It was a big moment for British businesses last week as Rachel Reeves set out the government’s plans to expand Heathrow alongside accelerating other critical infrastructure projects. There were two main purposes to the chancellor’s speech. First, articulate a programme of interventions that sets the economy on the path to growth. Second, restore business confidence battered by last October’s budget.
On the first ambition, Reeves may well succeed over the long term. Yet on the second, business leaders remain almost unanimously frustrated. We hoped for a way forward for the economy and an end to the doom and gloom rhetoric of the preceding months. We are faced instead with limited confidence to make the important decisions we need, including the prospect of another budget in March.
This despondency is reflected in regular business surveys, which all point to weak confidence. At the heart of the issue is surprise. Had the national insurance rise been phased in over a two-year period and debated prior to the budget with trade bodies such as the CBI, British Chambers of Commerce and Family Business UK, business would have probably accepted the need and knuckled down. Instead, the level of the threshold change caught us all off guard and felt like a gotcha. There is some hope for a change of heart here: Lord Wolfson of Aspley Guise, the CEO of Next, has tabled amendments in the House of Lords aimed at phasing in the changes.
Of course ministers face difficult choices and they have to call the shots, but there has to be an element of shared decision making. That is how you build confidence and trust. That is how you produce growth in the economy. The government has indicated its desire to issue a tax roadmap, which is positive, but it has to add up to more than sustaining corporation tax at 25 per cent, full expensing, and research and development credits. Business needs to understand the trajectory of further national insurance changes and a future path for the minimum wage.
Increases to the minimum wage is perhaps the least discussed of all the recent changes for businesses to contend with. The rate was introduced in 1999 under the last Labour government at a starting point of £3.60 for those above 22. Then, as now, it receives support from business leaders, including myself. No one can argue with the state setting a minimum wage for workers, for young people and for apprentices. It is morally and fiscally the right thing to do.
For years I have considered that there has been a transfer from state to private sector for the social responsibility of our citizens. This is reflected in the ever-increasing minimum salary level, which forms a type of social contract. Over the past ten years the minimum wage has grown from £6.70 to £12.21, a rise of 85 per cent and well over two times the rate of inflation.
If the intent behind these hikes is to drive more people to become net tax paying citizens, then it is not working. More than half of the population are net recipients of benefits rather than paying tax, including 45 per cent of the working age population. You might think with the new minimum wage at £23,800 a year, the state should need to support less. I would not bet on it. The system is simply not set up to appreciate the nuances of industries such as hospitality and retail.
For instance, the process for calculating the minimum wage — where the Low Pay Commission (LPC) recommends each year changes based on median hourly earnings — fails to take into account the varying needs of different sectors. In 2023, more than 80 per cent of those working in hospitality were on the minimum wage. In retail and wholesale it was 70 per cent. Setting wage increases of more than twice the rate of inflation for these industries is crippling for business and inflationary for the consumer.
There is further imbalance in the system. Graduates leave university with debts on average of £45,800 and then face the prospect of an average median starting salary of £28,100, a premium of just 20 per cent on the minimum wage. Finding roles for graduates is hard — the average employer now receives 140 applications per graduate job, according to figures from the Institute of Student Employers. If the financial rewards are so low, where is the incentive to learn, to acquire essential skills and to sacrifice three years of earning?
What business really needs is a plan. If the goal is to increase the minimum wage fairly, it must be pegged more closely to inflation, with additional considerations for the industries that are most affected. Under its revised remit, the LPC has to consider the cost of living when making decisions. Asking it to also consider affordability for business is a reasonable request. Some 54 per cent of all of the minimum wage employees are in hospitality, retail and the cleaning industry.
Equally important, there must be a premium for skilled employment. The minimum wage is a vital part of our fiscal and social fabric, but if it continues to increase at the current rate, it will be £30,617 in five years. Graduate salaries, meanwhile, grew at 3 per cent last year. At that rate, university leavers will be paid an average of £31,626 by 2030. Where is the incentive to strive and become a skilled worker?
The minimum wage is just one of a number of measures the government must consult on rather than enforce changes without laying the groundwork. Hopefully, the Treasury’s appetite for listening improves in the months ahead.
Steve Rigby is the co-chief executive of Rigby Group, a technology-focused family business, and a board member of Family Business UK
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