Experts have warned that Labour’s ambition to boost workers’ wages risks stoking inflation, meaning interest rates and mortgage bills could stay high for longer.
HSBC economists said forcing companies to spend more on wages could drive up prices.
Alternatively, it could lead companies to cut jobs, fueling unemployment, according to an analysis of Labor plans by Europe’s biggest bank.
The stark warning threatens to slow Labor’s progress in persuading business leaders and financial markets that the prospect of a change of government is no cause for alarm.
HSBC noted that “for now, the party’s efforts to win over the economic and business establishment appear to be bearing fruit.”
Commitment: The Labor Party, led by Kier Starmer (pictured), has alarmed some senior business figures with its plans for broader workers’ rights reform.
But the bank said there is “still room for non-market-friendly surprises” after the election, including a “truly extraordinary increase” in the national living wage or an increase in capital gains tax.
The bank’s report looks at the potential impact of the party’s “genuine living wage” policy, which would mean the cost of living is used, for the first time, to calculate the minimum wage.
That could boost it from £11.44 to £12 across the UK and £13.15 in London, HSBC economists suggested.
In the “best-case scenario,” that would attract more people back to work, increase productivity, increase tax revenue, and result in fewer people claiming benefits.
However, Elizabeth Martins, senior economist at HSBC, said reality “might not be so Panglossian”, referring to the absurdly optimistic character of Dr Pangloss from Candide, the 18th century satirical novel by Voltaire.
“A higher minimum wage could increase costs and reduce efficiency, increasing unit labor costs,” Martins said.
‘This, in turn, could push businesses to reduce their workforce – i.e. higher unemployment – and/or sustain persistent inflationary pressures, keeping the bank rate higher for longer.
While this has been a risk that has not really materialized since the minimum wage was introduced, at some level it would presumably have a detrimental impact on unemployment; we just don’t know where it is until we reach it.’
Martins also noted that while Labor had ruled out increases in income tax, national insurance and VAT, it had “tellingly” not done so for capital gains tax.
“Realistically, Labor may have to raise taxes, and both Keir Starmer and (shadow chancellor) Rachel Reeves have refused to rule out a capital gains tax increase at some point,” he said. .
electoral money
