Subsidising employers is a waste of money – so raise the minimum wage

Last weekend’s Observer threw up an interesting little titbit. Turns out that the UK government is the second-biggest customer of the UK’s investment banks. It spent £64m with them last year getting advice on bond issues and the like. This is of note simply because it is easy to forget, given all the talks about ‘cuts’, just how much the state subsidises absolutely every part of the private sector.

It subsidises the likes of JP Morgan and our housebuilders (who have been getting around 50% of their business from social housing contracts directly). But the indirect subsidies are equally vast. Think about the abolition of child benefit for example. The effect has been to make it more efficient for those on the cusp of becoming a 40% tax payer to turn down a pay rise, unless it is a particularly large one.

Let’s say you make £43,874 a year and you have two children. You’ll be getting around £1,700 in tax-free income from your child benefit. Say you then get offered a pay rise to £46,000. Would you take it? Of course you wouldn’t. The extra £2,000 would be taxed at 42% leaving you with a mere £1,160 extra. Not enough to cover your losses. The truth is you’d have to be offered a rise of going on £3,000 before it would be worth your while to trade the unearned income offered to you by the state for the earned income you might get from your company. That adds up to a hefty effective transfer of cash from the state to your employer – they don’t have to pay you more because the taxpayer is doing it for them.
Still, that’s not the half of it. I’ve written here before about how the low minimum wage represents an effective transfer of cash from the UK tax payer to multinational firms. That’s the case because the minimum wage simply isn’t high enough to be a living wage. So anyone getting it has to have their income topped up by the state (via tax credits and so on). If they didn’t they would either get very cold, very hungry, or both.

That means the taxpayer has to subsidise the bottom-of-the-pay-rung employees at our supermarkets and fast-food outlets. And that, in turn, means we are subsidising our supermarkets and fast-food outlets. They keep their profits high, in part, by paying low wages. That’s something they can only get away with because the welfare state picks up the slack. The profits then go to their shareholders and the taxpayer gets left to top up the wages.

The argument about the ‘cuts’ and about how we can or can’t cut the welfare bill goes on and on. But still I’ve seen no one suggest that we might raise the minimum wage. It may seem like a ludicrous idea. But look at the main objection being put about to the idea of capping housing benefit at £400 a week. It is that if we don’t subsidise housing, not just for the unemployed, but for working people too, the low paid won’t be able to live near their jobs. The point being that there is something much more ludicrous than paying a minimum wage of, say, £7.50. It is paying a minimum wage of £5.90 and expecting the taxpayer to top it up to £7.50.