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.

Getty
Show Hide image

By refusing to stand down, Jeremy Corbyn has betrayed the British working classes

The most successful Labour politicians of the last decades brought to politics not only a burning desire to improve the lot of the working classes but also an understanding of how free market economies work.

Jeremy Corbyn has defended his refusal to resign the leadership of the Labour Party on the grounds that to do so would be betraying all his supporters in the country at large. But by staying on as leader of the party and hence dooming it to heavy defeat in the next general election he would be betraying the interests of the working classes this country. More years of Tory rule means more years of austerity, further cuts in public services, and perpetuation of the gross inequality of incomes. The former Chief Secretary to the Treasury, Seema Malhotra, made the same point when she told Newsnight that “We have an unelectable leader, and if we lose elections then the price of our failure is paid by the working people of this country and their families who do not have a government to stand up for them.”

Of course, in different ways, many leading figures in the Labour movement, particularly in the trade unions, have betrayed the interests of the working classes for several decades. For example, in contrast with their union counterparts in the Scandinavian countries who pressurised governments to help move workers out of declining industries into expanding sectors of the economy, many British trade union leaders adopted the opposite policy. More generally, the trade unions have played a big part in the election of Labour party leaders, like Corbyn, who were unlikely to win a parliamentary election, thereby perpetuating the rule of Tory governments dedicated to promoting the interests of the richer sections of society.

And worse still, even in opposition Corbyn failed to protect the interests of the working classes. He did this by his abysmal failure to understand the significance of Tory economic policies. For example, when the Chancellor of the Exchequer had finished presenting the last budget, in which taxes were reduced for the rich at the expense of public services that benefit everybody, especially the poor, the best John McConnell could do – presumably in agreement with Corbyn – was to stand up and mock the Chancellor for having failed to fulfill his party’s old promise to balance the budget by this year! Obviously neither he nor Corbyn understood that had the government done so the effects on working class standards of living would have been even worse. Neither of them seems to have learnt that the object of fiscal policy is to balance the economy, not the budget.

Instead, they have gone along with Tory myth about the importance of not leaving future generations with the burden of debt. They have never asked “To whom would future generations owe this debt?” To their dead ancestors? To Martians? When Cameron and his accomplices banged on about how important it was to cut public expenditures because the average household in Britain owed about £3,000, they never pointed out that this meant that the average household in Britain was a creditor to the tune of about the same amount (after allowing for net overseas lending). Instead they went along with all this balanced budget nonsense. They did not understand that balancing the budget was just the excuse needed to justify the prime objective of the Tory Party, namely to reduce public expenditures in order to be able to reduce taxes on the rich. For Corbyn and his allies to go along with an overriding objective of balancing the budget is breathtaking economic illiteracy. And the working classes have paid the price.

One left-wing member of the panel on Question Time last week complained that the interests of the working classes were ignored by “the elite”. But it is members of the elite who have been most successful in promoting the interests of the working classes. The most successful pro-working class governments since the war have all been led mainly by politicians who would be castigated for being part of the elite, such as Clement Atlee, Harold Wilson, Tony Crosland, Barbara Castle, Richard Crossman, Roy Jenkins, Denis Healey, Tony Blair, and many others too numerous to list. They brought to politics not only a burning desire to improve the lot of the working classes (from which some of them, like me, had emerged) and reduce inequality in society but also an understanding of how free market economies work and how to deal with its deficiencies. This happens to be more effective than ignorant rhetoric that can only stroke the egos and satisfy the vanity of demagogues

People of stature like those I have singled out above seem to be much more rare in politics these days. But there is surely no need to go to other extreme and persist with leaders like Jeremy Corbyn, a certain election loser, however pure his motives and principled his ambitions.

Wilfred Beckerman is an Emeritus Fellow of Balliol College, Oxford, and was, for several years in the 1970s, the economics correspondent for the New Statesman