Furlough Mk II could be just the job after all

After all the U-turns the smart money is that the Chancellor will have to extend the employment lifeline as well

Man with box
The furlough scheme is due to end next month but some sectors, such as nightclubs, still remain closed altogether

After U-turns on everything from A-levels to school dinners in a chaotic summer, the Westminster rumour mill is turning over the suggestion that ministers could save their biggest until last with an extension to the furlough scheme to stave off an unemployment crisis.

Since March the Treasury has paid out £35.4bn under an unprecedented coronavirus job retention scheme to support 9.6m jobs.

As of now, the scheme is being wound up at the end of October, and Rishi Sunak, the Chancellor, has warned against giving “false hope” to workers with further support. Instead there is the thin gruel of a £1000 bonus to firms keeping on staff until next January.

How long that line holds remains to be seen. Industry bodies, MPs and economists are warning of a jobs cliff-edge and unemployment could shoot above 9pc by the end of 2020, according to KPMG. Sources suggest the push for “Furlough Mk II” is gaining momentum by the day.

The Treasury’s apparent inflexibility so far comes despite other major economies moving in the opposite direction. Germany, for example, has extended the use of its Kurzarbeit wage subsidy scheme until March 2022 at an estimated cost of €10bn (£8.9bn). Next month, France will launch an adapted longer-term scheme which allows companies to reduce workers’ hours by up to 40pc, backed by state cash, in return for guarantees over jobs.

The UK faces a double blow, due to the “hard stop” currently planned and its own economic characteristics. According to the Bank of England, events involving social interactions, such as sports events or cinemas, account for 13pc of GDP compared to 10pc in the eurozone.

Paul Dales, chief UK economist at Capital Economics, says: “Internationally they’re all moving in the direction of an extension and the UK is the one that stands out. But we know that the make-up of the UK economy is one that makes it more exposed to social distancing. There is a bit of a double whammy there.” He estimates around 4.5m workers are still on furlough.

But what would a UK extension look like, and how much would it cost? The Office for Budget Responsibility’s July estimates suggested a £47bn price tag for the current scheme. The National Institute for Economics and Social Research says an extension until June next year could save up to 800,000 jobs, with the estimated £10bn cost paying for itself over time in reduced economic scarring.

In practice the cost could be much cheaper if the Government simply continued the tapering of wage contributions, which fall to 60pc in October, by 10pc a month down to zero by next April, rather than calling an abrupt halt. NIESR’s Cyrille Lenoel says a smoother unwind would “give a bit of breathing room”.

A sector-based approach is also seen as more likely for those who have borne the biggest cost of Covid-19. UK Hospitality’s head of strategic affairs Tony Sophoclides points out that nightclubs – employing 45,000 people – are in an invidious position as they remain closed. Some 2.8m food and hospitality workers were furloughed at peak. He thinks a cliff-edge finale could cost 350,000 jobs.

With sporadic outbreaks and lockdowns likely, localised solutions may also be needed. The head of the East Midlands Chambers of Commerce, Scott Knowles, saw companies suffer in the Leicester lockdown. He warns: “Our members have very strong feelings that anybody able to demonstrate a loss as a result of local lockdowns ought to be compensated.” That could be through an expansion of the local authority grants system which has seen £11bn handed to business so far, he suggests.

The message has hit home with MPs of all colours pushing for a sectoral approach. Julian Knight, Conservative chairman of the culture, media and sport select committee, says: “We are going to look ridiculous and set the economy back a generation if our world-leading creative sectors go belly up for the sake of a few billion.”

Anneliese Dodds, the shadow chancellor, warns: “We’ve said time and time again that withdrawing income support for businesses when many haven’t even reopened and others are subject to local restrictions was a recipe for a jobs crisis.” Sarah Olney, the Liberal Democrat business spokesman, wants “targeted packages” for sectors like hospitality.

Even Conservative backbenchers on the party’s libertarian wing, such as Steve Baker, could countenance some extension, albeit with misgivings. He says: “Extending furlough for its own sake seems to me to be simply pain delayed. If the Chancellor needs to extend it further as part of a coherent plan I would not oppose it, but I would want to see how it is affordable.”

Industry sources say the Treasury dislikes furlough as a “blunt tool” and that, politically, an evolved scheme “has got to be something that looks like it is moving on”. Speed is also of the essence as firms are likely to be triggering 45-day consultations on more redundancies by mid-September. Economically – and perhaps electorally – it will be Sunak’s biggest call yet.