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Leave Minimum Wage Be and Cut Taxes to Aid the Cost of Living

20/04/2014 15:31 BST | Updated 20/06/2014 10:59 BST

I'm not sure the widespread support for an increase in minimum wage would continue if some of the potential consequences became reality. Even some conservatives have now jumped on the populist bandwagon and called for the minimum wage to be increased. Whether it be the potential saving to the Treasury through less claiming of in-work benefits such as tax credits or the aim of ridding the conservatives of their 'nasty' reputation, the possible consequences of an increase in minimum wage will be far nastier for those earning it.

To claim an increase in minimum wage will not cause employment consequences is to ignore the prevalence of technology within low-skilled jobs. As the Centre of Policy Studies quite rightly points out, increasing minimum wage is "essentially a tax on those who hire unskilled labour". A business is far more likely to implement innovative technology if their labour costs increase, thus having a derogatory impact on the employment prospects of those seeking minimum wage jobs as labour is replaced with technology. A recent NIESR report suggested that the implementation of a 'living wage' would be accompanied by 160,000 job losses. There is significant evidence to suggest that rather than aiding those who it aims to help; its effect is in fact damaging due to increased barriers to employment and job losses.

If politicians want to aid those on lower incomes who are facing the 'cost of living crisis' which has been coined by Labour, cutting taxation would be far more effective. One of the taxation reforms which would be most effective in relieving the squeeze on those on minimum wage is raising the threshold for National Insurance (NI) contributions in accordance to the income tax personal allowance. The government has predicted this will deliver a £200 tax cut for each employee. It will also result in up to 1,297,000 people being taken completely out of direct taxation. Moreover, this will incentivise business expansion as firms will no longer incur a 'jobs tax' as they previously would have under the NI system or if minimum wage were to be raised.

Reducing VAT would also alleviate some of the worries those on lower incomes have about the cost-of-living. The increase of VAT to 20% in 2011 affected the lowest paid the most: it caused a 2.25% loss of their net income, compared to less than a 1% loss for the largest income decile group. Furthermore, the increase to 20% has led to the poorest quarter of society spending 10% of their disposable income on VAT. Alongside a reduction in the cost of living, a VAT cut releases money from the Treasury coffers and allows people to spend their money as they choose to do so.

During a period of fragile economic recovery, it is sacrilege to increase labour costs and thus jeopardise the prospects of those who minimum wage aims to help. Cutting tax will give hard-working people some of their money back without firms incurring increased labour costs.