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International Socialism, June 1973

D.A. Turner

Briefing:
Wages and the Cost of Living

From International Socialism (1st series), No.59, June 1973, pp.14-15.
Transcribed & marked up by by Einde O’Callaghan for ETOL.

A wage increase of 10 per cent is not adequate to compensate for a similar rise in the retail price index for three main reasons:

1. Progressive taxation. As earnings increase you pay a higher proportion of them in income tax and National Insurance contributions;
2. Loss of earnings-related benefits. For example rent rebates, family income supplement; all or part of these will be lost on receipt of a pay increase;
3. Distortions in retail price index. The index does not accurately reflect the actual cost of living for working-class families because, for example, they pay a higher proportion of their income in rent than is allowed for in calculating the index (and rents rise faster than other prices).

We shall consider each of these effects in turn and then summarise the total effect. Obviously the three factors operate very differently on different people. For the sake of definiteness the case of an employed man with a wholly dependent wife and two children under 11, at various income levels is taken. A calculation for this typical family will produce a more meaningful result than an ‘average’ which would be distorted by the presence of small numbers of highly atypical cases (millionaire bachelors for example!)
 

(a) Progressive direct taxation (all data for year 1973/74).

1. Income tax. The family is allowed tax free: £600 (married man) + 2 x £155 (for the children) = £910 per year. From this we must deduct family allowance ‘clawback’ of £42 leaving £868 per year – that is £16.69 per week tax free. All income above this is taxed at a rate of 7/9 x 38.75 per cents – 30.14 per cent. (Source – PAYE coding guide. Inland Revenue)
2. National Insurance. Flat-rate contribution 84p per week + 4.66p graduated for every £1 of gross income above £9, up to £54 per week. (Source – Department of Health and Social Security leaflet N140. April 1972, corrected for 1973/74 by budget report given in Financial Times, 7/3/73).
   
   (Note 1. Taking (i) and (ii) together we have a marginal rate of tax of 30.14 per cent + 4.66 per cent = 34.80 per cent. Therefore to take home an increase of £1 you must win an increase of £1/(1 – 34.88 per cent) = £1.53 This holds over the whole range of incomes from just above the lowest tax-paying level to £54 a week.)
    
3. The family receives 90p a week family allowance which is taxed at standard rate (we take this into account here since we have to deal with clawback under income tax anyway). Hence:

(b) Loss of benefits.

Three major items have to be considered here: family allowance, rent rebates, and family income supplement,

1. Family allowance ‘clawback’ already allowed for in calculation (a).
2. Rent rebate. Of our three earnings levels only the £20 and £30 will be likely to qualify for this. Assuming a rent of £5 a week the maximum income at which a rebate is possible for a two-child family is about £36 a week. The £20 family would receive a rebate of £2.89 and the £30 family a rebate of £1.20 a week. In all cases the rebate is lost with rising earnings at the rate of 17p per £1 rise in income. (Source: Rent Rebates, a Guide for Local Authorities: HMSO 1972.)
   This acts just like an extra 17 per cent slice of income tax, and correcting the last column of Table A accordingly we get:

   Table B
   Weekly earnings		£20	£30	£40
   % increase in earnings to get 10% increase		19.2%	17.4%	12.1% (no rebate to lose)

   Note 2. If you receive a rent rebate, then Note 1 about the marginal rate of tax must be revised. The marginal rate becomes 34.80% + 17% =51.80% and we have £1/(1 - 51.80 per cent) = £2.08, so to increase your net income by £1 you must win a £2.08 increase in earnings.)

3. Family Income Supplement (FIS). A family with two children qualifies for this below a gross income of £23.50 (including family allowance in gross income). Therefore we need only consider the £20 family. Benefits received = ½(23.50 minus gross income) = ½(23.50 minus £20.90) = £1.30.
   This is lost with rising income at the rate of 50p per £1. Free school meals, free prescriptions and dental treatment have an estimated value of £2 per week. Therefore total benefits under FIS = £3.30. All of this will be lost on winning a pay increase of the order necessary to match a 10 per cent rise in prices. So we must add £3.30 – 15.6 per cent – to the necessary increase for the £20 family to make up for the loss of FIS benefits.

(Note 3. If you receive FIS as well as a rent rebate your marginal rate of ‘tax’ becomes 51.80 per cent plus 50 per cent (rate of loss of FIS) – a total of 101 per cent. So if you get a £1 increase in pay your net income ends up about 2p less than it was before! Fortunately this effect only occurs over a short range as entitlement to FIS soon vanishes.

To carry this out properly would be a formidable task both in terms of the data required and in terms of the complexity of the calculation. We have taken into account only the major factor – housing. Housing costs consistently rise faster than other prices, when the retail price index goes up by 10 points the cost of housing goes up by 15 points (this ratio has been fairly consistent over the last 10 years and during the recent period). In the calculation of the r.p.i., housing is weighted as 12 per cent of total family expenditure. While this figure is average for families on £40 a week, for families on £20 and £30 the weight should be 18 per cent and 14 per cent respectively. (Source Social Trends. Central Statistical Office, 1972, various tables on page 100.) Correcting for this we find that a 10 per cent rise in the r.p.i. means a 12 percent rise in the actual cost of living for a family on £20 a week and an 11 per cent rise for a family on £30 a week. So the corresponding entries in the tables must be increased by the factors 12/10 and 11/10 respectively.
 

Conclusion

For our ‘typical family’ of a couple with two children under 11, living in rented accommodation, with the man the sole breadwinner we have:

Note: In fact the last entry is rarely applicable since only a small proportion of the families entitled to FIS benefits are thought to be receiving them. In comparison with these figures it should be noted that the Tory ceiling of £1 plus 4 per cent corresponds to a rise of 9 per cent at £20, 7.3 per cent at £30, and 6.5 per cent at £40.

D.A. Turner
April 73    

 
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