Policy Innovation Blog

A Budget for jobs? Innovation in job creation and the Employment Allowance

Laura Gardiner - 22.03.2013

The single largest new measure in this week's Budget (aside from capital investments) was an allowance of up to £2,000 per year to offset the costs of employment for all businesses and charities. We know that entrepreneurial small businesses are set to drive growth in coming years, so is this the boost they need to take the risk and create new jobs?

After his crowd-pleasing and headline-grabbing announcements on cheaper mortgages, cheaper fuel and cheaper beer, George Osborne ended his 2013 Budget speech with his biggest non-capital policy change, and it was about jobs. While this may not have excited newspaper editors, it piqued the interest of those of us at Nesta who've been thinking about innovation in jobs since the publication of our Making it Work report.

The Chancellor's final flourish was the Employment Allowance: up to £2,000 per year for all businesses and charities with employees, to be offset against their National Insurance Contributions (NICs) bill from April 2014. The Red Book claims that over 90 per cent of the benefit will go to small businesses, 450,000 of which will be taken out of NICs altogether. Furthermore, the government is clear that the intent of this policy is very much around incentivising the creation of new jobs by small employers and start-ups, stating that:

"The Employment Allowance will reduce the cost of taking on new staff for small businesses; supporting those with an ambition to grow by hiring their first employee or expanding their workforce. Every business will be able to employ one worker on a salary of £22,400, or four employees working full time on the adult National Minimum Wage, without paying any employer NICs at all."

As laid out in our Making It Work report, we wholeheartedly agree with the Chancellor that helping businesses to start up and expand, such as by taking on their first member of staff, will be key to stimulating the jobs growth our economy needs. While such support is not part of the mainstream at present, our research has uncovered some innovative and exciting approaches. These include Community Catalysts, which provides business support to micro-enterprises in the care sector and links them to public sector demand for their services, and Business Employment Cooperatives in France, which provide administrative and payroll support to unemployed entrepreneurs.

In this light, the Employment Allowance announced in the Budget is good news. But I would suggest that if the intention really was to support small businesses to expand their workforce as part of a jobs-led recovery (rather than just to give companies tax breaks, as may be the case), then the Chancellor could have done better. The problem is that that the allowance applies to all companies, not just small ones, and not just those taking on new staff. This means that much of the large sums of money spent will be 'deadweight', supporting employment that businesses were doing already or would have done anyway. Incentives targeted at micro-enterprises, or self-employed people who currently don't employ anyone at all, would stand a much greater chance of driving behavioural change in recruitment and supporting genuinely additional jobs in the economy. In fact, with the sums set aside for the Employment Allowance you could throw in quite a degree of extra incentives and support when the jobs goes to an unemployed person, further targeting the funding to the parts of our labour market that really need it.

Having said all that, one advantage of the Chancellor's plan is that it should be easy to administer and simple for employers to understand and opt into. Previous National Insurance relief has had extremely low take up,[1] so this is not a trivial thing. The Red Book states that the government will now consult on "the design and operation of the new allowance, in order to ensure the system is as simple and effective as possible." I sincerely hope that this process focuses on maximising take-up by small businesses creating new jobs in the parts of the country that really need them. Meanwhile, at Nesta we will continue to explore how national government, local leaders and community organisations can innovate to support enterprise and entrepreneurship in a way that stimulates jobs growth.



[1] The Centre for Economic and Social Inclusion's analysis of Budget 2013 provides further detail.