The announcement, which came as a surprise to many, is predicted to cause the loss of around 60,000 jobs but lead to around 6 million workers seeing their pay increase as a consequence.
In his speech this afternoon, the chancellor unveiled that the new National Living Wage will be compulsory for all working people aged 25 and over and will start next April, at the rate of £7.20.
However, the wage is expected to rise quickly with the Low Pay Commission recommending future rises that achieve the Government’s objective of reaching 60% of media earnings by 2020.
The Office for Budget Responsibility (OBR) says that the new National Living Wage will have only a ‘fractional’ effect on jobs, estimating that by 2020 there will be 60,000 fewer jobs.
However, Osborne is confident that the Government will create a further one million new jobs in the next five years.
The OBR also estimates that the cost to business will amount to around 1% of corporate profits and to offset this cost, Osborne cut corporation tax to 18%.
Economists reacting to the budget announcements and in particular the new National Living Wage announcement, were largely positive, claiming it was the new National Minimum Wage but warning that the Bank of England could hasten the increase of interest rates.
Hospitality industry bodies have reacted with caution to the announcement and urged the Government to take into account overall employment costs when debating the new National Minimum Wage.
Ufi Ibrahim, chief executive of The British Hospitality Association, said: "Hospitality and tourism created one in five jobs in the last Parliament and is the fourth biggest industry in employment terms but there is more we can achieve with further support from the Chancellor. As an industry employing a large number of individuals earning more than national minimum wage and less than the proposed living wage, we have tried to have a constructive dialogue with HM Treasury on building towards the living wage without job losses.
"We were very surprised the Chancellor made this announcement without consultation. Despite the Chancellor trying to alleviate the pain with adjustments to corporation tax and employment allowances, these changes do not go far enough to reduce the impact on SMEs and mitigate potential job losses across the industry."
Kate Nicholls, chief executive of the Association of Licensed Multiple Retailers, said: “We need to make sure that the Government takes into account legitimate business concerns in future discussions regarding the new National Living Wage – and crucially how it will relate to the NMW for younger workers.
"We need a thoughtful approach that will take into account the amount our workers take home, their total earnings and benefits such as pensions not just the headline hourly rate. We also need some sensitivity surrounding the timetable for introduction, with wage rounds currently planned around April.
“The Chancellor acknowledged that the change would hit employment in certain sectors and we would urge him to go further and faster in introducing changes to National Insurance Contributions for small businesses and in cutting corporation tax. It will be critical for the timings of the changes to be aligned and restricting these changes only to the Employment Allowance will limit the impact. We would like to see the abolition of jobs taxes extended from under 21s to under-25s.
“The Chancellor is right, the best way to help the lower paid workers is to allow them to keep more of the money they earn and the changes announced to Personal Allowance are set to put an extra £900 per year in the pockets of our workforce and consumers.
"Measures such as these have the dual effect of aiding both businesses and staff and we urge the Government to bear this in mind when he comes to consult on the National Living Wage. Having a higher hourly rate benefits no one if it is at the expense of a job.”
Labour responded to the Summer Budget with anger, claiming it wasn’t the budget for working people that the chancellor claimed it was and cited huge welfare cuts, such as to tax credits, as leaving families worse off.
The party claimed that under the new proposals a family with one earner on average earnings will lose over £2,000 in tax credits from the changes announced today, whilst a lone parent with two children working 16 hours a week at National Minimum Wage gains just over £400 from the new National Living Wage but loses £860 from tax credit changes in 2016/17.
The National Minimum Wage was set to rise in October to £6.50 for working people aged 21 and over, but the new National Living Wage has now replaced this. The details regarding those under 25 remain unclear under the new proposals, with previous boundaries citied as apprentices, under 18, 18 to 20, and 21 and over, expected to change.
The Living Wage Foundation cites several different living wages depending on where a person lives, for instance it calculates the UK Living Wage at £7.85 an hour, whereas the London Living Wage increases to £9.15 an hour.
In response to the Summer Budget, Rhys Moore, director of the Living Wage Foundation, said: “We are delighted that the announcement made in the Budget this lunchtime will see over 2.5 million workers receive a much needed pay rise. This is a massive victory for Citizens UK and those communities, workers and business leaders who have campaigned for a Living Wage since 2001. We agree with the Chancellor that work should be the surest way out of poverty. However, this announcement raises several important questions.
““Is this really a Living Wage? The Living Wage is calculated according to the cost of living whereas the Low Pay Commission calculates a rate according to what the market can bear. Without a change of remit for the Low Pay Commission this is effectively a higher National Minimum Wage and not a Living Wage.
“Secondly, what about London? We have been working with the Mayor of London for seven years and there’s a London Living Wage rate that recognises the higher costs in the capital, currently £9.15 per hour. These changes will not help the 586,000 people for whom even the 2020 rate announced today would not be enough to live on now.
“Thirdly, what about the 2 million under-25s who are not covered by this announcement? To make sure workers in London and those under 25 do not lose out, we call on employers to join the group of 1,600 organisations that have already chosen to become voluntary Living Wage employers.
“And, lastly, do the tax credit changes announced today mean that the Living Wage needs to be higher to make sure people have enough?
“The Living Wage Foundation, members of Citizens UK and the 1,600 accredited Living Wage employers look forward to an early meeting with the Chancellor to address these questions and help the millions of workers who deserve a pay rise.”
It was previously reported that Greater London Assembly member, Tony Arbour calculated that a compulsory Living Wage could put 213,247 hospitality jobs across the UK at risk and cost around £4bn.
Services company KPMG also revealed figures that suggested 80% of the hospitality industry earns below the Living Wage, 85% of waiters and waitresses and 90% of bar staff all earn below the recommended Living Wage.
Ian Wright, director general of the Food and Drink Federation, said: "We support the national living wage in principle and many of our leading members have already made individual commitments to pay the living wage. It is important, however that the direct impact on the thousands of small and medium-sized food businesses is minimised to ensure the future competitiveness of the food and drink manufacturing sector. The counterbalance of a reduction in corporation tax and National Insurance contributions will go some way in helping food and drink manufacturers to manage this change.”