Reeves ‘to raise national living wage’ in extra burden for firms
Rachel Reeves is set to confirm a rise in the National Living Wage by four per cent at the Budget, according to reports, in an electorally popular decision that could have severe implications for businesses and the wider UK economy.
Businesses have repeatedly warned that the double cost of last year’s tax raid on employers’ national insurance contributions (NICs) and a rise in the minimum wage has squeezed profits at firms and piled costs on the private sector.
A new plan to raise the living wage and its extension to people aged between 18 and 21, as reported in The Times, could further damage employers’ recruitment and investment plans, businesses and economists have warned.
The Budget plan would see employers have to raise workers’ wages from £12.21 to at least £12.70 an hour.
Reports come after the Living Wage Foundation, an independent group that determines the real living wage and whose wage-setting is followed by major employers, recommended raising pay by up to 6.9 per cent in London to £14.80 an hour and to £13.45 nationwide.
Increasing the minimum wage was polled as one of Labour’s most popular policies, according to More in Common.
But leading economists have warned that elevated wage growth has stoked inflation in the UK, eroding people’s income, and added costs on businesses, which have decided against hiring more staff over the last year.
Bank of England policymakers Clare Lombardelli and Megan Greene have spoken out about the UK’s battle with “second round effects”, which can take place when higher wage growth feeds into higher inflation due to costs being passed on to consumers.
A Bank survey in September showed that 46 per cent of businesses said higher minimum wages were lowering profit margins while nearly a third (31 per cent) said it was forcing them to raise prices of goods and services.
UK inflation was nearly double the Bank’s two per cent target rate in September at 3.8 per cent while the International Monetary Fund and the OECD have warned that the country faces the highest price growth levels of any country in the G7 over the next two years.
Questions raised on Reeves’ efforts to curb inflation
Reeves has talked up plans to focus on the cost of living at the Budget and lowering inflation.
In Cabinet meetings, she has told senior ministers to focus on policies that can help to stop prices spiralling.
The government has repeatedly refused to comment on suggestions it could strip VAT from household energy bills at the Budget as part of its efforts to reduce costs for households.
The left-leaning think tank Resolution Foundation, whose alumnus counts Treasury ministers Dan Tomlinson and Torsten Bell, warned that government policies adding costs for employers had contributed to fewer jobs being offered to young people.
“Government policy has made employers less willing to take on young people,” Louise Murphy, a Resolution Foundation economist, said.
“There is a genuine risk that doing another year of very large increases could harm their employment prospects.”
Several business groups have also warned Reeves against raising the national living wage.