Tax Credits, Investment and the Chancellor's Living Wage

If you haven’t noticed, this has been a hell of a week.  The chancellor has announced some radical changes in policy, and two of these – devolving Sunday trading decisions and introducing a national living wage – have huge implications for our sector.  Both of these were unexpected and not included in the Conservatives’ manifesto.  You can see our briefings and statements on the budget here but I try to keep my blogs reasonably short, so I want to focus on one thing only here.

This is the argument that low wages have increasingly been subsidised by tax credits. This is part of the so called the circular economy: people earn low wages but pay tax on these earnings, then claim them back as tax credits.  This means higher welfare costs for government, and can lead to some anomalies where work no longer pays.  Any government would be right to look at this, and we fully support the principle of taking minimum wage earners out of income tax.

But there’s a problem with the part of this argument that describes the circular economy as becoming a growing problem, and one caused by falling wages and rising benefits.  The problem is, it’s not true.  Here’s a graph indexing the minimum wage, inflation and tax credits since the latter were introduced in 2003.

Tax credits min wage

You can see that it’s the minimum wage that has increased fastest since 2003.  So, it is possible to argue that tax credits shouldn’t subsidising low pay, but it is outright wrong to suggest that this situation has got worse.  It’s been employers growing incomes of low paid households far more than the government over this time.

Let’s be absolutely clear: some retailers will not be able to afford this increase in their biggest cost.  We try not to cry wolf and claim that one policy measure will close all shops, but we have very clear evidence that retailers will react to this by cutting staff hours and jobs, and yes, some will close.  The worst affected retailers will not necessarily be the smallest businesses, many of whom do not employ staff.  It’s the businesses who are growing, making the £177m investments by our sector in the second quarter of this year, who will be hit hardest.

We support the establishment of a floor below which ages should not fall.  Should that floor be £6.50, £6.70 as it will be from October, £7.20 as it will be from April 2016, £9 as George Osborne wants to see by 2020, or a different figure?  I think that’s a call better made by an independent Low Pay Commission than by a chancellor driven as much by politics as economics, and with the prospects of the businesses who voted him into his post absent from his considerations.

This entry was posted by Chris on Fri, 10/07/2015 - 11:54