Merry-go-round to helter skelter; business picking up the benefits tab

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“Merry-go-round…topping up low pay…helping to create well paid jobs in the first place.” These are just a few excerpts from the Prime Minister’s speech on opportunity, where David Cameron laid the ground for the Government to cut welfare spending by £12bn. These cuts will have a heavy focus on working age benefits, and in particular tax credits, which top up the wages of low earners. And it is this focus on benefits relating to those who work, which raises an important question for employers… how are they going to pick up this tab?

For this is what the government has said must happen, as the Work and Pensions Secretary Iain Duncan Smith later told the House of Commons, saying “We want companies to pay better salaries, which means less tax credits from us [Government].”

In principle the idea that we want to move to a high skill, high wage society is an admirable goal. I have previously argued here that business must do more to help boost the wages of lower and middle level executives, who have only recently started to see any sign of wages rising to counter the increasing costs of living since the recession. And in fairness, business has already started to take seriously the increasing costs facing employees with the CBI’s flagship call for more childcare support for working people made to government last year (and discussed here).

But in order for this to be fair on both sides -the working poor who lose this support and the employers who are to pick up the slack in increased wages- a serious and long term plan is needed. We await more details on these cuts in the Chancellor’s budget next month, with the plans to be finalised in the autumn. But given the “salami-slicing” nature of the announcement, where the value of tax credits is simply taken from the £12bn cuts figure, it doesn’t seem well planned or fair.

“Salami-slicing” is the phrase used by Mark Littlewood, Director General of the Institute for Economic Affairs, a libertarian think tank (and therefore more likely to support cutting welfare support from the state) which has criticised the plans. He says the composition of the cuts “looks set to be extremely unfair on the working-age population”. The Resolution Foundation have also said that working families with two children could lose up to £1,690 with these cuts. Importantly, their chief economist Matthew Whittaker has said that it “will take heroic pay rises to offset the losses caused by severe cuts to tax credits”. Which brings us back to business.

If business is to pick up the tab for these benefits cuts in the short term via increased wages, how will this be done?

For those who might suggest the Living Wage, no political party or the vast majority of the poverty lobby would advocate making this mandatory for business. As  moving the payment of the living wage from an aspiration to a reality, it is simply too expensive for many SMEs (who it must be remembered are driving our economic recovery) to pay. This is why we retain the Minimum Wage as well as the Living Wage. Bodies such as the Federation of Small Businesses (FSB) have made this point strongly. 49% of FSB members already pay staff the living wage (as surveyed in 2014). However, there was in fact an increase of 420,000, or 9% in those in the UK who were not being paid the Living Wage (2013-2014) according to the Living Wage Commission. A lot of these firms who don’t pay the Living Wage are also in sectors such as cleaning or retail where many of those who rely on tax credits reside.

So what might the other alternatives be? One might be a suggestion that Labour put forward before the election of offering tax breaks to those employers who pay the Living Wage. But whether this is enough of an incentive to increase adoption remains uncertain. The costs that need to covered, as well as the previous downward trend in Living Wage payment, suggest it might be part of a solution, but not sufficient on its own. It is also unlikely to breech the scale of pay gap needed or be as quick to deliver as the government’s £12bn welfare cut drive would demand.

Longer term innovation is also possible here on the quality and skills needed in jobs to boost wages. For example, the Low Pay Commission has recently (2014) stopped classifying the security sector as ‘low-paying’, after the introduction of a statutory licensing system, minimum qualification requirements for security guards, and better use of technology within the industry. This has improved levels of training and raised wages, including the ‘going rate’ for entry-level positions. It will not be possible for all jobs to develop higher wages from this type of innovation, but such measures should be looked at as part of the solution. Again, however, the need to match the timeframe of the government’s £12bn welfare cuts, makes such innovation an unlikely short term solution

Stopping the “merry-go-round” of the low paid paying tax and receiving it back as tax credits -as a substitute for higher wage jobs- is a noble aspiration. But driving it through heavy and fast paced cuts to welfare as the Prime Minister has outlined, risks turning this aspiration into a helter-skelter of a prolonged squeeze on living standards for the working poor and unfair expectations and burden for business.

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About the Author

About the Author: Crispin Oyen-Williams is the Director and Founder of Business Innovate. .

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