Labour should focus on reforming the market to support the vulnerable without being labeled as profligate.

Amanda Jacobs (not her real name) lives down the road from me in Peckham. It's a classic inner London location where deprivation soars as high as the rents. The state pays £900 a month to keep her and her daughter in a tiny, damp flat with failing heating. With 20,000 people on the waiting list, there's not much chance of a council house, and the jobs she's qualified to do would almost certainly leave her worse off.

"I want to work, and I've been looking," she says, "But there's no way I could afford the rent if I lost my benefit, and I have to think about her (my daughter) -- I don't want her changing schools again."

Talking to Amanda, you can't deny that some of the right's critique is spot on. It's true that the threat of losing benefit stops you working. It's true that paying £192bn a year in welfare is outrageous when you're trying to decrease debt. And it's true that the public is running out of sympathy for families like hers. Perhaps that's partly why in a week when the Tories have been talking about capping benefit, they have gained a five-point poll lead over Labour.

So what does the left do? It would fail people like Amanda to follow the coalition and suddenly limit their benefits. As Randeep Ramesh helpfully points out, the government itself acknowledges that this move is likely to increase child poverty and detrimentally affect some disabled groups and even those in work. But the left will also fail people if it leaves them in a position where work doesn't pay.

The answer is not to simply accept a watered down version of the government's proposals that allow a higher cap for higher rent areas like London, or even to just exclude child benefit from the equation. The answer is to change the market as well as the state.

First, we need to understand that the disincentive to work doesn't just come from high benefits from the public sector. It also comes from low wages in the private sector. For most people on benefits, the only jobs available are low skilled, badly paid, insecure and part time. If you had a living wage, regular hours and a chance of rising up through a company, you would be more likely to come off benefits, not because of the threat of eviction, but because of the rewards of employment.

Second, you need stricter regulation on the scandal that is the private rented sector. There is no way that Amanda's flat is worth £900 a month. In a world where housing is limited and ownership concentrated, we need much tighter regulation that so far we're failing to get. Otherwise we're just wasting our money and vulnerable people are still living in substandard housing.

Finally, we also need to promote alternative models of home ownership that give people a stake in where they live. Co-operatives, mutuals and community land trusts need to be much more accessible. What's happening in Rochdale -- where they have just created the largest housing mutual in the country -- is interesting. The left should remember its past and learn from it.

So the problem with welfare reform isn't so much the benefits cap, it's the failure to look at the problems of the market as well as the state. What I wanted to get across on the Sunday Politics this week but didn't have space to, is that the Tories have nothing to say about this. Reforming the market is fertile ground for Labour if the party wants to support the vulnerable without being labeled as profligate. And perhaps most importantly, such measures wouldn't just support Amanda, they'd also leave her more empowered.

Rowenna Davis is a journalist and author of Tangled up in Blue: Blue Labour and the Struggle for Labour's Soul, published by Ruskin Publishing at £8.99. She is also a Labour councillor.

