A third of British households now live on inadequate incomes, according to the Joseph Rowntree Foundation. To increase prosperity, it’s not enough to raise wages. We need to scrap the policies that are pushing up the cost of living.
Unemployment is exceptionally low in the UK. That’s the upside. The downside is that high employment has been achieved through wage compression.
Downward pressure on wages is partly the result of the free movement of cheap labour from Eastern Europe. But that’s not the only reason.
The government is also subsidising low pay – through tax credits. Employers are incentivised to keep wages low, knowing taxpayers will top them up. In-work benefits are also an added incentive for immigration.
But low pay isn’t a stand-alone problem. Wage stagnation is an issue because the cost of living is high and keeps rising. For that, government bears much greater responsibility.
Regressive taxes – VAT, ‘green’ levies, duties on fuel, alcohol and tobacco etc. – place the greatest burden on the least wealthy households. According to official statistics, the poorest fifth of households spend an average of 30% of their disposable income just on indirect taxes.
The poorest are also hit hardest by monetary policy. Decades of low interest rates have not just raised prices that would otherwise have fallen, but also stoked a housing bubble – transferring wealth from the asset-poor to the asset-rich in the process.
Letting people keep more of their own money, and not debasing its value through constant monetary expansion, would raise the welfare of the poorest at a stroke.
The answer isn’t more state intervention. It’s less