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Give the unemployed some means to live within, chancellor

If George Osborne is going to offer targeted economic help in the budget, he must make unemployment an absolute priority

Despite Moody’s unwelcome warning that the UK faces a one in three risk of losing its cherished AAA rating, last week’s economic news – inflation down to 3.6%, unemployment rising less rapidly than at any time since last summer – came as a considerable relief to the UK’s policymakers, who had begun to fear the eurozone would drag us into a deep recession.

Recent business surveys have painted a marginally less dire picture than those in the autumn that suggested activity might be “falling off a cliff” in a way scarily reminiscent of the post-Lehman shakeout. But even if the drama unfolding in Athens has a happy ending – which it won’t – the UK is in the early stages of a prolonged adjustment to living within its means.

Analysis by consultancy McKinsey suggested that while US households have made some progress towards tackling the legacy of debt left by the boom years – partly through painful repossessions, which result in their mortgages being written down – in the UK we have barely begun.

That’s not surprising: in an era of public sector austerity, it’s all but impossible for many families to work on repairing their own finances.

But it does mean that even once confidence returns, and more families recover what David Cameron has called Britain’s “can-do optimism” – and, more importantly, real take-home pay finally starts to rise again as inflation eases – the clouds won’t part to reveal a sunny economic future.

Without the cut-price credit and spiralling house prices that helped to sustain consumption in the early noughties, many households will scale down their aspirations, and concentrate on paying off their mortgages instead of hitting the shops.

Some analysts – including the Ernst & Young Item Club – have highlighted the healthy state of corporate balance sheets as promising a rapid recovery if “animal spirits” revive; but, as the British Retail Consortium warned on Friday, many companies are facing the choice of whether to spend those cash balances at home, where demand is on the floor, or expand abroad instead.

Meanwhile, the human costs of the stalled recovery are immense. The detail of the labour market figures included the profoundly depressing news that 860,000 people have now been unemployed for more than a year. More than 300,000 claimed jobseeker’s allowance – meant to be a temporary benefit – throughout 2011.

More women are unemployed than at any time for a quarter of a century (and remember, the total includes only those looking for work, not those who have given up altogether), and more than a million young people are stuck on the shelf.

The government has been careful not to release any data about the performance of its Work Programme, which is meant to give private sector firms the incentive to tackle tricky cases – drug-users, single mums who haven’t worked for years, long-term sickness-benefit claimants who have now been declared fit for work.

But the National Audit Office warned recently that the success rate of the scheme was likely to be far lower than the government assumes; and anecdotal evidence is of clients being “parked” on cut-price training courses, or coaxed into unpaid work experience, while the outsourcing firms pocket the payments for having them on their books.

As George Osborne draws up his budget over the next month, he will need to tread extremely carefully to avoid alarming the gilts market, given his commitment to austerity.

But he must also be aware that a prolonged period of slow or non-existent growth will undermine tax revenues and make his programme self-defeating. No amount of tough talk will stop investors eventually losing hope if growth fails to return – and that could unleash a damaging spiral of rising gilt yields, fresh austerity measures and rising interest rates.

Osborne has already had to extend his planned spending cuts beyond the next election, to avoid missing his target for balancing the budget after the economy underperformed in 2011.

Given the political mood and the markets’ views, he can’t chuck austerity out; but he could take some targeted measures, using cash raised elsewhere. If he does, the unemployed should be his first target.

The Lib Dems’ cherished aim of progressively raising the personal tax threshold towards £10,000 is laudable, but, like the Work Programme, it was dreamt up in better times. Giving a tiny fillip to a very large number of people – many of them earning well above the average wage – is a luxury the government cannot afford. Many of the poorest in the population already pay no tax because they earn too little or nothing at all.

Whether it’s through cuts in national insurance for firms hiring the long-term unemployed, or a new targeted scheme along the lines of Nick Clegg’s Youth Contract (which echoes Labour’s Future Jobs Fund, shut down by the coalition), the 860,000 people who couldn’t find a day’s work in 2011 urgently need help if they are not to become dependent on costly handouts for many years to come.

Judging by the noises emerging from Downing Street, the Tories are keen to use Moody’s warning as a reason to brush off Clegg’s demands to raise the personal allowance. They are right to do so, but that would not preclude raising new funds to pay for more targeted emergency measures from those who can best afford it. Levying a supertax on this year’s bonus round, as Labour has suggested, would be a good place to start. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds