Lord Hannan of Kingsclere is a Conservative peer, writer and columnist. He was a Conservative MEP from 1999 to 2020, and is now President of the Initiative for Free Trade.
We need, sooner or later, to cut spending. Yes, the epidemic was a generational event, and yes, there are good arguments for treating its associated costs like war debts, to be paid off over many decades. But there is no argument for keeping an ongoing structural deficit after the end of lockdown – which is what will happen if these supposedly one-off spending increases are allowed to stand.
In theory, almost every Conservative accepts this proposition. In practice, there is fierce resistance to screwing shut any particular tap once it has been spun open. The furlough scheme, free school meals outside term, grants to performing artists and to charities, the increase in universal credit, various business rebates – how often do you hear an MP calling for any of these things to be wound up? Individually, they may be defensible; collectively, they are unaffordable.
On Monday night, I sat through a Lords debate on the increase in the minimum wage. The responsible minister, the clever and capable Lord Callanan, announced that the Government had accepted in full the recommendations of the Low Pay Commission, increasing the hourly rate in every age band, up to a level of £8.91 for people aged over 23.
These increases come following a 9.9 per cent contraction of our economy in 2020 and a commensurate rise in unemployment. Many public-sector workers have seen their pay frozen; many private-sector workers have seen a real-terms cut. Yet ministers, conscious of the role that minimum wage workers have played in the pandemic, none the less decreed increases.
Did they get any thanks for it? Of course not. One after another, peers appeared on the remote screens to express their outrage at the nugatory rise. It was mean, it was unfair, it was ungrateful. How would the minister like to live on less than £8.91? (Actually, Lord Callanan’s first job was on a building site at a far lower rate than that, but he was too polite to say so.)
Every speaker except one attacked the proposal – the proposal, remember, that had come from the Low Pay Commission and been accepted in full – as inadequate. The sole exception was the Conservative peer Lord Balfe, a former Labour MEP, who warmly congratulated his new party for having dropped its former concerns about unemployment and embraced the aim of a constantly-rising minimum rate.
The debate illustrated the fundamental problem that faces any politician who wants to reduce expenditure or, as in this case, to reduce barriers to growth. The debate is conducted as if it were the politician’s own money at stake rather than taxpayers’. If he wants restrain spending, he is howled down as a Scrooge. If he wants to give more away, he is warmly applauded for his decency.
In such a climate, anger trumps account-keeping. You might have all manner of sensible and proportionate concerns about the minimum wage. You might argue that favouring the low-paid over the unemployed is not the best way to help the poor. You might point out that some companies will respond by cutting non-wage benefits, such as free meals and shop discounts.
You might be concerned that, once the level gets too high, employers will turn to the black market – especially to the pool of illegal labour provided by people who do not have residence rights in the UK, and who therefore cannot claim any social protections. You might fret that wage costs will push firms into assuming the up-front costs of automation, thus reducing opportunities for younger and unskilled workers.
You might point out that rises in the minimum wage are passed on to customers, and that some of these customers are themselves poor. You might cite a powerful new study by Professor Jeffrey Clemens of the University of California, which shows that companies with low-income employees tend also to have low-income clients. If a wage hike pushes up prices in McDonald’s, it won’t be fund managers who are primarily affected.
You will find, though, that hardly anyone engages with these objections. Instead, they will fall back on the rhetorically powerful, but logically irrelevant, question: “How would you like to earn less than £8.91?”
I see the minimum wage as a way to privilege people in low-paid work over people looking for work. Now there are defensible reasons for doing this. You can argue that people should always be rewarded for trying to do the right thing, even if there are wider costs, or that reducing the number of households in which children never see an adult going out to work is a social benefit that justifies some unemployment.
What you can’t do, at least not if you have a shred of intellectual honesty, is to deny that there are trade-offs. Imagine that the hourly rate were not £8.91 but £89.10. Can anyone doubt that it would push up unemployment? Some companies would install machines, some would contract out their work overseas, some would hire illegal immigrants but most would cease trading.
Until now, that objection has been largely theoretical. Since the minimum wage was introduced in 1998, the economy has (other than a relatively brief blip at the time of the financial crisis) continued to expand. Although the minimum wage rose faster than the average wage, it was doing so against a background of record job creation. The increases, in other words, were affordable.
We are now in a very different situation. We have suffered the sharpest downturn in modern history, worse than anything that happened during the Depression or the two world wars. How much unemployment has risen will be revealed when the furlough is eventually wound up but, even on the current figures, we have undone a decade of falling joblessness. The idea that we can carry on as if nothing had happened is ridiculous.
Ridiculous but powerful. Once you have embraced the idea of a bigger state, you will find ways to downplay the economic costs. Supporters of the minimum wage, for example, cite the rise in employment over the past two decades as “proof” that there are no negative consequences – as though our current economic conditions were comparable.
Supporters of ever-higher spending have embraced “Modern Monetary Theory” (or at least a garbled version of it) to argue that debt doesn’t matter, because governments can always print whatever they need – a theory which, if true, would have made Robert Mugabe a financial genius.
As we prepare for the budget, all the pressure is one way. Some want tax rises now, so as to close the deficit. Others say that, no, early tax rises would choke off the recovery, and they we should defer them. But common to almost all the analysis is the assumption that the increase in spending, or at least a goodly chunk of it, is permanent.
If there are any MPs who think we should instead close the deficit with spending reductions, that lower spending boosts competitiveness, that a growing economy leads to naturally rising wages, and that cuts are therefore our surest way out of this mess, they are keeping remarkably quiet.