum income of £175 per week for the over 50s moving back into full-time work. Those taking up part-time work, of 16 hours a week or more, will be eligible for £40 per week. The Employment Credit will be available not just to unemployed people on Jobseeker's Allowance, but also to the over 50s not participating in the labour force: those on Income Support and disability benefits, and to partners of unemployed or economically inactive benefit claimants in workless households. The Employment Credit will be available in New Deal for the over 50s pathfinder areas from October 1999 prior to national roll-out of the programme in 2000.

Chart 4.4: Net income for a single earner family with two children aged under 11, before 1998 Budget and after Budget 99

The Disabled Person's Tax Credit

4.70 The 1998 Budget announced that from October 1999 a new Disabled Person's Tax Credit (DPTC) would replace the Disability Working Allowance. The new Credit would be more generous than the benefit it replaces, with higher earnings thresholds (£70 for singles, £90 for couples) and reductions in the taper (from 70 per cent to 55 per cent). As a result the DPTC will provide a guaranteed minimum income of at least £155 a week for a single disabled person who moves from benefit to full-time work earning the National Minimum Wage, and £230 for a couple with one earner moving from benefit to full-time work and one child under 11.

4.71 In the November 1998 Pre-Budget Report, the Chancellor announced he would be consulting on a new Fast-Track to the Disabled Person's Tax Credit (DPTC) targeted at helping with the retention of employees who become sick and disabled while working. The proposal received a very positive and constructive response. In the light of this response, the new Fast-Track will be available from October 2000. People will be able to claim after 20 weeks on Statutory Sick Pay or related benefits, provided they meet the current Disability Working Allowance test, their condition is likely to last at least another six months, and their continued employment depends on a reduction in earnings of 20 per cent, as a result of reduced hours or taking a lower paid job.