How will the Budget affect HR?

Alex Blyth looks at the HR implications of the chancellor’s Budget decisions for employers and staff


There was much to interest HR practitioners in Gordon Brown’s latest Budget.

It had been feared that to reduce a ballooning deficit without alienating voters in the run up to a general election, the Treasury would impose further taxes on business. In the end, however, there was little cause for concern as the chancellor introduced a series of relatively minor measures – most of which have won the general approval of the business community.

Job cuts

With a budget deficit close to £38bn, the Government either needed to make some cuts in spending or increase taxes. It went for the former, and it came as little surprise that the axe came down on the Civil Service.

At least 40,000 jobs will go in an attempt to save £20bn. The Civil Service employs 512,000, so these cuts will not be insignificant. The majority of losses will be at the Department for Work & Pensions, and most of the remainder will come from merging the Inland Revenue with Customs & Excise.

The CBI welcomed the announcements, arguing that the private sector has been working on becoming leaner and more efficient for quite a while, and that it was about time the public sector caught up. However, most civil service unions were furious at the way in which the announcement was made.

“It’s just playing politics with people’s jobs,” said Jonathan Baume, general secretary of the FDA, the trade union and professional body representing senior civil and public servants.

“We’ve been talking closely with the Government recently about a range of issues and this was never mentioned, so it came as a real shock,” he said. “Moreover, there weren’t any specific details of where the cuts will be made and how they’ll be achieved. So this announcement just creates a climate of uncertainty which won’t help anyone.”


Business has welcomed changes to the pensions system, whereby eight different sets of taxation rules have been replaced with one universal limit on how much a person can save towards a pension without paying tax on it. The limit will start at £1.5m when the new regime is introduced in 2006, and will rise to £1.8m by 2010. Most commentators also welcomed the decision to phase in this new system over a number of years.

Similarly, plans to pay Working Families Tax Credits in cash rather than through the payroll system have also been welcomed. Not only will these payments now go directly to the person who most needs them, but the administrative burden on business has now also been removed.


The chancellor placed considerable emphasis on the need for the UK to become more productive. The Treasury document supporting the Budget stated: “The UK has historically experienced low rates of productivity growth compared to other major economies. Recent data indicates that, on an output per worker basis, the UK now has higher productivity than Germany, and is closing the gap with France.”

However, the UK still lags some way behind the US, and the Government aims to close the gap. Two key announcements on this were increased spending on education and a New Deal for Skills.

Education spending will rise from £59bn to £77bn in 2007-08, representing an annual increase of around 4.4 per cent a year. It is a significant investment. In England, state funding per pupil will rise from £4,500 in 2004 to £5,500 by the end of 2008, making it twice the 1997 level. Susan Anderson, director of HR policy at the CBI, has welcomed this investment.

“Less than half of UK schoolchildren achieve a grade C or above in English or maths GCSE, and this results in significant literacy and numeracy problems in the workplace. More money is needed to address this, but it must also be introduced gradually,” she said.

“At the moment, we’re short of about 3,500 teachers in maths alone, so just pouring in more money too rapidly wouldn’t have the desired result.”

Under the previously announced New Deal for Skills, every adult will be guaranteed the chance to acquire NVQ level 2 qualifications. A number of centres will be set up offering advice on how to acquire skills to build careers, and employer training pilot schemes will be extended.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, has mixed feelings about these announcements.

“Our view is that skills alone are not enough to raise productivity,” he said. “They must be skills that are geared to the needs of the business, and good HR practice must ensure they are used effectively. So, we’re not convinced by the emphasis on qualifications, and worry that the Government might be overlooking the importance of work-based training.”

Claire Donovan, education and skills policy adviser at manufacturers organisation the EEF, broadly agrees. “When it comes to learning and development, it isn’t enough just to give time off for training,” she said. “It is essential for that training to be geared to the needs of the business. So, we’re glad the Government is extending the employer training pilots. We had hoped for a more specific statement on the release of funds for Modern Apprenticeships, as all this extra training will have to be paid for.”

Minimum wage

The Government also announced further rises in the national minimum wage. For over-21s, the hourly rate will increase from £4.50 to £4.85, and for 18-21-year-olds, it will go up from £3.80 to £4.10. A new minimum wage of £3 for 16 and 17-year-olds was also introduced.

While children’s charities welcomed the move and unions continued to call for a minimum wage of £5, the CBI has joined other employers’ organisations in warning against any further increases.

The CBI’s Anderson said: “This means it will have gone up by 15 per cent in two years – 1.7 million workers are now affected, and it’s really beginning to bite in some sectors such as retail and leisure. The Government needs to be careful about how it moves forward in this area.”

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