The Treasury will start to wind down the furlough scheme this week – and not a moment too soon.
For a start, the support is relatively generous – and costly – and still due to last another three months. Under the Coronavirus Job Retention Scheme (CJRS), employees on furlough receive 80% of their normal wages for any hours not worked, capped at £2,500 a month.
Currently, the Government pays the entire 80%. The taxpayer’s contribution will be scaled back to 70% from July 1, and cut further to 60% from the beginning of August, but the scheme is not due to close completely until the end of September.
In the meantime, the number of people on furlough has already fallen sharply. The latest hard data from HMRC reported that about 3.4 million jobs were still furloughed as of April 30. But more timely survey estimates from the ONS suggest that the proportion of the UK workforce on furlough had fallen to about 6% in early June, which would be about 1.5 million.
That is still a large number, of course. But there is also every reason to expect this figure to continue to tumble as the remaining Covid restrictions are lifted and consumers and businesses spend again. The employment components of the latest business surveys, such as the June PMI, are still hitting new highs.
Here, by the way, the decline in GDP in the first quarter of this year is old news. But, if anything, the latest detailed breakdown is encouraging. The trivial downward revision to headline GDP, mainly due to weaker consumer spending, was accompanied by an upward revision to household saving, meaning that pent-up demand may prove to be even stronger.
To be clear, it is inevitable that the winding down of the furlough scheme will lead to some job losses. However, these should not be sufficient to derail the economic recovery. For example, the Bank of England’s Decision Makers Panel suggests that firms expect the proportion of employees on full furlough to drop to 2% in the third quarter, which is about half a million people.
If (and this is a big if) they then all lose their jobs when the furlough scheme ends, unemployment could jump from 1.6 million to 2.1 million, or from 4.8% to 6.3%. But this would be a worst case scenario. In practice, the strong economic recovery and buoyant labour market should mean that most either keep their existing jobs or find new ones.
What’s more, the changes in the terms of the CJRS were announced at the beginning of March. If there was indeed going to be a tsunami of job losses, we should already have seen this in the statutory notices that warn of large-scale redundancies. That hasn’t happened.
In reality, it is increasingly clear that the furlough scheme is now contributing to staff shortages and holding back the recovery, including in the most vulnerable sectors such as hospitality. With most of the economy open again, people should be encouraged to find new jobs, instead of being locked into their old ones.
The original justification for the furlough scheme has therefore fallen away. It made sense for the Government to protect jobs when the economy was shut down and businesses could not operate as normal. This no longer applies, making furlough both inefficient in economic terms – and unfair on those who are not benefitting from paid leave underwritten by the taxpayer.
Needless to say, not everyone agrees. The TUC has argued that the Treasury should make a ‘cast-iron commitment’ to extend furlough for as long as it is needed. But there is already plenty of evidence that the costs are starting to outweigh the benefits.
The director of the National Institute of Economic and Social Research (NIESR), Jagjit Chadha, has also argued that the phasing out of furlough is a risk to the recovery, and that both the Treasury and the Bank of England need to adopt a flexible approach to maintaining emergency support. Well, yes.
But this policy flexibility must work in both directions. Economic growth and inflation have both been stronger than either the Treasury or the Bank expected. This means that policymakers should be thinking of scaling back their support sooner rather than later, rather than providing even more.
It is tempting to add that the recovery is still a lot stronger than NIESR seems to think even now, with the latest survey data suggesting that overall activity is already back to within a whisker of pre-Covid levels.
The Institute for Fiscal Studies (IFS) also seems to be behind the curve: its rather pessimistic briefing on the winding down of furlough started and finished with the 3.4 million figure from the end of April.
The Resolution Foundation has looked at the data in more detail and concluded, not unreasonably, that the ‘labour market is recovering but not yet recovered’, and that the furlough scheme is only one of many factors contributing to labour shortages. Nonetheless, I’m sure even the RF would agree that the case for continuing furlough on the same terms is now much weaker.
In short, it has always been a race between the pick-up in the economy and the winding down of the furlough scheme, but the economy is clearly winning. The Treasury is therefore right to scale back support that is no longer needed and could be increasingly counterproductive.
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