Will Sunak’s budget really help ease the cost of living squeeze?

With a severe cost of living squeeze hitting Britain this winter, Rishi Sunak is betting that an increase in the minimum wage and unfreezing pay for public sector workers will dispel criticism that the Tories are idly standing by.

In the latest sneak preview of Wednesday’s budget, the chancellor has signed off on a 6.6% increase in the national living wage from £8.91 an hour to £9.50, designed to help Britain’s lowest-paid workers. More than 5 million public sector staff, including police, teachers and the armed forces, will receive an increase after pay was frozen last year.

On the surface this appears a hefty increase, and a significant boost for the millions on low incomes, given the warnings of an inflationary burst reminiscent of the 1970s, with the rise in the cost of living expected to hit almost 5% in the months ahead.

However, scratch a little deeper and not everything is hunky dory. Rather than going above and beyond, the rise matches the recommendations of the independent Low Pay Commission, and is below the immediate £10 an hour demanded by Labour and the trade unions.

Not only will the rise be eroded by inflation, it will not take effect until April, after a difficult winter, and as Sunak imposes cuts to universal credit and ramps up national insurance.

While the move to unfreeze public sector pay will be welcomed, it won’t be quickly forgotten that Sunak clapped for carers only to impose harsh real-terms pay cuts for most – barring an exemption for NHS staff.

The decision also underscores the need to tackle worsening staff shortages after a decade of austerity and pay restraint drove many away from public service. Attention-grabbing investments designed to “level up” and tackle Covid backlogs – with new hospitals, schools and other projects – aren’t much use without the staff to operate them.

Despite the increase in the living wage, ministers have faced intense criticism over their plans to cut benefits and raise taxes amid the escalating squeeze on households caused by Covid-19 and Brexit.

In response, Boris Johnson has said his party believes in people improving their fortunes through work. You can earn more by doing more hours on higher pay, claimants are told. But try telling that to a single parent struggling to balance work with childcare.

The prime minister’s rhetoric also ignores a key feature of universal credit that ensures claimants will take home only 37p of every extra pound they earn above their work allowance.

While billed as a £1,000 boost for a full-time worker, the Institute for Fiscal Studies estimates that those claiming the benefit will only see their disposable incomes rise by £250 because their taxes rise and benefit receipt falls as their earnings increase.

For those on incomes a little higher than the wage floor, there is also scant help with the cost of living crisis. The Resolution Foundation warns that inflation rising by more than expected next year will leave the average household almost £1,000 worse off than would have been the case if inflation held steady.

What’s more, the rise in the living wage stands as an outsourcing of responsibility from the government to the private sector, reliant as it is on companies footing the bill. Speak to most business owners and that is hardly a prospect to relish amid record growth in costs and the worst materials shortages since the 1970s.

Although most economists agree that raising the minimum wage has not held back employment levels, with a circular benefit from higher pay in the pockets of workers being spent across the economy, firms will argue that that theory will be put to the test next year.

Johnson has spoken about moving from a broken economic model (one overseen by his party for a decade, incidentally) to a high-skill, high-wage economy. The trouble is, business leaders feel there is no joined-up plan to match this rhetoric, with the ambition undermined at every turn by the government’s policies.

To sustain higher wages without driving up inflation, increases in productivity are required. But with companies reluctant to invest in new technologies amid soaring costs, and the Treasury keeping tight control of the purse strings, experts fear that such gains are unlikely to materialise any time soon.