Tuesday, 21 July 2015

National Living – Wasted?

By Amanda Vigar, Managing Partner, V&A Bell Brown LLP

The number crunchers at Battle-Axe HQ have been running their slide-rules over Budget 2015 version 2.0 and the sound of tutting and sighing has been getting louder as each day has passed.

Like the proverbial magician, the Chancellor kept his biggest rabbit until the end of the Budget speech – the National Living Wage or “NLW”. That has grabbed a lot of headlines but its implications, along with other elements of the Budget (announced or hidden away in the small print) tell a different and, for me slightly concerning story.

Firstly, the NLW is neither national in its impact nor is it the Living Wage. In November 2014, the Living Wage Foundation calculated the required hourly rate to be £7.85 outside of London. Setting aside the slightly dodgy maths in their calculation, that’s rather more than George’s NLW which, when introduced next year, will be set at £7.20. That’s clearly rather less - and significantly less than the Living Wage in London, which is currently £9.15 - a rate that the NLW won’t even reach by 2020.

Secondly, it will only apply to those over the age of 25. There’s a political prize to be won by getting down youth unemployment, but this is a problem waiting to happen! When staff hit around 24 year and 9 months old will their employers start looking to get rid of them to take on youngsters who will cost 21% less?

The affordability point is critical for smaller and medium sized businesses where there isn’t the extra margin, even taking into account the drop in Corporation Tax rates, to cover the extra cost.

Add to this, that the Chancellor has effectively put NICs onto their dividends reducing what they have to live on. Big business gets as tax cut but smaller businesses are, to all intents and purposes, getting a tax hike. That’s businesses that last year accounted for 25 million jobs – just under 50% of all UK employment!

No doubt the Government will point to things like the increase in the Annual Investment Allowance from £25,000 to £200,000. Great, but for most of those 5.2 million small businesses they can only dream of spending £25k a year on new kit. Even if they could find a bank willing to lend them the money!

No-one likes the idea of people living in poverty, but my team is concerned that the National Living Wage won’t have the effect that everyone hopes for. Increased costs will have to get passed on to the end consumer. So the cost of living for all (including those on NLW) will go up. In turn, that, of course, means we need a further hike in the NLW to make up for it which will push up prices….. You see where we’re heading here?

Even the Government accepts that the NLW will cost around 60,000 jobs. But we suspect that’s only existing jobs and doesn’t take any account of the roles that SMEs were looking to create, but now either won’t be able to (not all jobs can be done by youngsters!).

So, the National Living Wage needs more refinement, more consideration and more consultation on how to get it to really work. If not, the UK will end up missing a major opportunity to update, upgrade and accelerate both the whole country’s economy and the current recovery.