Surprise turnaround as Chancellor backs above-inflation minimum wage rise

Chancellor George Osborne Photo: Rui Vieira/PA Wire

The Chancellor has suddenly declared himself in favour of an above-inflation rise in the minimum wage. This is quite a turnaround - only last week he was refusing to back calls for the lowest pay to be increased from the current level of £6.31.

The levels are set by the government but based on recommendations from the Low Pay Commission, an independent body set up by the Labour government in 1998. It is due to set this year's recommendation at the end of next month and the Treasury has just sent its evidence.

Since the economic crisis hit Britain in 2008, the minimum wage has fallen behind inflation making those workers earning it worse off. They make up about four percent of the workforce and are, of course, not alone - wages across the board have been eroded by inflation. But this year, as the economy improves, average wages are expected to outgrow prices and the Chancellor has decided he thinks this should also be reflected in pay for those at the very bottom.

Average wages are expected to outgrow prices for the first time in several years Credit: Julien Behal/PA Wire

In an interview with the BBC, he said the economy "can now afford" a higher minimum wage and mentioned it would need to rise to £7 an hour by 2015 to return to the relative level it was at before the crisis.

Politically, this is aimed squarely at improving the Conservatives' standing amongst a group that is not its traditional support base. Labour has made great running with its focus on the "cost of living crisis" and George Osborne is trying to win back some of those votes.

Some business groups, however, are unimpressed. The Institute of Chartered Accountants says that companies have already fixed their budgets for the year and higher wages "would have to be paid for from savings elsewhere in the business, increasing product prices, or even by stalling recruitment plans". Could the remarkable success story of the past year - falling unemployment - finally draw to a close?

One boss of a security firm has told ITV News this evening that she is very worried: "If I had to put guards on the new minimum wage," she said, "I just don’t know how I could work in that sector."

Some businesses that employ workers on minimum wage are concerned by talk of a rise Credit: Rui Vieira/PA Wire

Many businesses (and the Consdervatives) were dead set against the minimum wage when it was first introduced, making similar warnings as today - yet it hasn't hampered the growth of low pay jobs compared with job creation across the whole economy.

The Treasury's own modelling, submitted to the Low Pay Commission, concludes it would be broadly neutral for the government: What it gains in higher taxes and lower benefits payments is balanced by lower corporate tax receipts, amongst others.

The Chancellor's bet is that he will benefit from a higher minimum wage. Not his own pay, of course, but that those who do see their pay packets increase will rate him and his party more highly.

More on this story