Robert Halfon is a member of the 1922 Committee Executive and MP for Harlow
The new Labour pledge card says that, if elected in 2015, they will re-introduce the 10p rate of tax which was scrapped by Gordon Brown in 2008. What it doesn’t say is that Labour have only pledged to do this on the first £1,000 above the personal allowance threshold. Ed Ball’s policy would save basic rate taxpayers just £100, whereas by 2015, the Conservative-led Coalition will have lifted 2.7 million people out of income tax altogether. That is the difference between gesture politics and substantive measures.
Despite this, wages remain stagnant and the cost of living is high. This isn’t a new phenomenon as median wages stopped rising in 2003.
Conservatives believe in rewarding people for working hard with fair wages. Everyone in work should be able to earn enough to cover their basic costs of living. Hence the Living Wage: calculated to be £8.55 in London, and £7.45 for the rest of the UK. Currently, 20 per cent of all employees earn below this.
The question for us should be not whether we can have a Living Wage, but how it can be achieved without hurting small business?
First; the National Minimum Wage. Many people have argued that the minimum wage should be raised, perhaps in line with the Living Wage. But you have to balance the moral justification for raising the National Minimum Wage with the possibility of job losses. The Resolution Foundation have suggested that increasing the minimum wage to the Living Wage could cost up to 160,000 jobs, and would adversely affect the young and low-skilled. Any substantial raise would have to be done very carefully.
One option could be to introduce a regional wage top-up so that those living in more expensive places would get a Regional Minimum Wage on top of their National MInimum Wage.
Government could also reward companies with tax breaks who pay the Living Wage. But this wouldn’t be compulsory, and so may not reach those people who might need it the most.
Second; achieving a Living Wage through tax. There are two different choices: ensuring that everyone who earns the Minimum Wage pays no tax altogether, or by introducing the 10p tax on earnings up to £12,000. This would cost significantly less than raising the personal allowance, and is politically symbolic. It also allows people to pay into the ‘system’, meaning that they have a ‘stake’ in it. That said, it would provide less of a benefit in cash terms to individuals.
Third; fundamental tax reform. Currently, employees pay National Insurance if they earn over £7,748 per year. This is significantly lower than the personal allowance, despite both being deducted from the same pay packet. Currently, many of the poorest people are not affected by changes to the personal allowance because they earn under £10,000, and last year, the 2020 Tax Commission found that 72 per cent of bosses think that high rates of National Insurance reduce the wages they can pay staff. Raising the threshold for National Insurance contributions would truly take lower earners out of tax, and show that it always pays to work.
In the longer term, the Government could go further by radically reforming the system. One idea worth considering is merging National Insurance and income tax into just one tax. Although some argue that we need to maintain National Insurance because of the contributory principle, it now effectively acts as a double income tax, and a contributory system could be transferred into any consolidated form. This could have enormous benefits such as a much needed simplification of the tax system, greater transparency, less cost in terms of administration, and would leave workers with more money in their pockets.
Let every Conservative make the case for a Living Wage. It can be achieved not with the heavy hand of the State, but doing what Conservatives do best – ensuring a fair minimum wage, lower tax for lower earners, and simplifying the tax system. Achieving the Living Wage should become a moral mission, and show the public that the Conservatives really are on their side.