A radical shakeup of the welfare state, under which benefit payments to those out of work or on low incomes would vary according to their past contributions to the state, is being considered by the Labour party.
As Ed Miliband’s party seeks to counter Tory claims that it is soft on welfare, the Observer understands that detailed work is under way in the party’s policy review on how to revolutionise the way the system works and address concerns that it promotes a “something-for-nothing” culture. One central idea under consideration is the creation of a flexible payments system offering higher benefits to those who have been employed for longer and have therefore made more national insurance contributions.
After a week in which Labour has been accused of defending benefit lifestyles such as that of convicted child killer Mick Philpott, party sources said the far-reaching reform would not only introduce greater fairness, but also build stronger incentives to work into the welfare system. “The problem at the moment is that you have a person aged 50 who has worked all his life and then becomes unemployed getting much the same as the person next door who has never worked. It is about linking what you take out to what you have put in,” said a senior party source.
The shadow work and pensions secretary, Liam Byrne, writing in theObserver, commits Labour to a return to the “old principle of contribution” championed by William Beveridge after the second world war. “There are lots of people right now who feel they pay an awful lot more in than they ever get back,” Byrne writes. “That should change.”
In a further move to reward work rather than welfare, Byrne says Labour will allow councils to give priority when allocating housing “to those who work and contribute to their community”.
At the heart of Labour’s plan is the reinstatement of full employment as a government objective. Under its plans, no one would be able to remain unemployed for more than two years, reduced to a year for a young person. After that, they would be offered a real job with appropriate training funded by the taxing of bankers’ bonuses and restructuring pension tax relief for the wealthiest. If they fail to take the job they would be stripped of benefits.
The ideas form part of Labour’s alternative to the host of tax and benefits changes announced in George Osborne’s controversial 2012 budget, many of which come into force this weekend. On Saturday a cut in the top rate of income tax from 50p in the pound to 45p was introduced benefiting people with incomes of more than £150,000.
Ed Balls, the shadow chancellor, unveiled a poster highlighting what he called a “tax cut for millionaires” which would see 13,000 people earning over £1m get an average tax cut of £100,000. Labour said three of the Tory party’s biggest donors alone would together receive a tax cut of over £500,000. Balls said: “The whole country will today see whose side this Conservative-led government is really on and who is paying the price for their total economic failure.”
Further changes will mean that the amount pensioners can earn without paying tax will no longer rise with inflation, a move labelled as a “granny tax” by critics. The threshold for 40% tax also comes down to to £41,450 from £42,475, adding 400,000 people to that tax band.
The shadow chancellor claims that as a result of the changes working families will be up to £4,000 worse off, while millionaires receive average tax cuts of £100,000.
Labour also goes back on the attack over benefit cuts, revealing freedom of information responses from 326 local authorities, to which 259 replied, showing that 394,000 disabled people, including 117,000 households claiming severe or enhanced disability benefits, will pay council tax for the first time.
This is a result of a 10% cut to council tax benefits given to the vulnerable and the decision to shift decisions on where cuts will fall to local authorities.
However, the coalition was keen to stress that the amount people earn before paying income tax has now risen to £9,440, leaving an extra £267 a year in the pockets of millions of basic rate taxpayers. Pensioners also receive a larger rise in the state pension, which goes up by 2.5% to £110 a week.
The chief secretary to the Treasury, Danny Alexander, said he believed the changes would “make work pay”.
“We think it’s important that we make work pay, that we reward people who are working hard on ordinary incomes, and that is what the increase in the personal allowance will do. The wealthy are paying more in every year of this government than they did during the entire period Labour was in office.”
Byrne says Labour’s approach to welfare will be based on three principles: “First, people must be better off in work than living on benefits. Second, we would match rights with responsibilities. Third, we must do more to strengthen the old principle of contribution.”