The Government should prioritise cuts to employers' national insurance contributions (NICs), rather than funding further increases in the personal income tax allowance, if it wants to boost growth and pay, a think-tank report has argued.
Since 2010, the coalition has spent billions of pounds on raising the threshold at which workers start paying 20% income tax from £6,475 to £10,500, and Deputy Prime Minister Nick Clegg has said he would like to go further and take everyone earning under £12,500 out of the tax altogether.
But a report by the Policy Exchange think-tank argues that, while changes to low-paid workers' taxes can support their incomes, they "do not address the fundamental cause of the recent downturn in pay".
Real wages have fallen by 8% over the past five years since the economic crisis of 2008, broadly in line with a decline in productivity, the report found.
Author Matthew Tinsley argued that this close link means that boosting productivity is the best way of improving workers' pay, and that a cut to employers' NICs is "one of the most effective tools at stimulating growth and incentivising greater hiring".
He called for the level from which employers have to pay NICs to be raised from £157 to £192 a week i n 2015/16, the equivalent of £10,000 per year. At a cost to the exchequer of £5.4 billion a year, this would reduce employers' yearly NI liability by £250 per employee, he said.
"This will be the most effective way of reducing the slack in the labour market to the extent that it can stimulate a recovery in pay," said the report.
"On top of this, reducing the wedge between what employers pay and employees receive should make it easier for companies to increase pay after a period of time where that wedge has only increased."
The report also called for National Minimum Wage increases above the rate of inflation in 2015 and 2016 to allow it to regain its 2007 value.