Public sector pay rises are to be capped at 1% for two years, the Chancellor announced today in his Autumn Statement.
The cap will follow straight on from a two-year-long pay freeze for public sector workers and is only likely to inflame anger over the Coalition Government’s proposed changes to pensions. Among other things, the changes are expected to result in employee contribution levels being raised, which is a key cause of tomorrow’s national day of industrial action.
But George Osborne also revealed that independent Pay Review Bodies would be asked to evaluate how public sector pay could be made to reflect local labour market rates more accurately and to report back by July next year. Cabinet Office Minister Francis Maude will likewise be tasked with reviewing the situation in the civil service.
The state pension age will, as expected, also rise to 67 by 2026, a decade earlier than originally proposed, while £1 billion will be made available for a ‘Youth Contract’ to subsidise six-month work placements for 410,000 young people.
Other plans, meanwhile, include a doubling in the number of free childcare places for parents of deprived two-year-olds to 26,000, at a cost of £380 million a year by 2014-15. Osborne also said that some working tax credits would be increased at below-inflation rates, while welfare benefits would be boosted in line with inflation at 5.2%.
But the Chancellor likewise confirmed that UK economic growth would be lower and borrowing higher than was forecast in his Budget in March. He told MPs that the UK economy was now predicted to grow by 0.9% this year, down from 1.7%; 0.7% next year, down from 2.5% and 2.1% in 2013.
The Office for Budget Responsibility also intimated that it now expected the public sector to shed a further 710,000 jobs between the first quarter of 2011 and the first three months of 2017 – a sharp increase on previous projections – bringing the total number of job losses to 850,000 – or 15% of the total workforce – since the Coalition Government took power in 2010.
Structural unemployment
The OBR also anticipated that unemployment would peak at the end of next year at a huge 2.8 million or 8.7% and was unlikely to fall back below 8% until 2015.
John Philpott, chief economic adviser to the Chartered Institute of Personnel and Development, said: "The loss of 850,000 public sector jobs in less than a decade is not unprecedented in UK economic history. A similar cull occurred in the 1990s and was easily absorbed without any associated rise in unemployment."
At that time, however, the labour market was being boosted by a strongly rising economic tide, but there was "less prospect of a similarly benign outcome in today’s far more straightened times", he added.
As for domestic money matters, the OBR likewise forecast a 2.3% drop in real household incomes this year, with a further 0.3% drop expected next year, before they started to rise again in 2013.
Philpott pointed out that the Chancellor would now “have to acknowledge that this is the price of sticking with his fiscal Plan A, and things could yet turn out to be worse if the situation in the Eurozone deteriorates further”.
But he added, that, encouragingly, and in line with the CIPD’s own view, the OBR appeared to have found little evidence of a permanent structural deterioration in the labour market. As a result, it put structural unemployment at 5.35%.
“This is good news in that it suggests that unemployment can fall quite rapidly once the economy returns to a strong rate of growth which, incidentally, implicitly undermines the Chancellor’s argument that the UK needs a major dose of employment deregulation to stimulate job creation,” Philpott said.
Employment deregulation
The bad news, however, was that, with economic growth expected to remain sluggish for the foreseeable future, unemployment was forecast by the OBR to remain above two million until the middle of the decade. This situation would, in turn, result in low earnings growth across all sectors of the economy for several years to come.
Other statements by the Chancellor, meanwhile, related to previous announcements aimed at shaking up UK employment law, including the introduction of ‘protected conversations’.
But Mike Emmott, the CIPD’s employee relations adviser, warned: “Pitching employment deregulation as a major contribution to driving growth is at best a distraction and, at worst, could undermine efforts to boost competiveness and productivity.”
The problem was that removing significant levels of employee protection had an “adverse impact” on staff engagement, “risking the very economic recovery that the Government is trying to nurture”, he added.
An example of this scenario was ‘compensated no fault dismissal’ for small firms, which ran the danger of creating a “two-tier labour market causing confusion for employers and employees alike”, while also introducing a perverse disincentive for micro-businesses to recruit more staff, Emmott said.
Instead UK business would be better off focusing on improving core management skills. “Deregulation is no substitute for better management,” he explained.
To make matters worse, Tim Marshall, a partner in DLA Piper’s employment practice, warned that some of the Government’s deregulation proposals were likely to be challenged when they came into effect. This meant that they were potentially unsafe for employers to rely upon.
A classic example was the doubling in the qualifying period for unfair dismissal claims to two years from next April, which was likely to be contested by trade unions for being discriminatory on the grounds of sex and age. “This change may lead to greater uncertainty and risk of litigation for employers than exists with the current one-year qualifying period,” Marshall said.
