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Charlie Duff

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Emergency budget – what it means for HR and employers


This ‘emergency’ budget, delivered by Chancellor George Osborne (flanked by two Liberal Democrats to prove how well the coalition is working and how much cross-party support the financial plan has) could be significant for managers and HR, according to business leaders and the CIPD.

John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development (CIPD) said: “The Chancellor has introduced what must surely rank as the most astonishing UK budget statement in modern times. Mr Osborne’s combination of £32 billion additional spending cuts by 2014-15 and an £8 billion net tax hike amounts to an unprecedented fiscal squeeze, including an extremely severe clampdown on the welfare bill.”

He also commented on the management challenges faced by the public sector, saying: “Significant job cuts were inevitable whoever won the election. However, there is little evidence that any of the parties gave serious thought to the enormous management challenges associated with delivering their manifesto commitments through a workforce demoralised by redundancies, pay restraint and pensions reform.”

This worry was shared by Alan Lewin, chief executive of Axiom, a regional housing organisation, who said: “These budget cuts will result in the creation of a new model of the employer/employee relationship. A radical review will need to take place of the current employment contracts and practices if public sector bodies are to continue to meet the increasingly challenging demands of budget retraction and service expansion. 

“Now, more than ever, we need to attract, retain and develop people who have the flexibility to work across a wide remit, are adept at problem solving and can mould their skills and experience to meeting today’s challenges.”
Despite the Chancellor’s stern warnings of ‘necessary’ pain his outlook remained optimistic for the recovery of the economy and deficit.

The small and private business-friendly budget is hoping private business growth will boost the economy in short order. As an incentive, George Osborne announced that any company set up outside London, the south-east or the eastern region will not have to pay employer National Insurance contributions (NICs) for its first year in business.

Firms will be able to apply for the tax cut at any time over the next three years up to a maximum of £5,000 per employee for a maximum of 10 employees. It will be targeted at regions with a high concentration of public sector workers. (See the Guardian’s datablog for a visual representation of these types of areas – external site.)

This scheme may lead to interesting new business set ups: Kevin Barrow, Partner and sourcing specialist at international law firm Osborne Clarke seems to think so, saying: "I predict that recruiters will offer to help start-up companies apply for this reduction in NI payments."

Carol Dempsey, tax partner at PricewaterhouseCoopers LLP added: "National insurance incentives for new businesses should help manage employment costs."

However this golden hello to new businesses won’t last forever…will it provide the boost needed to the economy? The coalition certainly hopes so.

Pensions and savings
For pensions, George Osborne announced he planned to look again at proposals restricting pension tax relief for high earners from April 2011. Claire Carey, a partner at Sacker & Partner LLP (Sackers), said: "Plans to restrict tax relief on pension savings for high earners will go ahead in order to help protect Treasury coffers. However, the method originally proposed for achieving this under the Finance Act 2010 was fiendishly complicated. The new Government has clearly listened to industry concerns and is seeking an alternative approach, possibly by drastically reducing the existing annual allowance (from its current £255,000 a year, down to £30,000 to £45,000).  Whilst a welcome move in terms of simplicity, it remains to be seen how many pension savers will ultimately be caught by the restrictions."

There remains confusion for employees over the best pension option. There was a slight change to for NEST, due to come in 2012, which has been touted as the simplified version which will ensure almost everyone in employment has a pension: the National Employment Savings Trust (NEST) will be able to register with HMRC as an occupational pension scheme, meaning contributors, being employees and employers will be able to benefit from tax relief currently available to other registered pension schemes and it will be subject to the same tax rules as other schemes.

Flexible working and family policy
Something HR may well have to deal with directly as a result of this budget is single parents, who are going to be expected to find work after their youngest child goes to school. Making more flexible and part time work available – and possibly better crèche provision too, will require understanding employers and careful management. However it’s difficult to see how a government can make lone parents work if there aren’t jobs available; and with Osborne predicting that unemployment will get worse before it gets better and the CIPD claiming he’s being too optimistic on his figures it seems a difficult time is ahead.

The CIPD suggests it’ll be more like three million unemployed – John Philpott added: “Economic growth will slow by far more than today’s budget suggests and, rather than peaking at 8% this year, unemployment will continue to rise toward 3 million (10%) by the time Mr Osborne’s measures take full effect. This will add to public borrowing and debt, not reduce it. The 2010 Emergency Budget is not the beginning of the end of the UK’s post-recession economic difficulty but the start of a period of painfully slow growth, falling living standards, and prolonged high unemployment.”           

The emphasis from the budget would seem that this government is more focused on private enterprise and small businesses: however, traditionally, public sector and larger organisations have been better at providing flexible work and family provision.

Public sector pay and pensions
For those working in the public sector it’s bound to be a rough ride as public sector pensions, already being phased out from final salary to contribution only in many departments, come under the microscope with a review by John Hutton and the sector is squeezed to do more with a lot less. All those earning over £21,000 in the public sector will face a two year pay freeze. John Philpott gave his comment: “We’ve warned consistently that the public sector may be numerically overmanaged, it is qualitatively undermanaged. To get the best from a workforce cowed by the harsh winds of fiscal restraint will require a step change in management capability in the public sector. Those who lose their jobs are only part of the story – how the ‘survivors’ are managed will determine if the story has a happy ending for the UK’s public services.”

Charles Cotton, CIPD reward adviser, added: “In the short term, while a pay freeze will stop the public deficit getting any worse, it will do little to help the deficit get any better. For that to happen we need to review what public sector services we need, what delivery structures are most appropriate, what skills, behaviours, attitudes and performance we need from public sector workers and how we should reward and recognise these. At the moment, however, serious joined-up thinking about how to reform pay and benefits to get the best from public sector workers is being drowned out by the incessant, monotone noise of the deficit reduction vuvuzelas.”

He also pointed out that long-term freezes would lead to other problems with retention in the public sector. A talent drain from the public sector would leave it weak and put services at risk.

George Osborne also called for the disparity between those at the top of the public sector and those at the bottom to end, saying those at the top should not be paid more than 20 times the salary of those at the bottom of the organisation.

As we have covered before on HRzone, there’s little point having benefits if they are not communicated properly: one of the failing of the public sector, claimed the CIPD’s Charles Cotton, is that although public sectors are extremely costly the benefits of them are badly communicated and they are not leveraged correctly as an attraction and retention tool. He said: “As well as addressing the costs, public sector employers need to find better ways of communicating to employees the benefits of public sector pensions.”

Although the interim report isn’t due until September and the full report will not be available until next year’s budget, Michaela Berry, a partner in the Public Sector Unit at Sacker and Partners LLP (Sackers), said: "We already know one item which will feature in the review – George Osborne stated that public sector pension will be up-rated in line with consumer prices, rather than the current retail prices index in future, along with benefits and tax credits."

Default retirement age
The plan to rise the state retirement age to 66 will be accelerated according to the chancellor but there was no definitive scrapping of the DRA. Charles Cotton added: “It is a shame that they have swerved a clear decision on the default retirement age, and have chosen instead to hold yet another consultation on its abolition. They should make their consultation swift, and move quickly to bring to an end the absurdity of enforced retirement. In tough times like these, it is all the more crazy to force people out of the labour market and into the pension claimant ranks. People who want and are able to keep working can do more to reduce the deficit than people forced out of work and into unwilling retirement.”

What about skills?
The complete lack of any mention of skills, learning and apprenticeships compared to the last budget, has drawn the attention of the skills sector. Proskills has released a statement expressing disappointment that the report contained no direct indication of how the ongoing cuts and deficit reductions will affect the skills system, or future public support for employer training. They also added that the Coalition Government since the election have suggested that reforming the skills system is a priority, and agree that simplification is required to ensure that employers can access the funding and support that they need.  However, the budget did not contain any further details on this agenda, and there was very little information regarding the support that will be required for manufacturing companies if the economy is to be successfully rebalanced.

Following the budget, it is now unlikely that more information regarding the future of the skills system will be published until the Spending Review is published in October 2010: the public sector and other areas will also have to wait for news on what the future will look like.

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Charlie Duff


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