By Richard Johnstone | 17 January 2014
Government calls for the National Minimum Wage to rise to £7 an hour would improve the public finances through both lower benefit payments and higher taxation income, the Institute for Public Policy Research has said today.
Chancellor George Osborne and Business Secretary Vince Cable yesterday called for Low Pay Commission to approve an above-inflation increase from the current adult rate of £6.31. In an interview with the BBC, Osborne suggested the UK economy could afford an above-inflation rise, and said setting it at £7 an hour would return its value to the level before the economic crisis.
‘I want to make sure we are all in it together, as part of the recovery, which is why I want to see above-inflation increases in the minimum wage, precisely because the British economy can now afford that,’ he said
Examining the call, IPPR director Nick Pearce said the submission called for the rate to rise to £7 an hour by 2015.
This would have implications for both welfare spending and tax revenue, he said.
‘If the minimum wage rose to £7 an hour the financial gain to the low-paid would be real and meaningful, while we should prefer an economy where people earn their way to a decent standard of living, rather than relying on the state.
‘However, it is also true that some of the gain of a higher minimum wage will accrue to the state, in higher taxes (largely National Insurance contributions) and reduced benefit payments.’
This reflected that benefits had risen in recent years in part due to an increased role in topping up the incomes of working households.
‘Yesterday’s announcement was potentially great news for low paid workers. It should also lead policy makers to make the connection between wages and benefit spending, given that both will be central to the political battleground in 2014 and beyond,’ Pearce added.
Confirming the government’s submission, Cable said the rate should go up so the benefits of economic growth are shared fairly. Last September, he asked the commission to examine the case for an increase and the LPC will now consider the government’s evidence when setting minimum wage rates for this year in the spring.
‘The National Minimum Wage is designed to strike a balance between protecting the low paid and making sure they can find work. But as the economy starts to recover, the benefits of growth must be shared fairly,’ Cable said.
‘This is why last September I asked the independent Low Pay Commission what economic conditions would be needed to allow for significant rises in the National Minimum Wage without damage to employment. I am keen to use their expertise to understand what economic conditions would be needed to allow for rises in the wages of the low paid.’
