The case for increasing wages to cut the welfare bill

Learning from Joseph and the Chocolate Factory.

Writing in today’s Times Philip Collins produces a powerful and eloquent article arguing that we should cut the welfare bill by increasing wages. What’s more, he argues for a more moral form of capitalism to underpin it.

So what’s brought this on? Well, today JRF published our annual Minimum Income Standards report. This research asks members of the public what are the goods and services every household needs to be able to afford in order to achieve a minimum acceptable standard of living in the UK. As Collins notes:

Whether or not you agree that a few pence a week for Blu-tack is necessary, most of the costlier items are hard to dispute and they come to quite a price.

And our research shows the cost of that decent standard of living is rising fast – up 25 per cent over the last five years, higher than the official rate of inflation, which was 17 per cent for the same period. This means people today need much higher earnings just to afford the same standard of living they had five years ago. As Collins argues:

The gap between the minimally decent life and reality is growing. People on low incomes are subject to a higher rate of inflation than those who are a little richer … The gap between the life that people think others should be able to afford, in a rich and lucky country, and the life that most people lead is huge.

So what would it take for people to afford a better standard of living? The research costs the basket of goods and services people say they need for a decent standard of living, and works out what that means for how much you need to earn, once tax and benefits have been factored in. The resulting hourly wage rates are substantially higher than the national minimum wage (which is currently £6.19 per hour). A single person would need to earn £8.16 an hour while a couple with two children would need to earn at least £9.91 an hour each. 

Collins argues employers have responded to this challenge before and they should do so again, learning from historical figures like Joseph Rowntree:

When he opened his chocolate factory in York in 1869, Rowntree established good pay, housing benefits and the first occupational pension scheme for his workers...

He understood that the corporation was and is a public entity, underpinned and given a license to operate by the laws of limited liability. He felt, as all the pioneers of the American joint stock company did too, that his private accumulation came with a public obligation, which he fulfilled by paying his people well.

Low paid jobs remain prevalent in the UK, and a fifth of the workforces is on low pay. This costs us all dear as the state subsidises low income working households through the tax credit system. 

For those employers not persuaded by the moral case for change Collins argues the rate of the minimum wage should be ratcheted up as a backstop, a view that is starting to gain more support. This undoubtedly has to be part of the solution, but alone will not solve the problem. Instead a more comprehensive strategy is required that looks at why we have such an endemic low pay problem in the UK; what is driving up the cost of essential like housing, childcare and energy; and yes, as unpopular as it is right now, how best to support people through the social security and tax systems.

Katie Schmuecker is a Policy and Research Manager at the Joseph Rowntree Foundation (JRF) 

Joseph Rowntree. Photograph: Getty Images
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I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.