Tag: furlough scheme

During the pandemic, millions of people’s wages in the UK were paid by the government to prevent the closure of businesses and a surge in unemployment. The furlough scheme officially came to an end in September 2021. However, with the spread of the Omicron variant and the fear of further restrictions being put in place, there has been a call by many to re-introduce the furlough scheme.

The furlough scheme

The furlough scheme began when the government brought in, what was officially called the Coronavirus Job Retention Scheme (CJRS) in early 2020. This was when the pandemic first forced businesses across the country to close. The scheme worked by paying part of employees’ wages, preventing the need for businesses to make their staff redundant, therefore avoiding a rapid rise in unemployment along with the associated costs. It also avoided the financial and emotional costs of firing and then rehiring workers post pandemic. Under the scheme, furloughed workers received 80% of their wages, up to £2500 a month, if they couldn’t work because of the impact of coronavirus. Employees were able to maintain the security of employment and the payments helped furloughed workers pay their bills.

The scheme saw billions of pounds spent paying the wages of employees whose firms were forced to close temporarily. It could be argued that the expense of the scheme was a huge disadvantage. However, the alternative would have been for the government to pay unemployment-related benefits. Despite the furlough scheme being deemed necessary, it was not without its drawbacks for the structure of businesses. Rather than businesses adapting to changes in the economy and consumer demands, they could decide to claim the money and avoid the need to restructure. There was also concern about the length of the furlough scheme and the ability of businesses to bounce back post-pandemic.

Since the start of the scheme, the specifics of what was paid and who received it changed over time, especially once the economy started opening again. Initial steps were made to allow part-time return to work and the scheme started to wind down over the summer of 2021, with the government covering less of the wages and businesses covering more. From July, employers had to provide 10% of the wages of their furloughed staff, with the government paying the rest. This then increased to 20% in August with the CJRS coming to a complete end on 30 September 2021. At this point, there were around 1.6 million employees still receiving payment from the scheme.

Impact on Employment

With the end to the furlough scheme in September 2021, there were concerns that this would lead to a large number of redundancies. However, data indicate that has not happened and there is a record number of job vacancies. Official figures show that UK employment rose in October, confirming the strength of the labour market. The Office for National Statistics stated that the employment rate rose to 75.5% in the three months to October, up 0.2 percentage points on the previous quarter. This is believed to be driven by a rise in part-time work, which had dropped sharply during the pandemic. However, it is important to note that the strength in these numbers was prior to the emergence of the Omicron variant.

Omicron

In November, the government had ruled out once again bankrolling people’s wages at enormous expense. However, the Chancellor is now under pressure to respond to the latest announcements around the ever-changing landscape of the pandemic. The fast-spreading mutation of the Covid-19 virus, Omicron, is posing a fresh threat to the economy.

On the 8 December, the Prime Minister announced new ‘Plan B’ Covid rules for England. As part of these new rules to limit the spread of Omicron, people are being asked to work from home again if possible and face masks are compulsory in most public places. Covid passes or a negative Covid test result are also needed to get into nightclubs and large venues.

Scotland and Wales have brought in further restrictions. Scotland’s First Minister, Nicola Sturgeon, has asked people to limit socialising to three households at a time in the run-up to Christmas. Shops and hospitality venues in Scotland must bring back physical distancing and screens. In Wales, nightclubs will close after 26 December and social distancing will be reintroduced in shops.

Although the hospitality industry and retail sector remain open, they are facing a slump in trade thanks to the new restrictions and worries among the general public. With the work-from-home guidance and advice from health officials that people should limit their social interactions, pubs and restaurants have seen widespread cancellations in the run-up to Christmas. Trade is suffering and these mass cancellations come at a time when these sectors were hoping for bumper trade after a dismal last couple of years.

In light of these concerns, ministers are now being urged to guarantee support in case businesses have to shut. Despite the indication that it would be highly unlikely that the UK would experience a full return to the restrictions seen at previous stages of the crisis, the International Monetary Fund has stated that the UK government should be drawing up contingency plans. The IMF has called for a mini-furlough scheme in the event that the Omicron variant forces the government to close parts of the economy. The idea is that the mini-furlough scheme would see a limited version of the multi-billion-pound job subsidy scheme being rolled out if firms are forced to close.

There are strong calls for there to be targeted support, which this mini-furlough scheme could offer. The Resolution Foundation argued in mid-December that a furlough scheme tied solely to the hospitality industry would help prevent job loses in an industry that is currently suffering once again. It calculated that the cost of a hospitality-only furlough scheme would be £1.4 billion a month if it were pitched at the original level of 80% of wage support. If a January to March sector-specific scheme were to be introduced it is estimated to cost around £5 billion, a small cost in comparison to £46 billion spent on furlough so far.

Inflation

Any reintroduction of a furlough scheme would be a jolt for the government. This would mean a return to the 2020-style arguments around protecting livelihoods and businesses, a contrast to the recent messaging from the Treasury of restoring public finances. There is also concern about how this will all impact on current growth predictions and inflation concerns. The IMF expects the growth of the UK economy to be 6.8% in 2021 and 5% in 2022. However, the drawback from this is that the recovery would also be accompanied by rising inflation. It has been suggested, therefore, that interest rate increases from the Bank of England would be needed to keep inflation under control, while at the same time being not so great as to kill off growth.

It was widely expected that the Bank of England would again put off a rate hike in order to wait to see the economic impact of Plan B restrictions. However, on Thursday 16 December, interest rates were raised for the first time in more than three years. Despite the fears that Omicron could slow the economy by causing people to spend less, Bank Rate was raised from 0.1% to 0.25% . This came in the wake of data showing prices climbing at the fastest pace for 10 years.

Next Steps?

Government finances would take another huge hit if the furlough scheme were revived. But a version of such a scheme is likely to be necessary to avert an unemployment crisis and the attendant costs.

However, in resisting further measures, the government has argued that it has already acted early to help control the virus’s spread by rapidly rolling out booster jabs, while avoiding unduly damaging economic and social restrictions.

The government also argues that some of the measures from the total £400 billion Covid support package since the start of the pandemic will continue to help businesses into Spring 2022. Such measures include government-backed loans for small- and medium-sized businesses until June 2022, a reduction in VAT from 20% to 12.5% until March 2022 and business rates relief for eligible retail, hospitality, and leisure businesses until March 2022. Talks are ongoing with hospitality and and other business organisations directly affected by Covid restrictions.

The British Chambers of Commerce has argued that current measures are not enough and has called for VAT on hospitality and tourism to be cut back to its emergency rate of 5% and for the 100% business rates relief for retailers to return. The CBI has also called for any unspent local authority grants to be spent now to help affected firms and that further help, including business rates relief, should be on the table if restrictions continue after the government’s 5 January review date. The IMF said that with strong policy support, the economy had proved resilient, but it stressed that a return of some of the measures that prevented mass unemployment and large-scale business failures might soon be needed.

Conclusion

Infections caused by the new Omicron variant are rising rapidly, doubling every two to three days. It is expected to become the dominant variant in the UK soon with health officials warning it may be the most significant threat since the start of the pandemic. However, it is not yet known what the full extent of the impact of this new variant on the NHS will be, leaving the severity of future restrictions uncertain.

But what is evident is that the course of the pandemic has changed and there is a growing case for the government to start planning for new support packages. Although a reintroduction of the furlough scheme was hoped not to be needed on the path out of the pandemic, a short detour may be required in the form of a mini-furlough scheme. The size and reach of any support put in place will depend upon any further restrictions on economic activity.

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Questions

  1. Should the level of support for business return to the levels in place earlier in 2021?
  2. What measures could a government put in place to curtail the spread of the Omicron variant that have only a minimal impact on business and employment?
  3. Compare the UK measures to curtail the spread of the virus with those used in some other European countries.
  4. What are the arguments for and against (a) re-introducing the furlough scheme as it was earlier in 2021; (b) introducing a version restricted to the hospitality sector?

With the imposition of a new lockdown in England from 5 November to 2 December and in Wales from 3 October to 9 November, and with strong restrictions in Scotland and Northern Ireland, the UK economy is set to return to negative growth – a W-shaped GDP growth curve.

With the closure of leisure facilities and non-essential shops in England and Wales, spending is likely to fall. Without support, many businesses would fail and potential output would fall. In terms of aggregate demand and supply, both would decline, as the diagram below illustrates. (Click here for a PowerPoint.)

The aggregate demand curve shifts from AD1 to AD2 as consumption and investment fall. Exports also fall as demand is hit by the pandemic in other countries. The fall in aggregate supply is represented partly by a movement along the short-run aggregate supply curve (SRAS) as demand falls for businesses which remain open (such as transport services). Largely it is represented by a leftward shift in the curve from SRAS1 to SRAS2 as businesses such as non-essential shops and those in the hospitality and leisure sector are forced to close. What happens to the long-run supply curve depends on the extent to which businesses reopen when the lockdown and any other subsequent restrictions preventing their reopening are over. It also depends on the extent to which other firms spring up or existing firms grow to replace the business of those that have closed. The continuing rise in online retailing is an example.

With the prospect of falling GDP and rising unemployment, the UK government and the Bank of England have responded by giving a fiscal and monetary boost. We examine each in turn.

Fiscal policy

In March, the Chancellor introduced the furlough scheme, whereby employees temporarily laid off would receive 80% of their wages through a government grant to their employers. This scheme was due to end on 31 October, to be replaced by the less generous Job Support Scheme (see the blog, The new UK Job Support Scheme: how much will it slow the rise in unemployment?). However, the Chancellor first announced that the original furlough scheme would be extended until 2 December for England and then, on 5 November, to the end of March 2021 for the whole of the UK. He also announced that the self-employed income support grant would increase from 55% to 80% of average profits up to £7500.

In addition, the government announced cash grants of up to £3000 per month for businesses which are closed (worth more than £1 billion per month), extra money to local authorities to support businesses and an extension of existing loan schemes for business. Furthermore, the government is extending the scheme whereby people can claim a repayment ‘holiday’ for up to 6 months for mortgages, personal loans and car finance.

The government hopes that the boost to aggregate demand will help to slow, or even reverse, the predicted decline in GDP. What is more, by people being put on furlough rather than being laid off, it hopes to slow the rise in unemployment.

Monetary policy

At the meeting of the Bank of England’s Monetary Policy Committee on 4 November, further expansionary monetary policy was announced. Rather than lowering Bank Rate from its current historically low rate of 0.1%, perhaps to a negative figure, it was decided to engage in further quantitative easing.

An additional £150 billion of government bonds will be purchased under the asset purchase facility (APF). This will bring the total vale of bonds purchased since the start of the pandemic to £450 billion (including £20 billion of corporate bonds) and to £895 billion since 2009 when QE was first introduced in response to the recession following the financial crisis of 2007–8.

The existing programme of asset purchases should be complete by the end of December this year. The Bank of England expects the additional £150 billion of purchases to begin in January 2021 and be completed within a year.

UK quantitative easing since the first round in March 2009 is shown in the chart above. The reserve liabilities represent the newly created money for the purchase of assets under the APF programme. (There are approximately £30 billion of other reserve liabilities outside the APF programme.) The grey area shows projected reserve liabilities to the end of the newly announced programme of purchases, by which time, as stated above, the total will be £895 billion. This, of course, assumes that the Bank does not announce any further QE, which it could well do if the recovery falters.

Justifying the decision, the MPC meeting’s minutes state that:

There are signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak. …The fall in activity over 2020 has reflected a decline in both demand and supply. Overall, there is judged to be a material amount of spare capacity in the economy.

Conclusions

How effective these fiscal and monetary policy measures will be in mitigating the effects of the Covid restrictions remains to be seen. A lot will depend on how successful the lockdown and other restrictions are in slowing the virus, how quickly a vaccine is developed and deployed, whether a Brexit deal is secured, and the confidence of both consumers, businesses and financial markets that the economy will bounce back in 2021. As the MPC’s minutes state:

The outlook for the economy remains unusually uncertain. It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It also depends on the responses of households, businesses and financial markets to these developments.

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Questions

  1. Illustrate the effects of expansionary fiscal and monetary policy on (a) a short-run aggregate supply and demand diagram; (b) a long-run aggregate supply and demand diagram.
  2. In the context of the fiscal and monetary policy measures examined in this blog, what will determine the amount that the curves shift?
  3. Illustrate on a Keynesian 45° line diagram the effects of (a) the lockdown and (b) the fiscal and monetary policy measures adopted by the government and Bank of England.
  4. If people move from full-time to part-time working, how is this reflected in the unemployment statistics? What is this type of unemployment called?
  5. How does quantitative easing through asset purchases work through the economy to affect output and employment? In other words, what is the transmission mechanism of the policy?
  6. What determines the effectiveness of quantitative easing?
  7. Under what circumstances will increasing the money supply affect (a) real output and (b) prices alone?
  8. Why might quantitative easing benefit the rich more than the poor?
  9. How could the government use quantitative easing to finance its budget deficit?

In March 2020, the UK government introduced a Coronavirus Job Retention Scheme. Businesses that had to close or cut back could put staff on furlough and the scheme would allow employers to claim 80% of workers’ wages up to £2500 per month. This would be passed on to workers.

There was large-scale uptake of the scheme. By the end of August, 9.6 million employees were on furlough (28% of the workforce) from around 1.2 million employers (61% of eligible employers). The scheme significantly stemmed the rise in unemployment. The claimant count rose 121% from March to August from 1.24 million to 2.74 million, far less than it would have done without the furlough scheme.

Since 1 August the level of support has been reduced in stages and is due to end on 31 October. It will then be replaced by a new ‘Job Support Scheme (JSS)‘ running from 1 November 2020 to 30 April 2021. Initially, employees must work at least 33% of their usual hours. For hours not worked, the government and the employer will pay a third each. There would be no pay for the final third. This means that an employee would receive at least 77.7% (33% + (2/3)67%) of their full pay – not far short of the 80% under the furlough scheme.

Effects on unemployment

Will the scheme see a substantial rise in unemployment, or will it be enough to support a gradual recovery in the economy as more businesses are able to reopen or take on more staff?

On first sight, it might seem that the scheme will give only slightly less job protection than the job furlough scheme with employees receiving only a little less than before. But, unlike the previous scheme, employers will have to pay not only for work done, but also an additional one-third for work not done. This is likely to encourage employers to lay off part of their staff and employ the remainder for more than one-third of their usual hours. Other firms may simply not engage with the scheme.

What is more, the furlough scheme paid wages for those previously employed by firms that were now closed. Under the new scheme, employees of firms that are forced to stay closed, such as many in the entertainments industry, will receive nothing. They will lose their jobs (at least until such firms are able to reopen) and will thus probably have to look for a new job. The scheme does not support them.

The government acknowledges that some people will lose their jobs but argues that it should not support jobs that are no longer viable. The question here is whether some jobs will eventually become viable again when the Covid restrictions are lifted.

With Covid cases on the rise again and more restrictions being imposed, especially at a local level, it seems inevitable that unemployment will continue to rise for some time with the ending of the furlough scheme and as the demand for labour remains subdued. The ending of the new scheme in April could compound the problem. Even when unemployment does begin to fall, it may take many months to return to pre-pandemic levels.

Update: expansion of the scheme

On 9 October, with Covid-19 cases rising rapidly in some parts of the country and tighter restrictions being imposed, the government announced that it was extending the scheme. From 1 November, employees of firms in certain parts of the country that would be required to close by the government, such as bars and restaurants, would be paid two-thirds of their previous wages by the government.

Critics of this extension to the scheme argue many firms will still be forced to shut because of lack of demand, even though they are not legally being required close. Employees of such firms will receive nothing from the scheme and will be forced onto Universal Credit. Also, the scheme will mean that many of the workers who do receive the money from the government will still face considerable hardship. Many will previously have been on minimum wages and thus will struggle to manage on only two-thirds of their previous wages.

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Articles: update

Government information

Questions

  1. If people on furlough were counted as unemployed, find out what would have happened to the unemployment rate between March and August 2020.
  2. If an employer were previously employing two people doing the same type of job and now has enough work for only one person, under the Job Support Scheme would it be in the employers’ financial interest to employ one worker full time and make the other redundant or employ both of the workers half time? Explain your arguments.
  3. What are the arguments for and against the government supporting jobs for more than a few months?
  4. What determines the mobility of labour? What policies could the government pursue to increase labour mobility?
  5. Find out what policies to support employment or wages have been pursued by two other countries since the start of the pandemic. Compare them with the policies of the UK government.