Ending furlough too soon will wreck post-Covid chances for many firms

The complaints from employers are getting louder. Far from the headlines a year ago warning of a rerun of 1980s-style unemployment, businesses are worried there aren’t enough workers to go around.

And yet Britain’s economy faces a paradox: after the government delayed the final easing of Covid-19 restrictions in England, employers are also turning up the volume about the growing risk of job losses. Is this simply Janus-faced corporate lobbying or can both somehow be right at once?

This juxtaposition is not lost on the chancellor, Rishi Sunak. Faced with demands for fresh economic support as the end point for pandemic restrictions once again drifts off into the distance, the Treasury has steadfastly stuck to its guns. Calls to extend furlough to avoid a renewed hit to jobs have been rejected.

Although Sunak would never have admitted it at the time, the Treasury argues that the chancellor went “long” at the March budget by extending furlough to the end of September deliberately to cope with delays coming out of lockdown.

Treasury insiders are quick to point out industry complaints about staff shortages when questions about furlough are raised. Tory MPs are also pressing to bring the scheme to a close, arguing that furloughed workers are bleeding the state dry and preventing the efficient functioning of the jobs market.

There are many reasons why this logic is upside down. After the worst recession for three centuries, severe risks to jobs remain. The Covid-19 pandemic is far from over. Although employers have started hiring again – and many can’t find enough staff – there are still half a million fewer people in work than before the pandemic. The continuing health emergency and restrictions are the main barrier to a functional jobs market, not support measures.

Against this backdrop, the Resolution Foundation thinktank estimates there is still a “Covid employment gap” of 2.8 million workers – either furloughed or out of work – to close before the UK’s jobs recovery is complete.

More than a million migrant workers are estimated to have left the UK during the pandemic. Many are unlikely to return because of the pandemic restrictions and tougher post-Brexit immigration rules, exacerbating labour shortages for employers who had relied on low-paid EU staff. But this is not solved by ending furlough; it is fixed by employers raising wages and boosting working standards, after neglecting their staff for far too long.

Business might be suffering from short-term supply bottlenecks after the easing of lockdown measures this spring but look beyond this immediate moment and there are plenty of reasons why these problems are temporary factors that will dissipate.

Il Banca d'Inghilterra expects unemployment to rise to almost 5.5% after furlough ends in September, up from the current rate of 4.7% – representing thousands of lost jobs. While far better than last year’s Office for Budget Responsibility forecasts for a peak jobless rate of 12%, made as the pandemic worsened, it is hardly a moment for complacency.

From next week, employers must contribute 10% of a furloughed employee’s wage, climbing to 20% in agosto, as taxpayer support is cut from the current level of 80%. Employees will continue to receive the same amount.

tuttavia, almost 2m jobs are still furloughed. The vast majority of these jobs are in sectors most affected by pandemic restrictions: ospitalità, live events and travel. To suggest that venues still forcibly closed by the government, still with no source of revenue, can contribute towards staff wages is a total nonstarter.

Delaying the easing of lockdown is unlikely to be severely damaging for the economy at large. The fallout from each renewed period of tight controls has been successively smaller, as companies and households learned to adapt.

As the economy snaps back to strength from the latest shutdown, UK GDP is only 3.7% below its pre-pandemic level. That recovery from a plunge of about 25% is a remarkable feat but significant ground still remains to be recovered. Some of the hardest yards will also be found in the last few percentage points to be regained.

The economy as a whole is expected to return to pre-crisis levels by the end of the year but some sectors have much further to recover than others. In retail and construction, the job has already been completed, con output already higher than before Covid-19 struck. Professional sectors, such as IT, communications and banking, are not far behind.

On the other hand, the accommodation and food services sector – which includes pubs, restaurants and hotels – is still 40% down despite starting to make up for lost time in recent weeks. The arts, entertainment and recreation industries are still 32% below pre-crisis levels.

With the economy rebounding overall, and some companies struggling to find enough staff – including in hospitality – the Treasury could make the argument that a change in stance is warranted. Furlough does not need to be a permanent feature of the UK labour market. But removing it too soon will wreck many firms that would otherwise be viable post-pandemic.

The chancellor should know this, as Britain has been here before. Late last summer when furlough was last scaled back, Sunak came under pressure to provide targeted support for sectors continuing to struggle with restrictions.

At that time, the chancellor kicked the idea of sectoral support into the long grass, arguing it was too difficult to make judgments about which companies should be given financial aid.

It was problematic, we were told, when individual firms spanned multiple sectors – such as a supermarket with an in-house cafe. Depending on where the boundaries were drawn, suppliers could miss out on aid, such as a manufacturer of ice-creams with sales to theatres and cinemas – technically not hospitality but reliant on it.

Sectoral support packages such as the £1.57bn cultural recovery fund, VAT cuts for hospitality, and business grants for the hardest-hit firms have been deployed. But the most comprehensive support measure, furlough, remains a blanket policy and will be badly missed for firms in the hardest-hit sectors.

The Treasury has had a full year to contemplate these issues, and it was always clear this problem would come back. So why has the chancellor made no apparent progress? With delays affecting some firms more than others, it is time for the chancellor to think again. A one-size-fits-all approach will not work.

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