Cutting the minimum wage won’t be what boosts growth

At a time when the mainstream political discourse seems preoccupied with boosting low pay, living wages and a citizens income it seems odd that the Conservatives would float the idea of reducing the National Minimum Wage. As many have rushed to point out, most evidence suggests that it boosts growth, putting money in the pockets of those most likely to spend

At a time when the mainstream political discourse seems preoccupied with boosting low pay, living wages and a citizens income it seems odd that the Conservatives would float the idea of reducing the National Minimum Wage.

As many have rushed to point out, most evidence suggests that it boosts growth, putting money in the pockets of those most likely to spend. In a consumer driven economy reducing the disposable income of the low paid is likely to lead to low growth and stagnation.

This is not new ground; ahead of David Cameron’s 2012 conference speech early drafts circulated to the media urging households to pay off their credit cards, despite consumer spending and confidence being suppressed.

Unsurprisingly, this line was omitted from the final speech once journalists and commentators pointed out the self-defeating nature of the plea. Similarly, recent benefit changes such as the cap on the up-rating of benefits are only likely to further reduce disposable income in an economy reliant upon consumer spending.

The rapid unravelling of one of the policies at the centre of last months Budget – the extension of the Help to Buy scheme – was also hardly surprising for similar reasons.

It sought to do two things: encourage unsustainable levels of mortgage lending by banks and increase demand in a market crippled by a lack of supply. As the OBR suggests, the result is likely to increase house prices and risk creating another asset bubble, much like the one the economy has yet to recover from.

The government’s difficulties stem from the game-changing nature of the financial crisis and the undermining of previously accepted notions of common sense and orthodoxy. This is demonstrated by Labour’s ability to criticise the government’s cutting of the top rate of tax, even though tax rates are still higher than at any point during 13 years of New Labour.

The public now expects high taxes for the wealthy; this is the new norm.

The Conservative’s ideological disorientation goes much deeper than public anger over tax rates and banker’s bonuses. Many of the government’s central ambitions and priorities were developed by the Conservatives during the post-materialist and post-ideological growth years in which ‘sharing the proceeds of growth’ was the challenge for government.

The fundamental questions were supposed to have been answered. The context in which many of these policies were created no longer applies; the question for government now is how to create growth and reduce public spending in the fairest way possible.

From the start it was unclear how the Big Society would flourish while charities saw significant cuts in their budgets. It was similarly unclear how the private sector would rapidly grow simply by cutting public sector spending and employment.

Reducing capital spending in the middle of a recession has rarely, if ever, sparked economic growth. Squeezing incomes through benefit cuts suppresses growth and reforms such as the Universal Credit become high risk when so many families are reliant on benefit income  in the face of soaring living costs.

Reducing employment protection appears nonsensical when confidence and job security is low and is only likely to further undermine growth. Localism could be empowering, but faces an uphill struggle when local authorities experience unprecedented cuts to their block grants.

Ring-fencing pensioner benefits and protecting the grey vote is unsustainable even when the economy is growing, let alone stagnating.

Number 10 has placed responsibility for the final decision over the NMW on the Low Pay Commission, suggesting little may actually change. Yet by floating the idea it hints at the apparent contradictory nature of policy-making with the relationship between disposable income, spending and growth seemingly misunderstood or ignored.

Perhaps more likely is that this incoherence is the result of an inability to reconcile competing priorities; reducing and redefining the role of the state and growing the economy. At present they appear mutually exclusive; the government has successfully reduced benefit entitlements and cut public sector employment, but has failed to encourage growth to offset the impact of these changes.

While the Pound has been devalued to encourage exports and rebalance the economy, this has led to a surge in living costs that has depressed domestic demand.

The criticism that the government has no clear narrative on growth continues to resonate partly because it has such a clear sense of what it wants to do in other areas; it’s not simply bereft of ideas. But in pursuing these ambitions it is undermining its ability to encourage growth or reduce spending, the big challenges on which it will ultimately be judged.

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16 Responses to “Cutting the minimum wage won’t be what boosts growth”

  1. SadButMadLad

    Err, a clue to help you understand. Minimum wage is not a tax credit or a benefit. Wage is something employers pay to their staff to keep them. So if loads of employers are having to lower the salaries of their employees due to the recession, then it’s fair and right and proper that the minimum wage is lowered also. To increase the min wage when everyone else is having theirs lowered would be just thing to sow discontent and disruption into a business.

    Do you know what will help the economy? Again a clue. The economy is something driven by business, not by government spending money collected from taxpayers. So everything that helps business to succeed is important. And for business to succeed they need to make a profit. And don’t try and say that it’ll just mean that the nasty capitalist pigs will suck the money out and not give it to their workers. The vast majority of businesses are SME which means that they are very dependent on their staff and so will do anything to keep them.

  2. LB

    Ther were 16,000 million a year earners.

    Now there are 6,000 and falling.

    Welcome to the new norm.

    There aren’t enough rich to pay for 7,000 bn of debt.

  3. LB

    Yep, but the left think that public sector tax pays for the public sector.

    Bonkers thinking because they haven’t worked out where the before tax money is coming from

  4. blarg1987

    It is a symbiotic relationship, you can’t really say that BT, BAE, National grid, EON, virgin trains, first group are fully private companies when the majority if not all their money comes from the tax payer in the form of subsidies or contracts.

  5. 2Legsbetter

    I run a business, I pay everyone well over the “living wage” of £7.45 an hour. Unlike Tesco and other low payers I dont make billions in profits each year. My staff are well paid and dont need their wages subsidised by universal credits and state benefits. The real problem with the welfare bill is that it subsidises bad employers like Tesco, the vast majority of welfare goes to low paid workers.
    The answer is simple. Double the minimum wage and cut benefits, abolish employer NI and increase taxes on unearned income! Stop this state subsidy of bad employers.

  6. LordBlagger

    That is not symbiotic. It is parasitic.

    It’s killing the host, and with it the parasite will die.

    Any beneficial part, such as help for the handicapped is going to go in the process

  7. LordBlagger

    And who pays for the increase?

    Your customers, or your staff when they can’t generate the profits.

    Are your profits so large you can double your costs?

    Seems to me you’re profiteering

  8. blarg1987

    So therefore both sides are parasites? The point I am saying is that we need a level of public sector services and state as well as a level of private sector the whole notion of the state just takes money and provides nothing is factually inaccurate which is a flaw that needs correcting.

  9. m philpott

    topping up low wages just means employers just lower the wages by that amount. its the market and you can’t really buck it. the govt would do better by not topping up wages and letting them increase naturally by restricting the number of low skilled people available to do them.

  10. keynes

    we’d be better of if the state took little and did nothing – except for set up the legislative framework which we work under. we can see how badly the state runs car firms or airlines or the nhs or benefits. all these things are better done in the private sector

  11. 2Legsbetter

    Tesco can afford to pay their low paid state subsidised staff more, they make several billion a year in profits. Why should I as a tax payer have to subsidise Tesco for their poor management and a failed business model that requires state subsidies. My customers appreciate the better service they get from our well paid and satisfied employees.
    The increase in costs to a large employers could also be partially offset by abolishing their NI contributions. Higher wages would increase demand for goods and services so its a virtuous circle. Even extremist socialists like Boris Johnson support the living wage. Cutting the need for state subsidies for bad employers helps us all, apart from the rentier class but we really dont want to support parasites like that with tax payers money do we?

  12. LordBlagger

    No. There are plenty who aren’t on the private side. The state however is impoverishing people making the. Destitute.

    The private parasites are people like the Green power companies who rather than compete rely on the state to rob peop,e for them. Note, they need the state to harm people.

    Let me give the example as to why the state is evil.

    In the example above, the private company asked the state to screw people. The correct response from the state should be to tell the to piss off. However you think it’s great that the likes of Tim Yeo should profit.

    However top of the lists of parasitic behaviour are the nhs, killing 40’000 a year, and the 5’300 bn pension debt that can’t be paid.

    One is direct killing, the other indirect

  13. blarg1987

    Wasn’t the actual report you quote that figure actually say it fell to 4.8? So what about companies like, BAE, EON, virgin trains, BT, National grid, all private companies who’s main source of income is the tax payer through contracts and subsidies are they parasites or growth creators in your logic, bearing in mind that they need the state to be succesful.

  14. blarg1987

    Well there have been success stories, such as rolls royce, eon etc which are or state owned and were succesful under that leadership. Bear in mind alot of the technologies we take for granted, computers, satalites etc can all be traced back through stet dmaned and funding, i.e, the space race created the technologies that we use today which was driven by the state demand to visit other planets and go to the moon. It was not the private sector that said we are going to the moon was it?

  15. LN

    It takes two to make a subsidy.

    1. The company or people asking for the subsidy
    2. The muppets who hand over other people’s money.

    The first set aren’t the problem because there is an easy solution.

    Its that the second set tell them to get off.

  16. LB

    Look. Tesco’s worker asks for a subsidy. Government pays it.

    Whose to blame? Worker for asking? I think not.

    Government for paying it? They are the one’s giving your money away.

    On the abolishment of employer’s NI. A good idea. If you tax fags, people stop smoking. If you tax employing people, they stop employing them. (In the UK)

    Here’s a far simpler solution. Forget living wage. How about not taxing people who earn less than they need to live off? Entirely within the government’s control?

    What you have is the left and Boris trying to blame others for the fact they are taxing people such that their take home pay is insufficient.

    Get the government to stop taking the money.

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