Living wage 'would give Treasury £2bn'

Around £2 billion a year would be added to the Exchequer's bank balance as a result of higher income tax payments and lower spending on benefits under the scheme.

And raising 5 million low-paid people's wages to the living wage of £7.45 an hour - £8.55 in London - would add around £6.5 billion to workers' earnings overall.

The Resolution Foundation and IPPR think tanks said that even though paying the higher rate in the public sector would increase costs the total saving to the Treasury would be a couple of billion.

The think tanks recommended that all Whitehall departments and London boroughs should pay the living wage, which is higher than the current £6.19 adult national minimum wage.

Living wage rates are calculated as the minimum required to live above the breadline.

Resolution Foundation analyst Matthew Pennycook said: "There are significant overall public savings to be made from paying a living wage, on top of the beneficial effects it would have on reducing working poverty.

"Public-sector employers are well placed to expand the living wage and to set an example which the private sector can follow."

IPPR spokeswoman Kayte Lawton said: "As a first step, making sure that all council staff in London are paid at least the living wage wouldn't cost very much but would be an important symbol of political leadership.

"Councils in other parts of the country, like Glasgow and Newcastle, have shown that the living wage can be affordable even though the costs are higher."

New TUC general secretary Frances O'Grady added: "This report shows that fairer wages and decent in-work benefits are both vital means to boost living standards for millions of workers in low-pay Britain.

"Becoming a living wage employer helps staff, improves a company's reputation, and in many sectors is easily affordable.

"In some cases introducing the living wage leads to overall wage bills rising by less than 1 per cent."