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What should we make of Osborne’s National Living Wage?

July 9th 2015

The new National Living Wage announced in the Chancellor’s July 2015 budget is a welcome move, but there’s a sting in the tail.

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Low pay is a scourge of contemporary Wales, with nearly a quarter of workers living on less than the 2014 rate of £7.65 an hour.

Low pay is bad for workers, bad for their families, and bad for productivity and the wider economy.  A Living Wage improves workers’ quality of life and has business benefits too, despite the immediate increase in the wage bill.  So on the face of it, Wales’ 261,000 workers who earn less than £7.65 an hour should be very pleased indeed. A 10% pay rise from the current National Minimum Wage to the 2016 Living Wage, and a 38% rise to the 2020 rate, is more than most trade unionists could dream of.  For someone working 30 hours a week, the prospect of an extra £21 in their pockets, free of tax, is attractive indeed.

Unfortunately, not everyone will enjoy the benefits of the National Living Wage.

Young people are excluded from the new National Living Wage – not even a 24 year old who might have completed an apprenticeship and have 6 years’ work experience under their belt is eligible for the new rate.  Add to that the abolition (in England – we don’t know about Wales) of grants for students from low income families, the removal of help with housing costs from under-21s and soaring costs of housing, and young adults are under unprecedented pressure. Far from an 18th birthday marking the transition to adulthood, it seems today to mark entry into a period of enforced hardship.

Women, on the other hand, stand to gain as they are by far the largest number of people on low pay.  Four out of ten women working part time last year earned £7.43 or less, as did more than 10% of women full timers.  As far as their pay packets are concerned, women part timers will enjoy very real increases.

Give away and take away

The bad news is that some people will lose a great deal of their Osborne bonus. Anyone working for more than 29 hours a week on the new National Living Wage will see their earnings go over the income tax personal allowance of £10,800 in 2016/17, promptly giving 20% of their Osborne bonus back to the Chancellor.  On top of this, anyone earning more than £155 a week (21 hours at the new Living Wage rate) will give 12% in National Insurance to the Chancellor.

On top of this, low paid workers will also lose from changes to Tax Credits – reducing the earnings threshold, cutting the family element and limiting the child element to a maximum of two children  as well as freezing the rate. Quite how this pans out depends on each family’s circumstances, but the Social Market Foundation estimate that a family with two children, with one adult working full-time earning the National Minimum Wage and Living Wage will be £1,279 a year worse off than at present. Even by 2020, the family will be nearly £200 a year worse off in cash terms, without allowing for inflation.  The truth is that for this family at least Osborne’s headline-grabbing gain is in fact a cut.

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The July 2015 budget is a major challenge for all the Welsh political parties going into the Assembly elections.

The headlines about the National Living Wage are appealing – what’s not to like about a 38% pay rise?. The bad news is hidden in the interplay of earnings with income tax, national insurance and tax credits – a complex and technical issue that is not headline-friendly and which most writers and commentators never experience.

But there should be no illusions.

About 200,000 people in Wales are currently paid less than £7.20 an hour will gain from the new National Living Wage.  But more than that number – 238,000 according to HMRC –  currently claim Child and / or Working tax credits, receiving on average £6,000 a year in help.   We simply do not know how each family will be affected, because everyone’s circumstances are different, but if the impact is for each family to be on average £1,000 a year worse off as a result of the changes, as a ball park figure, then £238 million will be stripped out of family budgets.

This figure is no more than a guess – it could be more, it could be less – it all depends on how many hours people work, how they respond to changes in pay, and what benefits they claim. My point is that the net impact on Wales is likely to be gains for a few (such as the low-paid partners of those in middle and higher pay or the pensioners supplementing their pensions) and losses for many.

The challenge for each and every party is how to stop these changes driving more and more children, young people and adults into real hardship – the daily grind of struggling to make ends meet, of keeping the heating off when it is chilly, of eating beans on toast again, of the catastrophe when a child needs new shoes, of the fear of the washing machine breaking down.

Over to you political leaders.

Victoria Winckler is Director of the Bevan Foundation. 

 

 

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