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.

Felipe Araujo
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Hull revisited: What happens when a Brexit stronghold becomes City of Culture?

We report from Hull, to find out if you can replace the kind of nostalgia that led to a Leave vote with cultural investment.

At 75 metres long, the offshore wind turbine blade erected across Queen Victoria Square, in the heart of Hull, is a sculpture intended to mark a new chapter in the city’s history. For the next 12 months, Hull, a city of more than a quarter of a million people in the northeast of England, will be the UK’s City of Culture.

The 28-tonne blade hails from the local Siemens plant. The German technology company employs around 1,000 people in the area, making it Hull’s biggest single employer.

Seen up close in this context – laid dormant in the middle of a town square instead of spinning up in the air generating energy – the structure is meant to remind passersby of a giant sea creature. It is also, I’m told, an allusion to Hull’s rich maritime history.


All photos: Felipe Araujo

Nostalgia is a big thing in this part of the country. At one point, Hull was the UK’s third largest port but technology and privatisation drastically changed that. The battle over cod fishing with Iceland in the waters of the North Sea 40 years ago has also dealt a major blow to a region with a long and proud trawling tradition.

People here still talk about a bygone era when the fishing industry provided jobs for everyone and there was enough money to go around.

Fast forward to 2017, and the country’s new capital of culture is the same city that voted 67 per cent in favour of leaving the EU last June. Its new-found prestige, it seems, is not enough to erase years of neglect by a political class “too busy for commoners like us”, as one resident puts it.

“More than a message to Brussels, it [the Brexit vote] was a message to Westminster,” Paul Leeson-Taylor, a filmmaker born and bred in Hull, tells me. “For the first time in a long time people in Hull felt like they had the chance to change something, and they took it.”

But while speaking to people on the high street and hanging out with locals at the Community Boxing Club in Orchard Park, one of the city’s most deprived areas, there is one word that consistently popped up in conversation – more than any specific policy from Westminster or the much-hated rules “dictated” by Brussels. Foreigners.

According to official figures, Hull’s population is 89.1 per cent white British. Still, immigration is big on people’s minds here.

During my two-day stay in the city, I find myself being the only black person in most places I visit – I’m certainly the only black guy at the boxing club. So when someone begins a sentence with “I’m not racist but…”, I know a tirade on immigrants is about to ensue.

“There are just too many of them,” Nick Beach, an estate agent whose Polish clientele is a big part of his business, tells me as he is about to teach a boxing class to local children. Beach was born in Shepherd’s Bush, in West London, but has been living in Hull for the last 20 years.

“When I go down there these days and go into Westfield shopping centre, it is very rare you get an English person serving you now,” he says. “I just find it disappointing that you go into your capital city and you are a minority there.”

These are the much-discussed “left behind”, a white working-class community that has gained particular prominence in a time of Brexit and Donald Trump. Under economic pressure and facing social change, they want to have their say in running a country they claim to no longer recognise.

For Professor Simon Lee, a senior politics lecturer at the University of Hull, immigration is only a superficial layer when it comes to explaining the resentment I witness here. For him, the loss of the empire 70 years ago is still something that as a country Britain hasn’t come to terms with.

“The reason for us to be together as a United Kingdom has gone, so what is the project?”

As destiny would have it, a foreign company will now play a major role on Hull’s economic future, at least in the short term. In the wake of the Brexit vote, there were widespread fears Siemens would pull out of the region and take its factory elsewhere. With the massive blade looming large in the background, Jason Speedy, director of the blade factory in Hull, assures me that isn’t the case.

“The Brexit decision has made no difference. We have made our investment decision, so Siemens, together with the Association of British Ports, has put in £310m. It’s all full steam ahead.”

As Hull becomes the country’s cultural hub for the next few months, the hope is that its residents stop looking back and start looking forward.

For Professor Lee, though, until there is a complete change in the power structures that run the country, the north-south divide will remain – with or without the EU. “The way you kill nostalgia is to have something new,” he said. “The reason why people here are nostalgic is because there is nothing to replace it with.”

Felipe Araujo is a freelance journalist based in London. He writes about race, culture and sports. He covered the Rio Olympics and Paralympics on the ground for the New Statesman. He tweets @felipethejourno.