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Labour's jobs guarantee plan creates smart dividing lines with the Tories

The party pledges to fund the policy for the whole of the next parliament by introducing a bank bonus tax and restricting pension tax relief for those earning over £150,000.

Policy will be funded by bank bonus tax.
Ed Miliband and Ed Balls at the Labour conference in Brighton last year. Photograph: Getty Images.

Labour recently found itself in a difficult position when it was forced to concede that it was only committed to funding its jobs guarantee plan for the first year of the next parliament. The admission created the impression of a party that still lacked a full plan for government. 

But ahead of the Budget next week, Labour has radically updated the policy. It has pledged to guarantee a "paid starter job" for every young person claiming JSA for more than a year, and every adult claiming it for more than two, for the entirety of the next parliament. The policy will be financed in its first year by a repeat of the bank bonus tax (which Labour is keen to emphasise will only be used to fund this programme) introduced by the last government and for the rest of the period by reducing tax relief on pension contributions for those earning over £150,000 from 45p to 20p (the same rate as a basic taxpayer).

The party's aim is to appear both compassionate - the long-term unemployed will not be left to languish on the dole - and tough - those who are out of work must take accept any job they are offered (paying at least the minimum wage) or lose their benefits. Here's what Ed Balls will say today during a visit to a building project in south London which employs and trains young people:

It’s shocking that the number of young people stuck on the dole for more than a year has doubled under David Cameron. For tens of thousands of young people who cannot find work this is no recovery at all.

We’ve got to put this right. So if Labour wins the next election we will get young people and the long-term unemployed off benefits and into work.

The government will work with employers to help fund paid work with training for six months. It will mean paid starter jobs for over 50,000 young people who have been left on the dole for over a year by this government.

But it will be a tough contract – those who can work will be required to take up the jobs on offer or lose their benefits. A life on benefits will simply not be an option.

After the global banking crisis and with bank bonuses soaring again this year, it’s fair to pay for our jobs plan with a repeat of Labour’s tax on bank bonuses. We need a recovery for the many, not just a few at the top.

As a country we simply cannot afford to be wasting the talents of thousands of young people and leaving them stuck on the dole for years on end. It’s bad for them, it’s bad for our economy and it’s bad for taxpayers who have to pay the bill.

Both the policy itself and the tax changes that will pay for it are smart politics. While the Tories never miss an opportunity to boast about their record on jobs (which is better than that on wages), Labour can highlight persistent problems such as the doubling in long-term youth unemployment - and offer a concrete plan to do something about it. The programme is modelled on the successful Future Jobs Fund, which the coalition cancelled upon entering office, only for a subsequent DWP study to show that it had been an unambiguous success with a net benefit to the economy of £7,750 per participant. 

The greatest challenge for Labour is simply convincing the public that it is possible. Many voters understandably respond by asking "how can you guarantee a job?" But Labour has been clear on the details this morning. The government will pay for workers' wages and employer’s national insurance contributions for 25 hours a week over a period of six months. Businesses bidding for government funds will need to demonstrate that the jobs are additional and will not lead to someone else losing their job or having their hours reduced. At the end of the six months, participants will be required to undergo training provided by the employer as well as "intensive job-search activity" for a permanent position. 

Based on current claimant count levels, the House of Commons Library estimates that the cost of the policy will be £1.9bn in the first year and £900m a year in the following years. The figures do not include the anticipated reduction in the benefits bill and the savings that will be achieved by scrapping existing government schemes. 

The tax changes are also designed to create beneficial dividing lines with the Tories. While George Osborne battles in Brussels to prevent the introduction of an EU cap on bank bonuses, Labour has pledged to tax them to fund jobs for the young. Importantly, the tax will also apply to allowances paid by banks to avoid the new cap (which limits bonuses to 100 per cent of annual salaries, or 200 per cent with shareholder approval).

The plan to restrict pension tax relief has been attacked as "another raid" by the Daily Mail and other papers, but few voters will shed tears for the 1.5 per cent fortunate enough to earn over £150,000 a year (who, as Labour never misses a chance to point out, have received an average £107,500 tax cut from the coalition). It's worth recalling that before the 2012 Budget, Danny Alexander called for the government to adopt a similar policy, noting that "If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate". However, rather than scrapping higher rate relief, Osborne has reduced the annual tax-free pension allowance from £50,000 to £40,000 (having already reduced it from £255,000) and the lifetime allowance from £1.5m to £1.25m (having already reduced it from £1.8m). As a result, basic rate taxpayers are still subsidising the pension contributions of the highest earners in the country. Balls's proposal is a neat way of reopening this particular coalition divide.