IN HIS speech in east London yesterday, Ed Miliband hoped to reframe the debate by outlining a distinctively Labour approach to welfare policy. Distinctive perhaps but, from a policy perspective it can only really be described as a mixed bag.
On the positive side, Miliband rightly pointed out that “the welfare state, through housing benefit, bears the cost for our failure to build enough homes”. His suggestion that “any attempt to control housing benefit costs, which fails to build more homes, is destined to fail” is also correct, because this is precisely what is happening in Britain today.
The coalition has been tinkering with the formula for setting housing benefit rates since it took office, and yet the bill is still soaring – to the £23bn annual figure reported in the 2013 Budget. And how could it be otherwise? The skyrocketing cost of housing benefit is purely a consequence of rapidly rising housing costs. As long as the latter is not addressed, no amount of coalition formula-shuffling will bring housing benefit spending down to reasonable levels.
But the obvious question is why so few new homes have been built in Britain for so long, when the demand is clearly there. Miliband’s answer was underwhelming. He jumped directly to “tackling private landlords” and building more public housing. The Labour leader seems to assume that only governments can provide homes for their citizens. But why have countries like Switzerland and Germany, where public housing is not nearly as extensive as in the UK, had much higher rates of housing completions for decades? Why are house prices in those countries now lower, in real terms, than they were 20 years ago, while British house prices are more than twice as high?
Crucially, those countries have allowed the private sector to respond to consumer demand. There is no need for the government to be involved in building houses – no more than it needs to be involved in baking bread or brewing beer. All it needs to do is allow developers to do their job, rather than restrain them through draconian planning regulations. That, however, would require taking on the Nimbys, which Miliband does not seem to have the courage to do.
Miliband’s plea for a strengthening of the contributory principle within the welfare system was also welcome. But his claim that “without spending extra money, we can change the system” is strange. In principle, there are two ways in which contributory aspects can be strengthened. The system can be made more generous for those with a strong contributory record, or less generous for those without a strong contributory record (or both). If the former is chosen – and that is the only one that Miliband considered – of course, these changes will require additional spending.
A contributory system may well be more cost-effective in the long run, because it would provide better work incentives. Under the current system, national insurance contributions are simply a second income tax; under a contributory system, they could become more like a quasi-investment. But until these effects unfold, such changes would require an upfront investment. Miliband’s claim to the contrary is implausible.
Most interestingly, Miliband offered support for a compulsory work programme, where long-term unemployed would be given a subsidised job or work placement that they would have to accept. If he is serious about this, it would be an almost revolutionary change. It would represent a workfare programme of sorts – and one that went much further than the coalition’s feeble steps. But would the Labour Party really be prepared to apply sanctions to those who refuse to work? Or would Miliband include so many ifs and buts that the programme became a toothless tiger? The compulsory job guarantee is a proposal worth watching, but it was also the part of Miliband’s speech where he was most stingy on the details.
Finally, Miliband’s proposed overall cap on social expenditure – which has won most of the headlines – can only really be seen as a symbolic commitment. What does it mean in practice? What would happen if social spending was on the way to exceed this upper limit? Unless there are mechanisms to decrease welfare spending automatically in such a situation, and Miliband did not mention any, this supposed cap would be as ineffective as the Eurozone’s attempts to limit European government deficits through its Maastricht criteria. Presumably, embracing the cap is a more roundabout way of saying “we recognise the importance of fiscal prudence”.
The most generous interpretation of Miliband’s foray into welfare policy is that it was meant to signal a U-turn away from Labour’s previous record of unrestrained spending. Hopefully, it was not meant to be taken at face value, and we can expect more detail to come.
Kristian Niemietz is poverty research fellow at the Institute of Economic Affairs.