MoneyMagpie

Jan 27

Why the Government is raising the National Minimum Wage

You might have been surprised, as I was, when George Osborne announced his intention to raise the minimum wage from £6.31 to £7 an hour in October.

It doesn’t seem like the sort of thing a Conservative-led Government would do.

A number of commentators, such as Nicholas Watt in the Guardian have implied that it’s a vote-grabbing move to pull the rug from under Ed Milliband seven months before the elections.

That may be part of it but I don’t think it’s even close to the fundamental reason. After all, those on low pay, and the young, are less likely to vote than those on medium to high wages.

Personally, I think it’s part of a plan to shift the financial burden of supporting the populace from the State to business.

These are my reasons

  • Over the last couple of decades big businesses have been factoring-in State financial aid for people on low pay. It’s happening in the USA and other European countries as well as the UK. If you think about it, in the UK we have tax credits and various benefits to help people who are working but earn less than a set amount (it varies depending on whether you have children and whether there are two earners etc). This was an idea brought in by the last Government to encourage people to work rather than be on benefits. It was a reasonable attempt to make work more attractive but the unforeseen effect has been that businesses have realised that they can pay very low wages in some sectors because the Government will take up the slack.
  • We’re already seeing that the personal tax threshold is going to go up to £10,000 next tax year (from April) and it could go higher than that soon. Who knows? Again, I think the point of this (and it’s something I’ve been campaigning for for a while) is to make it more worthwhile for people to work, even if on a low salary, than to stay on benefits. If you can keep all the money you earn up to £10,000 (I would like it to be £14,000) then it makes it totally worthwhile to work for your money.
  • So these two moves – raising the personal tax threshold so that you can keep more of your money and raising the minimum wage so that even those in unskilled, very basic jobs can earn a bit more, make me think that the next step coming along will be the abolition of tax credits and possibly some other benefits such as a certain level of housing benefit.

So, in other words

I think that the Government will put more of the financial burden on businesses which will have to pay people more and take it off the State by stopping the whole tax credits system.

I don’t know any of this. It’s all conjecture. But it makes sense to me that this Government – like other Western Governments – has seen how impossible it is for the State to continue to fund their populations. It has probably realised that some businesses are using State payments as a tool to bring down their wage bill and that other businesses will follow if they don’t do something soon. Of course the Government will lose tax revenue by raising the personal tax threshold but in the long-term it’s worth it because of the future saving on the benefits bill and, ideally, the extra tax revenues they will get from businesses paying their employees more.

 

If this is the case, personally I agree with it.

Even though I run businesses, I do feel that it’s not the job of the State to bolster companies by filling the pay gap for those on low wages. I have spoken to people who have been put off working more than a few days a week because they knew they would lose their tax credits if they did. This is like the benefits trap again with people not working purely so that they don’t lose their pay out.

Not only that but it takes a lot of time, money and effort to administer tax credits. It costs the Government a lot to pay them out and they can be so complex that a lot of people who are entitled to credits end up not getting them. So if they can find a way to cut this whole system out it would probably be worth the loss of tax revenue with the higher tax threshold.

So in the long run it’s simpler and fairer to up the minimum wage, up the personal tax threshold and even up the higher tax threshold so that a whole lot more people can make and keep more money and the Government can take away a whole swathe of social payments.

I am concerned about its impact on businesses, particularly small businesses, but I think it’s a price we have to pay…if, that is, I am right in my assumptions.

Let’s see if I am!

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