THE GUARDIAN

COMMENT

Why is Britain shelling out millions to allow so many private companies to continue paying rock-bottom wages?

What is the government going to do about growing inequality? Is there a plan for the third term? Although Labour has done well so far, it will for ever be running up a down escalator until it can start to shrink the gaps in pay and wealth it is trying to counteract. The measure of inequality (the Gini coefficient) increased between 1996 and 2003, and a new study by the LSE economist John Hills has just spelt out how hard are the choices that lie ahead for Labour.

Here is one small step the government could take. Yesterday the TUC put in its bid to the Low Pay Commission, calling for a modest 50p more an hour on the national minimum wage next October. That is not a lot, and the government should accept it. It would raise the minimum hourly rate to £5.35 - still £1 below the lowest estimate for a survivable living wage. Figures from the Office of National Statistics (ONS) released yesterday show that 272,000 workers are paid illegally below the minimum wage, over 1% of the workforce.

The chances are the TUC won't get its 50p. The Low Pay Commission last year accepted exactly the sum the CBI submitted. The CBI has yet to publish its bid, but says it must be a lot lower than last year's 7% increase. Yesterday it called the TUC's 50p "rash and unrealistic. The TUC has chosen a poor time to suggest throwing caution to the wind when so many firms are under pressure from rising costs." It's what the CBI always says. Its alarmist lobbying caused the minimum wage to be brought in at such a low rate that it has benefited about half as many people as the government originally intended. Every year the CBI cries wolf, threatening dire job losses - but every year the number of jobs rises, up by 2m now.

Flat percentages are no fair way to look at pay: 7% of nothing much is nothing much, while 7% up at the top is a fortune. (What the top FTSE directors actually awarded themselves was even more: this year it was 13%, on top of 24% the previous year.)

Pay is the great missing piece in the government's anti-poverty strategy. After seven years, like pulling dragons' teeth, it finally agreed before the party conference to give contracted-out public services workers the same deal as directly employed cleaners, cooks and carers. It will take a while to happen, but it rights a great wrong and will help a lot of the low paid, mostly women. Otherwise, Labour says nothing about how the pay and wealth gap is to be narrowed.

The government has done exceptionally well in redistributing money towards low-paid families. Through tax credits, most experts agree, a million children have been lifted out of poverty - reaching the quarter-way target for abolition. So what's the problem? Why not just go on upping the tax credits every year? A New Policy Institute (NPI) report, Why Worry About Low Pay?, nails the issue. It makes the blindingly obvious (but officially unmentionable) point that tax credits have become a way of subsiding low-paying employers with ever heftier sums of government billions. What are we doing shelling out so much to keep supermarkets, private care homes and office cleaning companies paying rock-bottom wages? If there were no tax credits, all these employers would have to raise their pay or lose their staff, who couldn't afford to take jobs at these pay rates. The state is financing a low-pay culture. The CBI blusters on about keeping the minimum wage low - but it never utters one word of gratitude for the massive subsidy we taxpayers give employers so that they can pay sub-survivable wages.

The chancellor's impressive anti-poverty record has been far more redistributive than most observers dared expect in 1997, and he has had to fight hard to keep that money flowing. Tax credits will always be needed as one way to make sure everyone, in all circumstances, is always better off in work. But, the report's authors argue, tax credits cannot be the main method for keeping most people out of poverty. Sooner rather than later, fair pay has to be part of the equation. Inching up the minimum wage as a weak backstop is not enough. A Labour government must have something to say about both gross wealth at the top and gross poverty at the bottom. The aim must be a living wage for everyone, without need of subsidy.

There is no reason why a care assistant or a hospital cleaner is paid less than they can survive on. There is no iron market law: other countries have far less unequal pay rates. Look around Europe and countries make different political choices over the years, resulting in different tax rates, social benefits, levels of unemployment and in all (but Ireland) less inequality. There is no crude pay-off between fairer incomes and higher unemployment, as the CBI would have us believe. For a start, the state can set public sector pay at a living wage rate, if it is willing to raise taxes. Most private employers would have to match that. These jobs can't go abroad: they are virtually all in the service sector, and you can't have your granny cared for from Bangalore. How high can the minimum wage go without losing jobs? No serious economist says they can possibly predict it: suck it and see, they say. Keep pushing it up until it does demonstrable harm. The only long-term chance of zero child poverty is fairer pay.

Meanwhile, in another neck of the woods - but not as far away as you might think - on Monday the gambling bill reaches the Commons. The Department of Culture, Media and Sport's latest rebuttal of "myths" about it is duplicitous nonsense. There is no point in pouring billions into an anti-child-poverty strategy when these gigantic slot machine sheds will make hundreds of thousands of children very poor indeed. Where do the millions of pounds come from that these great corporations are bribing local authorities with? Straight out of the pockets of a lot of addicted parents. These are not "casinos" - they are hyper-addictive 12 pulls-a-minute jackpot slots that transfix their prey, who are easily enticed in by free floor shows and free meals. Never mind if it is only "20 to 40" mega casinos to start with, these mega profits will mostly come from people who can't afford it. Very few people can.

If these casinos are approved by parliament, in future years official poverty figures will need to add in many hundreds of thousands of hidden child victims of adult addicts. These children's household incomes may look high on paper, but their secret reality will be the worst poverty of all. It's no good Tessa Jowell saying it is "snobbery" to want to keep the same lid on this "leisure industry" as the rest of Europe does. Encouraging the most addictive type of gambling runs counter to all the other noble efforts the government is making for children.

· Inequality and the State by John Hills, OUP; NPI report by Peter Kenway and Catherine Howarth

polly.toynbee@guardian.co.uk