Why a minimum wage hike? It could cut £1bn from welfare bill

DAVID CAMERON is ready to defy the protests of small business by allowing an inflation-busting increase in the minimum wage in October, but his motives are not entirely altruistic. It could lead to a £1bn cut in the welfare bill.

Chancellor George Osborne wanted to include the promise to raise the minimum wage in his Autumn Statement but was urged not to so because the independent Low Wage Commission is due to issue its recommendation next month.

Whatever the commission might be thinking, The Independent reports that Treasury sources are talking up the prospect of a “real terms rise” in the current £6.31-an-hour minimum wage. The Indy says the Tories’ strategy reflects their concerns at being seen as “out of touch” with ordinary people.

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However, the Mole hears that the Prime Minister has been persuaded that a big increase in pay for the poor would not only answer Ed Miliband’s highly effective campaign over the ‘cost of living crisis’ - it would also enable a huge cut to be made in the welfare bill which the Chancellor is targeting if the Tories win the 2015 general election.

To make a real impact, it could be an attention-grabbing rise, not just 10p an hour to match inflation, but as high as 50p an hour, even more. Rachel Sylvester reports in The Times that such a move would meet what Cameron's former director of political strategy, Andrew Cooper, calls a "10,000 volt initiative".

“There is an economic, as well as a political, case for greater generosity,” says Sylvester. “According to an analysis produced for the Prime Minister in No 10, a 50p-an-hour increase in the minimum wage would save the Government £1 billion a year, because people in work would be less dependent on benefits as well as paying more tax.”

In short, requiring businesses to pay their staff more per hour would stop low-paid workers from claiming more in income support. “Employers at the moment are being subsidised by the welfare budget because they are not paying people enough,” a Department for Work and Pensions source told Sylvester. “Some of these companies have very high profits. It’s their responsibility to pay higher wages so people can stand on their own two feet.”

Boris Johnson, the Tory Mayor of London, has already tumbled to the good financial sense behind getting employers to boost the pay of the low paid. He has gone even further, by endorsing the “living wage” - calculated on the cost of living in the capital – which went up last November by 25p to £8.80 an hour. Since the living wage was introduced in 2005, 214 employers have signed up including the National Portrait Gallery, Pearson and Oxfam.

Downing Street is insisting that the decision on setting the minimum wage should be left until after the Low Pay Commission has made its recommendation in February.

But small businesses – normally the cheerleaders for the Tories – are already up in arms at the prospect of being forced to pay more for their staff and are warning it could lead to employees being laid off, or not taken on. The Financial Times reports today that “leading business figures” warned the Chancellor against a big increase in the minimum wage at a meeting before the Autumn Statement.

Meanwhile, the Liberal Democrats have accused the Tories of "nicking" their policy on increasing the minimum wage. A Lib Dem source told The Guardian: "This is the fourth or fifth thing the Tories have tried to nick from us."

This could come in handy for Dave. If his business friends get too angry, Cameron can always blame Nick Clegg.