Furloughing Expected To Cost The British Exchequer Three Times More Than Originally Envisaged

As much as two third of the British employers are expected to avail the government-funded furloughing scheme as per a survey report published by the British Chambers of Commerce on 15 April 2020.

The furloughing scheme which is a part of the stimulus packages was rolled out by the government last month to offer financial support to the companies during coronavirus crisis. The United Kingdom government has promised to bear as much as 80 percent of the salaries of the employees of the businesses which are struggling through the pandemic and are on the verge of furloughing all or part of their employees to harness their survivability. The scheme when originally envisaged was estimated to cost the exchequer about £10 billion but now with the increased number of businesses likely to seek benefit of the scheme, a media company quoted that scheme could cost nearly £40 billion to the government in three months.

At the same time, in another report published by the Office for the Budget Responsibility (OBR) on Tuesday, 14 April 2020, it estimated that in total nearly 30 percent of the employees in the country will be furloughed. The country’s budget watchdog also estimated that despite the government help the unemployment level in the country is still likely to rise by 2 million in the coming few months , which would take the unemployment rate to 10 percent of the current workforce. The coronavirus pandemic has in the past few months forced the country into a lockdown with almost all industries suffering because of the massive drop in their revenues. The Office for the Budget Responsibility in that report has also stated that in the next quarter, period from April to June, the British economy is expected to shrink by about a third and during the full year 2020 it might shrink by nearly 13 percent altogether.

The British government is prioritising to resolve the challenge of rising unemployment in the country. Even when the first stimulus measure was announced, the government directed businesses to utilise the funds towards staff payments since their revenues faced a virus-induced hit. However, there still are millions of self-employed people and part time workers in the country who are out of work due to the pandemic and have currently no regular income to support their livelihood.

Falling employment levels could be the most potent contributing factor in the shrinkage of the British economy in the coming few months, which is already facing a demand shock due to the lockdown. Further, if the situation continues to deteriorate on this front the country could still move into a much sharper recessionary trend. The current scheme which includes a payment of 80 percent of the salary maximum of £2,500 per employee per month does not puts any obligation on the employer to pay for the remaining 20 percent if the employee is furloughed. It essentially means that any employee earning more than £2,500 per month is not guaranteed to receive anything above this amount from the employer as they are not obligated by the regulatory orders to do so. The companies, therefore, could choose to top up the salary or rather could use the funds to pay for their other obligations. It seem that now the benefit of this scheme will be better derived by the large and midsized businesses who have more permanent staff rather than the ones employing more temporary ones.

Prior to the breakout of the pandemic, the employment level in the country was at an all-time high. As the country had freshly come out of the European Union, the demand for jobs started to test new highs with wage levels also rising sharply. Before the pandemic cut short the budding sprouts of economic recovery after the long pre-Brexit slump period, the interest rates in the country were at a record low putting all the required ingredients in the right place for the country to enter into a high growth phase. In the initial days of the outbreak, the magnitude of the virus was not precisely clear to the government because of which the stringent measures like ‘nationwide lockdown’ were not immediately imposed, leading to the situation now getting more deteriorating.

Incidentally, the businesses that are supposed to protect the jobs in the country are also not in a good shape. Despite the government promising to share the burden of salaries most of them are reporting low cash levels to pay for other expenses and could very well dry up in the next few months. The market believe that a part of the problem to this is the banking system in the country which is blamed to be working below the optimum levels, leading to a lower pace of the distribution of the governments’ schemes. The Bank of England and the Chancellor have been working throughout to persuade the banks to ramp up extension of loans under the new schemes. While some of these funds have already reached their intended beneficiaries, most of it is yet to be distributed. It is highly likely that if the disbursements would be done at an accelerated pace some of the people applying for unemployment and welfare benefit claims would still be in employment.

It seems that United Kingdom has reached an alarming stage to find early solution for the halt of virus spread across the nation. Should the pandemic conditions continue to linger in the country, an extension of the lockdown seem to be inevitable as the government’s first choice is to save the lives of people at any cost. Under such circumstances, furloughing cost and every other cost that the government is bearing right now to help the country sail through these troubled waters could get insufficient to prevent the country from plunging into a deep recession. Further, it is highly likely that the Furlough cost estimates could see a further revision.

It is not only in the United Kingdom, but in other countries as well that unemployment problem is sharply raising. United States and many of the large countries in Europe and Asia are also reporting significant level of unemployment claims with several of their companies either laying off their workforce or sending them on Furlough. The IMF has already predicted that the world economy is going to shrink by 3 percent this year and the recovery in 2021 would majorly depend upon the time it will take to put a lid on the pandemic.


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