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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