Raising low pay is welcome. But we should still fear the forces hurting family incomes

George Osborne’s audacious unveiling of what he termed the “national living wage” dominated the budget coverage and succeeded in delighting, outraging and confusing in almost equal measure. Low-pay campaigners were certainly buoyed, just as some business leaders were appalled at what they viewed as a Milibandesque intrusion into pay-setting. Many others were left puzzling over what this national living wage really represents.

For starters, let’s note that it’s a highly significant – and welcome – pay rise for a large chunk of Britain’s 5 million low-paid workers. It will be introduced in April 2016 at £7.20 (the current rate is £6.50 rising to £6.70 in October) and will apply to all workers aged 25 and above. This represents a 7.5% cash increase; if we look at the change from April 2015 to April 2016 it’s almost an 11% rise, matching the biggest hike of the Labour years. No one saw that coming. The chancellor set the ambition that the national living wage will increase to 60% of the typical wage – drawing on one strand of a major report by Sir George Bain, founder of the Low Pay Commission, for the Resolution Foundation. The independent Office for Budget Responsibility estimates this will translate into more than £9 by 2020, meaning a direct pay rise for about 2.7 million workers, with a larger number again gaining some knock-on wage gains.

That’s a large slice of working Britain. But is it a living wage? No, the new national living wage is a misnomer: it is really a “minimum wage premium” for those 25 and over. That’s because, regardless of the label plundered by George Osborne, living wages and minimum wages are very different creatures. Just because I call my cat Rover, it doesn’t make it a dog. What we might now have to refer to as the “real” living wage has its origins in the early 2000s in a grass-roots campaign in east London against working poverty. Its value is set meticulously every year to reflect public perceptions of the income needed for a range of family types to reach a minimum acceptable standard of living. This calculation is completely unencumbered by concerns over the state of the economy or its impact on jobs. For this reason it is a voluntary wage rate – currently £9.15 in London, £7.85 everywhere else. Crucially, these figures take account of existing in-work support: without this, for instance, the London rate would soar to £11.65.

A minimum wage, by contrast, is set according to a judgement about what employers can afford: it is legally binding and divorced from any consideration of what a household needs to live on (as is the case with Osborne’s national living wage). Both approaches are valid; they just play very different roles. It’s wise not to elide them, as Osborne has done. Leaving the terminological muddle to one side, the budget’s establishment of a premium minimum wage has very real implications for families, employers, campaigners and politics more widely. Households will, of course, want to know whether they are going to be better or worse off overall: as the Resolution Foundation and Institute for Fiscal Studies have shown, the boost to pay and the cuts to in-work support don’t balance out. A £4bn boost to pay cannot match a £12bn cut to benefits. Millions of working families will lose and many on tax credits now face a punishing 80% marginal tax rate. Don’t let anyone tell you the budget was “pro-work”.

When it comes to employers, many sectors should be able to absorb this wage hike relatively easily, despite inevitable carping. But it will pose a severe challenge in some, above all social care, where endemic low pay means two-thirds of all care workers currently get paid less than today’s living wage. The truly heartening news is that more than 700,000 should now receive a pay rise. The worry is that if more public funding is not forthcoming to accommodate this increased wage bill we can expect an escalation in law-breaking by employers dodging their pay responsibilities, and an intensification of service rationing for the vulnerable. The budget announcement has also created a wave of turbulence for several vital campaigns and institutions. The inspiring Living Wage Foundation must feel elated, flattered and mugged. It’s certainly a campaigning coup. But in future when recalcitrant employers are asked to move to the living wage they may well reply: “Thanks, but I’m already paying George Osborne’s version.”

For its part, the Low Pay Commission – which has more than earned its place in public life – will feel chagrined that it was not even consulted on these changes, nor is its future role clear. And child poverty campaigners are still coming to terms with the fact that open season has been declared on tax credits and benefits without much public backlash; while their definition of poverty, and their cherished goal of eliminating it, has been unceremoniously ditched. That’s a lot of fallout for just one budget. Looked at through a wider lens, the chancellor’s budget appears to have driven a wedge between sound policymaking and the emerging centre of gravity in British politics. There are all manner of forces bearing down on working households – the rise of robots, trade patterns, shareholder ascendancy, weak unions – that require a nuanced policy response.

A strong wage floor backed by well-designed in-work support should be part of it. Either on its own is inadequate. On pay, George Osborne has commendably put his foot on the accelerator, while on tax credits he slammed it into reverse. The numbers show it adds up to a bad deal for the working poor. But politically it flows with a powerful current of popular opinion that sees a decent wage floor as a moral imperative, but support for family incomes as an expensive luxury. That is a sentiment for which both right and left should take their measure of responsibility.

This blog originally appeared in the Observer newspaper and on their website