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Bold package urged to stave off rise in unemployment

Steve Overell

21 November 2008

An immediate package of measures - centred on a comprehensive programme to boost bank lending, a one-off tax credit targeted at the poor, higher benefit payments to stimulate demand, a public works programme, and an incentive scheme for employers to put workers on shorter hours rather than make them redundant - is needed to stave off a prolonged recession and high unemployment.

Predicting a peak of 2.5 million unemployed and a worse recession than both the 1980s and 1990s, a new report urges the government to use every means at its disposal – monetary, fiscal, financial and through assorted labour market interventions – to boost the economy and protect employment.

 It urges:

  • Fiscal stimulus: a boost equivalent to 1 per cent of GDP (£15 billion), including a a one-off tax credit to the poorest households who are most likely to spend any additional income.
  • Private sector credit flows: to stimulate lending, the terms of the Bank of England’s special liquidity scheme should be relaxed; the 12 per cent interest rate on the coupon it is charging when it invests in banks via preference shares should be lowered; and action is needed to reduce the insurance premium being paid to guarantee the £250 billion of unsecured debt in interbank lending, together with extending the small business loan guarantee scheme.
  • Public works programme: the government should bring forward as many construction projects as possible. There should be particular attention paid to smaller, more labour intensive projects such as social housing, hospitals, schools and transport (about 50 per cent of all construction orders consist of projects involving less than £2 million spending).Where Private Finance Initiative schemes are being held up by lack of credit, public money should be made available.
  • An increase in out-of-work benefits: a time-limited scheme to increase unemployment benefits (which are low by international standards) to around 60 per cent of previous net earnings.
  • Support for the unemployed: expand the capacity of job search and support services (such as JobCentre Plus), tailored to the needs of local areas where possible. Quality must be maintained despite the numbers of unemployed people, though the government’s welfare-to-work ambitions main need to be revisited. UK investment in ‘active labour market programmes’ is low by international standards.
  • Short-time working: incentives should be offered through a publicly funded short-time working scheme to encourage employers to retain human capital rather than dismiss workers. The scheme would be suspended once recovery is under way.
  • Regional aid: Devolve necessary funds and powers to encourage local authorities and Regional Development Agencies to invest in worklessness and skills schemes (or labour market policies) that respond to the particular challenges of the area; and to set up short-term schemes to help struggling firms - for example, Advantage West Midlands’ ‘Transitional Loan Fund’.
  • Bonus taxation: the government should introduce a financial services bonus tax taper with a higher marginal rate of 75 per cent for annual bonuses. This would discourage excessive risk-taking and reduce the impact of perverse incentives.

David Coats, associate director – policy at The Work Foundation, said: ‘It is vital that the government is bold and decisive. Without intelligent intervention by the state, the banking crisis could damage the real economy just as severely as the Great Crash of 1929.

The principles that should determine the government’s response to the crisis are that interventions should be timely, targeted and temporary. Some of our proposals are contentious and go against the grain of recent political thinking – higher unemployment benefits, for example. But our aim is to put money where it is most needed, where it will most readily be spent, and to help maintain employment. Public indebtedness in the UK is low by international standards and as long as the reflationary package is strictly time-limited and wound up on recovery, we can afford it. Ultimately, it falls to the state to get us through the downturn and ready for the upturn.’

Dismissing claims of a ‘middle class recession’, the report says job losses are likely to fall disproportionately on full time, male workers, amongst the young, and among those in less secure employment (this mirrors the experience during the 1990-92 recession). So far employment has fallen in distribution, manufacturing and construction and increased slightly in business and financial services.

The impact of the current recession is likely to be felt across all sectors. With regional differences less marked than in previous eras, it is also likely to be less ‘geographically specific’.

Ian Brinkley, associate director, said: ‘Full employment is the most important economic policy objective - certainly more important at the moment than the battle against inflation. Joblessness can scar people and communities for a long time. It is the job of the government now to throw everything at its disposal at making sure we do not have a jobs crisis.’

Notes to editors

‘Hard Labour: Jobs, Unemployment and the Recession’ by Ian Brinkley, David Coats, Naomi Clayton, Will Hutton and Stephen Overell is available from The Work Foundation.

David Coats and Ian Brinkley are available for interview.

Media enquiries to Stephen Overell on 00 44 (0) 207 976 3507 or 07970 765251.

The Work Foundation is an independent research and consultancy organisation.