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Sunak faces tricky balancing act in ending furlough scheme

Tom Rees
·5-min read
 Rishi Sunak  - John Sibley/Reuters
Rishi Sunak - John Sibley/Reuters
Furlough figures embed
Furlough figures embed

The fate of one in four workers will be decided by Rishi Sunak this week. Many of those 8.4 million furloughed employees fear their jobs will disappear when the Chancellor reveals how he plans to start weaning the economy off its furlough “addiction”.

“You could be adding a few million to unemployment if it didn’t exist at all at a stroke,” warns Tony Wilson, director of the Institute for Employment Studies, on the potential impact of a sudden withdrawal. 

“The most important thing about withdrawing it is it needs to go in lock-step with suppressing the virus. Until the virus is suppressed, industries like hospitality, retail and even construction won’t be able to go back to normal.”

Creating a revamped Job Retention Scheme that protects workers, the economy and the taxpayer could prove to be Sunak’s biggest challenge yet. The support covers 80pc of furloughed workers’ wages up to a maximum of £2,500 per month, supporting incomes and slashing the costs of under-pressure businesses.

Whilst its introduction has stopped Britain suffering the huge wave of redundancies sweeping the US, its withdrawal could be more tricky.

Pulling the support too fast before output has sufficiently recovered risks mass unemployment. Yet keeping in place an overly generous scheme for too long could stunt the reopening of the economy and pile the pressure on public finances. The economy’s recovery depends on the Chancellor striking the right balance.

Sunak has extended the scheme until October, but the devil will be in this week's detail.

The Chancellor has signalled that from August firms will have to contribute to the wages of furloughed workers. However, the scheme will be more flexible, allowing workers to come back on a part-time basis with some of their pay covered by the state. 

Sunak is expected to announce the first cut in the subsidy when he fleshes out details of his revamped scheme this week. 

The Treasury is likely initially to taper the wage support down from 80pc of furloughed workers’ wages to somewhere in the region of 60pc. Businesses would therefore have to top up pay if they wanted to keep employees on furlough. The level of state support be lowered further as the economy’s reopening progresses.

“It has to end at some point and the best way to end it is in a tapered way,” says Craig Beaumont at the Federation of Small Businesses. He says the “debate is over the timing and how that relates to the opening up of the economy”. 

Firms forced to stay closed when the scheme starts to taper, such as pubs and restaurants, should be allowed to claim the full amount currently available, Beaumont says. “If your workplace has to be closed, the Government should maintain the full furlough. That is logical and feels right.”

Even a small step lower in the wage subsidy forces bosses to make a decision on whether the furloughed employee is ever likely to return to work. Business wage bills would rise by about £3.5bn every month if the subsidy was tapered to 60pc and the same level of support was needed.

Sunak and Bailey vs coronavirus
Sunak and Bailey vs coronavirus

One in two firms using the subsidy said they could provide 20pc or more of furloughed workers’ wages, according to the Institute of Directors (IoD).  However, its survey found a quarter could not afford to make any contribution at all, putting jobs in danger when the tapering kicks in.

Jonathan Geldart, IoD director general, warns companies will be forced to make difficult decisions in August: “The Government must soften the blow by introducing as much flexibility as possible into the furlough system.

Flexibility to lead to complexity

The Chancellor has vowed to make the scheme more flexible to help the economy reopen, but that could make the support much more complicated. 

Furloughed employees cannot work for their company while receiving the government wage subsidy. The support could be made more flexible by businesses compensating employers for the days they do work with their pay topped up by the Government. 

Making the scheme more flexible is particularly important for smaller businesses that cannot afford to have their one marketing or HR employee on furlough but not allowed to do any work. The IoD survey found a third of companies using the scheme would bring back the majority of furloughed workers part-time if they could.

The part-time aspect would therefore make it appealing to firms looking to cut wage costs as demand sags. However, the Financial Times reported that the scheme will be closed to new entrants from a certain cut-off date, eliminating that risk.

Keeping such generous support could eventually hold back the economy’s revival and discourage businesses to reopen. Propping up some jobs that are already insecure and have little prospect of returning soon could also be damaging, Wilson warns.

“Paying people not to work for an extended period of time may not be the right thing to do for  those people or the economy ultimately,” he says. “Keeping people on furlough for six, nine or 12 months, may not be doing those people any favours when they could be helped to find a better job.”

Business Briefing Newsletter REFERRAL (Article)
Business Briefing Newsletter REFERRAL (Article)

Bungling the tapering would deal the economy’s recovery a big blow.  Economists have warned that its shape depends on the extent of scarring – lasting damage caused by job losses and business failures. 

If tapering triggers a wave of redundancies and hits household incomes, growth could be depressed by lower demand and the Treasury would pick up the bill for higher welfare costs and lower tax receipts.

Peter Dixon, UK economist at Commerzbank, says furlough schemes “have a track record of preventing the worst case scenarios”, but believes Britain is still facing an epic collapse in employment despite the Chancellor’s support.

“We anticipate that the short-term decline in employment could be even faster than in the wake of the Great Depression of the 1930s.”

He warns job losses will extend into 2021 as firms reassess their post-Covid-19 plans after the huge loss in earnings.

The Chancellor may find that many of those 8.4 million furloughed workers will have no job to go back to.