Growth by numbers

A report by Ernst & Young, sponsor of the 'Competition in a New Society, Cities and Regions' supplem

Chris Lewis looks back at the first two rounds of the Regional Growth Fund to understand what more can be done to stimulate job creation.

The £1.4bn Regional Growth Fund (RGF), launched in June 2010, has the ambitious goal of rebalancing the UK economy by helping the private sector create sustainable employment in areas previously reliant on the public sector for employment.

A competitive tendering process was intended to ensure that the funds would be deployed to have maximum and immediate impact on job creation and growth. Round one was completed in spring 2011 and round two winners were announced early November 2011.

Media coverage has tended to focus on thereduced level of funding, the slowness of the bid process, the speed with which funds have been distributed, and a focus on the disapp-ointed bidders.

However, successful bids for funds from the second tranche should lead to 201,000 jobs being created or protected, with 37,000 being directly created and more than 164,000 "in the supply chain". The government claims that the grants are unlocking significant amounts of private sector investment - with at least £5 put in for every £1 of public money.

The RGF really does have potential to be a more efficient mechanism for supporting private-sector-led growth than the system it has supplanted. It gets money directly to those organisations that can make best use of it to create sustainable private-sector employment.

However, projects that have been successful in receiving funding are those that could be perceived to be safe bets and "ready to go" and are not necessarily the most ambitious projects with the most transformational potential, likely to have the greatest economic impact. Rather than prioritising against a clear strategic growth framework, the approach seems to be to let a "thousand flowers bloom".

There is also a surprising amount of successful bids from the public sector which could be a result of the fact that public sector organisations know their way around bidding for government money much better; they are used to applying for funding. Business often needs more help in navigating the machinery of government.

Business is also put off by uncertainty. It has not been confirmed whether further rounds of finance will be made available. If government is serious about improving consumer confidence and supporting private sector growth in an efficient way that business understands and supports, there needs to be a clear commitment to more RGF money over the next two years.

After two over-subscribed bidding rounds, itis proving to be a pragmatic way of getting support to commercial organisations, quickly and efficiently.
The market needs to be given unequivocal assurance that the coalition government's commitment to supporting private sector growth through the RGF will continue. We need to maintain and increase momentum. Businesses now understand better how the system works and how to apply.

The over-subscription seen in the first round has remained but at a lower rate in round two as businesses learn which of their investment opportunities have the best chance of support. The RGF process took time to create and get up and running, but has increased in efficiency as each bidding round has been completed. Having built it, it would be a waste to scrap it in favour of a new initiative.

The application process needs to be refreshed and the government needs to give the market much clearer direction on what it wants, where and why. The system also needs to speed up, with due diligence on projects accelerated so that confidence is built. The RGF has the potential to deliver a rapid impact on job and wealth creation. We need more active, considered government intervention, we need greater pace and urgency and we need a commitment to further funding rounds.

Chris Lewis
Director, Ernst & Young
+44 (0) 20 7951 8310

The 'Competition in a New Society: Cities and Regions' supplment was sponsored by Ernst & Young. Chris Lewis, Director of Ernst & Young, offered the above report.

This article first appeared in the 28 November 2011 issue of the New Statesman, The rise of the muslim brotherhood

Show Hide image

Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.