Chancellor Rishi Sunak plans to taper the state-backed employee support furlough scheme on the rising concerns about its spiraling cost to the exchequer. The scheme currently covers over 8.4 million worker, furloughed by their employers on a tip off of major redundancies.
Under the scheme, the government pays 80% per cent of workers’ wages up to a monthly cap of £2,500. The scheme had been launched to support businesses in the times of coronavirus crisis while at the same time ensuring the regular flow of income to workers in order to support them in their daily livings. But the huge cost of furlough scheme has now started weighing on the British Exchequer prompting the government to pass on some burden onto the shoulders of employers.
Under changes to be announced in the next couple of days, the UK’s government is set to put more onus on employers by forcing them to pay their part of 20% of wages to furloughed workers from August. Companies are also expected to be asked to start paying the national insurance and pension contributions to the staffs on leave.
It comes in addition to the government’s already indicated plan to cut back the furlough cash to 60 per cent of wages as the furlough scheme is estimated to cost £12 billion per month to the Treasury for 7.5 million employees- means same as monthly NHS budget, told Mr Sunak. This, however, did not stop the Chancellor to extend the scheme until the end of October 2020 as the government attempts to prevent the job losses in the UK.
Mr. Sunak told media that the government would ask UK firms to start sharing the cost of the scheme from August so as to avoid a ‘cliff edge’ cut-off to the furlough scheme for people who rely on it. He added that the message today is simple: UK government stood behind the workers and businesses as the country entered into this crisis, and will continue to stand behind them until the Britain come through the other side.
The scheme was initially launched in March when the coronavirus outbreak started picking up the pace in the United Kingdom, forcing the government to impose a lockdown. It was meant to last for three months until June, in anticipation of early economic revival. But the recovery no longer materialized in the way originally mapped out. In the figure released earlier this week, the government revealed that the furlough scheme so far has costed £15 billion to cover the wages of 8.4 million workers under its job retention program. Besides, the government’s Self-employment Income Support (SEISS) program has covered over 2 million claims at a cost of £6.8 billion.
Before the outbreak of coronavirus pandemic, the employment level in the United Kingdom was rising sharply with the employer demand touching new highs as the country had freshly come out of the European Union. But now the ripple effect of the virus has created a deep-rooted impact on the labour market due to the businesses struggling to protect their revenues. Despite the government taking the forbearance to share the burden of salaries, most of the businesses are reporting low cash levels with not enough to pay for other operational expenses. If this continues to be the case, in no time the cash reserves of the companies would dry up pushing them to the verge of collapse.
Office for Budget Responsibility (OBR) gauged the potential impact of the novel coronavirus on the economy and public finances and estimated that unemployment is likely to rise by 2 million to the rate of 10 per cent in the Q2 2020 with overall rate for the year standing at 7.3 per cent. In April 2020, the country’s budget watchdog also estimated that approximately 30 per cent of the employees in the country would be furloughed.
The OBR estimates also included initial broad-brush estimates of real GDP that predicts the decline of 35 per cent in the British economy during the period April to June, while during the full year 2020 OBR forecast is to shrink by nearly 13 percent altogether. The OBR also expects annual borrowing to reach 15.2 per cent of the UK economy that would mark the highest level since the 22.1 per cent recorded at the end of World War II.
Every 7 out of 10 businesses in the UK have signed up for the state-backed furloughed scheme. It is estimated that about 935,000 businesses would put their furlough employees under the government’s job retention scheme. Let’s have a look at two LSE-listed companies that have claimed this furlough scheme.
Next PLC- Leader in retail industry, Next PLC (LON: NXT) had initially placed 88 per cent of its employees under the state-backed furloughing scheme due to the impact of temporary closure of stores and warehouse under the nationwide lockdown. But when the company’s online business resumed operations, the group reduced the furloughed employees to 84 per cent.
NXT is trading at GBX 4,952, down 2.56 per cent, on 29 May 2020 as at 2:52 PM GMT. The company holds a market capitalisation of GBP 6.79 billion with the shares outstanding of 132.95 million. The beta of the stock stands at 1.42, reflecting higher volatility compared to the benchmark.
Dixons Carphone PLC- Publicly listed electrical and mobile retailer & service company Dixons Carphone PLC (LON: DC.) has placed 16,500 employees on furlough throughout its outlets and supply chain in the country.
The stock of Dixon Carphone has dropped 1.70 per cent or GBX 1.30 to trade at GBX 75.25 on May 29 as at 3:12 PM GMT. Dixon’s 52-week high/low stock price stands at GBX166.45/GBX53.50 as recorded on 13 December 2019 and 19 March 2020, respectively. The company’s worth is GBP 889.79 million, and it is trading at a beta of 1.49 – reflecting higher volatility compared to the benchmark.
Mr. Sunak has told earlier that the current economic situation is ‘not sustainable’ which persuades the government to taper the wage support. However, the country is building optimism around the early economic revival as the Recruitment & Employment Confederation (REC) has recorded signs of labour market growth with significant rise in hiring seen in rural parts of the United Kingdom.
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