On the 8th July, Chancellor of the Exchequer George Osborne used his seventh budget to announce a new National Living Wage. While the move is anticipated to boost the wages of 6 million people, a number of concerns have been raised within the travel and tourism industry (among others) about what the impact of the plans might be.

For instance, compared with other industries, the travel and tourism industry typically hires a disproportionately higher number of lower-skilled, lower-paid and temporary roles and, as a consequence, the impact of the move on the industry will be more considerable than that of others. Additionally, while the move may be more easily absorbed by cities such as London —where wages are already typically far higher than the national average — the plans will disproportionally hinder businesses operating in Britain’s coastal, rural and less wealthy regions, some of which rely heavily on tourism.   

Detailing his plans, the Chancellor announced that only workers over the age of 25 will be entitled to the Living Wage, and will receive a minimum of £7.20 an hour starting in April 2015, which will then rise to £9 an hour by 2020. For workers beneath this age, the present Minimum Wage laws will continue to apply, and are expected to be increased annually.

Reaction from the UK Travel and Tourism Industry

From perhaps a moral perspective, in general there would be minimal objection to the principle that attempting to increase wages for the lowest-paid workers within the travel industry is in itself a good thing. However, from a business point of view, legitimate concerns have begun to present themselves regarding the possible effect on jobs and prices.

For instance, following the Chancellor’s announcement, Ufi Ibrahim, the Chief Executive of the British Hospitality Association (which represents UK tourism businesses), warned as follows in a press release on the BHA website:

“As an industry employing a large number of individuals earning more than the national minimum wage and less than the proposed minimum wage, we have tried to have a constructive dialogue with the Treasury on building towards the living wage without job losses.... We were very surprised the Chancellor made this announcement without consultation.”

How Might Businesses React to the Change?

Given that the Chancellor looks in no way likely to alter his plans, the industry seemingly must now find ways to adapt to the changes; and for enterprises that will be forced to take action to remedy the consequences of higher wage costs, a range of options are available to them.

In the first instance, in a drive to enhance productivity, businesses may choose to cut back on the number of hours worked by existing employees, or to cut jobs entirely. Secondly, they may opt to alter the compositions of their workforce; considering that the new Living Wage applies only to those aged 25 and over, employees entitled to the higher wage may find themselves replaced by younger and, therefore, cheaper labour. And thirdly, to mitigate the effects of higher operating costs, businesses may choose instead to raise their prices, effectively passing the higher wage cost on to customers.

Tourism VAT in the UK

Although seemingly negative for the industry, the move by the Chancellor has also served to re-awaken and give furtherance towards one of its long-standing goals.

In an attempt to mitigate the detrimental consequences of the Chancellor’s plans, representatives from the industry have again urged for the Government to lower the rate of VAT levied on tourism, bringing the UK into line with what is already in place across Europe. In fact, of the 28 Member States of the EU, the UK is at present one of only two which levels the full rate of VAT across the industry. The remaining 26 have, to varying degrees, lowered their rates of tax on hotel accommodation, restaurant meals and admissions to cultural services.

The Cut Tourism VAT lobby group is campaigning for the UK to reduce its VAT rate on tourist accommodation and attractions from 20% down to 5% (the average in the EU is somewhere around 10%). The group acknowledges the likelihood that the move would result in reduced tax revenues for the Treasury, but only temporarily, as it is further anticipated that in the longer term, a correlating escalation in the level of consumer spending on travel and tourism will actually serve to increase tax revenues, to the tune of an extra £3.9bn over 10 years. In addition, the supposed greater level of spending in tourism and the wider economy would produce estimated gross domestic product (GDP) gains of up to £4bn annually, not to mention an anticipated 123,000 new jobs.

Conclusion

Tourism in the UK represents the fourth-largest service industry in the country, and is responsible for employing an estimated 3.1 million people, or 9.6% of the workforce (both directly and indirectly). In addition, it contributes around 9% of the UK’s entire GDP — the equivalent of £127bn in 2013 — and from an export point of view the value of travel expenditure by foreign visitors to the UK totalled £24bn in 2013, representing 12.4% of UK service industry exports and 4.7% of total UK exports.

Therefore, bearing in mind the tourism industry’s vital economic contribution to the country, governmental initiatives such as the new National Living Wage — which is anticipated to damage the industry — are a worrying potential sign of things to come, particularly given the propensity of the industry to offer disproportionately high levels of employment to lower-skilled, lower-paid and temporary staff, which makes it inevitable that a number of enterprises engaged in the industry will need to alter their business models in order to mitigate the impact.

However, even if only one benefit is to arise from the move, it is that the Government will find it increasingly difficult going forward to ignore what is now steadily becoming a more legitimate campaign from the tourism industry to finally lower its rate of VAT.

Tom joined Key Note in January 2014 and works as a Senior Writer & Analyst, specialising in the travel, transport & motor goods sectors.