Bank of England forecasts 

The most recent Bank of England forecasts made for grim reading. Inflation increased to 9.4% and is projected to peak at just over 13% next year. Driven by price increases in goods and services, but primarily surging energy prices, this kind of inflation puts pressure on family budgets, but also businesses and government departments, whose spending power is eroded. The resulting contraction in spending is projected to lead to an economic recession lasting five quarters.

The impact on the labour market remains uncertain. As of now, organisations continue to report skills and labour shortages, with demand for labour outstripping supply. There is a range of factors at play here, including higher inactivity rates or different migration patterns. It is likely that the recession will lead to lower labour demand and that labour supply will increase, as people seek to work more hours or return to employment to mitigate the rising cost of living.

The BoE forecasts unemployment to stay low over the next year, then steadily increasing to just over 6% in 2025. While that is still considerably lower than the post-2008 unemployment peak, the fall in real disposable incomes for households up and down the country will push many into in-work poverty. Our most recent Working Lives Scotland report found that only 35% of employees on the lowest incomes can pay their bills each month without any difficulty – and this was based on a survey in January, pre-dating energy cap increases and soaring inflation.

Government policy response

Of course, forecasts are subject to change, depending on circumstances. This could include any additional UK Government intervention to, for example, support households with energy costs. The current Conservative Party leadership contest has been notably light on policy solutions to the cost of living crisis, with the two candidates focusing on personal or corporate tax cuts. It is unlikely that the new Prime Minister, whoever it may be, won’t go further in providing direct financial support building on previously-announced measures.

In May, the UK Government announced a £15 billion Cost of Living Support package, primarily aimed at supporting those on the lowest incomes. Most of the measures apply UK-wide, including the Energy Bills Support scheme rebate, doubled to £400 and no longer repayable in the future. Other measures included a one-off payment of £650 for households on some benefits, £300 for pensioners and a £150 payment to people on disability benefits.

If the primary response by the UK Government is one of income tax cuts, it will not automatically apply in Scotland. Due to tax devolution, the impact of any income tax cuts on Scottish taxpayers and the Scottish Budget will largely depend on choices made by the Scottish Government. However, the Scottish Government has some tools at its disposal too and has provided additional support.

As ever, policies often get conflated or rebadged and the independent Scottish Parliament Information Centre recently put the Scottish Government’s claim of providing £3 billion in cost of living support under the microscope. It found that the figure included some long-standing policies like increased funded early learning and childcare (coming in at £1 billion). If one were to use October 2021 as the starting point, we still see a considerable £490m being put in place in the form of council tax rebates, higher than planned benefit uprating or a boost in the Scottish Child Payment.

The Scottish Government’s inclusion of their childcare policy does, however, highlight one of the areas often responsible for big chunks of household budgets. Families looking for savings may explore other avenues, including more flexible working arrangements built around childcare needs. And this is where employers and people professionals can make a real difference.

Employers and financial wellbeing

Much of the recent narrative around the labour market has focused on recruitment difficulties. But retention is just a different side of the same coin. It is just as important for employers to focus on their existing staff, including their financial wellbeing. The CIPD has teamed up with the Joseph Rowntree Foundation to raise awareness of in-work poverty and encourage employers to take additional steps to support their employees.

Paying a fair and liveable wage is at the heart of this, but providing security of hours wherever possible, removing barriers that prevent employees from working the hours they would like and having clear, transparent conversations about pay are all crucial. Supporting in-work progression can also help. This can include promoting a truly inclusive flexible working culture that ensures opportunities for career progression or skills development are available to those working flexibly. Similarly, promoting lifelong learning and supporting the development of your staff can help them move into higher-paying roles. As our research consistently shows, much of this depends on good people managers who can both identify as well as help link staff to opportunities. 

In addition to wages, there is a range of other ways that employers can help provide financial wellbeing support, especially for those on the lowest incomes. This can include rent or utilities subsidies, help with childcare or travel, as well as different types of grants or crisis loans. Of course, all of this has to be underpinned by open communication with staff – both to explain what’s on offer as part of the benefits package, as well as to understand their concerns and needs.

What next?

This is the third crisis in short succession and the third crisis with our profession at its heart. While there will undoubtedly be additional support to deal with the cost of living from both the UK and Scottish Government on a public policy level, it is our profession that can make the case for financial wellbeing of staff across our organisations. It was said that employees will remember their employers’ response to the Covid crisis and the same applies to the rising cost of living. We all need to weather the storm together.