Miliband reimagines welfare for an era of austerity

With the old tax and spend model broken, Labour has been forced to be radical.

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What's the point of Labour when there's less money around? It is the question that has stalked the party throughout this parliament. In his speech tomorrow to mark the publication of IPPR's Condition of Britain report, Ed Miliband will attempt to provide the answer. The 280-page report, which features 30 policy recommendations, covers ever aspect of social policy from the cradle to the grave, but Miliband's address will focus on the implications for the benefits system.

In an age of fiscal famine, the tax and spend policies of the New Labour era are no longer an option. To achieve progressive outcomes, the party will need to rewire the state without spending more money. In framing this choice, Labour's policy review head Jon Cruddas cites the “Burning Platform” email sent to Nokia staff by the company’s then chief executive Stephen Elop in 2011. Elop wrote of a man who woke to find the oil platform he was sleeping on engulfed in flames. In desperation, he jumped 30 metres into the freezing waters below. After his rescue, he reflected how the fire caused him to act in a radically different way. Faced with the “burning platform” of a £107bn budget deficit, Labour, too, is changing how it behaves.

Even were this a time of plenty, a trajectory of ever-higher welfare expenditure would not be possible. Public hostility to the social security system has risen inexorably in recent decades and shows little sign of receding. No party in the business of politics can afford to deny this reality.

The three principles around which Miliband will seek to remodel the welfare state are supporting work, not worklessness; rewarding contribution; and shifting spending from benefits to services. A series of emblematic policies will be announced tomorrow to flesh out this vision.

The first is the abolition of out-of-work benefits, most notably Jobseeker's Allowance (JSA), for 18-21-year-olds without Level 3 qualifications (such as A-levels) and its replacement by a new means-tested youth allowance (based on parental income) conditional on them being in training. For too long, as Labour has recognised, the system has created perverse incentives for the young to subsist on welfare, rather than seek to better themselves. Those who shun work automatically receive benefits but those who spend more than 16 hours a week in training or further education are denied any support. Along the way, tens of thousands cycle between poor work or no work without ever acquiring the skills they need for a fulfilling career. In an age of constraint, it is no longer acceptable for the taxpayer to pick up the tab.

As one Labour strategist told me: "The 1945 welfare state was built around certain features of Britain, which are no longer there ... The problem of the quality of jobs wasn’t there in the same way, the premium on skills wasn’t there in the same way and public attitudes towards welfare were totally different. We’ve got to adjust to all of those things, it’s not moving to the right, or the left, or any of those things. It's making the welfare state legitimate again."

The new youth allowance would end the injustice of the "16 hour rule" and offer those in further education (part of what Miliband calls the "forgotten 50 per cent") the same support provided to those in higher education. Those who refuse to take up the offer of training would lose their benefits; IPPR estimates that the policy would result in a net saving of £65m.

Some on the left will bridle at the conditionality, but Labour sources emphasise that exemptions would be made. Those who already have the qualifications needed to secure adequate work, those with children under one, those from troubled family backgrounds and those with severe disabilities would all be protected.

The second signature policy is to reward contribution by introducing a higher rate of JSA for those who have paid in the most. Policymakers have devoted much attention to ending the "something-for-nothing" problem - that too many who get out don't pay in - but they have had less to say about the "nothing-for-something" problem: that too many who pay in don't get out. Those who have contributed taxes for decades find that they are left with the paltry sum of £72.40 a week to soften the hammer blow of unemployment. That they are offered no more than someone who has worked for just two years is one of the causes of the profound public disillusionment with the system.

In recognition of this unfairness, Miliband will pledge to reaffirm the original Beveridgean contributory principle by introducing a higher JSA rate of up to £100. Again, this would not involve spending more money. The policy would be funded by extending the qualifying period for contributory JSA from two years to five. Aside from the moral justification for the policy, Labour strategists view a strengthened contributory principle as a powerful shield against those who want to take a scythe to the welfare state.

The third and final policy change concerns housing benefit. Since the 1980s, the payment has grown to become one of the biggest components of the welfare budget as extortionate rents and inadequate wages have forced ever more to rely on state support to remain in their homes. Labour would seek to reverse this trend by expanding housing supply (to at least 200,000 new homes a year by 2020) and would empower local councils to shift funding from benefits to bricks and mortar. Local authorities including Lewisham, Liverpool, Leeds, Manchester, Sheffield and Birmingham have told the party that they could negotiate lower rents with landlords through measures such as bulk purchasing. At present, any savings would go straight to Whitehall, but Labour would allow local authorities to keep the proceeds and invest them in affordable homes - the only long-term solution to the bloated housing benefit bill.

In recent months, many have written of the divide betwen those in Labour who want a "radical" offer, and those more concerned with a "credible" one. But the fiscal crisis means that the most credible policies are also the most radical ones. The route to social democracy now lies through big reforms, not big spending. There is much further for Labour to go, but Miliband's speech is an important nudge in this direction.

George Eaton is assistant editor of the New Statesman.