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Ed Holmes is a senior research fellow at Policy Exchange.

Ed Milliband’s leadership has arrived at an interesting juncture this week. Liam Byrne – who apart from being Ed’s welfare spokesman moonlights as Labour’s policy review chief – has set tongues wagging in Westminster with his opposition to the Government’s £26,000 benefits cap:  “Let's be honest, a one-size-fits-all national cap simply would not work in practice.’ He even goes on to argue ‘a regional cap would clearly not be right. We need a local cap right for each area.”

What he does not spell out is why. Presumably the argument is that the cost of living is very different in different parts of the country.

That’s a fair point but it raises a tricky question of consistency. A separate debate is underway on national pay bargaining: a system its MPs and affiliated trade unions are strongly opposed to reforming. The Shadow Chancellor Ed Balls did not even mention it after the regional pay review was announced; only after some seven weeks did he set out Labour's position that: “‘we will oppose any moves to undermine the pay review bodies by shifting wholesale to regional and local bargaining in the public sector.”

In other words, it doesn’t matter that the cost of living is very different in different parts of the country.


Or does it? In Government Labour introduced regional pay in the courts service.  Everyone (including the unions) supports a different rate of pay for people in London.  But the unions don’t support extending this principle to other expensive areas.

While stating that he wanted to keep one-size-fits-all pay, Ed Balls did cryptically add that “Of course… pay needs to reflect local circumstances”.  This is intriguing, but it is hard to understand what it can mean.

Reflecting ‘local circumstances’ is precisely what a national pay structure prevents. With both policies – a nationally-set benefit cap and nationally set wages – problems are caused because regional conditions go unconsidered. Where households are able to claim such a high level of benefits relative to local wages that it does not pay to work (largely through Housing Benefit) welfare dependency becomes widespread. Similarly, where public sector workers are overpaid relative to the local labour market, the private sector is ‘squeezed’ by making its wages uncompetitive, robbing it of the best talent and limited the number of public sector jobs that can be paid for.

The welfare cap is very high – around £35,000 of a working household’s pre-tax income and certainly can be defended on grounds of fairness. Its impact on work incentives is likely to be limited unless different caps are set for local areas with widely differing wages and living costs, (it could also be set on a principles-driven basis for different benefits – what we want social housing and child benefit to achieve for example). We should remember, if even one member of the household works for just 16 hours a week, the cap disappears entirely. National pay bargaining has had a far more significant impact for decades: reducing public sector productivity by linking pay more to tenure than performance, distorting incentives in regional economies and limiting growth. Liam Byrne has the right idea – localised rates generally are better and fairer.

But once you accept this logic in one area, it’s very difficult to resist it in others.

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