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How could The National Living Wage affect Consumers?

The national minimum wage, introduced by Tony Blair’s Labour government in 1999 at a now almost laughably thrifty £3.50 an hour and standing at £6.50 an hour today, up to  fair pay for workers across the United Kingdom and is now pretty much a universally supported idea politicians of all parties.

 

Earlier this month, the Conservative Chancellor of the Exchequer, George Osborne, announced a new national living wage for all UK workers over the age of 25. Starting at £7.20 an hour in 2016, and rising to £9 an hour by 2020, this new legislation will essentially replace the national minimum wage. Osborne claims that this will address “Britain’s low pay problem”, and that it will positively benefit 6 million working families across the country. Osborne has faced criticism from many journalists and opposition politicians for this plan, mainly because it only applies to those over 25 and it also replaces the previous, although voluntary, living wage scheme that actually paid workers more if they lived in London. 

 

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As is often the case in politics and economics, this new policy has divided commentators, politicians and business leaders across the left and right of the political spectrum. Some businesses and corporations maintain that a higher living wage will cause businesses to hire fewer workers, and insome cases, lay off employees they already have, as they cannot afford the higher costs incurred. The government, however, completely rejects this idea and commissioned over 130 studies into this area which all concluded that “higher minimum wages don’t harm employment.”

 

In this budget, Osborne has also promised to further cut the corporation tax rate from 20% to 18% by 2018. It stood at 28% in 2010, and this planned cut will mean the UK has the lowest corporation tax rate in the G20 – by a considerable margin. So even if there really was a financial burden imposed on a business by a higher minimum wage, this should be offset by a significantly reduced tax rate.

 

The government’s hope, by slashing corporation tax and instigating a living wage, is that an economic positive feedback loop will be created in which increased wages lead to more consumer spending and a growing economy that can afford to pay its workers higher wages, and so on. Through this increased consumption stimulating economic growth, the Treasury can recoup any losses caused by the initial cutting of taxes – as the old saying goes, you can’t make an omelette without breaking eggs.

 

The kind of growth that will hopefully be spurred on by the higher minimum wage might lead to an increased inflation rate, leaving many of those worst off (especially when coupled with the removal of tax credits as also announced in the budget) in an even more difficult financial situation. However, many other people across the UK will stand to benefit from these changes and the entire economy of the country should stand to gain from economic growth in the long run. A higher, mandatory, living wage also means increased tax revenue for councils across the UK (although the level is significantly lower outside London) who can use this money to invest in highly needed public housing and infrastructure improvements.

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The main voices of dissent against Osborne’s plans come from the agricultural sector, where profit margins are notoriously tight and the living wage may send many businesses into the red. It is estimated that this may cost up to 60,000 jobs across the UK but theactual impact will not be known until the new legislation comes into effect. In fact, as previously discussed, the resulting increase in economic growth and the staggered introduction of the wage itself may offset these job losses if they are in the end required at all (although this will be cold comfort to anyone who is actually made redundant as a result of these changes).

 

On a personal finance level, for those who aren’t hard up, the period following the living wage increases could seem like a good time to take out one of the many kinds of personal loans available on the market. Increased disposable income coupled with a stronger economy that stimulates lending, makes borrowing an attractive prospect.

 

However, consumers should be aware that when inflation is anticipated by lenders, they will often adjust interest rates in order to account for this disparity. And if inflation then falls, consumers will be left paying higher interest on any personal loans – but on the flip-side, if it continues to rise, they will get a better deal. 

 

So don’t borrow more than your means, even if the economic outlook looks promising, as economic climates are unpredictable and can be wild (just like the actual climate). What looks like a great deal today might not be such a great one tomorrow, so always plan for the worst and never borrow based on economic uncertainty. 

 

 


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