The minimum wage has been cut, not increased

Vince Cable rightly noted that "cuts in real wages depress consumption" but the 12p increase in the minimum wage to £6.31 is a real-terms cut.

After recent speculation that the minimum wage could be frozen or cut in cash terms, Vince Cable used his speech at The Institute of Directors to announce that the adult rate would increase by 1.9 per cent (12p) to £6.31 an hour, the under-21s rate by 5p to £5.03 and the under-18s rate by 4p to £3.72. 

In justifying the increase, against those on the right who argue that the minimum wage prices workers out of employment, Cable cited the Keynesian insight that "cuts in real wages depress consumption and demand and thereby cause unemployment." Cable is right; low earners are forced to spend, rather than save, what little they receive (their "marginal propensity to consume" is greater) and stimulate growth as a result.

It's worth noting, then, that the minimum wage has just been cut in real-terms. CPI inflation was 2.8 per cent in February and RPI inflation was 3.2 per cent. The former is forecast by the Office for Budget Responsibility to average 2.8 per cent this year. Indeed, as the Resolution Foundation's James Plunkett recently noted, in real-terms, the minimum wage has already fallen back to its 2004 level. 

Today's decision will by described by most of the media as an "increase" but by the best measure economists have - the cost of living - it's a cut. 

In this area, as elsewhere, the coalition would do well to follow the example of Barack Obama, who has pledged to increase the minimum wage to $9 an hour, from $7.25, and to peg annual increases to inflation thereafter. 

Business Secretary Vince Cable announced today that the adult minimum wage would rise by 12p to £6.31 an hour. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Getty Images.
Show Hide image

Theresa May gambles that the EU will blink first

In her Brexit speech, the Prime Minister raised the stakes by declaring that "no deal for Britain is better than a bad deal for Britain". 

It was at Lancaster House in 1988 that Margaret Thatcher delivered a speech heralding British membership of the single market. Twenty eight years later, at the same venue, Theresa May confirmed the UK’s retreat.

As had been clear ever since her Brexit speech in October, May recognises that her primary objective of controlling immigration is incompatible with continued membership. Inside the single market, she noted, the UK would still have to accept free movement and the rulings of the European Court of Justice (ECJ). “It would to all intents and purposes mean not leaving the EU at all,” May surmised.

The Prime Minister also confirmed, as anticipated, that the UK would no longer remain a full member of the Customs Union. “We want to get out into the wider world, to trade and do business all around the globe,” May declared.

But she also recognises that a substantial proportion of this will continue to be with Europe (the destination for half of current UK exports). Her ambition, she declared, was “a new, comprehensive, bold and ambitious Free Trade Agreement”. May added that she wanted either “a completely new customs agreement” or associate membership of the Customs Union.

Though the Prime Minister has long ruled out free movement and the acceptance of ECJ jurisdiction, she has not pledged to end budget contributions. But in her speech she diminished this potential concession, warning that the days when the UK provided “vast” amounts were over.

Having signalled what she wanted to take from the EU, what did May have to give? She struck a notably more conciliatory tone, emphasising that it was “overwhelmingly and compellingly in Britain’s national interest that the EU should succeed”. The day after Donald Trump gleefully predicted the institution’s demise, her words were in marked contrast to those of the president-elect.

In an age of Isis and Russian revanchism, May also emphasised the UK’s “unique intelligence capabilities” which would help to keep “people in Europe safe from terrorism”. She added: “At a time when there is growing concern about European security, Britain’s servicemen and women, based in European countries including Estonia, Poland and Romania, will continue to do their duty. We are leaving the European Union, but we are not leaving Europe.”

The EU’s defining political objective is to ensure that others do not follow the UK out of the club. The rise of nationalists such as Marine Le Pen, Alternative für Deutschland and the Dutch Partij voor de Vrijheid (Party for Freedom) has made Europe less, rather than more, amenable to British demands. In this hazardous climate, the UK cannot be seen to enjoy a cost-free Brexit.

May’s wager is that the price will not be excessive. She warned that a “punitive deal that punishes Britain” would be “an act of calamitous self-harm”. But as Greece can testify, economic self-interest does not always trump politics.

Unlike David Cameron, however, who merely stated that he “ruled nothing out” during his EU renegotiation, May signalled that she was prepared to walk away. “No deal for Britain is better than a bad deal for Britain,” she declared. Such an outcome would prove economically calamitous for the UK, forcing it to accept punitively high tariffs. But in this face-off, May’s gamble is that Brussels will blink first.

George Eaton is political editor of the New Statesman.