Why Labour is right to consider a salary insurance scheme

A welfare system that provides greater support to people when they need it most offers an alternative to the divisive pose bring struck by the coalition.

On Sunday, the Observer reported that Labour are considering an IPPR proposal to establish a system of National Salary Insurance (NSI). This would offer working people who have contributed into the benefits system, but have lost their job, much greater income protection at the point they need it most. The twist on the proposal – which has provoked most reaction – is that to control the costs of the system, the extra money provided would be recouped once people are back in employment.

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.

In our original proposal, we suggested that the additional amount available might be £132.50 a week for six months, providing people with £200 a week in total, including their £67.50 in JSA (which has actually now risen to £71.70 a week). These numbers could be altered, but the core rationale is three threefold.

First, for anyone earning much above minimum wage, the benefits system offers very weak protection of their income for short-term, temporary periods of unemployment. For instance, social security provides just 38 per cent of the previous average wage for a single person who also qualifies for help with rent. This compares to an EU average of 58 per cent. For those not eligible for housing support, such as the two-thirds of homeowners, the replacement rate for average earners is just 13 per cent. And it’s not that the private insurance market is filling the gap: a survey published last week by Scottish Widows found that only 5 per cent of people own an income protection policy, which would pay out if they lose their job.

The second rationale for NSI directly flows from the first: the popular legitimacy crisis facing the welfare system is not only about the sense that it pays out too much to people who have not worked, but also that it offers so little protection to those who have. A decade and a half of welfare reform has focused on increasing the conditions attached to the receipt of benefits, but has neglected the erosion of any meaningful reward for the contributions of those who have worked (outside of the state pension). Labour is right to alight on this issue as part of developing a strategic alternative to the populist and divisive pose bring struck by the current government on welfare.

However, the challenge in seeking to improve income protection and rebuild the contributory principle is that it costs money. This is where the third rationale comes in. Deploying the income-contingent loan principle in NSI means that greater security at the point of crisis can be improved without imposing considerable extra net costs. In other words, the social security system would add a new function: smoothing household income to help people to cope with the loss of a wage, keeping them out of the hands of payday lenders and loan sharks, while reclaiming the money once they are back on their feet.

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. But over half of people who claim JSA leave the benefit within three months; 80 per cent after a further three months. Conditionality would continue to apply, so people would be required to take up job offers (or lose access to NSI) and if they hadn’t found employment in six months they would revert to the much lower level of JSA (a strong incentive to find work within that period). Fundamentally, this policy is explicitly aimed at people who have a good work record and so are motivated and job ready.

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). One option is redistributing money from within the existing social security budget, perhaps by lower disregards or sharper tapers on Universal Credit (or, of course, ending the protection of pensioner benefits). Alternatively, the costs could be met by extra departmental cuts, more borrowing or higher taxes. But it is highly unlikely that any party will cut public services or raise taxes to pay for a higher rate of JSA (especially with £21bn of welfare cuts that some want to see reversed potentially ahead of this in the queue).

Given all this, those of us interested in building up economic protection for working people should probably bank on having to be creative.

A National Salary Insurance system would provide people with £200 a week for six months after they become unemployed. Photograph: Getty Images.

Graeme Cooke is Associate Director at IPPR

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.