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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The clever ideological trick that could save the Labour party

The Co-operative party could suddenly get a lot more popular. 

It’s do or die for the party’s moderate MPs, who have lost the fight for the soul of Labour and must quickly move on. 

The 172 Labour MPs who backed a no-confidence vote in Jeremy Corbyn earlier this year may not like their newly elected party leader much, but they loathe John McDonnell. 

So it is little surprise that one of them, John Woodcock, reportedly looked “sick to the stomach” when the Shadow Chancellor tenderly invited him for a cuppa in his office following the leadership election result at conference. Reading the tea leaves tells me those talks aren’t going to go well.  

Yet moderate MPs would do well to revisit McDonnell’s off-the-cuff comments from a few years back: “I’m not in the Labour party because I’m a believer of the Labour party as some supreme body or something God-given or anything like that,” he told a small audience in 2012. “It’s a tactic. It’s as simple as that. If it’s no longer a useful vehicle, move on.” 

Two feather-spitting former frontbenchers called for McDonnell’s resignation when these comments emerged in March, saying they revealed his Trotskyist tendencies. "The context (a hard-left gathering) and the company (which included Gerry Downing, expelled from Labour for his comments on 9/11) didn’t make for great publicity, no," a Leader’s Office staffer privately confesses. 

But McDonnell is right: There is nothing necessary, natural or divinely ordained about Labour’s existence lest it can get things done. Which is why the parliamentary Labour party cannot botch its next attempt at power. 

In the wake of Corbyn’s re-election, Labour MPs face a fork-in-the-road: fight this civil war until its bitter end - play the long game, wait until Labour loses the next general election and challenge Corbyn again - or start afresh. 

It is a bleak, binary choice, akin to a doctor delivering test results and declaring the illness is terminal as feared: the patient can go down fighting and die a slow death, notwithstanding a medical miracle, or instead take part in a pioneering new drug trial. This carries the risk of dying immediately but promises the possibility of life as well. Both options are fraught with danger.

The problem with the first option is that moderates have all but lost the party already. A poll reveals Corbyn won 85 per cent - 15 per cent among members who joined after he became party leader and lost 37 per cent - 63 per cent among those who were members of the party before the last general election. The result: victory by 119,000 votes. 

Corbyn has already announced he wants to give these foot soldiers far greater firepower and told Andrew Marr he had asked the NEC to draft plans for increasing the membership and including it in “all aspects of party decision making”. Labour is transitioning apace into a social movement: free of formal hierarchy and ambivalent about parliamentary power. 

So why wait until 2020? There is every chance that MPs won’t any longer have the power to challenge to Corbyn within four years’ time. If Momentum has its way with reselection and shadow cabinet elections, leading rebels may not be around to begin with. 

Even if MPs mount another leadership challenge, few believe organisations like Saving Labour or Labour First could put together a sizeable enough electorate to outgun Corbyn at the ballot box. He would be voted back in by a landslide. 

The alternative is for MPs to create a new centre-left force. The main plan under consideration is to join the Cooperative party, Labour’s sister party, and sit as a bloc of “double hatted” MPs, with their own policy agenda on Brexit and the economy. This new bloc would apply to the Speaker to become the official opposition. 

Plenty of MPs and members recoil at the idea of a semi-split like this because of the mixed message it would send to voters on the doorstep. "So you don’t have faith in Corbyn, but you’re a Co-op MP campaigning on behalf of his Labour?" Many believe a full-split would be worse. They fear being pitted against Corbyn-backed Labour candidates in local constituencies and splitting the left vote, opening the door to Ukip or the Conservatives in marginal seats. 

But if moderate MPs mean what they say when they warn of total electoral wipeout in 2020, risking a new centre-left grouping is intuitively worth it.  What do they have to lose? And how many more times can Labour’s moderates cry wolf - Labour "risks extinction", Sadiq Khan said yesterday - until voters call their bluff and tell them to quit complaining and fall in line behind their leader? 

While Corbyn’s polling remains disastrous, a Co-op/Labour party would boast a mandate of 9.3m people, a policy agenda in line with Britain’s political centre of gravity and a chance of becoming the official opposition: a risk worth taking in the face of electoral oblivion. 

A handful of battle-bruised MPs are talking about coming together. "Time to unite," a deflated Hilary Benn tweeted this weekend. There is a precedent for this: first past the post means the party has always been composed of uneasy coalitions of different groups - take the trade unionists, liberal cosmopolites and ethnic minorities of the New Labour years - and it is arguably no different now.  

Yet this is not about a coalition of diverse interests. It is about two parties within a party, each of which believes Labour is their rightful inheritance. Of the two, moderates are least likely to gain anything by engaging in an all out war. It is time they took a leaf out of McDonnell’s book and accepted it is time, regrettably, "to move on". 

Gabriel Pogrund is a journalist at The Sunday Times and a Google News Fellow 2016.