Will the new Job Retention Scheme work?

History is likely to judge the UK Government’s furlough scheme as one of the most effective policy responses to any economic crisis that we have seen in recent history.

Over 9 million workers in the UK have benefited, including around 800,000 in Scotland.

But arguably the decision for government to pay up to 80% of wages through the height of the lockdown was the easy part. How and when to wind down such a scheme was always likely to be much more difficult.

Anyone looking at last week’s labour market statistics might wonder what the fuss is about. Over the 3-month period to July, employment fell by just 12,000 in the UK and by 2,000 in Scotland. Unemployment in Scotland is 4.6%, well below its long-term average.

But don’t let this fool you.

The furlough scheme – coupled with various other government support packages – has been the buffer that has acted to cushion any rise in unemployment.

Recent figures estimate that around 15% of Scotland’s workforce remains on furlough. That’s still around half of those who were on the scheme in June.

Only once this, and other support schemes, are unwound will the true economic cost of the crisis emerge.

Indeed, whilst the economy has returned to growth, it remains around 10% smaller than it was prior to the pandemic being declared. Many firms are working at a fraction of ‘normal’ capacity and will be for the foreseeable future, particularly in the light of the further restrictions announced this week.

Redundancies are already on the rise, up 48,000 in the UK in the three months to July – the fastest rise since the financial crisis.

It is against this backdrop that the debate over how and when to unwind the furlough scheme has intensified.

Keep such schemes in place for too long risks hampering the recovery by putting off the return to work. The furlough scheme has been expensive – over £35 billion has been spent on it so far. There are also concerns of fairness, with many people who have already been made redundant earning a fraction of those still on furlough.

But lifting these vital support mechanisms too early will tip many businesses over the edge and undo the good work that the government has done to date. It may also undermine public health efforts to limit the spread of the virus if people are forced back to work, or to look for work. At a time when cases are on the rise this is a real risk.

But doing too little in a crisis is worse than doing too much.

The Job Support Scheme announced yesterday is designed to keep that support going but in a more targeted fashion. The government contribution is now capped at just over 20% compared to 80% under the original furlough scheme. So, whilst welcome, it is much less generous than the scheme it is replacing and arguably shifts the cliff-edge for businesses back just a few months.

Will it work? The scheme will certainly help protect some jobs and slow the inevitable rise in unemployment. But as the Chancellor again acknowledged, the government will not be able to save every business or every job.  

Of course, it’s easy to criticise the scheme as not being generous enough. But at some point, we also need to start discussing how all of this is going to be paid for. Taxes will have to rise, but growing a vibrant tax base will be important too. It’s easy to call for an extension of the furlough scheme. But just like unwinding it, it’s much harder to come up with a plan for paying for it.

Authors

Director of the Fraser of Allander Institute.

Stay ahead of the curve
Subscribe to receive our latest articles, podcasts and events

You can unsubscribe at any time. For more details, read our Privacy Policy.