Labour’s unemployment benefit reforms could ‘save £3bn a year’
A government proposal to replace the unemployment benefits system with an “unemployment insurance” benefit could save the government up to £3bn a year despite being higher than the current new style jobseeker’s allowance payment, a new report has indicated.
Labour officials are mulling over plans to cut the welfare bill to reduce the size of the fiscal hole awaiting Chancellor Rachel Reeves at the Budget, which is likely to be worth some £30bn.
The current system for out-of-work benefits is currently split into two, with an allowance offered indefinitely for unemployed people with health conditions and the new style jobseekers’ allowance offered at a rate of £92.05 a week for up to six months.
The government has explored simplifying the welfare system to only offer a new unemployment insurance system that pays at the higher rate of £140.55 a week for people with health conditions while working in a specific time-limit.
Researchers at the Institute for Fiscal Studies (IFS) have said the government could save £2bn a year if the time limit for the benefit is set at 12 months.
The new report added that £3bn savings could be made if the time limit was set at six months, in line with the new style jobseekers’ allowance.
It found that, because 88 per cent of current spending on contributory benefits goes towards claims lasting at least a year, the savings from time-limiting the benefit will outstrip the cost of the proposed higher rate.
But researchers warned little to no savings would be made in the short term if the policy only applied to new claimants.
Martin Mikloš, research economist at IFS, said the benefits were a “small but significant” part of the welfare bill and social safety net. He suggested its reform was urgent and could help lower costs for the government.
“Their design has been neglected for many years and it is high time they were modernised, not least so that they work better alongside the rest of the benefits system,” Mikloš said.
‘The government’s proposed unemployment insurance would substantially increase the benefit rate for jobseekers, but that rate would still be low by European standards.
“Most European countries pay unemployment insurance benefits for 12 months or more. Making the new unemployment insurance available for 12 months would still yield fiscal savings relative to the current system.’
Labour’s proposals analysed
It is unclear whether changes could be made ahead of the Budget.
But the government could fast-track its roll-out in order to lessen the impact of damaging tax hikes later this year. Applying a time-limit to current claimants of the new style employment & support allowance for people with health conditions could be contentious, however.
A saving of around £2bn would represent a slightly higher amount to costs the government will now incur from its U-turn on scrapping winter fuel payments.
But it could represent one of many savings to the welfare bill, with Labour officials hoping to get more inactive people into the national workforce.
While the IFS has provided some guidance on the possible savings to be made, the long-term savings will have to be analysed by a small team of economists at the Office for Budget Responsibility (OBR) before they can make a calculation on the size of Reeves’ headroom.
The Department for Work and Pensions has been approached for comment.