POINT OF VIEW - EXTEND THE FURLOUGH SCHEME
The Government’s furlough scheme is in the news this morning: the chief economist at the Bank of England is the latest to join the chorus calling for the scheme not to be extended and to finish at the end of October as the Government currently plans; and then there is the news that between 5% to 10% of the money paid out so far may have been fraudulent or claimed by mistake, according to testimony yesterday by the HMRC to Parliament’s Public Accounts Committee. I appeared live on Nick Ferrari’s breakfast show on LBC this morning to talk about this.
First, the Government Job Retention Scheme has been a success. When it was implemented, at a time of great uncertainty about the virus, there was a genuine risk that firms might have been forced into large scale redundancies. The scheme provided a necessary breathing space, it allowed firms to take stock, and in that respect it will have saved jobs.
The numbers are remarkable. In total, 9.6 million people were furloughed at some stage. This represents one in three of those eligible. The numbers furloughed peaked at 8.9 million on 8th May. They have fallen since. The latest government data covers the period up to mid August. At that time the cost of the scheme had reached £35.4 billion. The total cost is still unclear. In early June the Office for Budget Responsibility said it would cost £60 billion, a significant reduction on their initial estimate. By region, the numbers furloughed appeared consistent across the country, with 32% being the national figure and it being highest at 34% in the West Midlands.
By sector, the most people furloughed were in the wholesale and retail sector at 1.9 million, but the highest proportion was in accommodation and food, where a huge 77% of staff were furloughed.
However, despite this success, there have been challenges. Alongside other government measures, it was rushed in. That possibly means that not all aspects of it were as smooth as would have been the case if it had been rolled out slowly. But speed was of the essence given the economic shock the economy faced. This rapid roll-out may account for the issues talked about this morning re fraud. Also, as the Treasury Select Committee has correctly pointed out, there were a significant group who were excluded from this and other schemes.
The scheme has already been phased. The Government originally paid 80% of wages up to a monthly maximum of £2,500 but this was reduced to 70% in September and will be cut to 60% in October before ending at the end of that month. The National Insurance and pension contributions were initially paid by the Government, up until the end of July, and have been paid by the employer since.
In my view, there is a valid reason to consider extending the scheme but not for everyone who may be on it at the end of October. The reason to consider an extension is this. There are a number of sectors of the economy that will not be able to return to business as usual because of the absence of a vaccine and necessary social distancing. I am thinking in particular about the arts and hospitality areas. Some jobs may be lost for good, but many others need not. Who, for certain, can tell what the virus and the economy will look like by next summer?
In all likelihood, many of the jobs in sectors hit by social distancing will likely return when we can go out again as normal. Indeed, the creative sector was one of the fastest growing areas of the economy prior to this pandemic. Temporary but necessary support would help safeguard these jobs as it has in recent months. Thus, prolonging the furlough scheme makes sense when one considers it in terms of some sectors. This helps explain why wage support schemes have been rolled out in a number of countries on the Continent.
Ending furlough will likely see a rise in unemployment. The lastest jobs data, released in August, but relating to earlier months, shows that between March to July, employment payrolls fell by 730,000 or around 2.5%, and that the claimant count, which includes those in work but not on long hours or on high wages, reached an alarming 2.7 million in July. The latest unemployment figures are 1.34 million, a rate of 3.9%. Unfortunately, this will rise inevitably, possible in waves, with the end of furlough scheme being one.
Another may be next year, when many small firms face a rise in debt as a result of this crisis. That is why, as I argued last week in a column in The Times, that it may make sense to convert some of the loans given to firms into grants, thus allowing small firms in particular to emerge from this crisis without a burden of debt, thus being better able to invest and also not being forced into a position where more staff may need to be laid-off.
It is this pragmatic policy thinking that is needed, and one reflection of that may be to extend the furlough scheme for those in certain sectors who have seen their business models impacted temporarily by the Covid-19 crisis.
Gerard Lyons, 8th September.