Draft National Minimum Wage Regulations 1999 (Amendment) Regulations 2002

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Mr. Osborne: Did my hon. Friend hear from the Minister any explanation of why the development rate seems to be closing on the main rate? Indeed, the development rate is increasing at 2.85 per cent. whereas the main rate is only increasing at 2.4 per cent.

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Mr. Hammond: I hear my hon. Friend's question. No doubt the Minister will deal with it. I suspect that the answer is not statistically complex—it is merely that 10p on each figure produces those rates. The proposed increase is modest and we do not oppose it. However, it is the second stage of a two-stage increase and we have to look at the total increase in the minimum wage main rate since it was introduced three and a half years ago, this coming October.

Mr. Forth: My hon. Friend will be aware that some of us are still hankering after what we used to call market forces and I hope that he will briefly explore for the Committee's benefit the potential impact of these apparently modest figures on regional differences, sectoral differences and what my hon. Friend the Member for Westbury (Dr. Murrison) referred to as the differential impact on small and growing businesses on the one hand and very large businesses on the other. Surely, all those variables exist now as they did before the concept was introduced.

Mr. Hammond: My right hon. Friend is absolutely right; I shall attend to the regional issue later. If he looks at the Low Pay Commission report, he will be shocked to see that there is scarcely a reference to regional economic differences. I shall also consider the impact on the social care sector, about which I am particularly concerned and so is the House, as last night's debate testified. A large number of people in that sector earn very low wages and the Government, in various guises, are its principal customer. My right hon. Friend is right; specific issues must be addressed. He also draws attention to the way in which the Government present such matters.

The Minister, in his regulatory impact assessment, states that the overall impact of the uprating is about 0.05 per cent. of the total wage bill across the economy. That is a small amount. However, his hon. Friend the Financial Secretary to the Treasury, in his reply to the Third Reading debate of the Finance Bill last week, when he was talking about the imposition of a marginal additional tax on oil production in the North sea, pointed out that the impact on marginal enterprises and marginal investment projects has to be considered. It is not the 0.05 per cent. increase in the total wage bill across the economy that is relevant, it is the increase in the wage bill of an enterprise in which many employees earn the minimum wage. Typically, that will be an enterprise in a sector such as social care, where raising prices is not an option in many cases given that the Government—its sole customer—have not been very sympathetic.

I return to the point that I was making before my right hon. Friend's intervention. Although the uprating is only 2.4 per cent. on the main rate, that main rate will have increased by 16.66 per cent. between April 1999 and October 2002. I shall not comment on whether that is too much, too little or just right, but it is important to focus on the rate of increase. It is probably self-evidently true, but if the main rate increases broadly in line with the rate of wage increases in the economy as a whole, the impact of the national minimum wage will not change

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significantly over time; there will not be a further step-change impact. However, if the national minimum wage increased in relation to wages overall, we could expect further effects of the type to which my right hon. Friend referred.

Mr. Forth: I do not want to let that point slip by without comment. In an economic downturn with a consequent increase in unemployment, people can take voluntary pay reductions in marginal businesses and at the edge of the pay range so that they keep their jobs. Does my hon. Friend accept that their option to do so could easily be removed by such a provision? Happily, the measure was introduced in a period of growth in the economy and in employment but we have yet to see the impact, during a downturn in the economy and a rise in unemployment, of the lack of an option that might otherwise have come to the rescue of individuals and businesses.

Mr. Hammond: My right hon. Friend is right. The acid test of the impact of the national minimum wage will be what happens in a serious downturn, when jobs are shed. The fear will be that jobs may be shed at a faster rate in lower-paid employment than would otherwise be the case. We do not know yet, as the jury is still out. The Minister stated earlier that the national minimum wage had been an unambiguous success, but although it has caused no obvious damage to the economy the acid test is yet to come. I therefore caution him on making similar statements.

Geraldine Smith (Morecambe and Lunesdale): Thousands of my constituents—low-paid workers in the tourism industry and rural communities—have benefited from the minimum wage. Is the hon. Gentleman suggesting that if there were a downturn in the economy, those people should take a reduction in their already low wage? That is typical of why the Conservative party is in opposition. It has lost touch with the majority of people in our country.

Mr. Hammond: I hear what the hon. Lady says from the heart, but if she thinks with her head she will realise that, in a downturn, some people may regard it as less onerous to take a pay cut than to lose their jobs altogether, as my right hon. Friend suggested. That is the harsh reality of economics. In some situations, people have to choose between higher wages and no job. Let us hope that many of her constituents and others in the country do not have to face that dilemma, but the point needs to be made. Until we see how the economy performs in a serious downturn, we cannot know the real impact of the measure.

Dr. Desmond Turner (Brighton, Kemptown): I want to make a request of the hon. Gentleman in view of his point, as it suggests that those at the bottom of the heap should pay the price for an economic downturn. Will he ask his friends in boardrooms who still award themselves obscene bonuses and pay rises whether they will take multi-million pound pay cuts in a downturn?

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Mr. Hammond: The hon. Gentleman makes an unrelated point. Many of the people who have awarded themselves what he calls obscene pay rises have channelled some of that money into Labour party funds, to judge from what I have read in the newspapers.

When one of my hon. Friends or I present a few simple economic facts, it is easy for Labour Members to say that Her Majesty's Opposition are inventing the idea that those on low wages may lose jobs in a downturn, as a result of their wages being fixed at a floor that is set above the economic level of the work that they can do in those circumstances. We are not inventing it; it is a simple economic truth. It is unpalatable to the hon. Member for Brighton, Kemptown (Dr. Turner) and to everyone else, but we cannot change the laws of economics in this place, as I would have thought that Labour Members had finally learned after the experiences of the 1960s and 1970s.

I want to make progress, as I am sure that some of my hon. Friends are anxious to participate. Also, Labour Members may want to probe the Minister, in particular on issues relating to the rejection of the Low Pay Commission's advice on 21-year-olds. I am delighted to see that we have been joined, albeit belatedly, by the Liberal Democrat spokesman.

We do not oppose the increase announced by the Government last year, subject to economic conditions. The Department of Trade and Industry subsequently carried out what purports to be an economic analysis, a review of whether the economic tests have been met. Conservative Members are sceptical about so-called economic tests, which masquerade as rigorous, objective analyses of the economic situation to decide on a course of action, whether it is joining a single currency or implementing an increase in the national minimum wage. Anyone who reads that economic assessment and looks at the data underlying it would have to accept that the Government could have drawn either conclusion that they wished to draw from the analysis. The data available in April 2002 could equally have been presented to create a case for not proceeding with the second stage of the uprating. The Department of Trade and Industry paper made a limp case for the uprating, although the Government are now introducing it on the basis of that paper.

Provided that the uprating is sensible and broadly in line with wage growth, it is unlikely seriously to damage the economy, but we shall have to wait for a serious downturn in economic activity before we can properly analyse the effects on the economy. There is no doubt, however, that, for better or worse, the shape of our economy will change. In the private sector, businesses will be forced to move up the value-added chain, as a floor minimum wage is introduced. I accept that there is a legitimate economic argument for trying to move business further up the value-added curve. Unfortunately, the same thing does not happen in the public sector, where the impact of an artificial floor on wages is simply that public sector spending rises and taxes rise, as they have done inexorably under this Government, to pay people for delivering the same amount in the value-added chain.

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Mr. Chris Mole (Ipswich): Will the hon. Gentleman explain why he believes that there are not concomitant productivity gains in the public sector?

Mr. Hammond: I look at the world around me and see that productivity in the national health service has fallen—that is based on the Government's figures, not mine. The evidence shows that productivity in the public sector is not rising at anything like the rate of productivity in the private sector. Indeed, the nature of the public sector means that the pressure to move up the value-added curve simply does not exist. A private business faced with increasing wages, whether as a result of the minimum wage or economic pressures in the marketplace, must chase higher value, because that is the only way in which it can survive. The public sector is not subject to the same pressures. It does not operate in a competitive environment. Ministers recognise that but have been unable to do anything about it. If the hon. Member for Ipswich (Mr. Mole) had an off-the-record chat with the Secretary of State for Health, he would find him susceptible to the idea that productivity in the NHS must increase significantly, but unclear about how to achieve that objective.

Considering the Government's broader record, they would trumpet the introduction of the national minimum wage as their principal weapon in the battle against low wages. At the same time, the Chancellor has hit families on low incomes with highly regressive stealth taxes. The tax increases of the past few years have impacted far more on those at the lower end of the income scale than on those with more substantial incomes. For the poorest 20 per cent. of households, the proportion of income going in tax is at an all time record under Labour. Between April 1997 and March 2001, the tax burden on that poorest 20 per cent. of earners increased from 37 per cent. to 41 per cent. Taxes on the poorest households have increased more sharply than on any other group.

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Prepared 9 July 2002