In a major speech on welfare this week, David Cameron said he wanted to tackle ‘the crucial issue of low pay’.
He wants employers to pay their workers more but he also wants to cut the amount the government pays to low-paid workers to top up their incomes. So is his approach going to make the low-paid better off or worse off?
It is not perhaps what you would expect from a Conservative prime minister, to call on employers to put up the wages of their workers. That’s what Labour prime ministers might be more likely to do; Tories are supposed to be on the side of the bosses. But the issue of low pay is much more complicated than that.
David Cameron said in his speech that the welfare system he had inherited five years ago was ‘crackers’. The coalition government he led from 2010 made some major reforms to it, notably raising the threshold to over £10,000 before anyone paid income tax at all, and capping the amount of household benefits paid to non-working households at £26,000 a year. But he said there was still a ‘complacency in how we approach the crucial issue of low pay’.
He said: ‘There is what I would call a merry-go-round. People working on the minimum wage having that money taxed by the government and then the government giving that money back – and more – in welfare. It’s dealing with the symptoms of the problem – topping up low pay rather than extending the drivers of opportunity – helping to create well-paid jobs in the first place.
‘So this is the change we need. We need to move from a low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare society’.
Central to the approach to low pay adopted by the last Labour government was the introduction of a statutory minimum wage. No employer could legally pay wages below the minimum rate set by an independent Low Pay Commission. But in setting this rate, the commission had to be careful not to put it so high that it would put companies out of business and so create unemployment. The result was that, even with a minimum wage, many people found their incomes too low to live on, so the government topped up their pay with an in-work welfare benefit call tax credit. It’s this top up which Mr Cameron has set his sights on reducing.
As part of his central policy of turning the government’s current deficit into a surplus by the end of this parliament, the Prime Minister is committed to finding £12bn in welfare cuts. On Sunday, the day after tens of thousands of people marched through Britain’s cities campaigning against continuing ‘austerity’, the chancellor, George Osborne, and the work and pensions secretary, Iain Duncan Smith, wrote an article in the Sunday Times saying they had reached agreement on how this could be done. Since child benefit and benefits to pensioners are to be protected, the axe is likely to fall particularly sharply on tax credits, now costing the government £30bn a year.
Of course the government would find itself paying out less in tax credits if the minimum wage were simply raised. Before the election Mr Osborne publicly called for it to be substantially increased (though he has no direct control over it himself). Some go further and think the minimum wage is in itself an inadequate concept and should be replaced by what is called ‘the living wage’, currently estimated at being around £1.35 an hour above the minimum wage.
But those who set the minimum wage will still be concerned about the effect on unemployment. They will argue that one of the benefits of a relatively low minimum wage, with incomes topped up by tax credits, was that during the long recession that followed the global financial crisis in 2008, Britain’s unemployment did not increase anything like as much as it did in most comparable countries.
The government may hope that with continuing economic growth and real wages rising at last, its tax credit bill will fall naturally. But few commentators think it will wait for this to happen before taking action of its own to reduce how much it forks out.
Although we do not yet know what Mr Osborne and Mr Duncan Smith have agreed, there is plenty of speculation. One idea that has been floated is that they could reduce the value of tax credits to what they were in 2003. This, it’s estimated, would save the government £5bn a year. But it’s also estimated that such a move would have the effect of reducing the incomes of 3.7 million people on low incomes by £1,400 a year. No wonder Andy Burnham, one of the contenders for the Labour leadership, accused the government of ‘frightening vulnerable people’.
There is a further interesting wrinkle in the debate over the future of tax credits. In trying the renegotiate the terms of British membership of the European Union, Mr Cameron has made clear that he wants restrictions on the access to in-work benefits of migrant workers from within the EU. But it is likely to prove one of the most difficult deals to strike, not only because EU countries from eastern Europe seem certain to resist (since so many of their nationals working here would be affected), but also because such a change would be regarded as discriminatory and therefore against the very principle of free movement of labour within the EU. Mr Cameron may calculate, however, that if he can, in effect, do away with most in-work benefits for British workers he can’t be accused of discrimination of he wants to do the same for EU immigrant workers.
There is, then, a lot at stake in what the Prime Minister was floating in his speech this week. What matters to the low paid is how it affects them. Do you think he can give them a better world of higher pay and lower welfare, or do you think they will end up with even lower incomes? And what do you think is best for Britain?
