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The economic circumstances faced by the coalition Government are challenging, with rising unemployment, weak growth and a record gap between pay and inflation, says XpertHR benchmarking editor, Michael Carty.
The 2010 general election is now over and a Conservative-Liberal Democrat coalition Government is in place. The UK economic situation remains precarious, but detail is beginning to emerge as to what the new administration plans to do about it.
There is no doubt that the new Government has inherited a very challenging set of international economic circumstances. There is also no doubt that its actions on the economy will be closely observed and fiercely judged right from the off. When it comes to the economy, the stakes are therefore extremely high for the new Government.
Conservative-Liberal Democrat coalition Government: What can employers expect?
As of Tuesday 11 May 2010, the UK has a new Conservative-Liberal Democrat coalition Government, with Conservative leader David Cameron as Prime Minister and Liberal Democrat leader Nick Clegg as his Deputy. It remains to be seen if it will coalesce effectively into a strong, decisive force capable of steering the UK back to full economic recovery and sustained growth, or if it will ultimately prove to have been a short-lived marriage of convenience.
Marriage metaphors were thick on the ground in the earliest days of the coalition. BBC political editor Nick Robinson likened the inaugural prime-ministerial news conference - held in the picturesque surrounds of Number 10's rose garden - to "the exchanging of vows at a political civil partnership ceremony". The Guardian, meanwhile, described the two men brought together to steer the UK economy back to recovery - (Conservative) Chancellor George Osborne and (Liberal Democrat) Business Secretary Vince Cable - as "the odd couple who could make or break [the] coalition". It notes that the relationship between Osborne and Cable has been problematic from the start, and quotes a former Labour minister as follows:
"The problems at weddings don't normally involve the bride and groom. It's the other guests that cause the problems."
The coalition has already seen its first high-profile resignation, with Treasury Minister David Laws stepping down over expenses this past weekend.
Looking ahead, the following links give some idea of what HR professionals and reward practitioners can expect from the coalition Government's policies:
Osborne's plans for the economy
The new Government has acted fast to set out its stall on how it will tackle the UK's record budget deficit. On Monday 24 May 2010, Chancellor George Osborne announced details of an initial £6.2 billion worth of public spending cuts to be enacted by April 2011. The coalition Government described these cuts as "the first step in the Government's efforts to tackle an unprecedented £156 billion deficit and focus on driving out Whitehall waste [...] while protecting the quality of key frontline services." These preliminary cuts included a civil service recruitment freeze for the rest of 2010/2011, a review of pay for some civil servants, and £1.15 billion worth of savings on consultancy and travel costs. But this is by no means the full story: further cuts are inevitable.
We will not have to wait long for a more complete picture of Osborne's plans for the economy: an emergency Budget will be delivered on Tuesday 22 June 2010.
The Bank of England's view of the economic challenge ahead
The Bank of England delivered its own take on the scale of the economic challenges facing the incoming coalition Government on the morning of its first full day in power (Wednesday 12 May 2010), with the publication of its latest quarterly Inflation Report (PDF format, 5.53MB).
Bank of England Governor Mervyn King struck an upbeat note at the press conference. He praised the coalition Government's outline deficit plan as "strong and powerful", and the initial £6.2 billion cuts as "sensible". This is in contrast to leaked comments from King earlier this year, reportedly suggesting that "whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be."
However, a close reading of the Inflation Report itself suggests a much more measured take on the UK's economic prospects than that which King expressed at the press conference. The report states that "a pick-up in UK GDP [gross domestic product] growth is likely", but cautions that a range of factors could hamper growth - including the Government's planned public spending cuts.
The Bank of England is confident that we are unlikely to see growth return to pre-recession levels any time soon: "[T]he level of economic activity is very unlikely to return to its pre-crisis trend for a considerable period."
Unemployment: Rises set to continue
The May 2010 official unemployment data release also came on the morning of the first full day of the coalition Government, and therefore represented the first piece of bad economic news for the new administration. The headline unemployment rate rose to 8.0% over the three months to March 2010, while the number of inactive working-age people hit what the ONS terms "a record high" of 8.17 million.
The Bank of England believes unemployment will remain high for an extended period, and that the impact of public spending cuts on public sector employment could contribute to this trend.
Whole economy pay awards hold at 1%...
Pay awards remain subdued but stable, according to preliminary analysis of the crucial April pay bargaining round (traditionally the busiest month in the reward calendar) from IRS for XpertHR.
The broad whole-economy pay pattern has remained unchanged for each of the four rolling quarters of 2010: the median pay award held solid at 1% (XpertHR subscription required) over the three months to 30 April 2010, while the interquartile range remains between nil and 2%.
...but public sector pay settlements slow down
However, analysis of 12-month trends in pay awards by broad industry sector reveals an interesting change of pattern. The public sector median has halved, falling from 2% over the 12-months to 31 March 2010 to 1% over the year to 30 April 2010, bringing it in line with the private sector median.
This is a significant development, as public sector pay awards tended to outpace private sector settlements over the course of the recession. However, a 'reversal of fortunes' is possible over the coming months, if private sector pay awards stage a slow recovery in line with the UK's faltering return to economic growth. In contrast, pay freezes look set to be a major feature of public sector reward in 2010.
Record gap between pay and inflation
It is notable that whole-economy pay awards do not appear to be rising due to high inflation, as might normally be expected. Latest data show the spike in inflation is ongoing: retail prices index (RPI) inflation rose by 5.3% over the 12 months to April 2010, while consumer prices index (CPI) inflation rose by 3.7%.
One consequence of ongoing elevated inflation is that the gap between pay and inflation continues to widen. Headline RPI is 4.3 percentage points above the median whole economy pay award of 1%. This is the widest gap between pay and inflation in the 26-year history of the IRS pay databank.
The Bank of England Inflation Report states the current spike in inflation is likely to be short-lived. However, minutes from the May 2010 Bank of England Monetary Policy Committee (MPC) meeting (PDF format, 89.4K) suggest dissension in the ranks: some members are increasingly concerned that rising inflation risks becoming a threat.
Interest rates: A rise in prospect?
The MPC has yet to act on these concerns. Interest rates have now been held at their current record low of 0.5% for 15 consecutive months. Leaked comments from Mervyn King earlier this year suggested that no significant movement in rates is likely for the foreseeable future. However, speculation is increasing that a rate rise before the end of 2010 is possible. This has been fuelled in no small part by a speech from David Cameron last week, in which he said:
"We have seen a slightly worrying increase in inflation in recent months, so interest rates will be set to control inflation."
Public spending cuts and the coalition Government's relations with unions and HR
It seems certain that public spending cuts will almost inevitably be met with widespread public sector strike action.
It also seems certain that that both Cameron and Clegg will take a hardline stance when dealing with the trade unions. Cameron stated at the start of the year that he would be tough on the unions. Clegg said more recently that he had developed some degree of sympathy with Margaret Thatcher's position on trade unions, stating that "her victory over a vested interest, the trade unions, was immensely significant".
The CIPD has warned that public sector HR departments (dismissed as "form-fillers" by Cameron during the election campaign) are in for "a bit of a shock" once austerity measures begin to kick in. As Personnel Today reports:
"HR has a huge challenge on its hands to ease the blow dealt to public sector employment as the new coalition government moves to make an extra £6.2bn worth of cuts by next April. Minimising compulsory redundancies, engaging staff and addressing plummeting morale will be among the work required of HR teams, who themselves potentially face "inevitable" cuts to HR admin roles. [...] HR departments are in for a bleak future beset by pay freezes and job cuts."
The economic stakes are high: "Great depression II" or "death spiral" in prospect?
Economic growth remains weak. Latest revised data put estimated GDP growth for the first quarter of 2010 at 0.3%. This is up only 0.1 percentage points from last month's preliminary estimate of 0.2%. It is also 0.1 percentage point down on GDP growth for the fourth quarter of 2009.
As noted above, the Bank of England believes public spending cuts have the potential to constrain GDP growth. Economist David Blanchflower takes a more extreme view on this matter, warning that "the new Government risks a death spiral" by cutting public spending while growth remains unstable.
Even if Blanchflower's view ultimately proves overstated, prospects for GDP growth are nonetheless precarious. The Guardian's Larry Elliot argues that as cuts are imposed on public spending, increased private sector growth will be required to take up the slack. Renewed private sector growth will require a growth in exports to Europe, which in turn requires renewed growth across the eurozone.
But economic prospects for the eurozone are also uncertain. The Royal Bank of Scotland head of European rates strategy Andrew Roberts warns that Europe's current financial crisis risks developing into the "Great Depression II".
Larry Elliott consequently describes Osborne's approach as "a gamble which could easily go wrong."
The economic stakes are therefore high for the coalition Government. Decisions taken by HR professionals and reward practitioners will play a key role in the path taken by the UK economy as it tentatively emerges from recession.
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