Super Sunak can't save every job

With the UK furlough scheme due to end in October, Chancellor Rishi Sunak has come under pressure to provide additional support to households and businesses, especially as lockdown measures have been intensified in recent weeks.

Sunak has cancelled the Autumn Budget, and instead decided to focus on emergency measures. Today, he presented his “Winter Economy Plan” in a statement to the House of Commons. The Chancellor confirmed that the Coronavirus Job Retention Scheme will come to an end as planned, but to support households, a new Jobs Support Scheme will be introduced from the start of November and run for six months.

The scheme will allow employers to reduce the hours worked of employees to up to a third of their normal hours (must be paid as normal), and receive partial government support to help cover up to two-thirds of the pay lost.

Though not detailed in the speech, the HM Treasury website confirms that the government grant will cover half of the cost with the employer, which will be capped at £697.92 per month. This means that an individual earning up to £25,000 per year and reducing hours to a third will retain 77% of their pay. However, for employers taking part, in this scenario, it raises the hourly wage cost by 64%.

The scheme will cover all small and medium sized enterprises, but large businesses (over 250 employees) must show that they have been “adversely affected” by the pandemic and are expected not to be making capital distributions – or in other words, paying shareholders dividends.

The scheme will not impact the (in our view wasteful) Job Retention Bonus, which pays any company that applies for it £1,000 if they take back employees from furlough and hold on to them until January.

In addition, Sunak announced some loosening of conditions to the various loan schemes available – mostly extending the terms of payment with little or no additional interest. Deferred VAT tax bills for firms can now also be repaid in instalments over the whole of the next financial year rather than in full in March 2021.

Finally, the Chancellor announced a delay to the reinstatement of the 20% VAT rate (reduced to 5%) for the hospitality sector from 13 January to 31 March. However, a recent announcement to end VAT refunds for purchases made by overseas visitors (to be exported) is very likely to dramatically reduce the number of visitors that come to shop.

Lobbying is underway to reverse the change due at the end of this year, but it appears that the government is happy to make the UK, and especially London, less appealing to visit than competitor cities such as Paris and Milan.

Overall, the benefit of the new scheme is that it will be far less costly to run for the exchequer. Also, by encouraging at least part-time work, it maintains the connections and skills of workers, which research shows reduces the likelihood of long-term unemployment.

The new scheme resembles those already in place in mainland Europe, such as the German Kurzarbeit scheme which was introduced during the Global Financial Crisis, and was very successful in minimising the rise in unemployment during the crisis. Indeed, we called for the introduction of a similar scheme to avoid a hard stop in support.  

However, the new Job Support Scheme essentially creates a hurdle for companies to receive government support to hold on to their staff when compared to the outgoing Job Retention Scheme. This is designed to ensure that zombie companies (no longer viable firms) are not able to claim expensive subsidies to hoard staff.

If a company cannot meet the minimum requirements of providing a third of paid usual work and part-compensating for the lost hours/pay, then the company is expected to change the employment contract permanently, or make staff redundant.

This is positive from the perspective of improving medium-term productivity in the economy, and the scheme will help limit the rise in unemployment compared to not providing any support from November, but as the Chancellor admits, the new scheme will not save all companies and jobs. Unemployment is still likely to rise towards the end of this year, and with that, hurt demand in the economy.

Finally, it is worth noting that unlike mainland Europe, the UK has a very flexible labour market. Often this is seen as beneficial for the efficiency of the economy. However, in this instance, companies may decide not to use the new Jobs Support Scheme and see their hourly wage costs rise by 64%, and instead simply reduce the hours offered to their staff. In the current weak environment, job seekers have very little negotiating power.

Additional protection for staff, even if only temporary, could help encourage greater use of the Jobs Support Scheme and help households through this difficult period.