'Carrot and stick' to get jobless into work: More benefit for those on low incomes - Unemployed will have to work or train

KENNETH CLARKE is planning to use the Budget to lift more people out of the poverty trap by allowing them to earn more without losing state benefits.

Family credit is to be made more flexible in the November Budget to enable more people to continue claiming it as a top-up to low incomes. The Chancellor is also preparing to lift the point at which National Insurance contributions are paid, to enable the low-paid to earn more without being taxed.

Senior ministers close to the Chancellor said the moves were part of a long- term strategy for achieving full employment, to which Mr Clarke yesterday committed the Government. A similar guarantee was given yesterday by David Hunt, Secretary of State for Employment, in the first address by a Tory Cabinet minister to a TUC conference.

Privately, ministers forcecast that it could take ten years to achieve the goal. 'The difference between the Government and Labour is that Labour would throw money at job creation. We won't do that,' said one minister. Another senior Tory said: 'Instead of hand-outs, we are giving people a hand up.'

The Budget measures will be coupled with a drive towards a form of 'workfare', requiring the unemployed to work or obtain retraining if they continue to claim unemployment benefit. But ministers have ruled out costly US- style work creation programmes.

Ministers speak of a 'carrot and stick' appraoch. While they admit the change in rhetoric towards full employment is partly a response to the appeal of Labour under Tony Blair, it is also driven by Mr Clarke's determination to tackle the poverty trap, which discourages those on benefit from seeking work because they face cuts in benefits. He believes that will curb the inexorable growth in the pounds 80bn social security budget.

Mr Clarke signalled his intentions in the November Budget last year, when he announced that from October this year up to a maximum of pounds 40 a week in childcare costs could be disregarded before calculating family credit. Treasury officials estimated the cost at pounds 60m a year, but now believe it could lead to a net saving on social security.

The Chancellor has decided as a priority to tackle the 'why work?' syndrome, and to ease the system so that low-paid people are better off in work than on a range of welfare benefits, such as family credit, income support and housing benefit. The threat of losing family credit has dissuaded many women from taking work to earn extra income for the family.

Although Mr Hunt's speech to the 400-strong audience at a Congress House conference on full employment was largely a restatement of Tory policy, his text was larded with the language of dialogue and partnership, and contained a more overt commitment to high employment levels than would be expected from more Thatcherite colleagues.

Mr Hunt said the creation of full employment would have to go hand in hand with the need for greater competitiveness. The Government had no 'magic potion'. He set out five steps for tackling unemployment: keeping inflation low; encouraging enterprise and self-employment; investing in training and education; helping the jobless back to work; and striking a balance between the rights of the unemployed and those in work.

Mr Hunt also told his audience that their historic relationship with Labour was now 'discredited'.

Hunt speech, page 2

Leading article, page 15

Clarke interest rates pledge, page 27