Wednesday, 5 March 2008

"Minimum wage will rise to £5.73"

They are not just stupid enough to do this, but pathological liars who don't understand their own rules:

Business Secretary John Hutton said ... "Before it was introduced, some workers could expect to be paid as little as 35 pence an hour...".

I have no idea how many people worked for 35 pence an hour*, but glossing over that, somebody on the NMW and Tax Credits has a marginal tax/withdrawal rate of 70%, so in October 2008, their net hourly salary will rocket from £1.66 to £1.72. If they're claiming Housing/Council Tax Benefit as well, their marginal rate is 95.5%, so their net hourly pay will whizz up from 25 pence to a 26 pence an hour!

Dave Prentis, Unison general secretary [said] "A much more realistic figure would be a minimum wage of £6.75 an hour, which would lift many more families out of poverty and off means-tested benefits."

OK, let's assume Mum's at home with two kids and Dad is slaving away 48 hours a week on the NMW of currently £5.52 = £265 gross, per Table 1.6b the family's net income after housing costs is £259. Increase the NMW to £6.75, and assuming he doesn't lose his job anyway**, their net household income increases by a modest £18 to £275, so the family is hardly lifted out of poverty. At this stage he's paying £71 tax/NI a week but the family is still entitled to Child Tax Credits worth £76 a week, so they are very much still on means-tested benefits.

* But our hard working Dad in the above example is actually working for £1 an hour net; if he were to pack in working, the family's net income after housing costs would only fall to £209 (Table 2.1a). For comparison, in the early 1980s, up in Leeds, I earned £1 an hour working at a printer's and in a café near the market, so 35p must be decades ago.

** Because of course, a £1.23 rise in NMW would cost the employer £1.39 once you include Employer's NI; as against the extra 38 pence an hour our 'hard working Dad' would be getting. So the odds are 4-to-1 that the total net incomes of those people currently on the NMW would fall overall, once you net off the modest wins and those who become unemployed.


Simon Fawthrop said...


Have you ever seen or calculated how much collecting and distributing these means tested benefits cost? It would be interesting to know how much they could raise the income tax allowance rate if they were scrapped? Any calculation should include the direct cost to Govt in managing the means testing but also the direct and indirect costs to employers in managing their end as well.

As a higher rate tax payer I would more more than happy for any gain through increase in income tax allowance to be netted off by increasing the higher rate.

It just doesn't make sense for this money to whizzing round Govt to spew out again to the same people it was taken from. The opportunity cost must be huge.

Mark Wadsworth said...

Overpaid benefits, whether fraud or error = between 0% for flat-rate benefits (Child Benefit), 0.5% for non-means tested benefits (State Pension) and up to 10% for Incapacity Benefit. DWP running costs £5 bn-plus (per their website), HMRC admits cost of administering tax credits is nearly £1 bn ("3p for every £1 paid out"). So call it £10 bn-plus in round figures.

That's enough to increase tax-free personal allowance by £1,000, so no need to increase higher rate tax.

However, the real key to working out what the personal allowance 'should' be is the break even point where tax paid and benefits received net off to nil, for a single earner entitled to WTC, it's over £9,000 (£19 tax paid, £19 WTC received!!).

Stick your £1,000 on top of that and that's a nice round £10,000 personal allowance!