Experts have warned that Labour’s ambition to raise workers’ wages risks fueling inflation – meaning interest rates and mortgage costs could remain higher for longer.
Economists at HSBC said forcing companies to spend more on wages could push up prices.
Alternatively, it could push companies to cut jobs, fueling unemployment, according to an analysis of Labour’s plans by Europe’s largest bank.
The stark warning risks hampering Labour’s progress in convincing business leaders and financial markets that the prospect of a change in government is not a cause for alarm.
HSBC noted that ‘for now, the party’s efforts to win over the business and economic establishment appear to be paying off’.
Promise: Labor, led by Kier Starmer (pictured), has alarmed some leading business figures with its plans for wider reform of workers’ rights
But the bank said there is “still room for non-market surprises” after the election, including a “truly huge increase” in the national living wage or an increase in capital gains taxes.
The bank’s report examined the potential impact of the party’s ‘real living wage’ policy, which would see the cost of living used to calculate the minimum wage for the first time.
That could see interest rates rise from £11.44 to £12 in the UK and £13.15 for London, HSBC economists suggested.
At best, this would get more people back to work, increase productivity, increase tax revenues and reduce the number of people claiming benefits.
However, HSBC senior economist Elizabeth Martins said the reality “may not be so Panglossian” – a reference to the absurdly optimistic character Dr. Pangloss from Candide, the 18th century satirical novel written by Voltaire.
“A higher minimum wage could increase costs and reduce efficiency, raising unit labor costs,” Martins said.
‘This could in turn encourage companies to reduce workforces – i.e. higher unemployment – and/or maintain persistent inflationary pressures, keeping bank rates high for longer.
While this is a risk that has not really materialized since the introduction of the minimum wage, it would likely have a detrimental impact on unemployment at some level – we just won’t know where it is until we reach it.”
Martins also noted that while Labor had ruled out an increase 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 rise in capital gains tax at some point,” she said.