Is Furlough 2.0 the wrong scheme at the wrong time?

Rishi Sunak has revived his job retention programme, but some experts fear it is no longer suitable to help workers through the winter

Rishi Sunak has smashed the Treasury’s piggy bank again, defying the department’s usual caution on borrowing to ramp up the furlough scheme for the winter months.

The Chancellor was forced into the decision by the resurgent pandemic, bringing back his initial policy to deal with lockdown, but there are growing signs that the blunt tool might not fully match the economy’s changing circumstances.

“It has ended up an entirely necessary step to take, but it is a remarkable turnaround and it shows how deeply worried the Treasury is now – historically, they have been more on the side of the doves than the hawks on whether we stay open or lock down,” said Tony Wilson, chief executive of the Institute for Employment Studies.

In avian analogies, Treasury officials may be dovish on lockdown but are renowned for being hawkish on the public finances – but have instead been tamed by the second Covid wave, resulting in the new furlough extension.

The key question is whether or not a policy which was designed as a short-term measure to stem redundancies over a few months in the spring is an effective tool to prop up millions of jobs for an entire year.

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There is no doubt that jobs are at risk, and furlough will save many of them.

The biggest victims of this new lockdown are hospitality and non-food retail businesses.

They were the heaviest users of furlough first time around, and need it again now shops, pubs and restaurants have been ordered to close just as they begin the crucial pre-Christmas trading season.

Bank of England economists estimate that as many as 5.5m people could be furloughed this month, more than double the 2m or so thought to have remained on the scheme at the end of October.

A key benefit of furlough is simplicity. Any business can apply to cover any job which existed within a certain timeframe. That meant the programme could get up and running quickly in the spring.

Now it covers businesses regardless of the tiering system in England, or the alternative restrictions in Scotland, Wales and Northern Ireland, solving confusion for employers and the political rows between the UK’s nations.

Yet this seems an oddly comprehensive jobs market policy for a more targeted lockdown.

Tony Wilson notes that plenty of companies have used furlough even when they were not legally mandated to close, including more than 1.5m in manufacturing and construction at the peak.

If factories and builders, for example, turn to the scheme this time around, it indicates it is not merely being used as a measure to get through lockdown, but is becoming a prop to rely on through a longer depression in demand.

The longer this continues, the greater the risk of non-viable jobs being retained at taxpayers’ expense. This will be a relief for furloughed workers, but is no good for the wider economy. Eventually new jobs will be needed, and the sooner people start trying to find them, the better.

This is reflected in part in the Bank of England’s unemployment forecasts. Compiled in the expectation of a short JRS extension plus the part-time Job Support Scheme into the spring, the Bank predicted the schemes would hold down unemployment until April at which point there would be a spike.

It was predicted to take unemployment from below 4pc at the start of the year and below 5pc in August to almost 8pc by the middle of 2021. The blow to jobs has been flattened, but not eliminated, by furlough.

Lord Macpherson, a former permanent secretary to the Treasury, told the House of Lords’ economic affairs committee that a second lockdown requires a second furlough, and that simplicity is best for such a scheme, but that over time it could also have painful consequences for the economy’s dynamism and future growth rates.

“There is a risk that you end up supporting jobs which no longer are going to exist and that reduces efficiency of the economy,” said Lord Macpherson, warning that this would harm productivity in the years to come.

“So keep it simple, keep it in place, but the risk you are trying to manage is that we become a bit of a zombie economy.”

This tension between saving jobs and letting the economy adjust is one of several facing the Chancellor as outlined by Lord Macpherson. Another is the tension between spending heavily to prop up the economy, while keeping a lid on public spending to avoid a debt disaster in the years to come.

The scale of this effect depends on bosses’ willingness to use the scheme.

Furlough is not free. Employees receive 80pc of their wages via the Government, but employers still have to pay national insurance, pension contributions and other costs.

This might be fine for a short period - the initial lockdown was supposed to be just three weeks long, and companies hoped to get back up and running quickly.

Now they face months more without income, and mounting bills on top of the other costs of running a business.

“It isn't free. Employment generally isn't free. For instance, someone accrues holiday during their employment,” says lawyer Julia Wilson at Baker McKenzie.

“While you can require someone to take their holiday during furlough, you have to top up to normal pay, so there is an additional top up.”

Similarly workers accrue redundancy rights when they have been employed for more than two years, and may be eligible for other benefits such as private medical cover, all of which become expensive if the employee has been on furlough for an entire year.

“Furlough isn't cost-neutral,” says Julia Wilson. “It may be a problem for businesses. They are there on the P&L. It is mercenary if you look at it that way, but businesses have to look at this to continue to operate.”

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The scheme allows the re-hiring of recently redundant staff, but this is not costless either, nor is it risk-free.

“I have concerns about rehiring workers simply to put them on furlough. It might be morally something people want to do, but legally it is a bit of a minefield,” says Joanne Frew at law firm DWF.

“You are effectively pushing the problem to a later date. If that job is not viable, it is not going to be viable at the end of furlough either. In employment law terms, there is the risk of creating a precedent if you bring one person back, why are you not bringing someone else back, which might create problems as well.”

Furthermore, not everyone can use Sunak's support schemes – in particular those who only became self-employed in the year before the pandemic began, as well as company directors paid via dividends. It might have been bearable for this group to miss out on lockdown support if they were unable to work for a few months, but it is curious Sunak has not reviewed their position when Covid restrictions look likely to last for a year or more.

Chris Sanger at EY notes that “the Chancellor has been agile at introducing new things” so could take the chance to plug some of this gap in the income support coverage, particularly for those who became self-employed after 6 April 2019.

“Could the Chancellor have looked at those self-employed who have for the last tax year submitted their tax returns earlier than the final deadline, and used that as criteria for receiving benefits? Or is there another way to think about how to get that validation of self-employed income in order to give support? That is a clear gap in the overall targeting of the scheme,” he says.

Sunak’s latest statement on furlough might not be the final word on supporting workers through this winter.

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