HSBC’s economic team has raised concerns over Labour’s proposed ‘New Deal for Working People.’
- Raising the minimum wage to align with living costs may trigger higher business expenses and job cuts.
- The Bank of England remains cautious about lowering interest rates amidst persistent inflation.
- Labour’s intended public investments could be offset by existing Conservative spending plans, according to IPPR.
- Potential positive outcomes include boosted employment and productivity if Labour’s proposal is successful.
HSBC economists Elizabeth Martins and Emma Wilks have issued a warning regarding Labour’s plan to implement a ‘genuine living wage’ within its first 100 days if elected. Replacing the minimum wage with a living wage that reflects the cost of living could significantly elevate business expenses, potentially leading to job cuts. ‘A higher minimum wage could increase costs and reduce efficiency, adding to unit labour costs. This in turn could either push firms into reducing headcount and/or sustain lingering inflation pressures, keeping the Bank Rate higher for longer,’ they noted.
This proposed wage rise follows a record increase in April, where the minimum wage moved from £10.42 to £11.44. Over the past two years, the average wage bill for employers has grown by 20%. The Bank of England currently maintains a base rate of 5.25%, indicating hesitancy to reduce rates until inflation stabilises. ‘High wage growth is fuelling inflation in the UK at the moment,’ the economists emphasised, particularly highlighting the stubbornness of inflation within the services sector.
Public investment plans face scrutiny as well. The Institute for Public Policy Research (IPPR) indicates that inherited spending plans from the Conservatives could diminish Labour’s proposed green energy investments, leading to potential real-term funding cuts for various public services. Furthermore, significant spending cuts or tax increases might be necessary unless the economy grows faster than expected. ‘Realistically, it is possible that Labour might have to raise taxation,’ Martins and Wilks observed.
Despite these cautions, HSBC acknowledged that Labour’s wage proposal might also have beneficial effects. If enacted successfully, it could enhance employment and productivity by boosting worker motivation and encouraging workforce participation. This could potentially address the current employment challenges in the UK, particularly the high rates of long-term sickness that preclude many from working. However, the economists advise cautious optimism, suggesting that these positive outcomes may be overly optimistic.
The UK’s investment climate adds another layer of complexity. For the third consecutive year in 2022, the UK recorded the lowest level of investment among G7 economies. The IPPR’s associate director for economic policy, George Dibb, highlighted the need for fresh investment to enhance the UK’s economic performance. The IPPR reported a £1.9 trillion loss in investment over the past 32 years compared to the average G7 investment rate. Labour’s ambitious economic reforms will therefore be closely monitored for their impact on inflation, employment, and overall investment.
Labour’s proposed economic reforms introduce significant risks and opportunities that will require careful evaluation by economists and the public.
