December 05, 2021

The Great Debate: Top economist 'worried' increasing minimum wage is govt's 'only tool' to tackle cost of living crisis

October 25, 2021

It is a "real worry" that increasing minimum wage seems to be the government's "only tool" to tackle the cost of living crisis, a leading economist has warned.

Paul Johnson, director of the Institute of Fiscal Studies, said if wages are increased when the UK's productivity is not rising "in the end it will just result in higher prices".

Speaking on The Great Debate, Sky News' weekly discussion programme, he said the increases in the minimum wage "up until now have been incredibly successful".

"It's gone up an awful lot over the last 10 years," he said. "And that doesn't appear to have caused any problems with prices, or unemployment. But going forward, there's a limit to this."

He said: "I think one of the real worries is it seems to be the only tool the government has.

"At the moment, it's worried about people's earnings, it's worried about productivity, and the main policy it appears to have is just to keep on putting the national living wage up... that's going to cause real problems."

UK productivity has slowed significantly in the past 10 years, according to ONS data.

Average annual growth was an average of 2.0% from 1990 to 2007, falling to an average of 0.6% a year from 2010 to 2019, according to calculations by the Financial Times using ONS data.

He said the UK is facing a "push up" in prices that has not been seen for "quite a long time", with inflation heading up towards four or even five percent.

"That's not the levels some of us can remember in the 1970s of 20%, but that is still a big increase in costs," he said.

He said it is having a "much bigger effect on people on low incomes" due to its impact on things like fuel prices.

"Even if benefits go up in line with inflation, that's still not going to be enough to make up for that additional cost for people who are on benefits," he said.

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However, Lord Byrd, the founder of The Big Issue, welcomed the increase in the minimum wage, arguing that low salaries lead to "low delivery" and low productivity.

"It's the government's responsibility to lift us out of this hundreds of years of low wage economy," he said.

Personal finance expert Emanuel Asuquo warned that many of his business clients will have to increase prices to pay for greater salary costs, which in turn leads to higher inflation.

"We have to be careful when we put that pressure," he said.

He did agree that "the government needs to definitely do more to help the poorest".

"We've seen discounts on stamp duty for people who want to buy a house, we've seen pensions now being able to pass without paying any tax," he said.

"We've seen so much support for people who want to make money, but so many cuts when it comes to people who really need it most."

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