Ed's welfare squeeze betrays workers

Ask yourself: could you live on £71 a week? Of course not. As the Labour leader, Ed Miliband, pointed out last week, those who have made national-insurance contributions throughout their working lives are appalled to discover that, when they become unemployed, they are plunged into poverty. Unfortunately, he doesn't appear to want to do much about it. The prospect of living on this miserly allowance is what keeps people sticking with low-paid jobs, or going part-time, or taking black-economy work and declaring themselves nominally self-employed.

The low rate of benefits paradoxically increases the welfare bill because the state has to pay benefits to nearly 10 million people who depend on benefits for more than half their income. The big growth area in welfare is not the so-called "skivers" who exploit the system, but people in work who can't afford to live. The costly architecture of child benefits, tax credits, housing benefit, disability allowances and all the rest is based on this dysfunctional regime by which taxpayers' money is used to subsidise low-paying employers.

This system can be, and is, exploited by some claimants who discover they can make a lot more by harvesting child benefits and housing benefits than by working. A family of six living in a council home can "earn" more through benefits than through working in minimum-wage jobs. Hardly surprising, then, that some take that course. The astonishing thing is that all the millions who are on low wages don't all do the same. The truth is that most people on benefits dearly wish to work, indeed are working, even though they gain little, financially, by doing so.

Their goodwill has been exploited by successive governments which seem to believe that low pay is a good thing in itself. They take the banker's view that the way to economic dynamism is through the exploitation of those at the bottom and the enrichment, through low taxes, of those at the top. But low pay does not lead to economic growth – quite the reverse. Low pay depresses growth by draining demand from the economy by reducing family spending power. Low pay also reduces industrial efficiency by discouraging employers from using the most advanced labour-saving technologies.

It doesn't have to be this way. In countries like Germany, the most successful manufacturing nation in the world, unemployment benefits are 60% of earnings up to a cap of well over £2000 a month; more if there are dependants involved. The Germans believe that, if people have paid into a system of unemployment insurance, their incomes should be protected if they fall out of work. These benefits decline sharply after two years but are always very much higher than they are in the UK.

In Nordic countries like Denmark, unemployment benefits are even more generous, to a degree unthinkable here. We, in Britain, assume that generous unemployment benefits discourage people from working and lead to an inflexible labour market. The reverse is true. Under Denmark's system called "flexsecurity", workers can be hired and fired much more easily than they can in Britain, which encourages entrepreneurialism. Nordic countries like Denmark are cited by the OECD and the World Bank as among the best countries in the world for starting a business. They have coped most successfully with the financial crisis and have better growth and productivity rates than Britain.

Even bankrupt Ireland has a more generous benefits regime than Britain. Basic Jobseeker's Allowance there is nearly £200 a week, with over £100 for dependants. This hasn't discouraged hundreds of the world's greatest companies from investing in the Republic – Apple, Amazon, Cisco, Dell, PayPal, Oracle ... Last year alone more than 13,000 new jobs were created by inward investment to Ireland. Indeed, labour flexibility based on sustainable benefits has helped Ireland to reconfigure its economy out of the banking crash.

Why do we not hear anything about this in Britain? Why do we cling to backward, punitive attitudes to unemployment? Labour productivity in Britain is among the worst in Europe and getting worse. People are inhibited from retraining in Britain because they cannot afford to risk a period of unemployment. Labour mobility is sluggish because people are stuck in their council ghettos on housing benefit and cannot afford to move to where the jobs are. People are scared to risk setting up businesses on their own.

We have prehistoric attitudes to work and business in Britain, which is why Britain's manufacturing and exporting record is so poor. We have governments which believe that speculation and house price bubbles, combined with brain-dead austerity programmes, are the way to economic improvement. They have forgotten everything Adam Smith ever wrote about the productive economy.

They choose to stigmatise those who have lost jobs through no fault of their own. Ed Miliband's belated decision to join in this punitive welfare consensus last week will not help Labour to win any votes. Adopting the arbitrary measures like the social security cap, which will reduce benefits even further, and by means-testing benefits such as child benefit, he will drive Britain even further into economic primitivism. It was bad politics to withdraw the winter-fuel allowance, worth only £100 million, from pensioners who are the group in society most likely to vote at the next election.

But what is really objectionable is Ed Miliband's failure to reinforce the principle of social insurance. A contributory insurance system should do exactly what it says: insure people against loss of earnings in unemployment. People in Britain who have contributed throughout their working lives have a right to see their living standards maintained, at least for a reasonable interval. Britain's miserly system is a breach of contract with workers who have invested in national insurance in good faith: it is the biggest mis-selling scandal yet. By undermining this principle further, Labour risks undermining the moral basis of the welfare state.

Benefits should not be used as a means of driving down wages. They should not be used to divide society by creating perverse incentives for workless people to have large families in order to collect benefits. In Scotland, we do not on the whole subscribe to punitive welfarism, and the social insurance principle here is still intact, in measures such as free elderly care and free education. Devices like the bedroom tax are not welcome here.

But for how much longer? Now that a welfare Rubicon has been crossed by Ed Miliband, it can only be a matter of time before Scotland is forced down the same miserable and dishonest route to social and economic degeneracy. Welfare for bankers; workfare for the rest.