Paying workers up to £2,500 a month to kick their heels at home doesn’t come cheap. The cost to the exchequer of paying 80% of the wage bill for furloughed staff is one of the factors likely to push state borrowing to record peacetime levels this year.
Yet getting shot of the scheme is proving mighty hard for the government. Speculation that Rishi Sunak would make companies pay 20% of the wages of furloughed employees from August proved to be wide of the mark. Instead, the chancellor has opted for a much more cautious, step-by-step approach, and at the same time extended support to the self-employed for a further three months.
The two measures speak volumes about his view of Britain’s likely pace of recovery from the Covid-19 lockdown.
Originally, both the furlough and the self-employed schemes were meant to last for three months. Now the former runs until the end of October, the latter until August. Clearly, Sunak thinks recovery will be long and hard. There will be no rapid snap back in activity, no V-shaped recession.
Instead, companies that are only slowly returning to normal will be be given the flexibility to allow furloughed employees to come back to work, even if it is for just one day a week or a few hours a day. The downside of this flexibility is the risk of fraud: firms claiming staff are furloughed when they are working.
But this was just one of the tough choices Sunak had to make. On the one hand, he didn’t want to make the scheme so generous that firms would continue furloughing workers for longer than they needed too.
On the other hand, he knows that there are some extremely vulnerable sectors of the economy, such as hospitality, that would find it impossible to pay anything like 20% of the wage bill in current circumstances. The fear was that if these firms were asked to pay too much too quickly there would be a massive surge in unemployment over the coming months. The Resolution Foundation thinktank has estimated there were 2.5m people employed in the hardest hit sectors of the economy. Adding them all to the dole queues would leave official unemployment nudging 5 million.
Once the chancellor decided against a sector-by-sector approach he had little choice but to crank up employer contributions slowly. He has decided that all firms will need to start paying something from the start of August, whether they are open or not. As things stand, it doesn’t look as if many consumer-facing businesses in the retailing and hospitality sectors will be fully out of lockdown by then, but they will still be expected to pay employer national insurance contributions and pension contributions for furloughed workers.
The Treasury pointed out that these amount to a fraction – about 5% – of the gross employment costs the employer would have faced had the furlough scheme not been in place. In September the Treasury will pay 70% of a furloughed workers wages and in October – the last month of the scheme – it will pay 60%. Once NICs and pension contributions are included, employers will pay 14% of gross employment costs in September and 23% in October.
Yet the Office for National Statistics reported this week that 58% of firms that had paused trading had cash reserves of less than six months, and 7% had no reserves at all.
Many of these businesses were operating on wafer-thin margins even before Covid-19, and they will find it even tougher to make money with social distancing rules in place. Even finding 5% might be enough to tip plenty of them over the edge.
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