(Bloomberg) -- The UK minimum wage will rise by an inflation-busting 6.7% next year, an increase that helps Chancellor of the Exchequer Rachel Reeves argue working people are protected at Wednesday’s budget, but may complicate the Bank of England’s inflation fight.
The pay lift for Britain’s lowest earners, to £12.21 ($15.88) an hour from £11.44, will be worth £1,400 a year to an eligible full-time worker when it comes into effect from April 2025, the Treasury said in a statement on Tuesday.
The minimum wage for 18 to 20-year-olds will also rise to £10-an-hour from £8.60 — its largest increase on record — as part of plans by Labour to align the two rates and create a single adult minimum wage rate. That’ll be worth £2,500 to younger workers, the Treasury said.
“This government promised a genuine living wage for working people,” Reeves said in remarks released by her office a day before she’ll deliver her first fiscal statement as chancellor. “This pay boost for millions of workers is a significant step towards delivering on that promise.”
The increases for over 3 million workers are once again well above the rate of inflation, which is expected by Bloomberg Economics to average just over 2% in the current fiscal year and in 2025-26. Wage growth in the private sector dipped below 5% in the three months through August, while next year’s public-sector pay awards range from 4.5% to 6.5%.
In recent weeks, Reeves and Prime Minister Keir Starmer have suggested their main priority ahead of the budget has been helping what they’ve called “working people,” who they define as workers who worry about making ends meet.
While the move provides a much-needed boost for low-earners hit by a cost-of-living crisis in Britain that saw them disproportionately affected by the spike in energy and food prices, it means businesses will have to stump up for higher wages and potentially greater contributions to the national insurance payroll tax after the budget.
For the BOE, it also adds to a list of factors like labor shortages in low-skill sectors and rising long-term sickness that are fueling underlying inflation pressures in the face of high interest rates. In July, experts including Sanjay Raja, chief UK economist at Deutsche Bank, warned that Labour’s pay plans would have a “meaningful impact” on both inflation and unemployment.
“With productivity stagnant, businesses will have to accommodate this increase against a challenging economic backdrop and growing pressure on their bottom line,” said John Foster, chief policy and campaigns officer at the Confederation of British Industry.
“That pressure will make it increasingly difficult for firms to find the headroom to invest in the tech and innovation needed to boost productivity and deliver sustainable increases in wages,” he said.
--With assistance from Tom Rees.
©2024 Bloomberg L.P.
