UK set to raise pay floor 4% as Burnham seeks cost of living fix

CHANCELLOR of the Exchequer John Healey is poised to raise the UK’s national living wage by about 4 per cent, but will not close the pay gap with younger workers, amid growing concern that hiring costs are driving youth unemployment. 

The move is set to be announced by the chancellor in Wednesday’s budget, according to a person familiar with the discussions who spoke on condition of anonymity because no announcement has been made. Wages for workers aged 18 to 20 will rise by the same percentage of around 4 per cent, the person said. 

That’s a break from plans by the governing Labour Party to close the gap in minimum pay and end what it termed “discriminatory age bands” in its 2024 election manifesto.

Now, the government under Prime Minister Andy Burnham has paused the policy over fears that the higher cost to employers is driving up youth unemployment. Bloomberg first reported the government was considering pegging back the 18-20 rise.

The wage rises, which were reported by the Times of London newspaper and will be announced in Healey’s first big fiscal set-piece alongside measures to help with the cost of living, also raise questions about whether the low-paid would next year fall behind the government target of keeping their pay at two-thirds of median hourly earnings.

Figures from the Office for National Statistics last week suggested a higher up-rating than 4 per cent would be needed to maintain the ratio.

Deutsche Bank told Bloomberg earlier Monday that the ONS’s Annual Survey of Hours and Earnings implied the National Living Wage might need to rise 4.6 per cent in April 2027, while Morgan Stanley warned the increase could be as great as 5.5 per cent.

A 4 per cent increase would be still be higher than the 3.7 per cent the Low Pay Commission was anticipating earlier this year and probably outpace inflation once again.

The commission’s remit states that a decision to maintain the two-thirds of average earnings target should be balanced against broader economic and labour market conditions.

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Joblessness among those aged 16 to 24 rose above 16 per cent earlier this year, its highest level in more than a decade. Almost a million are not in education, employment or training.

Burnham has made the cost of living his focus since becoming prime minister in July, and on Monday the Treasury announced that import tariffs will be removed from staples like baked beans, gherkins and chocolate as part of a package of “everyday fixes”.

The tariff savings come alongside a more generous tax treatment for people who rely on their car for work, extending parental pay to self-employed fathers and ending the carers allowance “cliff edge” under which support is fully withdrawn if carers earn a penny over the earnings limit.

The whole package is worth as much as £200 million and is the latest in series of incremental changes that Burnham hopes will give struggling households “breathing space” in the face of rising food and energy prices due to the Iran war.

Further measures are expected to be announced in the Oct 28 budget, though Healey’s scope for giveaways is limited given the state of the public finances. 

“We are taking on the big challenges facing the country. But that doesn’t mean losing sight of the everyday problems that cost people money or simply aren’t fair,” Burnham said. “These changes will make life a little easier and put more money back in your pocket.”

Burnham has already cut VAT from household electricity bills for six months and frozen bus fares at £2. He is making school uniforms cheaper, cracking down on fake discounts and rogue traders, stopping airlines charging extras and tackling unreasonable management costs for leaseholders. “They do add up and they do matter,” Burnham said in an Instagram post.

Healey’s debut budget is expected to be a relatively small affair in terms of policy as he tries to balance help for families and business with protecting long-term economic growth and delivering the fiscal prudence bond markets are demanding against a backdrop of the US-Iran conflict.

Higher inflation and borrowing costs have roughly halved the £23.6 billion cushion against the fiscal rules that Healey inherited. Some of the loss will be mitigated if, as some expect, the Office for Budget Responsibility upgrades its wage growth forecast but investors might balk at a reduction in headroom below £15 billion, implying limited room for concessions. 

Ahead of the budget, Healey warned government ministers they must be prepared to tighten departmental spending to deliver on Burnham’s policy agenda, due to the wider economic pressures.

The chancellor told the Cabinet last week that they may have to go further to find spending cuts and efficiencies in their departments, the Times reported on Monday, in remarks confirmed by Bloomberg. 

At the same time, the government announced a list of measures that they hoped would relieve pressures from a financially squeezed electorate. The Treasury said on Monday that more than 100 products like garlic, marmalade, kerosene and boiled sweets will be exempt from import duties, saving households £120 to £185 million a year.

Burnham is making permanent last year’s temporary increase in the mileage allowance to 55 pence for workers who use their own vehicle for business travel and lifting it to 35 pence from 25 pence for business travel above 16,093 km.

Under the change, someone driving 24,140 business km would get £300 in additional tax savings. An estimated 3 million nurses, care-workers, self-employed builders and others will benefit.

Self-employed fathers will be eligible for two weeks of support worth up to £194 a week and unpaid carers looking after family members will have their allowance withdrawn by £1 for every £1 earned over the limit rather than lose the entire support and end up worse off for taking a pay rise. BLOOMBERG