George Osborne has signalled that he is willing to raise the national minimum wage to £7-an-hour, an above-inflation increase. The current minimum sits at £6.31-an-hour, with the chancellor indicating to the BBC that the increase to £7 was currently under consideration.
He said: "I think Britain can afford a higher minimum wage. I think we have worked hard to get to this point and we can start to to enjoy the fruits of all that hard work."
Osborne's remarks follow the submission by the Department for Business to the Low Pay Commission, which is expected to recommend a similar rise in the near future.
Osborne continued: "Because we are fixing the economy, because we are working through our plan I believe Britain can afford an above-inflation increase in the minimum wage so we restore its real value for people and we make sure we have a recovery for all and that work always pays.
"The exact figure has to be set by the Low Pay Commission, which talks to business, talks to other bodies in our economy. But, if for example, the minimum wage had kept price with inflation it would be £7 by 2015/16. It's £6.31 at the moment, so, that's an increase.
"I think we can see an above-inflation increase in the minimum wage and do it in a way that actually supports our economy precisely because the economy is recovering and many, many jobs are being created. Of course we have got to make the exact calculation of what the rate should be. That's for the Low Pay Commission, created by a Labour government, supported by this Government, to make the independent decision on the number itself.
"But, when I look at the British economy I see the British economy expanding, I see jobs being created, I see the prospect of future jobs being created as well and I think Britain can afford a higher minimum wage."
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The Chancellor's comments came just days after he warned against a "self-defeating" increase in the minimum wage rate to a level that would cost jobs. The indepedent Low Pay Commission, which includes representatives of business, unions and academia, is due to make its recommendations on the level of the minimum wage and its potential impact on jobs in February. Any upgrade would be expected to take effect in the autumn.
In a signal that ministers were hoping for a generous increase, Business Secretary Vince Cable asked the LPC last September to carry out an additional assessment of the economic conditions that would allow for faster increases without an adverse effect on jobs. Submitting his final analysis, Mr Cable left little doubt that he believes an above-inflation rise is possible, saying that the benefits of recovery should be "shared fairly".
Mr Cable said: "The national minimum wage is designed to strike a balance between protecting the low paid and making sure they can find work. But as the economy starts to recover, the benefits of growth must be shared fairly. This is why last September I asked the independent Low Pay Commission what economic conditions would be needed to allow for significant rises in the national minimum wage without damage to employment.
"I am keen to use their expertise to understand what economic conditions would be needed to allow for rises in the wages of the low paid." Any above-inflation rise in the main rate for adults would be likely to be reflected in the £5.03-an-hour rate for 18-20 year-olds and £3.72 for under 18s.
A rise to £7 per hour would represent a rise of almost 11% from the present rate. But trade unions suggested it should rise by still more, to match the "living wage" which campaigners say is the level required to meet basic needs. It is set at £8.80 in London and £7.65 for the rest of the UK.
TUC general secretary Frances O'Grady said: "We welcome George Osborne's acceptance of the TUC's case for an above-inflation rise in the minimum wage. But while this would help many, the Chancellor should be more ambitious about achieving decent pay rises across the whole of the UK workforce. The Government should work with unions and employers to increase the spread of the living wage, lift the cap on public sector pay, and recognise that the wages of the millions of workers across the economy have been falling in real terms and now need a decent increase."
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Unison general secretary Dave Prentis said: "While Unison welcomes any move to raise the national minimum wage above inflation, the increase must be to the level of the living wage. For the five million people who earn less than the living wage, an extra £10 in their pockets each week would make a massive difference. This is extra money to spend in local businesses and a saving to taxpayers' money by cutting benefits.
"A living wage will help to get hard working people out of in-work poverty and give people dignity at work. It makes no sense that low paid workers are subsidised by the taxpayer through in-work benefits."
Business leaders cautioned that raising the rate too quickly could hit jobs. CBI director general John Cridland said: "Recommending the rate of the national minimum wage must be a matter for the Low Pay Commission, as the Chancellor recognises. An unaffordable rise would end up costing jobs and hit smaller businesses in particular. Any increase in wages must reflect improved productivity."
The British Chambers of Commerce - which wants a 2.4% rise - said small businesses, young people and graduates risked losing out. Director general John Longworth said: "Although it is clear that there is an increased disparity between the highest and lowest earners, arbitrarily raising the floor isn't necessarily the solution and could in fact make the UK economy uncompetitive in the long term.
"The adverse effects of an unaffordable minimum wage hike would also be predominantly concentrated among SMEs, young people and graduates. If we want to spread the wealth around as the economy recovers, we need a long-term plan to create a high-skill, high-wage economy, including action on infrastructure and access to finance."
There was also criticism from the Adam Smith Institute, free-market think-tank, which said a better solution was to raise the income tax and National Insurance threshold to the current minimum wage level. Research director Sam Bowman said: "Increasing the minimum wage runs an indefensibly high risk of creating more unemployment and harming the people that supporters of the increase want to help. Even if the immediate impact is not large, this increase will lead to a long-run decline in job creation and standards for Britain's poorest workers."
Len McCluskey, the leader of the UK's biggest trade union Unite, said: "Hints here and there of rise in minimum wage and the promise of jam tomorrow will do nothing for the millions of ordinary working people who are in the grip of Osborne's cost of living crisis.
"People who have endured the biggest fall in living standards since Victorian times won't be fooled by a Tory party that only yesterday voted against a rise in the national minimum wage. We need an immediate increase of £1.50 an hour to put money in people's pockets and ease the squeeze in living standards."
Liberal Democrats said that Mr Cable had wanted to be clear last September about his belief that it was time for a generous increase in the minimum wage, but that the Chancellor had "dragged his feet" on the issue. "He blocked any reference at all to how we wanted to address the failure of the national minimum wage in real terms over the last few years," said a senior Lib Dem source. "It was his office which blocked any reference to restoring it to previous levels."
Declaring that the Lib Dems were "glad" that the Chancellor had come round to their view, the source added: "The Liberal Democrats have always said we are keen to see the minimum wage increased as fast as economic conditions would allow, to give further help to those on lower incomes. That is why in September Vince asked the LPC to consider whether the minimum wage could be allowed to rise faster."
Labour Treasury spokesman Chris Leslie said: "George Osborne is flailing around under pressure but he has made no concrete announcement about the level of the minimum wage. Ed Miliband and Ed Balls said last year that we need above-inflation rises in the minimum wage in order to catch up the lost value over the last few years. And both the Tories and Lib Dems voted against Labour's motion yesterday which called for action to make this happen.
"The Tories cannot hide from the fact that working people are on average £1,600 a year worse off since they came to office. We need action now to earn our way to higher living standards and tackle the cost-of-living crisis. That's why, as well as a higher minimum wage, Labour will make long-term reforms to our economy, freeze energy prices, expand free childcare, incentivise the living wage and build the homes Britain needs."
Shadow business secretary Chuka Umunna said that Mr Osborne's intervention amounted to no more than "commentary" as the level of the minimum wage would not be determined by him, but by the LPC. Writing on Twitter, Mr Umunna said: "Non-announcement by George Osborne on the minimum wage. Voted against our motion to restore the value of it yesterday and now says he agrees.
"The Government is struggling to keep up and respond to a cost-of-living crisis that has seen people take a £1,600 pay cut on average under their watch."
The Institute of Directors said that any rise in the minimum wage should be offset by reductions in employers' National Insurance contributions to reduce the impact on businesses. We understand the political pressure to tackle this issue, but economic reality must be the driver for any such policy," said IoD chief economist James Sproule.
"If raising the minimum wage is not justified by a rise in productivity, it would be a risky move that could well have an impact on employment, particularly among smaller firms. We would urge the Low Pay Commission to pay careful attention to the timing of any announcement.
"A rise in the minimum wage will put pressure on all wage differentials, and the cumulative effect of this could reduce UK productivity and therefore leave employers reluctant to take on new staff. This would be particularly concerning at a time when the Government should be doing all it can to make employment attractive."
The Federation of Small Businesses said the minimum wage rise should be in line with the rate of inflation, currently running at 2%. "Small businesses agree that after a period of wage restraint now is the time to look at raising the minimum wage but this should be at the rate of inflation for the coming year," said FSB national chairman John Allan. "The Low Pay Commission will recognise that in some industries, such as retail and social care, small businesses operate very fine margins and are still struggling with rising costs in areas such as utilities and business rates. At the same time, the recovery remains on a fragile footing in certain regions of the UK. "
Alison Garnham, chief executive of Child Poverty Action Group, said that Mr Osborne's suggestion would "do a great deal of good both for the poorest working families and for the economy". Ms Garnham said: "We know that when workers get better pay, not only are they able to better meet their children's needs but more money flows through their local community as they spend it. This helps jobs and growth and is exactly what we need to get the economy moving in the poorest communities that need it most."
Mark Littlewood, director general at right-leaning thinktank the Institute of Economic Affairs, said: "This move would not only jeopardise the jobs of some of the most vulnerable workers in the country, it will make it even harder for the young and out of work to get a foot on the employment ladder.
"If an employer cannot afford to hire someone because the minimum wage is too high, then someone who otherwise could have found work remains unemployed. The Government should be focusing on tackling rising living costs to benefit everyone, rather than creating an even higher barrier in the labour market."
Stephen Ibbotson, head of financial management at the Institute of Chartered Accountants of England and Wales, said that extra costs incurred by companies due to an increase to the minimum wage would have to be paid for from savings elsewhere in the business, by increasing product prices, or by ditching recruitment plans.
"Any decision on raising the minimum wage should be left to the Low Pay Commission without political interference," said Mr Ibbotson. "The unintended consequences of using the minimum wage to help alleviate the cost-of-living crisis could be to inadvertently exacerbate it, while also stalling economic growth."
Work and Pensions Secretary Iain Duncan Smith welcomed what he called the Chancellor's "bold move". "It shows that at the heart of all our reforms this Government is concerned to improve the quality of life for the poorest in society," he said. "The commitment to a higher national minimum wage is all part of ensuring that the economic recovery delivers for people who want to work hard and play by the rules."