National Minimum Wage

Chapter 5: Setting the Rate
5.11 The prospects for net trade (exports minus imports) depend on the relative value of sterling
and the outlook for economic growth in the main trading partners of the UK. The effective
exchange rate for sterling fell sharply between 2007 and the end of 2008, and has remained
more than 20 per cent below its 2007 value since the middle of 2009. As a result of that
relative fall in sterling, exports had picked up and there had been some evidence of a switch
from imports to domestically produced goods. Exports were also helped by the upturn in
global demand from the middle of 2009 that was sustained throughout 2010 and into 2011.
However, concerns about: deficit reduction programmes in developed countries; sovereign
debt sustainability in the eurozone; inflationary pressures in fast-growing developing
countries; natural disasters in Japan and Thailand; and political uncertainty in the US, had led
to a significant weakening in world trade, especially since the middle of 2011. On the back
of these concerns, the World Bank, the International Monetary Fund and the Organisation
for Economic Co-operation and Development (OECD) have all significantly reduced their
forecasts for world trade in 2012, with growth in the eurozone particularly weak. However,
growth was expected to hold up in the US, where recent labour market figures had been
stronger than expected. The outlook for trade was therefore not as strong as it had appeared
last year. Despite these concerns, the OBR and the median of independent forecasts were
expecting exports to perform better than imports, thus acting as a net contributor to UK
growth in 2012.
5.12 Since the end of the recession, government spending has contributed positively to growth.
Together with weaker growth since the autumn of 2010, the public sector deficit has
worsened. Consequently, the Chancellor announced in the Autumn Statement (HM Treasury,
2011b) that the fiscal tightening would be extended for a further two years. The Institute for
Fiscal Studies told us that this would be the largest sustained cut in real government
spending on record. It estimates that public service spending will fall by 16.2 per cent in real
terms over seven years from 2010/11 to 2016/17. The previous largest real cut over a similar
seven year period was 9.3 per cent (1975/76-1982/83). Among other things, this is likely to
adversely affect public funding for social care and childcare.
5.13 The recovery had been slower than forecast and growth was expected to continue to
be weak in 2012 and weaker than previously thought in 2013. We now go on to look at the
prospects for inflation and wage growth.
Prospects for Prices, Pay and Earnings
5.14 Inflation data for the twelve months to December 2011, the latest available to us, showed
the CPI at 4.2 per cent, and the broader RPI at 4.8 per cent. Both measures had fallen sharply
on November, in the case of CPI registering the biggest fall for three years. Even so, CPI was
over 4 per cent, and occasionally over 5 per cent, throughout last year. This was more than
double the Government’s inflation target, and was largely attributed by the Governor of the
Bank of England to a combination of the increase in Value Added Tax (VAT) in January 2011,
and higher energy and commodity prices. With the exception of the December figure, RPI
was above 5 per cent throughout 2011, driven mostly by the same upward pressures, but
also reflecting differences in the ways the two inflation measures are calculated – the
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