The Spending Review: the headline details HR leaders need to know

Yesterday the Chancellor, Rishi Sunak, delivered the government’s Spending Review, unveiling the spending plans for the coming year. Here are the key headlines and our analysis of what this means for HR. 

Slow recovery following worst decline in GDP for around 300 years
The Office of Budget Responsibility forecasts show a recovery is expected over the coming years, but it is going to take time and it won’t be the ‘V’ shaped recovery that we had all hoped for back in March/April. This year GDP will decline by an expected 11.3%, and even with growth forecasts of 5.5% in 2021 and 6.6% in 2022, it means that it will take until the end of 2022 for the economy to return to its pre-pandemic size. The Chancellor has warned that it there could be “long-term scarring” as late as 2025.  

Unemployment is set to rise to a peak of 7.5% or 2.6 million people by the second quarter of 2021.
Whilst the government has been trying to protect jobs through a variety of measures, including the furlough scheme, there is a consensus that the UK’s unemployment rate will rise over the next few months.  Jobs that are particularly hard-hit are in the hospitality and tourism sectors, and this disproportionately impacts younger people. ONS figures already show that 174,000 fewer 16- to 24-year-olds were employed in July to September, compared to the previous three months.

National Living Wage rate band will widen to include 23 and 24 year olds
There is some small comfort for younger people still in jobs, specifically low-paid roles, as the minimum age requirement for the National Living Wage (the minimum wage for those over-25) will reduce to 23. This represents a pay rise of almost 9% for 23 and 24 year olds.

National Living Wage will increase by 2.2 per cent to £8.91 an hour - lower than the £9.21 rate previously expected from April 2021
For other lower-paid workers there will be disappointment that the anticipated increase in the National Living Wage will be lower than expected. However, it does represent a real increase in wages - Bank of England’s current inflation rate stands well below the 2% target over the past year and currently stands at 0.7%. 

The table below shows the breakdown of the national minimum wage rates. However, it’s also worth noting that earlier this month, the Living Wage Foundation  the ‘real’ Living Wage – the voluntary hourly rate of pay recommended by the Living Wage Foundation – increased to £9.50 across the UK and £10.85 in London.
 

Public sector pay rises only for those earning below £24k and NHS nurses and doctors
With low inflation there is little pressure on the government to increase salaries. Pay will be frozen for the majority of public sector workers, including key workers such as teachers and police. Only those employees earning less than the median wage of £24,000 can expect to receive at least an extra £250 per year. Doctors and nurses in the NHS can also expect a pay rise. 

Overall, the spending review represents the largest ever peacetime expenditure and includes a £4bn infrastructure fund for local economies, but arguably this is only possible because interest rates are at historic lows. Forecasts are also largely dependent on an effective vaccine programme and a Brexit trade deal. 

What does all this mean for HR?
Impact 1: A squeeze on HR spending and a re-set of priorities
A slower bounce back means than many businesses will be reviewing their own growth forecasts and budgets.  We would expect to see a reduction in planned recruitment and potentially fewer roles replaced, as well as potentially smaller budgets for HR programmes and projects.  Many companies are likely to review recruitment, training and development programmes in light of any constraints on salaries and hiring. 

Impact 2: Less pressure on salary rises
Higher unemployment, combined with slower growth and low inflation, will mean overall slower wage growth in the market. Many private sector companies are likely to follow the government’s suit with pay freezes for 2021. And we expect to see a reduction in executive remuneration packages as bonuses are cut and some CEO’s have taken pay cuts this year (e.g. BT ‘s CEO Phillip Jansen) – although most of these pay reductions are temporary measures. 

Impact 3: Increasing importance to keep key staff 
Some key skills (e.g. in IT) may still attract a premium and it will become increasingly important for organisations to understand their key talent, and who they will need to retain – especially if pay budgets are tight and hiring is restricted. 

Impact 4: Increases for low pay roles – a double-edge sword 
For organisations with a high number of low paid staff, who might already be struggling from the impact of Covid (e.g. in the hospitality sectors), the lower national minimum wage increases will represent a slight relief. But on the flip side, these increases are still inflation-busting and may squeeze margins to the brink (or beyond) of sustainability. 

Over the coming weeks, Innecto will be taking closer look at a wide range of trends and forecasts, economic headwinds and tailwinds, statistical projections and estimations, and anything else that will impact HR and reward for 2021 and beyond. Whilst we don’t have a crystal ball (if only we could have known about the pandemic this time last year…!) we will be analysing, reviewing, digesting and summarising all the key things that we do know and the things that you should know. We will be presenting this at our Pay Trends event in January 2021 - please keep an eye on your mailbox for upcoming communications about this.

As always, if you'd like to discuss anything related to Pay and Reward, we are on hand. Please call us on +44 (0)20 3457 0894 or email me at judith.moore@innecto.com.