2014: the year of hard truths or return of the good times?

Posted by Krisnah Poinasamy Economic Justice Policy Adviser, UK Poverty Programmme

22nd Jan 2014

Economic growth returned to the UK last year and unemployment is falling, but can people on the lowest incomes expect things to get better in 2014? Krisnah Poinasamy analyses recent good and bad news and explores what else can be done to help people in the UK overcome poverty.

Judging from the latest round of announcements, it can be hard to tell whether times are good or bad. One week we're told 2014 will be the year of hard truths, with the Chancellor laying down a choice between cutting social security by a further £12 billion between 2015-17 or more borrowing (as if raising tax isn't a choice). The next week we're told the economy is doing well enough to raise the National Minimum Wage (NMW) substantially above inflation.

One thing is clear: some intervention will be required for the gains from a growing economy to be felt by all. If anything, this is an admission that the rising tide can sometimes leave some people to drown. It's a recognition that during the past three decades, long periods of growth occurred at the same time as increases in poverty and inequality, which are significantly higher today than they were in 1985.

A UK Living Wage by 2019?

There are currently 4.8 million workers in the UK paid less than a Living Wage, of which 1.4 million are paid the NMW. Assuming the Low Pay Commission agrees with the Chancellor, the NMW could rise from £6.31/hour today to £7 by October 2015. This equates to an increase in the NMW of 34p in October 2014 and the same again in 2015 - over 5 percent a year, considerably higher than inflation (2%, CPI) and growth in earnings (0.8%). On its own, therefore, an above-inflation increase in the NMW would have a significant impact on the lives on the poorest workers.

If the minimum wage can be raised by such a degree in periods of growth, shouldn't we continue this policy until it catches up with the Living Wage?

However, an increase of this magnitude is long overdue. The National Minimum Wage has fallen considerably behind the Living Wage, which currently stands at £7.65; £8.80 for London. This means someone on the minimum wage in London actually needs to earn 39% more - an extra £2.49 every hour - to have a basic standard of living. Despite the government's proclamation of 'making work pay', the NMW isn't paying anywhere near enough for a basic living, with full-time workers in London facing a shortfall of £4,532 per year.

The Chancellor's policy closes that gap and would put an extra £600 (before tax) into the pockets of full-time NMW workers. But that still leaves workers £3,923 short of the Living Wage. The urgency of raising the NMW cannot be overstated and begs an important question: If it can be raised by such a degree in periods of growth, shouldn't we continue this policy until it catches up with the Living Wage?

If the Living Wage were to increase by just 2% a year and the NMW was continue to receive same above-inflation increases, we could see the NMW become a Living Wage by 2019, and a London Living Wage by 2023. Work truly would pay and working poverty could begin to significantly drop.

Giving with one hand...

Despite the potential gains from increasing the NMW, we shouldn't forget that many households will have seen significant drops in their income as a result of the £22 billion cuts to social security over the period 2010-15. A sizeable chunk of these cuts will come into force this year, so people will most likely see their income fall in April before any increase in the NMW in October.

For example, the Welfare Uprating Act - limiting increases in working-age benefits to just 1% in April this year and the next - means 7 million working families see their income drop by an average of £165 this year.

More progressive forms of taxation ... could be used to fund a social security system that supports people to permanently overcome poverty

And if the proposal of a further £12 billion in cuts to social security were to take place, it's possible that the extra £600 a year achieved by increasing the NMW could end up being virtually meaningless to some working families. That is just income; cuts to spending and services will only add to this impact.

So whilst we should applaud the Chancellor for suggesting businesses reward the lowest-paid more fairly, it's worth considering what else we need to do to help people overcome poverty. For perspective, one just needs to look at how average executive pay rose by 14% in 2013 alone, whilst FTSE 100 directors' pay saw an increase of a whopping 58%. And when the 85 richest people own as much wealth as the 3.5 billion poorest, it's clear that raising the NMW won't eradicate deep-rooted inequality. Instead, more progressive forms of taxation, for example, could be used to fund a social security system that supports people to permanently overcome poverty by moving on from low-paid, insecure jobs.

Until we tackle the deeper issues with a raft of policy solutions, it'll continue to be good news for some and hard truths for the poorest.


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Blog post written by Krisnah Poinasamy

Economic Justice Policy Adviser, UK Poverty Programmme

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