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Quarter of workers furloughed as Sunak mulls National Insurance cut

Tim Wallace
Sunak - Dominic Lipinski/PA

More than a quarter of all workers are now on state-funded furlough as companies scramble to sign up for support ahead of a deadline next week, highlighting the scale of the battle ahead to restart Britain's economy.

A total of 8.7m workers across 1.1m firms are using the job retention scheme according to HMRC - at a cost to taxpayers of £17.5bn and counting.

A net 300,000 workers were furloughed last week alone as companies rushing to access the wage subsidy outpaced those bringing staff back to work as Britain gradually opens back up.

The figures are likely to alarm Treasury officials seeking to bring the country out of deep freeze and kick-start hiring.

Chancellor Rishi Sunak is mulling a national insurance holiday for employers as part of a raft of emergency measures set to be announced next month, a proposal which experts say could save almost 900,000 jobs by slashing businesses’ costs at a crucial moment.

It would force the Government to take a further financial hit up front. The tax was forecast to raise more than £80bn for the Treasury this financial year.

But the economic harm of the pandemic has reduced the tax haul already, meaning losses from a holiday would be less. Business groups and economists cheered the move as it could help reboot the economy, creating more jobs and so more tax revenues.

The Taxpayers' Alliance estimates cutting the tax could save or create between 595,000 and 892,000 jobs, based on a study of Sweden's decision in 2007 to reduce its payroll tax for young workers.

If correct this means the measure could protect more than one-in-four of Britain's 33.1m workers, many of whom are at risk of losing their jobs when the furlough scheme ends.

However, the continued rise in furloughing highlights how hard it will be for ministers to wean the country off extraordinary state support used to fight Covid-19.

Furloughed workers get 80pc of their usual pay from the Government up to £2,500 per month, letting their employer off the hook and preventing massive redundancies like those in America where more than 40m people have lost their jobs.

A deadline has been set at the end of this month for new furlough claims. Workers must have been off for at least three weeks before employers can seek support, meaning companies must take action by 10 June if they want the money.

The scheme will be tapered from August to cut the cost to the Government and encourage firms to bring staff back to work.

The next step will be to cut the cost of keeping staff on the books and encourage new hiring, with an employer national insurance holiday seen as the easiest action to take.

The tax, levied at a marginal rate of up to 13.8pc on wages, is a significant cost to companies which was forecast to raise almost £7bn per month for the Government before the crisis struck.

Tony Wilson, director of the Institute for Employment Studies, said: “It would clearly cost multiple billions per month to waive it entirely, but there would be longer-run benefits because it would support job creation and that supports growth.

“This could help support hundreds of thousands of new jobs, potentially. We have an economy with employment of more than 30m. Even if it only made a 1pc difference, you are talking about 300,000 jobs.”

Preserving jobs is crucial to the long-term health of the economy, as workers who fall into unemployment for a prolonged spell will find their job prospects and incomes suffer for many years to come - particularly if they struggle to get work when young.

The Government could retain some of its tax revenues by increasing the income threshold at which the employer starts paying national insurance, Mr Wilson said, focusing the boost on jobs at or below the average wage.

John O’Connell, chief executive of the Taxpayers’ Alliance, said: "Scrapping employers' national insurance this year would cut wage bills and kickstart hiring.

"That would offer a welcome boost to employment over the next two years and a meaningful long term simplification of the tax system.

"Bold action will be needed to reinvigorate growth and avoid a prolonged, painful slump which entrenches the structural weaknesses of the economy.”

Sunak's budgetary levers

The Federation of Small Businesses said action now would boost enterprise and hiring.

Mike Cherry, the group’s national chairman, said: “Employment costs are consistently ranked as the number one cause of rising outgoings among small firms. The more we can bring those costs down, the more we can keep the jobs market in a decent place.

Stuart Adam at the Institute for Fiscal Studies warned that unless the tax cut is targeted at new hires, companies might not choose to spend their reduced bills on new workers - though it may still be a beneficial tax cut.

He said: “It is basically putting money into firms’ pockets and they will spend some of that.

“Part of that might be hiring more people, but even if they do not and they treat it as a lump sum giveaway, they might well spend some of it, do more investment, and whatever it goes towards, to the extent that it gets spent, it goes to other people who might spend it in turn.”

Other policies could also be targeted at supporting specific industries, rather than trying to stimulate an economy which is still trying to contain the pandemic.

Alan Lockey at the RSA think tank said that for example, a car scrappage scheme where consumers are paid to trade in their old vehicle for a new one could help support the hard-hit automotive industry without stimulating the kind of activity which could risk more infections.