January 22, 2010 2:00 am
Gordon Brown is eyeing billions of pounds saved from lower-than-expected unemployment to announce one final burst of public spending ahead of the general election.
The prime minister and Alistair Darling, chancellor, have struck a deal where money released by falling jobless rates can be used to fund more spending, in spite of their insistence that cutting the £178bn deficit is the top priority. Any additional revenues from higher-than-expected growth in the economy are earmarked to tackle the deficit.
Although Mr Darling expects jobless rates to rise "in the first part of this year", ministers are relieved that the claimant count appeared this week to be stabilising at a much lower rate than initially forecast.
Downing Street estimates the government could be paying out £4bn a year less in unemployment benefits by 2014 than it had predicted. Some of Mr Brown's aides admit they are surprised by the labour market's robust performance.
Mr Brown and Mr Darling are treating this "windfall" as a spending opportunity, possibly to fund schemes to cut unemployment further.
Politically, the transfer of such savings is attractive: Mr Brown boasts that his economic policies through the recession have saved jobs, and reallocating money from lower benefit payments would highlight this perceived success.
International investors, already nervous about Britain's deficit, may be less impressed to see "spare" money being ploughed back into spending instead of paying down borrowing.
The Treasury estimates that it saves £500m in benefit payments every time the claimant count for unemployment falls by 100,000.
The number of claimants has so far peaked at about 1.6m, compared with the 1.94m peak predicted by the National Audit Office.
The 1.94m figure is used by Treasury forecasters and is assumed to remain constant from the end of 2011 to 2014, by which point Mr Darling hopes the real rate will be as low as 1.25m.
Annual net savings are harder to calculate because the Treasury pays out more in tax credits to people in work while receiving higher income tax receipts.
Mr Darling's aides argue that unemployment spending is managed annually within a pre-set spending envelope; money from extra growth is in addition to published forecasts.
At the sharp end, Page 12
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