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12 May 2020

Revising the furlough scheme would be a serious gamble

Reducing the support of furloughed workers from 80 per cent to 60 per cent relies on three assumptions about the economy.

By Stephen Bush

Rishi Sunak will reveal his plans for the future of the United Kingdom’s furlough scheme today. The Chancellor is expected to extend the Coronavirus Job Retention Scheme until September, but to cut the wage protection offered from 80 per cent of salaried workers’ pay to 60 per cent.

He is also expected to accompany this change with a sensible tweak to the scheme that will allow employers to part-furlough their staff. That fixes the bug in the scheme — the purpose of which is to keep people as close to the labour market as possible — that left businesses facing reduced trading with a binary choice between making workers redundant or furloughing them. This inflexibility meant that some organisations which could have continued trading at a reduced level had to close entirely.

But it’s that reduction from 80 to 60 per cent that will dominate the coverage of the measure, and it represents a major economic gamble by the Chancellor. There are in fact a series of big bets being made here.

The first is the assumption that cutting the wages of furloughed staff (now about six million people) won’t leave them unable to make ends meet, increasing household debt, causing personal misery and more widespread economic harm.

The second bet is that cutting furlough will make people who can’t make ends meet seek, and find, work elsewhere. This is the other side of the government’s attempts to increase the amount of work going on in manufacturing and construction: it’s not clear that there is, at the present time, as much demand for either as there was in January.

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And the third bet is that people will be able to find work at an equivalent salary level to the furloughed job they will be leaving.

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If any one of those bets doesn’t come off, the UK is looking at a big increase in personal misery, a further fall in overall demand, and potentially an even deeper recession.