Increases to public sector pay and minimum wage will not prevent cost of living crisis

With an increase to the minimum wage and the end of a public sector pay freeze, it seems clear that the chancellor is seeking to present himself as the friend of ordinary working people.

Around 2 million citizens on minimum wage will see a 6.6 per cent increase in their pay, which will go up to £9.50 next year. Up to 5 million more public sector workers are also in line for a pay increase in 2022 after a year-long freeze.

But the announcements expected to be made in the Budget this week should be put into context.

The minimum wage was already set to rise to two thirds of the median UK salary by 2024. At current levels, two thirds of median earnings is £9.42 an hour, just 8p less than the rate to be announced.

Moreover, pay rises will not erase the unprecedented stagnation in wages and living standards of the past 13 years. What’s more important than the 59p-per-hour increase is the impact on people’s real spending power.

The government has claimed that the minimum wage increase equates to a pay rise of more than £1,000. This doesn’t tell the full story. The figure is based on full-time workers, but many people earning the minimum wage are part-time.

For a minimum-wage worker who is also on universal credit, their take-home pay will rise by just £265, according to calculations by the Resolution Foundation. That’s because they will pay more income tax and because benefits payments taper off sharply when earnings rise.

Wages increase will also be eroded by increasing prices of goods and services. Inflation has hit 3.1 per cent with some forecasting that it will hit 5 per cent this year, cancelling out much of the 6.6 per cent rise in the minimum wage.

We cannot do a similar calculation for public sector workers because we do not know how much the chancellor plans to increase their wages by.

The headline rate of inflation also hides some much more alarming figures that will hit lower-income households harder.

Prices for some basic essentials, notably gas, electricity and petrol, are rising much faster than the rate of inflation. The energy price cap rose 12 per cent in October and is set for an even larger rise when it is reviewed again in April. These costs naturally make up a larger proportion of the budgets of poorer households than wealthier ones.

While energy costs are largely dictated by global markets, the government is making a political choice to squeeze household budgets further by raising taxes and cutting benefits.

In April, national insurance contributions will rise by 2.5 percentage points – 1.25 from the employer, 1.25 from the employee. Income tax brackets are also being frozen at their current levels. In real terms, this equates to a tax increase for workers.

The chancellor has reportedly rejected calls to cut VAT on energy bills, which would have saved £60 per household on average.

One of the chancellor’s most significant policy choices has been to cut universal credit, putting a hole in the budgets of more than 5 million people on the lowest incomes. In total, that cut alone takes £6bn of spending out of the economy.

While the chancellor will want to claim that he is being as generous as he can be, he is taking away more with one hand than he is giving with the other.

Meanwhile, he will cut the surcharge on banks’ profits in a bid to make the City of London “more competitive”.

There are other options. France has recently announced a plan to give many of its poorest citizens €100 to mitigate rising energy prices.

The US is embarking on a far more ambitious programme of stimulus spending and investment than the UK, and is considering raising taxes on wealth (or, more precisely, on “unrealised capital gains” such as the increase in value of assets like property or company shares).

Polling indicates widespread support in the UK for higher taxes on wealth, yet the chancellor – who is himself a multi-millionaire – appears reluctant to implement them.

Critics of Sunak’s approach argue that it risks choking off an economic recovery that’s already under threat from disruption to global supply chains and a worker shortage exacerbated by post-Brexit immigration curbs.

Sunak has stated that he wants to “balance the budget” in the way that a household might aim to do.

But the government is not a household. As a paper out this week from the New Economic Foundation highlights, every pound Sunak spent on pandemic support measures like furlough, was matched by a pound that the Bank of England created at the press of a button. No household, of course, possesses such a powerful tool.

In this context, balancing the government’s budget by ruining those of millions of households makes no sense.

For struggling businesses, the pay rises may be tough to bear, but having customers with little disposable income to spend is arguably a bigger risk.

What workers and businesses need most urgently is not for the Treasury to “balance its budget”, it is sustained economic growth, with rising prosperity shared evenly – something that governments have failed to deliver for decades.