Recalculating the Living Wage

I very much welcome the increase in the minimum wage to £7.20 an hour announced by George Osborne in his budget a few weeks ago, and that it would be set to rise to over £9 an hour by 2020. On the face of it, this 2020 figure would probably be in line with the Living Wage as calculated by the Living Wage Foundation.

When first introduced in 2011 the Living Wage was £7.20, and since then has risen by 25p in 2012 and by 20p in both 2013 and 2014 to now stand at £7.85. If that same annual increase were maintained for the next six years, then it would indeed be just over £9 an hour by 2020. Although, to be more precise, the Low Pay Commission (who recommend the minimum wage rate to the government) have been asked to ensure that the minimum wage reaches at least 60% of median earnings by 2020 ... which will probably be more than £9 an hour.

As a target sum, this would comfortably beat Labour's manifesto promise of £8 an hour by 2020, and be equal to what Plaid Cymru and the SNP had proposed. The LibDems didn't make any commitment. Only the Greens proposed something better: that the minimum wage would rise to £10 an hour by 2020.

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The problem, as everybody realizes, is that the Tory increase in the minimum wage is going to be offset by cuts in tax credits. In some cases families will be worse off, although not in every case. There is a good article on this here by the Social Market Foundation. They assume that 60% of the median wage will result in a minimum wage of £9.35 an hour, and on that basis this is the worst case graphic from it:

     

But it is better for others, as this graphic shows:

     

The question I asked myself was to what extent the proper Living Wage, as calculated on behalf of the Living Wage Foundation, would need to be adjusted to take account of the fact that tax credits would now be cut. But in doing this I discovered something which surprised me, which I think most people will be unaware of, and which is the main reason for me writing this post.

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The way that the Living Wage is calculated is set out in detail in this document. When the calculation was first made in 2011 the £7.20 rate it set was accurate, but the increases in the Living Wage since then have been limited by a formula which states that it should not increase by more than 2% above any rise in average earnings.

The effect of applying this cap is quite startling. This is from the conclusion at the end of the 2014 calculation:

Based on the above calculations, the ‘reference’ level of the Living Wage, reflecting actual minimum living costs, is £9.20 in 2014, but the applied Living Wage, resulting from the capped increase, is £7.85.

The difference is a huge £1.35 an hour.

I suppose I can understand the rationale behind the cap. The aim of the LWF is to get employers to become accredited Living Wage Employers; and in order to make a long-term commitment, it was helpful for there to be some method of cushioning large increases. Back in 2011 it was probably reasonable to assume that wages would rise following the worse ravages of the recession caused by the 2008 financial crisis, but wages haven't gone up by very much at all. So it's proved to be a false assumption. Whatever good intentions lay behind imposing this cap, the end result is that the current Living Wage of £7.85 is now way below what it should be in order to meet actual minimum living costs. Instead of rising by about 65p or 70p each year, the Living Wage has only risen by 20p or 25p each year.

Now consider what will happen over the next five years. It seems pretty obvious that the calculated Living Wage is going to rise further. In part this will be because of the effect of reductions in tax credits, but on top of that there will be the usual cost of living increases. What is currently calculated at £9.20 will certainly be over £10 an hour and probably closer to £11 an hour by 2020.

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The definition of the Living Wage, as taken from calculation document, is "the wage that produces enough income after taxes, benefits and tax credits to cover [a family's] expenses." So it is clear that the next calculation of the Living Wage will need to take the reduction in tax credits into account. This will be a major change, and therefore will provide a perfect opportunity to reset the calculation without the cap imposed in previous years.

I'm sure this will result in a large rise which will make some accredited Living Wage employers think twice. But I think it's a bullet that needs to be bitten. If the Living Wage doesn't actually reflect what minimum income is needed to cover expenses, it is meaningless.

Complete rubbish about energy from David Davies

I've spoken to David TC Davies on a few occasions, and I have to say that he's a rather pleasant and affable person face to face ... the problem is that quite a lot of what he says in public is stark raving bonkers.

He's just provided us with another example in this article in the Western Mail:

Scrap the climate change levy, says Tory MP David Davies
as Wales exceeds renewables target

Apparently, we are being asked to believe that:

Official statistics show that by August 2013, the amount of renewable energy produced in Wales was already running at 9.7 TWh.

The official figures for electricity generation are published by DECC, and are available from this page.

The figure for the whole of 2013 was in fact 2.664 TWh ... less than a third of what David Davies quotes.

Now it might just be that he is thinking of the total energy, rather than just electricity, produced from renewable sources. But he probably isn't, for two reasons. First, the figure of 7 TWh/y he quotes comes from paragraph 1.4 of TAN 8, and is specifically for renewable electricity. And second, because the DECC tends to measure total energy in TOE (tonnes of oil equivalent) and as we can see from table 6.6 of these figures, over 70% of energy from renewable sources is used to generate electricity. Therefore even if he tried to claim that he was talking about total energy, rather than just electricity, he'd still be talking complete rubbish.

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So, to be clear, we in Wales have definitely not "exceeded" our renewable targets. Paragraph 1.4 of TAN 8 sets two of them: 4 TWh/y of electricity from renewables by 2010, and 7 TWh/y of electricity from renewables by 2020. In 2013 we produced less than 2.7 TWh, in other words we were still a long way short of the 2010 target.

In fact, the picture is quite bleak, because the two large offshore windfarms that would have significantly boosted the amount of renewable electricity generated in Wales—the Atlantic Array in the Bristol Channel and the Celtic Array in the Irish Sea—have both been cancelled.

A pig in a poke

During the campaign for the Westminster election in May, the Tories promised that they would deliver £12bn of welfare cuts ... but refused point-blank to tell us what, exactly, they were going to cut. Of course nobody doubted that they could make this level of cuts, but if they'd been specific about what they were going to cut, a lot of people might have had second thoughts about voting for them.

Yesterday, Plaid Cymru took a leaf directly out of that Tory book. They made a promise that, if elected next May, they would generate all Wales' electricity from renewable sources within 20 years ... but refused point-blank to tell us how they intended to do it.

     

     BBC report | Wales Online report

As with the Tories and their welfare cuts, nobody doubts that Wales can produce more electricity from renewable sources than we consume. Although, to be precise, this isn't the same as saying that all Wales' electricity would come from renewables, but is probably what Plaid would have said if they'd thought more clearly about it. That in itself should give people a good idea of how seriously Plaid have thought this through.

But, to make that point more forcibly, we need to ask why Plaid only intend to produce this "route map" after they've been elected. What new information will be available next summer that isn't available right now? It's not as if there is some "secret" information that will only be available to Plaid Cymru if they form the next government.

In short, this policy announcement, as it stands, is nothing more than a confidence trick.

     

So what are Plaid Cymru playing at?

As I see it, there are two factors at play.

The first is blunt, but honest. There is no way that Plaid Cymru have a hope in hell of forming the next government of Wales. Plaid Cymru might, if they're very lucky, win one or two more seats next May, but (especially with the rise of UKIP) it is actually far more likely that they will lose one or two seats. In other words, they're pretty sure that they will never be called upon to deliver this "route map". It's the luxury of being in opposition.

The second is that if they were clear about how they intended to achieve it, they think (wrongly, in my opinion) they would alienate people and therefore stand even less chance of winning any new seats. However they formulate the renewable energy generating mix, it will mean many more wind farms and/or solar parks and/or tidal lagoons in Wales ... and will also mean new grid connexions to link these to the gird. Remember that only about 10% of our electricity is currently generated from renewables. We have a very long way to go.

From my time as a Plaid Cymru insider, I know that the party is all over the place when it comes to energy. Their policies in this area are hopelessly contradictory, and no-one is strong enough to unite the various factions and narrow interest groups within the leadership.

So, as it stands, this announcement should be, and will be, seen as nothing more than a joke. If Plaid Cymru want to be taken seriously, the answer is simple. Produce this "route map" now—before the election, not after it—and, if it's any good, they might be pleasantly surprised at how many people vote for Plaid because of it.

That's the way honest politics is meant to work. Only a party of charlatans could expect the public to buy a pig in a poke.