Ending the Furlough Scheme Is a Recipe for Economic Disaster

While countries across Europe extend their furlough schemes into next year, Britain is winding its support down just as lockdown returns. It is a recipe for economic disaster.

We stand on the brink of a catastrophic unemployment crisis. Hopes of returning to “significant normality” by Christmas are dwindling. Covid-19 cases are surging, with daily diagnoses comparable to levels last seen at the end of March. Social distancing measures such as the “rule of six” have been hastily re-introduced, while an increasing number of local lockdowns have been implemented. 

While Europe braces itself for the seemingly inevitable second wave, Britain has so far chosen to strip away the one policy which has protected employment throughout the pandemic. The furlough scheme is set to end at the precise moment when the economic recovery is at its most fragile. The government needs to understand we are not dealing with a normal recession. The collapse in economic activity has not been precipitated by a financial crash, overheating or the disruption of supply chains. We have witnessed an unprecedented managed decline in economic activity, in an extreme effort to halt the spread of Covid-19 and save lives. 

As long as the virus continues to pose a serious threat, the economy will remain subdued. This is partially a consequence of necessary public health measures. Many businesses are operating at reduced capacity to accommodate government guidelines. Even if all restrictions were eliminated tomorrow, voluntary social distancing will remain. People simply will not rush out to spend money when the infection rate is rising, and they face a greater risk of catching the virus. In short, the economic conditions which necessitated the furlough scheme in the first place will still exist once the scheme ends next month.

Without action, the burden of economic hardship will be thrust onto the shoulders of workers. Employment protection is notoriously weak in the UK. If businesses find themselves facing a prolonged period of diminished revenues, their demand for labour will fall and they will not retain staff. Unemployment will rise sharply. Recent research by the Institute for Public Policy Research (IPPR) found up to two million jobs could be lost by the end of October. The uncertainty, the insecurity, the anxiety would be a devastating blow for millions of workers. 

Stripping away the furlough scheme would be an act of economic vandalism. Countless households would experience a shock to their incomes, damaging their living standards and exacerbating income insecurity. The impact of this will ripple across the wider economy, hindering the fragile recovery. People will not want to spend if their jobs at risk. People will not be able to spend if their incomes are lost. Recoveries rely on stimulating demand, not sapping it. 

Beyond the pandemic, the threat of mass unemployment would seriously undermine workers’ rights. Unions have raised concerns that some unscrupulous employers have sought to fire workers, only to re-hire them on lower wages and inferior contracts. We cannot allow the pandemic to undermine the negotiating power of workers, leaving them at the mercy of a labour market heavily skewed in favour of employers.

The Chancellor must change direction. In July, Rishi Sunak promised he would “never accept unemployment as an unavoidable outcome.” Prematurely ending the furlough scheme would be an admission of defeat. As Keir Starmer recently said during his speech to the Trades Union Congress, “it just isn’t possible to get back to work” while infections are surging. He appealed to the Chancellor to use his “imagination” to protect jobs. At IPPR, we have developed an alternative path for the Chancellor, one that is bold, creative and enough to protect jobs and support the economic recovery.

Extending the scheme until March next year is the minimum demand. We do not know how long the pandemic will continue, but the economic projections suggest Winter will be marred by adverse economic conditions, and the recovery will only begin in earnest as we enter the Spring next year. It is far better that decisions on the future of the furlough scheme are based on economic performance, rather than an arbitrary end date in the middle of a slump.

We must also look to reform the furlough scheme, so that it encourages business to bring back staff into active work, providing it is safe. We are advocating that, in addition to the government covering 60 per cent of the wages for hours not worked, a 10 per cent subsidy for hours worked part-time should be introduced to boost work sharing while the economy is weak. In other words, businesses would be incentivised to bring workers back into active work on a part-time basis. We would share jobs to save jobs, protecting incomes and bolstering production.

Finally, we argue that some form of targeting may be desirable. This is a common feature of job protection schemes that exist across the world. In the Netherlands and Japan, wage subsidies have been made available during previous crises, providing firms can demonstrate demand has fallen below a set threshold. Similarly, we may want to look at a criterion which evaluates how badly firms have been affected by the pandemic and aim support at workers in sectors where social distancing continues to impact sales. These jobs are perfectly viable. With hopes of a vaccine at some point in the next year and economic projections suggesting a return to economic growth in the Spring, these businesses can live to see another day, but not if they are left without support as the second wave crashes into the economy.

Such a plan must be recognised as an investment into the economy, one that prioritises jobs and protects workers. The cost of these reforms is far lower than when the furlough scheme was first implemented. Extending the scheme until March and adapting it to encourage a return to part-time work where possible, would cost just under £8 billion. This is fairly modest in comparison to other support schemes used in the crisis –  a good deal to protect the livelihoods and incomes of potentially two million people. 

The costs of inaction needs to be recognised. Pushing millions of people into unemployment will still require the government to spend money. Except this will be through the meagre Universal Credit system. Households will feel the squeeze and the prospects for recovery will be hampered by a lack of income and confidence among British households. Local economies will be hit hard. The legacy from the last period of mass unemployment casts a shadow over the British economy. 

We may convince ourselves that regions and sectors can bounce back, but history has shown this path is not always assured. Most importantly of all, the human cost will be substantial. After a decade of austerity, low wage growth and cuts to benefits, many households were already on the breadline. A shock to employment now will condemn millions to penury.

An economy is only as strong as the sum of its parts. So many of us have endured months of isolation, anxiety and hardship. No one is demanding the unreasonable. No one wants to be furloughed forever. All people want is a little protection through a time of unprecedented national crisis. Support that reflects the circumstances we are living in, rather than those we desire to live in. Protecting workers is the bare minimum we must do if we want to return to normal. Protecting workers is absolutely essential if we have any hope of building something better.