Labour MPs revolt over Brown’s plan to charge 27% interest on emergency loans to poor

Gordon Brown and his Work and Pensions Secretary James Purnell were last night accused of behaving ‘like loan sharks’ over plans to slap punishingly high interest rates on vital loans to the poor.

In an astonishing move, rebel Labour MPs joined forces with David Cameron’s Tories to accuse the Government of penalising hundreds of thousands of families on benefits who get interest-free cash advances to cover the cost of unforeseen crises.

More than one million individual loans worth over £600million were paid out from the Government’s social fund last year to hard-up people – many of them disabled – who struggled to afford to repair a broken boiler or cope with some other domestic emergency.

Under Fire: Gordon the ‘loan shark’ and James Purnell

However, in a provocative move, Mr Purnell wants to start charging 26.8 per cent on new loans – the sort of punitive rate found on High Street store cards and way above normal credit-card rates.

This would add nearly £50 to the cost of an average £433 loan and saddle the borrowers, who are almost all on State benefits, with an extra four weeks of repayments.

Senior Labour MP Terry Rooney, chairman of the Commons Work and Pensions Select Committee, led an all-party attack on the proposal. ‘Whoever dreamed this up, particularly at this time of year, must have lost their moral compass,’ he said.

‘It cannot be right to start charging almost 27 per cent interest on loans to the poorest people, who currently pay zero interest.’

Mr Rooney believed that the plan, outlined in a consultation document produced by the Department for Work and Pensions, was a cynical cost-cutting ploy to stop poor families getting the money they need.

He added: ‘I fail to see how Mr Purnell can reconcile raising interest rates for the poor with the Prime Minister’s repeated calls to the banks to pass on interest-rate cuts to struggling mortgage holders. There will be one hell of a row over this.’

Ronnie Campbell, Labour MP for Blyth Valley, said: ‘James Purnell makes me ashamed to be a member of the Labour Party. It is a disgrace the way he is hitting the poor. Not even the Tories would try to do this.’

Labour MPs also suspect that Mr Purnell is worried that the cost of the social fund will rocket as unemployment soars and thousands more people apply for help.

In an embarrassing development for the Government, Labour MPs received support from Tory Work and Pensions spokesman

Chris Grayling, who called on the Government to scrap the plan. ‘This is beyond outrageous,’ he said. ‘It’s nothing more than James Purnell and Gordon Brown re-inventing themselves as loan sharks.

‘That any Government would even consider imposing swingeing interest rates on unemployed people in the middle of a recession is just extraordinary. It’s a sign that this Government is utterly out of touch with what is really going on in Britain.’

And Liberal Democrat Treasury spokesman Vince Cable said: ‘This proposal is perverse and inhumane. The principle of social funds is that they are interest-free to help people cope with emergencies.’

Mr Purnell’s document, which suggests that non-profit-making credit unions could run the loans, spells out in stark terms how the poorest families in Britain would be hit hard in the pocket under the new system. It says: ‘Interest would be charged …at affordable rates compared to those charged by commercial lenders in the same market.

‘We propose to set it at the maximum charged by credit unions of two per cent per month – 26.8 APR.

‘In 2007-08, the average initial budgeting loan award was £433.30. The estimated average loan repayment for all loans was £10.54 a week. If interest were charged at two per cent a month, it would take 46 weeks instead of 42 to repay such a loan at such a repayment rate, with a total interest paid of £47.80.’

Mark Serwotka, general secretary of the Public and Commercial Services Union, whose members administer the social fund, said: ‘This might start with credit unions, but it will become a Trojan horse for the private sector to charge loan-shark rates for distributing public money.

‘It is scandalous that in these dire economic times, vulnerable people in financial difficulties could be exposed to profiteering. Interest of 26.8 per cent rates alongside some of the most expensive store cards.’

But the Government hit back last night, saying that under the proposed scheme, hard-up families would benefit from new advice on how to manage household budgets.

It said it would also be easier and quicker to get the loans, which would become available to working people on low incomes as well as those on benefits.

In the consultation document, Mr Purnell signalled that simply handing people interest-free loans without financial advice did little to help them manage their money.

‘We want to improve the help we give people when many are struggling,’ he said. ‘The social fund helps with money problems in the short term, but not the underlying problems of managing a limited budget.’

Last night, Work and Pensions Minister Kitty Ussher conceded that there was ‘very strong opposition’ to the plans.

But she dismissed the idea that the social fund was heading for loan-shark levels of interest, pointing out that ‘doorstep lenders can legally charge 180 to 240 per cent. Illegal loan sharks have been known to charge up to 1,000 per cent’.

It is not the first time Gordon Brown has been accused of betraying the poor. As Chancellor, he was criticised for approving a meagre 75p-a-week increase in the State pension. And this year, he was forced to climb down over his decision to scrap the 10p tax rate.

By Brendan Carlin
Last updated at 1:23 AM on 21st December 2008

Source: Daily Mail