In a characteristically calculated intervention last year, George Osborne sought to compensate for the Tories’ past opposition to the minimum wage by declaring that he hoped the main rate would rise to £7 by 2015-16. “If, for example, the minimum wage had kept pace with inflation it would be £7 by 2015-16, £6.31 at the moment, so that is an increase,” he said, with an eye to his party’s blue collar wing. “I think we can see an above inflation increase in the minimum wage and do it in a way that actually supports our economy precisely because the economy is recovering and many, many jobs are being created.” The Treasury published an accompanying analysis modelling the impact of an increase to £7, lending further weight to the figure (which at the time would have restored the minimum wage to its pre-recession value).
But it is now clear that Osborne was raising false hopes. The Low Pay Commission, the body that advises the government on the minimum wage, has today published its recommendations for 2015-16 – and they do not include an increase to £7. Instead, the LPC has called for a smaller rise to £6.70 (up from £6.50). The government is not obliged to accept its proposals but Vince Cable, who is formally responsible for this area as Business Secretary, has signalled that ministers will almost certainly not oppose the figure. He said: “I will now study these recommendations and consult my Cabinet colleagues with a view to announcing the final rates in the next few weeks. The Low Pay Commission strike a delicate balance between what is fair for workers and what is affordable for employers, without costing jobs. It does so impartially and without political interference. No government has ever rejected the main rates since it was established fifteen years ago. It is important that it is able to continue to do its work ten weeks before a general election.”
Cable is known to have been angered when Osborne floated the figure of £7, believing that the LPC would never approve such a large rise. Indeed, Osborne pre-emptively retreated when the government failed to propose this rate in its final submission to the body. The Chancellor can point out that he maintained at the time that ‘the exact figure has to be set by the Low Pay Commission’. But that does not alter the fact that he sought (and won) headlines on his support for a £7 rate. Through this careless act, he has handed Labour political ammunition with which to attack him and ensured that a 20p rise (3 per cent above inflation) will now disappoint expectations.
Although inflation has fallen significantly, a rate of £6.77 would still fail to restore the minimum wage to its peak value. As the Resolution Foundation noted: “The minimum wage is set to rise by 3 per cent in October 2015, roughly the same percentage by which it rose in October 2014. Last year, the Low Pay Commission described its decision to recommend a 3 per cent increase last year – rising from £6.31 to £6.50 – as reflecting “a new phase” for the minimum wage, following a period in which it had suffered repeated falls relative to inflation. But that lost ground has yet to be fully made up. The Resolution Foundation estimates that an increase of 4.2 per cent to £6.77 would have been necessary to take the minimum wage back to its highest ever value in real-terms, which it held in 2008-09.”
To be on track to meet Labour’s promise of an £8 minimum wage by the end of the next parliament, the rate would need to rise to £6.78. That means the opposition faces some tough questions of its own: would it have become the first government to overrule the LPC?
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