What would happen after the Furlough Scheme ends in UK?

Highlights

• The £70-bn furlough programme, which has been hailed as a success, will come to an end this week.
• A think tank warns that over one million workers could still be on furlough at present.
• The country is set for a bumpy ride this autumn as the ending of the scheme is coinciding with rising energy bills and the £20 a week cut to Universal Credit.

At a cost of £70 billion, the furlough scheme of the Boris Johnson Government has been hailed as a great success as it supported 11.6 million workers in the time of an economic crises. Ending this week, the scheme has been in place for 18 months and has subsidised 2.3 billion working days, according to the Resolution Foundation. It will be no longer be open to struggling firms.

Chancellor of the Exchequer Rishi Sunak said the wage subsidy has helped the British economy a lot to get back on track and the economy has now recovered enough to function without government assistance in wage bills.

Most economists agree that the catastrophic impact of the pandemic was tackled with the help of furlough, which supported approximately 9 million jobs at the peak of the pandemic in May 2020, covering 80% of the wages up to a monthly limit of £2,500. Without the furlough scheme, the damage would have been enormous and unbearable leading to mass unemployment and economic destruction.

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Although there hasn’t been any consensus on what decision should be taken next to stabilise the economic recovery, the chancellor believes that customised support is needed in the labour market that will target the workers still on furlough and offer them over 1 million job vacancies. It is expected that the plan of action based on this move will be announced in the budget next month.

According to the Trade Union Congress (TUC), which helped in the development of the furlough, the UK government is at risk of doing away with all its good work. Furlough is seen as a basis for a permanent short time working programme in countries like Germany, and the UK Government has called for it to be used as a basis for the same.

The Bank of England is also concerned about what would happen to over 1 million still-furloughed workers after the responsibility for the payment of their full wages is transferred back to the employers. The Monetary Policy Committee (MPC) at its September meeting said that despite falling at a lesser degree, the number of full and part-time furloughed jobs had continued to decline more than it had anticipated in August in its trimonthly update on the economy. According to the bank, it was difficult to read the labour market with the record high job vacancies coupled with the slower pace of people coming out of the furlough.

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UK economist at Pantheon Macroeconomics Samuel Tombs said there are concerns regarding the speed of growth of the economy next month for all firms to fully employ all the 1.6 million staff again, who were still furloughed at the end of July. With the unemployment rate expected to rise from 4.5% in the third quarter of 2021 to just 5% in the fourth quarter, an upward spike is anticipated in underemployment as workers return to their former employers but work for fewer hours than their employers would expect. Significant downward pressure may be developed on wages due to the hidden pool of hidden labour market slack, same as occurred in the early 2010s.

The effect of ending the furlough scheme will be closely monitored by the bank along with the Monetary Policy Committee taking a note of the high option value in witnessing the coping of the labour market prior to rising interest rates.

Bottomline

According to think tank Resolution Foundation, the country is prepared to have a rough autumn as the end of the furlough scheme will occur simultaneously with rising energy bills and the £20 a week cut to Universal Credit. Furlough has played a critical role to protect the living standards of people during the sharpest economic contraction in over 300 years and thus it is certain that if the economy has to go through another lockdown due to rising infection rates, a precedent has been set that furlough will be bought back.

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