If Labour wins the next election it will inherit a set of challenges on employment and welfare quite different from those it faced in the late 1990s. Increasing the employment rate will be crucial to increasing living standards, given the reduced scope for redistribution. The legitimacy of the welfare system will need to be secured against populist Tory attacks and the sense that it offers too much to those who have not contributed into the system and too little to those who have. And benefit expenditure will still be rising, despite major cuts, partly due to high unemployment, with pressure for more reductions to protect public services.
In this context, there will be a temptation to play defensive: protect against Tory attack, while defending the status quo. Such a strategy is unlikely to work electorally, given that Cameron and Osborne have made it clear they will seek to exploit what they see as Labour’s vulnerability on welfare between now and polling day. And it would mean ducking the hard thinking and analysis needed to develop a plausible yet radical programme which an incoming Labour government could then advance once in office.
IDS is still lauded in Tory circles for his reform credentials. But it is becoming increasingly clear that the work programme and universal credit are policies fighting the last war: much more suited to the era of rising employment and expenditure. The work programme does not increase the supply of jobs available (leaving it overwhelmed by unemployment), while the universal credit does not establish priorities for spending (it just amalgamates existing payments). Instead, the main story has been £18 billion in benefit cuts, many hitting working families despite the rhetoric of making work pay.
In this context, Labour should consider how it might construct a ‘pro-jobs’ policy agenda on employment, welfare and spending.
The pre-condition for significant increases in employment is a return to sustained growth, driven by the private sector. But Labour could also consider ways to balance supply-side measures – such as active labour market policies – with steps to raise and maintain the demand for labour. This could include strengthening the impact of the ‘automatic stabilisers’, such as a cut in employer NICs kicking in whenever unemployment goes over a given level, such as two million. It might also explore the potential gains from asking the Bank of England to take employment into account in its decisions about monetary policy, as is the case for the Federal Reserve in the US. And there might be scope to improve the incentive for employers to hire people with disabilities or the long term unemployed, such as lowering NICs or taking on pension obligations for a transitional period.
Given the inevitable squeeze on public spending, Labour should also look to prioritise expenditure that is pro-jobs. Broadly speaking, this would mean prioritising capital over current expenditure and spending on services that support employment over cash transfers that do not. This could include paying for higher quality, more affordable childcare by holding down increases in cash benefits for families. Polling earlier this year found that 61 per cent of parents said they would support a ten year freeze in child benefit if it led to childcare being free or more affordable. Better childcare would boost employment and children’s early development (as well as directly creating jobs). Shifting money from Housing Benefit (especially the 40 per cent currently going to private landlords) into housing capital investment over time would also do more to promote jobs and growth.
Finally, Labour should aim to ensure welfare embodies mutual obligation. For some, the welfare system needs to provide a replacement income for a long period, due to a disability. But for the vast majority, the objective should be welfare that is more generous but more temporary. Reasserting the ‘social insurance’ function of the welfare state – such as higher benefits for people with a recent work record – will require structurally lower unemployment and inactivity to release the necessary funds. But consideration could also be given to ideas like national salary insurance, which would provide substantially greater financial protection for a short period to working people when they lose a job, in the form of an interest free loan (repaid once they are back in employment). This could be combined with embedding a job guarantee as a backstop in the welfare system, providing temporary paid employment for anyone on JSA after a certain period, but expecting them to take it up.
Labour has a proud tradition as the party of work – and the first priority of an Ed Miliband government should be to bring unemployment down and make full employment the central goal of economic policy. There is a rich policy agenda to be debated and developed over the next two and half years to turn that goal into a programme for government.
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Graeme Cooke is research director at IPPR. His Purple Paper, Getting Britain Working, can be downloaded here