Ed Miliband’s tax break for living wage plan – an exercise in missing the point

Ed Miliband has proposed tax breaks to encourage employers to offer a living wage, according to reports in this morning’s Guardian.  Labour, it is argued, wants to reduce the benefits bill by encouraging employers to pay higher wages.  The shadow Treasury team is reported to be considering options.

The aims are laudible – better pay, a real multiplier effect (which somewhat contradicts Ed Balls’ austeritarian view of public finances, but we’ll leave that one aside for the moment), a boost to the economy and a smaller benefits bill.  Everyone would benefit – and there can be little doubt that lifting wage levels for the low-paid would both boost the economy and reduce the benefits bill.  We are clearly in virtuous circle territory, especially when one considers that real pay in the UK is falling – and falling faster than in any of the other top 10 world economies.

But the plan is deeply flawed – in ways that are revealing about Labour’s economic mindset. The obvious objection is that, as with any proposal that tops up low wages, it effectively subsidises employers for doing the right thing.  It’s a bit like reducing VED for drivers who obey the speed limit.  And it ignores the fact that even firms employing staff at less than the living wage will still employ staff who are paid more than it – who are indeed paid well.  How do you define both the level of, and the criteria for receipt of, the tax break, in such as way as to ensure that businesses do not receive subsidies for simply paying their staff what the market will take?  And as soon as you find yourself offering tax breaks to business that are significantly in competition with others elsewhere in the EU, how do you stop this from turning into an illegal State Aid?  And what of the cost of administering all of this, and assessing who is eligible for the tax break?

You do not have to dig too far below the surface to find that this proposal unworkable. The discipline of turning a bright idea into a workable legislative proposal is cruelly exposing (and I speak as someone who in my Civil Service days had plenty of experience of developing Finance Bill legislation).  Like so many ideas that form part of Labour’s “predistribution” package, the whole structure starts to fall apart once you start to ask the awkward questions that turning policy into workable practice must beg.

More significantly, it exposes a long-term issue for wages and working conditions.  The number of people working in the public sector has fallen substantially, not least through outsourcing, and is expected to continue to fall substantially.  The largest employer in the UK – the NHS – has just effectively been privatised, which will mean that the number will fall considerably further as many NHS functions are transferred to the private sector.  Previously, the public sector has been a benchmark for decent pay and conditions – including of course pensions.  Decent pay and conditions in the public sector has driven standards of pay in the private sector as employers compete for staff – which is of course one of the reasons why the right wants to reduce it in size, because its shrinkage is a factor driving falls in pay (along with an explicit policy of reducing public sector pay in real terms).  Moreover, a large public sector payroll has an inherently stabilising effect on economies.

But with an incoming Labour government committed to keeping the Coalition’s cuts and possibly making more of its own, that trend will continue; and in it adherence to austerity economics Labour is actually throwing away the best tool it has to bid up real wages; an expanding, dynamic and decently-paid public sector.

Obviously simply expanding the public sector won’t do the trick on its own.  It needs the courage to argue for decent public sector pay as a good thing, when public sector pay and pensions have always been an easy targets for Blairites as well as Condems.  And it does need supply-side adjustments – better education, better training, career development (all of which come at a price and might be a better target for tax breaks – it remains the case that a firm pays VAT when it sends an employee on a training course but a public school education is VAT-free and heavily subsidised) and a mentality that sees labour flexibility as a managed process of improvement rather than a driver of low pay.

The trouble for Ed Miliband is that dealing low pay in a coherent and intelligent way means dragging Labour off the neoliberal yellow brick road. And that appears as far away as ever.

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