Next week we need a Spending Review for jobs – here’s how

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20 Nov 2020

Tony Wilson, Institute Director

Follow @tonywilsonies

With less than a week now until the Spending Review, the outline of what we can expect to see is starting to become clear – with announcements already of a big increase in Defence spending, investment in a ‘green revolution’ and likely further rises in health spending, but also news this morning of threats to public sector pay and overseas aid to help balance the books.  But with the Chancellor making clear that this will be a settlement for jobs, what can we expect to see on employment?  And will it be enough to support a recovery next year?

The first priority for the Chancellor will surely be to support employment demand, in particular in the early part of next year.  Having torn up the ‘Winter Economy Plan’ (rightly, in my view) and reinstated the Job Retention Scheme until March, it’s very likely that the government will think that it has done enough to protect existing jobs and that the focus now needs to shift to hiring and job growth instead.  The evidence backs this up too – with last week’s jobs figures showing that fewer people moved into work in the last three months than did at any point since the depths of the 2009 crisis.  Remarkably, as we said in our briefing on the day, this means that more people started a new job during full lockdown itself than did so over the summer, after lockdown had ended.

That’s not to say that job losses are no longer a threat – clearly they are, and redundancies are going to rise through to the end of the year.  But the bigger threat that we’re now facing in the labour market isn’t mass job losses, it’s weak hiring – leading to an inexorable rise in unemployment through 2021, and particularly long-term worklessness.  The reasons for this are fairly obvious, as many firms don’t have the capacity to hire – having brought back at least four million workers from furlough over the space of a few months; while others don’t have the cash or the confidence – because of the impacts of the crisis, and uncertainty around the path of the pandemic and of Brexit.  Events of the last four weeks will have added to this uncertainty, even while vaccine developments give us hope of a way out.

So addressing these issues – supporting labour demand, giving employers the confidence and support to create more jobs, and helping the unemployed to fill them – should be a top priority next week.  Top of my list in doing this (still…) would be to reduce labour taxes for employers, by raising the threshold at which National Insurance is paid.  Raising this by £2,000 would mean a £5 billion cut in labour costs, and the evidence suggests that this would flow through into higher employment.  Others have been calling for this too, but perhaps more likely will be something on a smaller scale and more tightly targeted at hiring.

One option would be to zero rate employer NICs for those aged under 25 (it’s currently zero for those aged under 21) – which would directly benefit the group most affected by falling hiring, would be cheaper than a general NICs reduction (but also a smaller stimulus) and would have the added benefit of reducing the Treasury’s costs for the Kickstart programme where government currently covers salary and NICs costs.  I think there’s also a strong case for specific hiring subsidies for taking on the long-term unemployed, which we first set out in early April (with much more detail on the rationale and evidence base in Annex B of this joint paper with Learning and Work Institute and others).  These often have relatively low take-up – with costs in the low hundreds of millions rather than billions – but if they’re well designed can make a positive difference to chances for those further from work, and would help to fill what is a growing blindspot in support for people who are aged over 25.

However just as important as measures to support private sector job growth will be what happens with departmental spending settlements for the coming year. In the last crisis, the rush to consolidate in the 2010 Spending Review (with budgets reduced by 8.3% in real terms) led to a slew of public sector job cuts and hiring freezes at the same time that the private sector was also holding back. Combined with a pay freeze, this contributed to a weaker recovery where unemployment stayed higher for longer.  We cannot make the same mistake again – there is a strong case for increasing employment in publicly funded services next year, to help pick up the slack while the private sector is subdued.

The news this morning, then, of a public sector pay freeze does not auger well for settlements next week.  But on the other hand, it may well be an attempt to ensure that any increases in budgets next week feeds through into employment growth rather than pay.  And in the short term, there are clearly a lot of opportunities for growth – in local government services, social care, health, early years, further education, the civil service, health and safety, tax inspection, the list goes on.  A temporary boost to budgets would also support areas that are more disadvantaged, have weaker private sector economies and are more reliant on public sector jobs.

The second main area of focus next week should then be on strengthening support for those out of work.  In my view the summer Plan for Jobs made a good start in doing this, particularly with big investments in our public employment services – which are now paying off as thousands of new advisers start work – and in support for young people (albeit only those who claim Universal Credit).  But it also left important gaps, most notably around support for the long-term unemployed and on skills and retraining.

We set out back in April some proposals for how a programme for the long-term unemployed could be designed – with specialist, one-to-one support; a stronger focus on local partnership and co-ordination; and access to work experience, pre-employment training, and wider support for those who need it on things like health and childcare.  There is no shortage of evidence on what works – much from the UK, and much copied and improved upon by other countries. 

Seven months on from that report, and the window for commissioning and mobilising this new provision is now incredibly short.  By necessity, it will surely now need to be contracted by DWP centrally and kept pretty simple in its design.  It will also need to be big – if it were able to start in the summer next year (which would require a pretty fair wind), then we think that between 180 and 200 thousand people who began claims for Universal Credit during lockdown will have reached long-term unemployment.  This would be nearly double the numbers referred to the Work Programme in its first few months, which itself is the largest single employment programme ever.  (Having said that though, we also think that volumes may well tail off fairly quickly after that, and to below the levels seen in the Work Programme.)

At a minimum, next week will set the funding envelope for the new programme – which will need to be around £400-500 million for next year, and likely around £300 million for subsequent years.  Headlines of a new £1 billion programme over three years, then, may not be far off.  But I hope too that we’ll see announcements on support for those further from work, including measures to maintain and increase investment in support for disabled people and those with health conditions (where there are signs that the employment gap is widening) and to support ‘levelling up’ in the most disadvantaged areas.  Central to this will be the size and scope of the new Shared Prosperity Fund, which will replace European Structural Funds.  The government has previously committed to maintaining current funding through the SPF, so the key figures to look out for will be £2.4 billion next year, with ideally one third of this earmarked for employment and skills. 

Finally, I hope too that next week will see more investment in supporting skills and retraining for the recovery.  Given the scale of the structural changes during this crisis, long-running declines in workplace training and a recent collapse in Apprenticeship starts, we have had disappointingly little by way of new measures to support careers advice, retraining and upskilling.   These issues will likely become even more acute with Brexit, as more skilled workers leave (as is happening already, especially in construction) and fewer arrive.  While it is welcome that government has put more meat on the bones of the £600 million-a-year National Skills Fund announced in 2019 (particularly through a new, partial, Level 3 entitlement), this funding needs to be brought forward, increased and better targeted at supporting training for work in jobs and industries that are growing.

Whatever happens, next week won’t be the final word on measures to support the recovery – and it may yet be a prelude to a far bigger, and more comprehensive, budget in the Spring.  But it may signal the end of the beginning in this crisis – with the government switching its focus from how we stem job losses and try to preserve the economy as it was in March, and instead focus more clearly on how we boost job growth, support those out of work and address the many inequalities and disparities in our labour market.

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.