Labour jobs deal hit by fear of slump

THE Government's election pledge to get youngsters off the dole faces a funding crisis as employers threaten to desert the New Deal in the wake of last week's interest rate hike.

Senior Government sources say the Treasury may have to inject tens of millions of pounds more into the project if its manifesto commitment to jobs for school leavers is to be honoured.

The threatened funding crisis, likely to become apparent by the autumn, has been caused by the slowdown in the economy and the difficulties faced by exporters.

Ministers fear that the number of subsidised jobs on the scheme - each of which cost around pounds 4000 a year - may have to be increased because of lack of confidence among employers. Yesterday, some manufacturers who had planned to take on youngsters said they could no longer do so because they had been hit by a combination of higher interest rates and the strong pound's impact on exports. That is certain to exacerbate tensions between the Chancellor, Gordon Brown, and David Blunkett, the Secretary of State for Education and Employment, whose worries about the level of the pound surfaced earlier this year.

Last week in an interview Mr Blunkett hinted that he expected no rise in interest rates - just hours before the Bank of England raised them. Many companies are already turning their backs on the New Deal's offer of subsidised wages for young recruits, because they fear that they will only have to sack them in the months ahead.

Ruth Lea, head of policy for the Institute of Directors, said: "We could see the New Deal crashing into the combined impact of a minimum wage and economic downturn."

Ian Campbell, director general of the Institute of Export, said anecdotal evidence suggests that the timing for the New Deal is in doubt. "There are worrying signs about jobs, and companies going down the New Deal road will find a lot of difficulty if they have to let go of people just after they have been taken on."

Bill Good, managing director of Sterling Tubes in the Black Country, which recently laid off 17 per cent of its employees, said he had been interested in the New Deal, but had been unable to take it up. "It's beginning to look less like welfare-to-work, and more like work-to-welfare.We have had to cut back and mothball equipment."

The Treasury rejects the fears, arguing that the value of the pound is now significantly lower than at its peak. It believes that industry has provoked the latest rise in rates by offering high pay settlements.

The Bank of England justified the raising of interest rates by a quarter of one per cent by arguing that the move was essential to counter signs of creeping inflation, especially on wages, where pay packets have been growing faster than inflation.

Mr Brown's calculations allow for a slowing of the rate of decline of unemployment. Some ministers believe this will be inadequate unless the position improves over the summer. Injecting much more cash would put acute pressure on the New Deal, which relies on a fixed budget of pounds 3.5bn, raised through the windfall tax on public utilities.

Last night Shadow Chancellor Francis Maude said the dilemma "illustrates one of the many contradictions at the heart of Labour policy". His colleague David Willetts, education and employment spokesman, said: "There's no point spending millions on this programme with one hand if with the other you are making things more difficult for British business."

Total unemployment is running at a record low of 1.34 million, with 118,000 of those the long-term young unemployed - chief target of Mr Brown's plans.