How a salary insurance scheme would work

The unemployed would receive a higher level of support and pay back when they return to work.

On yesterday's Newsnight, James Purnell made two big argument about how we could make people trust and respect the welfare state again. First, that it should provide fewer, bigger things that would really make a difference to people's lives, rather than many smaller ones that are marginal in the good times and insufficient in the bad. And second, that the principle of contribution should be revived, so that people get something out in return for what they put in.

This would reverse the approach of successive government over recent decades, which has been to maintain a permanent rear-guard action against the threat of a taxpayer rebellion by making the welfare state tougher for those on benefits. Conditionality has an important role to play, but this is an essentially defensive tactic, rather than a positive strategy. For those of us who see a strong welfare state as essential to advancing social justice and full employment, this won't do. The solution is to not only make welfare more demanding, but also more protective too.

This insight opens up the potential to develop a popular, majoritarian agenda for welfare. As a first step along that road, IPPR is today publishing a report proposing National Salary Insurance (NSI). This would offer anyone who had made enough national insurance contributions but became unemployed up to 70 per cent of their previous earnings in non-means tested support for up to six months, capped at a maximum of £200 a week.

NSI would incorporate the existing £67.50 a week of contributory JSA, trebling the amount of support available to working people when they lose their job - while not affecting their entitlement to other benefits or tax credits. This would help protect people from the dramatic drop in income they face on losing their job, which can often trigger a spiral of further (costly) problems, like losing their home, relationship breakdown or racking up unaffordable debt. Based on recent JSA flows, we estimate that between 700,000 and one million people each year could be entitled to NSI.

To make the scheme affordable, the extra amount in NSI - up to £132.50 a week - would be repaid once people were back in work and could afford to do so, charged at a zero real rate of interest. There would be a cap on the amount that people could borrow at any one time, equivalent to the maximum support for the full six months (£3,445). Eighty per cent of people claiming JSA get back to work inside six months and as people paid back, they would become entitled to the help again.

In short, NSI would offer much greater security to people when it is really needed, without imposing significant new net costs on the state. Based on the design of the student loans system, the net liability to the state of NSI would be between £180m and £520m a year - though because people would be able to borrow less and have to pay back sooner, there are good reasons for thinking it would be even cheaper.

For much of the 20th century unemployment benefit was paid at reasonable levels of generosity to people who had lost their job after having paid into the system. Over the last three decades, however, the contributory principle has been eroded (with means testing becomingly increasingly dominant), while the real value of the jobseeker's allowance (JSA) has declined significantly relative to average earnings. Today, the average 'replacement rate' for British workers - the proportion of previous earnings they can get if they lose their job - is 54 per cent, compared to 70 per cent or more for many of our European neighbours, including some with higher employment rates than ours (like Denmark and the Netherlands).

So people not only worry to others are taking advantage of the system unfairly, they also feel - often rightly - that the system won't really be there for them if they need it. In response to this problem, NSI would significantly provide real income security in a more risky world, while reinforcing the principle that people are rewarded for contributing to the system.

NSI contributes to the big task of rethinking the centre-left's approach to welfare in a post-crash era. Alongside ensuring that people on benefits fulfil their obligations to look for work in return for the support they receive, this reform can help to make the welfare state popular again - by showing that it demands more and protects better.

Graeme Cooke is Visiting Fellow at IPPR

Graeme Cooke is Associate Director at IPPR

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.