Increasing the minimum wage means the worker gets more in net wages, the taxman gets more in tax and NI, and it reduces the welfare bill.
The more you increase the minimum wage the greater the increase to the worker and to the taxman and the greater the saving to the welfare bill.
Take the example of a couple with three children and one wage earner working 35 hours per week at the £7.50 minimum wage and increase to £10 per hour and these are the impacts – all in weekly terms
- The worker gets a gross wage increase of £87.50
- The worker pays £17.50 more in income tax
- The worker pays £11.50 more in national insurance
- The worker has a net wage increase of £58.50
- The worker receives £36 less in working tax credit
- The worker receives £23.38 more in housing benefit
- Thus the welfare bill reduces by £12.62 per week (£36 less £23.38)
In overall terms:
The worker is £45.88 per week better off (£58.50 less £12.62)
The state is £41.62 per week better off [£12.62 + £17.50 + £11.50]
Thus the worker gets an overall increase of £2,390 per year and the state saves £2,170 per worker per year due to increased tax take and reduced welfare payments.
In this election Labour has promised to raise the minimum wage from £7.50 to £10.00 per hour while the Tories have reneged on their previous commitment to raise it to £9 per hour and instead now promise £8.20 per hour by 2020.
It is difficult to ascertain the precise figure but a cautious estimate would be 2 million families at least affected by the above. IF the state reduces its welfare spend by £2,170 per household the that is a significant saving of £4.34 billion per year which is more than the entire cost of Job Seekers Allowance for example.
As I have detailed in earlier posts as far back as 2014 Housing Benefit is in essence an employer subsidy of £5.8 billion per year as 1.1 million people in work receive it and up massively since May 2010 when there were just 650,000 in-work recipients of HB.
Housing Benefit and Working Tax Credit subsidise low-paying UK employers and if everyone took the government route incentivised by Universal Credit and numerous HB policies such as the overall benefit cap of a lone parent family working 16 hours per week and a two parent family 30 hours at today’s minimum wage it would see the welfare bill increase by around £3 billion per year.
Think on that. If everybody worked which is government policy then the welfare bill would INCREASE. That is perverse yet it is the welfare system which incentivises employers to offer minimum wage jobs in the full knowledge that the government pays out more in welfare. The system is wrong and the UC system brought in with so much fanfare as the panacea to replace the complex legacy system is so much worse.
Under UC everyone would get every penny they are entitled to yet we know from the governments own figures that some £33 billion per year or £90 million every day is entitled to yet goes unclaimed and so under UC the welfare spend increases by £33 billion per year.
It is not hyperbole to say Iain Duncan Smith’s ‘welfare reforms’ are an ill-conceived mess and a shambles… that would be far too complimentary, as would calling UC a dog’s breakfast or pig’s ear.
The underlying and central problem is the subsidy the taxpayer gives to low paying UK employers through HB and WTC that only a significant rise in the minimum wage can deal with and such an increase saves the ‘hardworking family’ to use that too often used political term. Your taxes whether income tax, vat and all other direct and indirect taxation is not subsidising layabouts as poverty porn TV bombards us with, it is subsidising unscrupulous low paying employers.
Working Tax Credit is ONLY paid to those in low paid employment and at around £29 billion per year it is a extremely costly employer subsidy to go along the £5.8 billion per year of Housing Benefit that is paid to those in-work.
The UK central government spends just over £35 billion per year on Education and the same on subsidising low wage paying employers is a correct analogy yet an argument we never read or hear or discuss. That subsidy out of ideology and right should be removed and the saving to the UK taxpayer is merely a bonus from the increase in the minimum wage to £10 per hour which is still too low.