Four ways Rishi Sunak can defuse the furlough jobs timebomb

Chancellor faces a tough choice as he mulls how to wind down the scheme, which has already been extended once

rishi sunak chancellor
Firms could soon begin the process of making their furloughed workers redundant

In less than three months on the job, Chancellor Rishi Sunak has become used to making difficult decisions at lightning speed.

The job retention scheme has been a central pillar of the Government’s economic response to Covid-19 and is now paying up to 80pc of the wages of some 6.3 million private sector workers from 800,000 firms. 

Now Mr Sunak faces another tough choice as he mulls how to wind down the scheme, which has already been extended once until the end of June. 

He does not have long to decide. The 45-day consultation period on large redundancies means he has just days before struggling firms kick off the process of removing workers before the end of June. 

Here are four options the Chancellor could choose from.

End the furlough scheme

More than a quarter of private sector workers are being paid by the state at a cost of £8bn and counting. Every pound spent now will have to be repaid with interest by taxpayers. 

Ending the scheme would incentivise people to get back to work but is likely to result in the inevitable firing of hundreds of thousands of employees by firms that cannot operate fully due to social distancing rules or a slump in demand. 

Fear of economic hardship could press people to return to workplaces without proper social distancing, increasing the risk of a surge in infections. 

Reduce the 80pc subsidy

While the Chancellor promised repeatedly to do “whatever it takes” to protect jobs, paying up to 80pc of employees’ wages is extremely generous compared to other state support payments. 

Gradually tapering support for workers would ease the strain on the Exchequer. The Government wage subsidy could be cut from 80pc to 60pc. Further cuts could follow if the economic recovery proves long and slow.

To ensure higher paid workers share the pain, the Government might consider a commensurate reduction in the maximum monthly support of £2,500 per employee to £1,850. 

This strategy still would not be cheap but it would prevent the wave of redundancies that could be triggered if support is abruptly shut off. 

Make the furlough scheme “flexible”

British workers are not allowed to carry out any work for their employers while they are furloughed. 

This makes it hard for firms to keep in contact with customers and suppliers and increases the risk of long-term damage to worker productivity as idle employees begin to lose skills. 

More than three-quarters of UK firms using the job retention scheme say allowing furloughed staff to work part time, which is allowed in Germany and Sweden, would help them get back up and running, according to a survey by CIPD, the professional body for HR professionals. One in six say more than half of their staff could come back part time if the scheme is changed. 

Peter Cheese, chief executive of CIPD, says allowing employers to pay employees for a few hours’ work each week will reduce the risk of large-scale redundancies in this next phase of the crisis. 

Sector-by-sector extensions

The crisis has not affected all industries equally. Office-based firms are adapting to home working. Construction sites are getting back up and running with appropriate social distancing. But hospitality and travel face a long road back to normality. 

The furlough scheme was a blunt and expensive instrument due to the speed at which it was drawn up. Targeting it specifically at sectors that cannot viably reopen or take back all their staff would cushion the blow to workers at a more reasonable cost to the taxpayer.

An example of what social distancing in offices could look like Credit: The Department of Business docs

Restaurants and bars will have their capacity, and their need for staff, greatly reduced by social distancing requirements, raising the prospect of a jobs bonfire if Government support is halted. 

But if the demand for eating and drinking out is set to remain depressed in the medium term, it may be better to rip off the plaster right away and begin to rebalance the economy rather than continuing to furlough workers whose jobs may not come back for years.