What a Burnham government could do for employers

Perhaps partly because there has been no leadership contest, there’s been little clarity about Andy Burnham’s economic policies.  We know he’s committed to sticking to the existing fiscal rules, and he has said he will stick to the previous Labour pledges not to raise VAT, income tax or national insurance. But he won’t be bound by all the previous government’s promises.

These also included a commitment to maintain certain spending commitments, including the triple lock that sees state pensions rise each year by whichever is highest out of CPI inflation, average earnings growth or 2.5%. According to reports, that commitment is now questioned by some of Burnham’s inner circle.

There’s also some signs we may see a shift to increasing taxes on assets in a Burnham budget, with talk of a land value tax, while tax devolution is another likely policy, giving local government more power on taxes and spending.    

Despite the rumours, however, there’s been little said on at least one key issue: employment. And it’s one key area that’s ripe for a new approach.

Unemployment is at 4.9%, marginally down from the five-year high of 5.2% at the beginning of the year, but still elevated for recent years and above the level it was when Starmer became PM two years ago. There is a range of reasons for that, but two key government policies have arguably not helped, and both could now be reviewed.

The first is the rise in employer’s national insurance contribution rates and lowering of the thresholds in Rachel Reeves’ first budget. It’s already been much discussed, so suffice to say that we know many businesses blame this for redundancies and hiring freezes.

A reduction to the 15% rate or an increase in the secondary threshold could redress some of the damage. It would be seen as a powerful sign that the new government is keen to ease costs on businesses to encourage employment and growth.

The second big strain on employers, meanwhile, was not initiated under the Starmer’s government but did significantly accelerate under his leadership: aligning the National Minimum Wage rate for 18 to 20-year-olds with the main rate. 

Since its introduction in April 1999, the National Minimum Wage has more than tripled, from £3.60 an hour to £12.71, up by 77% in the last ten years alone. It’s now among the highest in Europe both in nominal terms and as a percentage of median wages. 

The recent rises in the rate for younger workers has been even faster. In April 2016, the minimum wage for 18-20 year olds was just £5.30. It’s now more than doubled to £10.85.

Even last October, before the most recent rise, the Resolution Foundation warned that, against a backdrop of record high youth unemployment, the government should drop its ambition of equalising the youth and main rates.

“Any increases in the rates would need to be especially cautiously considered in the current economic environment to prevent young people from being priced out of entry into the labour market,” it wrote.

It’s hard to disagree, and a new government should seriously consider preserving the current gap or even freezing rates. 

The final change a new Chancellor could look at is one that hasn’t happened yet.

The new £2,000 cap on contributions into pension plans through salary sacrifice announced in the most recent budget won’t come into force until 2029. That is far enough on the horizon that it might be scrapped without much disruption, and there are strong arguments for doing so.

The first is that, in the long term, we should be looking to encourage pensions saving. The government argues that the relief is predominantly used by higher earners, so that most employees won’t be hit. However, £2,000 is just 5% (a standard automatic enrolment employee contribution) of a £40,000 salary. And by April 2029, £40,000 is likely to be below the median full-time salary.

The second case for scrapping the change is that it would ease strain on employers. While the implementation is some time off, good employers want to avoid last minute restructuring and possible mistakes. If the changes are to go ahead, therefore, they’ll need to be reviewing how pensions are funded and the workforce’s overall remuneration package much sooner.

Early action on this by employers could prove a competitive advantage in the long run. For next couple of weeks, though, they can probably be forgiven for waiting to see what happens.