The Effects that Ending Furlough May Have on the Economy

9th September 2020 Kellie Sharp

As of the 1st August, employers have had to pay national insurance and pension contributions for their staff under the Coronavirus Jobs Retention Scheme (CJRS) also known as furlough. Now we're in September, employers will have to pay 10% of furloughed employees' salaries, rising to 20% in October. Under the scheme, workers placed on leave received 80% of their pay up to a maximum of £2,500 per month.

So, what could be the impact of not extending the scheme? The National Institute for Economic and Social Research has warned that UK unemployment could rise to as high as 10% by the end of the year, with the level of economic activity in the final quarter of last year not being likely to be regained until the second half of 2023.

There is some talk that the government could ease this rise if they extend the furlough scheme beyond the end of October. There is an argument that for a relatively inexpensive measure it could pay for itself by preventing a rise in long-term unemployment. The cross-party committee has asked whether the government will consider targeted support for the worst-hit sectors at least, especially if a second wave of the virus forces further containment measures. Many companies have a viable future but need longer-term support to get back on their feet.

The economy has contracted by roughly 25% since the lockdown started and it is now entering a phase where activity is expected to be subdued at the same time the government withdraw their support measures.

The effect of this is that we are likely to see a sharp increase in unemployment in the second half of the year. To some extent, this is probably already happening with the cost of furloughing now being gradually transferred to employers, some of whom don't see a realistic prospect of taking back some of their employees in the current uncertain environment, whereas, if the scheme had remained open, they might have kept them on.

There are, however, incentives offered to employers by the Job Retention Bonus of £1,000 per employee, but this looks to be too small to be effective given the average wage is £530 per week. With many employers facing cash flow pressures, little demand and uncertainty about prospects throughout the rest of this year, the National Institute for Economic and Social Research doubt that many furloughed workers will be retained just because of the bonus.

Beyond this year, the scale of the damage may only become apparent in the longer term but some signs are already visible. Many redundancies have been announced at several large and high-profile employers, including many linked to retail and travel, such as Boots, John Lewis, Easyjet and British Airways. Travel restrictions have had devastating impacts on airlines' bottom lines. Around 22,000 jobs were lost across large restaurant groups and independent operators such as Bella Italia, Carluccio, Bistrot Pierre, Café Rouge and Byron, a rise of 95% on the 11,280 jobs lost during 2019. The recovery is predicted to be slow, with long lasting effects. Business loans have also increased to help them get through a cash flow deficit estimated by the Bank of England at £140 billion. Much of this new debt is underwritten by the government and issued on beneficial terms but repayments could weigh heavily on corporate balance sheets over the next few years.

While furloughing has sheltered the UK from the full effects of the pandemic, the National Institute expects the winding down and withdrawal to lead to a 'second wave' of redundancies this year as firms struggle to survive. The Monetary Parliamentary Committee (MPC) warned that "The outlook for the UK and global economies remains unusually uncertain. It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors." The MPC also said the UK's housing market "appears to have returned to close to normal levels", despite "signs of a tightening in credit supply for some households".

The general consensus is that the government must invest now to create the jobs we need for the future in sectors such as green industries, social care and across the public sector. The more people we can keep and get into work the faster our economy will recover.

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