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Why benefit loans still aren't the answer to Labour's welfare problems

A salary insurance scheme that would impose a 9 per cent tax on jobseekers after they return to work isn't worthy of the name.

A man stands outside the Jobcentre Plus on January 18, 2012 in Trowbridge, England. Photograph: Getty Images.

I think it’s important to clear up some of the arguments made by IPPR’s associate director Graeme Cook in his response to criticisms of the think-tank’s idea for benefit loans. If you haven’t been following, you can read my original criticism of the plan here.

Graeme says:

To clear up one thing straight away: this proposal is in addition to existing entitlements to Jobseeker's Allowance (we do not want to turn JSA into a loan). This means that, contrary to one claim, it wouldn’t mean people who hadn’t worked get more than those who had.

People who hadn’t worked wouldn’t get access to this scheme, because access is based on NI contributions, so clearly they’re not getting more within the confines of the proposal – that’s not up for dispute. The point is that when looking at welfare benefits as a whole there would be people who hadn’t contributed and who were on benefits who got more in non-repayable benefits than people who were on repayable benefit loans and who had contributed. This would create resentment.

If it’s not immediately obvious why this would be, consider a typical staple of negative press welfare coverage – a workless household with a large family receiving child benefit for each child, and on housing benefit.  There are plenty of examples of this kind of piece, and it is these intensively reported, atypical outliers that shape the negative public perception of welfare.

Yes, these articles are unfair and ridiculous for countless reasons. But now consider sums like £30,000 being banded around for supposedly 'feckless' families in the context of other people who find themselves unemployed, receive less than that because they’re not eligible for housing benefit (maybe they have a mortgage) or child benefit (maybe they don’t have any children) and are then told they have to repay most of their benefits - unlike the person they’ve been told is a 'scrounger'. If Labour are planning to successfully explain to the public why this isn’t as unfair as it looks, they’re in for a shock.

If the policy is aiming to destroy the notion that the welfare state "pays out too much to people who have not worked, but also that it offers so little protection to those who have" (Graeme’s words), treating contributors as second class will not help. This policy has the potential to create a whole new genre of articles about how the welfare state is on the side of the wrong people, even if its intention is to do the opposite.

Graeme:

Some have argued that repayment will create a disincentive for people to return to work. Clearly this risk should be monitored on implementation, and the point at which repayments began and the repayment rate could be amended to reduce this concern.

Apart from this being a bit of a cop-out, I think it seriously misses a wider point: even if there was no deterrent to work from a 9 per cent hike in your tax rate, it’s just not fair to tax people for losing their jobs. To paraphrase Tony Benn: you don’t tax people because they lose their job, you tax people because they can afford it. The fact that it’s probably economically the absolute worst situation you could levy a tax on someone is probably secondary.

If you thought the ‘bedroom tax’ or the ‘jobs tax’ were politically toxic, wait until you hear about the ‘unemployment tax’. It’ would be the Poll Tax and the 10p rate rolled into one, and for good reason.

Graeme:

Critics of this idea have questioned why the extra income protection provided by NSI cannot be attained simply by increasing the level of contributory JSA. The problem of course is where the money would come from (we estimated the upfront cost at somewhere between £1.8bn and £2.6bn, though it is hard to be precise).

The first thing to say to this is that if you’re not prepared to actually spend any money on a group, don’t expect them to actually thank you. There are no free political lunches here: If Labour or IPPR are merely trying to address the perception that some people don’t get enough out of the welfare state, rather than the fact, then they haven’t learned the lessons from the empty, headline-grabbing, initiative-driven spin years of New Labour.

But this needn’t be a problem. The £2bn or so a year needed to substantially increase contributory JSA is roughly what the coalition is planning on spending on the Universal Credit, so it’s hardly a fanciful sum of money for a flagship welfare policy.

IPPR also misses that someone is going to pay this money, it’s just a question of who. Under their proposals, it’s funded by a 9 per cent tax on people who have lost their jobs. A fairer approach would be for everyone to pay before they were made unemployed, as is conventional in any kind of insurance scheme I’ve come across. Why is the think-tank calling this an insurance scheme if the costs are borne by the person who suffers the accident? It’s not really worthy of the name. In its current form it’s more of a bank than an insurance policy.

But the killer here is that the policy doesn’t need to be – and indeed ought not to be – deficit neutral. Businesses are not investing because there is no demand in the economy; putting money in the hands of consumers is a good thing because it creates demand, which allows businesses to invest, which results in growth. There are better and worse places to spend a demand stimulus, and giving it to the unemployed as disposable income one of the best: unemployed people have low incomes, therefore they spend all their money and have a very low propensity to save. This means the money has what is called a "high velocity" in that it changes hands very quickly and has a multiplier effect throughout the economy.

Labour has to some extent been talking the language of stimulus, but politically is scared of committing to spending anything. It should be jumping at the chance to combine Keynesianism with a politically savvy commitment that would restore the political reputation of the welfare state.