The problems with Labour's benefit loan plan

A salary insurance scheme would disincentive work, penalise low earners and likely prove unpopular.

The Observer has reported that Labour is toying with a proposal from IPPR to give unemployed people loans to supplement their benefits. Under the plan, people who qualify for contributory Jobseekers’ Allowance (JSA) would get an extra 70 per cent of their previous pay, capped at £200 a week, which they would pay back like a tuition fee loan when they got a job. Here are four reasons why the plan isn’t a good idea.

It disincentives work

The proposal effectively increases the tax rate unemployed people face when they eventually return to work. Automatic deductions from salary to pay back a loan are, from the worker’s perspective, the same as an income tax. IPPR do not specify at what rate the loan would be paid back, but tuition fee loans, on which the proposal is modelled, deduct 9 per cent from graduates’ salaries past a £16,365 threshold. The unemployed could face what was effectively a substantial hike in the basic rate of income tax were they to find a job. This would have the opposite effect of 'making work pay' and potentially disincentive people from taking jobs. If redundant miners in the 80s had taken out these loans, structural unemployment in former mining areas could be even worse.

Loans are regressive

The longer you take to pay back a loan, the more you have to pay, and the more quickly you pay it back, the less you pay. This means people who go into high-paying jobs will end up paying a smaller amount back than people on lower incomes, because they accrue less interest. The opposite is true if the money is raised through progressive taxation. The IPPR proposal is to tie the rate of interest to inflation but with real earnings increasing at well below inflation, as a percentage of people’s incomes, the loan will continue to increase.

It will make over-leveraging worse

Households in the UK are seriously overleveraged on debt as a result of easy credit before the financial crisis. They are now in the process of paying down this debt. One effect of this de-leveraging is that the UK is facing a demand crisis because instead of people spending money on goods and services, they spend it paying down their loans. This has a knock-on effect on businesses, who do not invest because there is no one to buy their products, which all contributes to flat-lining growth. Encouraging unemployed people to take on more debt and forcing them to deleverage it when they get their job back will further exacerbate this problem and prolong the economic crisis.

It will be very unpopular

Once child benefit and housing benefit are taken into account, there would be thousands of cases where households who had not contributed were getting as much in non-repayable benefits as someone who had worked all their lives was getting in repayable benefit loans. The anti-welfare press would ruthlessly seize on this disparity as evidence that the system does not work for people who had paid in while giving people who never worked a free ride. The proposal has not been thought through and does not do what it sets out to do.

If Labour is going to pursue the contributory principle, it should do it properly and increase contributory JSA to 70 per cent of prior income, capped at £200 a week. IPPR estimates between 700,000 and 1,000,000 people are eligible for contributory JSA – roughly half of all JSA claimants. The total cost of all JSA is £4.9bn, so as a flagship welfare policy a substantial increase in the contributory element would have a cost in a similar region to the coalition’s £1.7bn a year Universal Credit. Labour will not convince people they are getting more out of the system unless they actually give them more.

Under the plan, people who qualify for contributory Jobseekers’ Allowance (JSA) would get an extra 70 per cent of their previous pay, capped at £200 a week. Photograph: Getty Images.

Jon Stone is a political journalist. He tweets as @joncstone.

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PMQs review: Theresa May shows again that Brexit means hard Brexit

The Prime Minister's promise of "an end to free movement" is incompatible with single market membership. 

Theresa May, it is commonly said, has told us nothing about Brexit. At today's PMQs, Jeremy Corbyn ran with this line, demanding that May offer "some clarity". In response, as she has before, May stated what has become her defining aim: "an end to free movement". This vow makes a "hard Brexit" (or "chaotic Brexit" as Corbyn called it) all but inevitable. The EU regards the "four freedoms" (goods, capital, services and people) as indivisible and will not grant the UK an exemption. The risk of empowering eurosceptics elsewhere is too great. Only at the cost of leaving the single market will the UK regain control of immigration.

May sought to open up a dividing line by declaring that "the Labour Party wants to continue with free movement" (it has refused to rule out its continuation). "I want to deliver on the will of the British people, he is trying to frustrate the British people," she said. The problem is determining what the people's will is. Though polls show voters want control of free movement, they also show they want to maintain single market membership. It is not only Boris Johnson who is pro-having cake and pro-eating it. 

Corbyn later revealed that he had been "consulting the great philosophers" as to the meaning of Brexit (a possible explanation for the non-mention of Heathrow, Zac Goldsmith's resignation and May's Goldman Sachs speech). "All I can come up with is Baldrick, who says our cunning plan is to have no plan," he quipped. Without missing a beat, May replied: "I'm interested that [he] chose Baldrick, of course the actor playing Baldrick was a member of the Labour Party, as I recall." (Tony Robinson, a Corbyn critic ("crap leader"), later tweeted that he still is one). "We're going to deliver the best possible deal in goods and services and we're going to deliver an end to free movement," May continued. The problem for her is that the latter aim means that the "best possible deal" may be a long way from the best. 

George Eaton is political editor of the New Statesman.