- Furlough scheme expires in October 2020, but Sunak is not in favour of extending it any further
- Germany is mulling over extending its furlough scheme to 24 months
- Up to two million at-risk jobs could be saved by extending the furlough scheme past October in the UK – IPPR
- A closer look at the worst and least hit sectors
The UK is entering a critical phase in the coronavirus era, which will be important in shaping the future of its businesses as well as employed people. Rishi Sunak, the Chancellor of the UK Treasury has re-iterated time and again that the economy has to come to terms with the reality and will need to survive with gradually fading government support, as it is not sustainable in the long-run.
As far as the impact and cost of the government coronavirus job retention scheme (popularly called the furlough scheme) are concerned, it has furloughed close to 9.4 million people till now and has costed the exchequer a huge sum of 34 billion pounds.
The UK furlough scheme is paying for up to 80 per cent of staff wages of troubled businesses, impacted by the coronavirus pandemic. It was capped at £2,500 per month for every employee furloughed. The scheme began on 1 March 2020.
From August 1, employers are paying staff National Insurance and pension contributions, which was earlier being paid by the government, as per the scheme guidelines. For September, the government furlough contribution will reduce to 70 per cent while the employers will have to pay 10 per cent of their furloughed staff wages. In October 2020, this contribution from employers will rise to 20 per cent, before the scheme totally winds up on 31 October 2020.
Germany could extend its Covid-19 furlough to 24 months
Angela Merkel, the German chancellor’s spokesperson has said that she welcomed the idea of continuing with the Kurzarbeit programme (the country’s ongoing furlough scheme). The scheme puts company staff on part-time employment and allows them to continue working.
The German finance minister Olaf Scholz said that it is not likely that the coronavirus crisis suddenly disappears in the next few weeks. The country’s furlough scheme is currently slated to last for a period of 12 months.
By the end of April 2020, more than 10 million people were availing the Kurzarbeit scheme across Germany.
The government is mulling over extending it by another year, which is estimated to cost €10 billion to the German government. An official announcement on this is expected on 25 August 2020.
The latest available unemployment rate in Germany was 6.3 per cent estimated during the month of July 2020.
The UK based prominent think tank namely the Institute for Public Policy Research (IPPR) has warned that up to two million jobs could be lost if the furlough scheme is not extended post October 2020, given the dire state of the British economy.
In its report titled the ‘Rescue and recovery: Covid-19’, IPPR has pointed out that in case the job retention scheme gets extended, around two-third of jobs could be made sustainable, as businesses will get more support and time to stabilise.
The report suggested that government replaces the furlough scheme with a new coronavirus work sharing scheme which would encourage employees to work rather than just being furloughed. It should be applicable to the worst affected sectors and continue till March 2021. IPPR has calculated the total cost of this new scheme to be £7.9 billion.
Impact of the end of furlough scheme on businesses
The worst affected sectors by the coronavirus pandemic remain travel, tourism, and hospitality. They probably have the maximum number of staff furloughed as well.
According to Dan Tomlinson, economist at the Resolution Foundation, close to 50 per cent of employees across the hospitality, arts, and leisure sectors might still require extended furlough support. So, what happens to these sectors post October 2020?
These most affected sectors are still struggling for business. They might not have any money to pay to their staff, in case they are not making any money. As a last resort, they could consider closing their companies instead, but one never knows!
At the same time, National Institute of Economic and Social Research has requested the government to extend the job retention scheme to mid of 2021.
Even for sectors like retail, where the demand has gradually started to pick up, have to be cautious that this could be a false dawn, and may need to wait for a sustained recovery before calling back the full staff strength to the workplaces.
The sectors that are least likely to be needing furlough support are information technology and sewerage, according to calculations by the Resolution Foundation. The think tank says that almost 90 per cent workforce of these sectors never needed to be furloughed, and so are least likely to be impacted if the scheme expires. The employees in the UK public sector are also least impacted by the coronavirus crisis.
In particular, the tech firms are going strong with consumer preferences moving towards digital channels. Companies are also increasingly using applications such as cloud platforms, artificial intelligence, and robotics to become more efficient. The government kickstart scheme that focuses on improving employment opportunities for 16 to 24-year old people is expected to benefit the UK IT sector and attract fresh talent.
Let us take a closer look at the performance of two IT stocks.
Softcat (LSE: SCT) is a FTSE 250 listed company specializing in providing IT infrastructure services. Over the last three years, the company sales have grown by close to 50 per cent.
The company stock was trading at GBX 1,350.00 on 19 August 2020, at 2.06 PM, up by 1.58 per cent from its previous day’s close. The 52-week low/high price was million. The volume traded at the time of reporting was 533,636. The company recorded a positive return on price, which was 10.93 per cent on a YTD (Year to Date) basis.
Another prominent company in the digital marketing space is dotDigital (LON:DOTD). It offers a latest artificial intelligence-based marketing platform named Engagement Cloud. Its revenue has also shot up by nearly 50 per cent over the past three years.
The company stock was trading at GBX 130.50 on 19 August 2020, at 2.12 PM, up by 2.76 per cent from its previous day’s close. The 52-week low/high price was GBX 71.00 / 132.00. It was having a market capitalisation (Mcap) of £ 378.32 million. The volume traded at the time of reporting was 619,693. The company recorded a positive return on price, which was 27.64 per cent on a YTD (Year to Date) basis.
The coronavirus job retention scheme expires in October 2020 and the worst affected firms are worried that they might not be able to pay staff salaries in case the coronavirus crisis continues. Expert estimates suggest that close to 2 million jobs could be at risk if the scheme ends as slated. It remains to be seen if mounting pressure forces Sunak to reverse his plan of phasing out the furlough scheme.