To promote the living wage, we need to reform the tax system

We must end the absurdity of companies being financially penalised for becoming living wage employers.

The living wage is one of the few policies that garners consensus across the political spectrum. Which politician would be crazy enough to speak against the idea of companies paying their low-paid employees enough to live on? Cue Ed Miliband and Boris Johnson giving speeches today to mark the start of Living Wage Week – with David Cameron not letting the fact that he’s in the Middle East prevent him from pitching into the debate.

Yet when it comes to what supporting a living wage actually means, the differences begin to show. The to-ing and fro-ing between the Labour Party and No 10 today highlight the slippery nature of an idea that is – since no politicians are advocating a statutory living wage – in essence about businesses doing the right thing.

Cameron and Johnson – if their contributions today are anything to go by – stand for business voluntarism in its purest sense. Politicians should stand alongside campaigning organisations like London Citizens in imploring businesses to pay a living wage, but there the buck stops. This ignores the fact that early living wage adopters have tended to be City corporations with a very low proportion of low-paid staff – for whom the costs of becoming a living wage employer are relatively low – and values-driven public sector organisations (of which Boris Johnson’s Greater London Authority is not yet one). The idea that a moral campaign led by civil society and government can by itself shift working conditions for millions in the low-paid, low-skill service sector remains a distant prospect.

Ed Miliband recognised this today by floating the idea that the tax system should reward those companies that become living wage employers. This is an idea that merits serious consideration. The idea that we would financially penalise companies for doing the right thing – for using green energy, for investing in R&D, or for supporting local communities, seems ridiculously self-defeating.

Yet when it comes to the living wage, that is exactly what we do. The IFS estimated back in 2010 that the annual cost to the taxpayer of employers paying below the living wage – in terms of tax credits, benefits and foregone tax – is approximately £6bn. Yet we financially penalise companies taking the decision to become living wage employers. An employer would face an extra bill of £570 a year in employer national insurance contributions (NICs) as a result of moving a full-time employee from the minimum to the living wage. This is despite the fact that the cost to the Treasury of employers paying below living wage is around £1,000 per employee. The tax system effectively charges employers to do something that not only is the right thing to do, but which saves the Treasury a substantial amount of money.

A good way to address this anomaly would be to take the disincentive to pay the living wage out of the system – by introducing a new, flat-rate employer national insurance contribution for employees earning below living wage. This would be set at the same level for a full-time employee actually on the living wage, paid pro-rata for part-time employees. The Treasury could recycle the extra revenue this generates through targeted NICs holidays for small businesses taking on new employees.

Of course, the tax bill is only one of a number of factors companies take into account when making decisions about how much to pay their employees. But if the energy invested by business lobby groups into making the case for lower national insurance is anything to go by, it is something that weighs heavily on the minds of employers, particularly in these straitened times.

Politicians are wary of legislating for the living wage, and they are right to be so: the effects of a big increase in the statutory minimum wage for unemployment are untested. But the Tory approach of just asking nicely won’t bring about the change we need. The Labour party is right that we need government to be much more creative in terms of how it encourages employers to pay the living wage. A reform of employer national insurance contributions for low-paid employees would be one pragmatic way of doing so.

Sonia Sodha is a former senior policy adviser to Ed Miliband. She writes in a personal capacity. She tweets @soniasodha.

Labour Party leader Ed Miliband addresses workers at Islington Town Hall. Photograph: Getty Images.

Sonia Sodha is head of policy and strategy at the Social Research Unit and a former senior policy adviser to Ed Miliband. She tweets @soniasodha.

Getty
Show Hide image

Why Clive Lewis was furious when a Trident pledge went missing from his speech

The shadow defence secretary is carving out his own line on security. 

Clive Lewis’s first conference speech as shadow defence secretary has been overshadowed by a row over a last-minute change to his speech, when a section saying that he “would not seek to change” Labour’s policy on renewing Trident submarines disappeared.

Lewis took the stage expecting to make the announcement and was only notified of the change via a post-it note, having reportedly signed it of with the leader’s office in advance. 

Lewis was, I’m told, “fucking furious”, and according to Kevin Schofield over at PoliticsHome, is said to have “punched a wall” in anger at the change. The finger of blame is being pointed at Jeremy Corbyn’s press chief, Seumas Milne.

What’s going on? The important political context is the finely-balanced struggle for power on Labour’s ruling national executive committee, which has tilted away from Corbyn after conference passed a resolution to give the leaders of the Welsh and Scottish parties the right to appoint a representative each to the body. (Corbyn, as leader, has the right to appoint three.)  

One of Corbyn’s more resolvable headaches on the NEC is the GMB, who are increasingly willing to challenge  the Labour leader, and who represent many of the people employed making the submarines themselves. An added source of tension in all this is that the GMB and Unite compete with one another for members in the nuclear industry, and that being seen to be the louder defender of their workers’ interests has proved a good recruiting agent for the GMB in recent years. 

Strike a deal with the GMB over Trident, and it could make passing wider changes to the party rulebook through party conference significantly easier. (Not least because the GMB also accounts for a large chunk of the trade union delegates on the conference floor.) 

So what happened? My understanding is that Milne was not freelancing but acting on clear instruction. Although Team Corbyn are well aware a nuclear deal could ease the path for the wider project, they also know that trying to get Corbyn to strike a pose he doesn’t agree with is a self-defeating task. 

“Jeremy’s biggest strength,” a senior ally of his told me, “is that you absolutely cannot get him to say something he doesn’t believe, and without that, he wouldn’t be leader. But it can make it harder for him to be the leader.”

Corbyn is also of the generation – as are John McDonnell and Diane Abbott – for whom going soft on Trident was symptomatic of Neil Kinnock’s rightward turn. Going easy on this issue was always going be nothing doing. 

There are three big winners in all this. The first, of course, are Corbyn’s internal opponents, who will continue to feel the benefits of the GMB’s support. The second is Iain McNicol, formerly of the GMB. While he enjoys the protection of the GMB, there simply isn’t a majority on the NEC to be found to get rid of him. Corbyn’s inner circle have been increasingly certain they cannot remove McNicol and will insead have to go around him, but this confirms it.

But the third big winner is Lewis. In his praise for NATO – dubbing it a “socialist” organisation, a reference to the fact the Attlee government were its co-creators – and in his rebuffed attempt to park the nuclear issue, he is making himeslf the natural home for those in Labour who agree with Corbyn on the economics but fear that on security issues he is dead on arrival with the electorate.  That position probably accounts for at least 40 per cent of the party membership and around 100 MPs. 

If tomorrow’s Labour party belongs to a figure who has remained in the trenches with Corbyn – which, in my view, is why Emily Thornberry remains worth a bet too – then Clive Lewis has done his chances after 2020 no small amount of good. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.