In his latest budget, George Osborne took the biggest step toward tackling low pay since the introduction of a national minimum wage in 1999. The chancellor announced a national living wage of £7.20, which is set to rise to £9 by 2020. This is more than just a re-branding and raising of the minimum wage, currently £6.50 per hour. It is an acceptance that setting a wage floor is a crucial part of attempts to raise living standards for low-paid workers.
Up to now, the Low Pay Commission has scrupulously avoided this issue, with a brief to set the minimum wage based solely on what the labour market can safely support. But Osborne has clearly done some careful political calculations in response to the living standards crisis. The result is a nod to the idea that – in the words of the Trade Union Congress – “Britain needs a pay rise”.
Meeting living standards
At first sight, Osborne’s announcement sounds like good news for low income earners. My team and I have calculated that the current minimum wage is insufficient to support what the public regard as a minimum income standard, which allows you to maintain a decent standard of living. Based on our calculations, the out-of-London living wage is currently set at £7.85 per hour.
Although Osborne’s initial £7.20 living wage does not meet this threshold, he has committed to raising it year-on-year, until it reaches £9 by 2020. This means that the official living wage will eventually be 15% higher than our £7.85 present figure, and more than this rate would be in 2020 if it rose with projected inflation.
But despite these promising signs, the combination of higher wages and reduced in-work support – the two big ticket items of this budget for low-income workers – will actually leave many of them considerably worse off.
This can be illustrated very simply by considering what will happen to a parent working full-time on the minimum wage over the next year. The jump from a £6.50 to a £7.20 wage will give them a handsome pay rise: from £12,710 a year to £14,080 – an increase of £1,370.
However, this will reduce the family’s entitlement to tax credits for three reasons. First, higher earnings reduce tax credit entitlements anyway. Second, the rate at which this happens was cranked up in the budget (from 41% to 48% of relevant earnings). And third, the amount you can earn before that clawback takes place was more than halved.
As the above graph demonstrates, the result is that tax credits for these families will be £2,330 lower by this time next year, wiping out the pay rise and causing a net loss of £960.
This is just one example of how reductions in support for working families’ incomes can more than wipe out gains from better pay. This has been a huge tension in the story of the living wage over the past few years. According to our latest calculations, families on the minimum wage are typically around £2,000 a year further short of meeting our minimum income standard now than in 2008 – even though wages net of taxes are actually at a similar level now in real terms as they were then.
This budget marks a turning point in the debate about living standards, pay and benefits. The case for employers to pay a decent rate is now being accepted by society and by government. But this doesn’t solve the problem of low family income. Without sustained support, many families will be a lot worse off. So while it will now be easier to separate these two issues out, this will not be of much solace to those currently suffering severe cuts.