Rishi Sunak’s furlough U-turn protects jobs but risks being poor value for taxpayer money

The chancellor has had a busy six weeks since his winter economic update on 24 September. In that time he has adjusted his policy no fewer than four times as the course of the coronavirus – and the government’s public health policy – has changed. Now, in a return to the policy of the spring, he has now announced that the government will pay 80% of furloughed employees’ wages until April.

The Treasury has been caught out by assuming that further public health restrictions would not be required this winter. But the new announcement risks being an over-correction, wasting taxpayer money by propping up unviable jobs if a fuller recovery is possible. The uncertainty caused by the pandemic means the chancellor needs to be flexible to tailor his policy appropriately over the coming months – but he needs to get better at communicating that flexibility to respond appropriately to a shifting landscape without causing confusion for business and the public.

The Treasury was too optimistic about the winter

Sunak has acknowledged that while the Treasury did expect some resurgence of the virus as winter approached, it thought it would stay under control and the economy would remain open. On this basis the chancellor announced policies over the summer – including ‘eat out to help out’ – that were designed to stimulate the economy during the recovery phase. This optimism also led to the phasing out of the Coronavirus Job Retention Scheme (CJRS) and the design of its much less generous replacement, the Job Support Scheme (JSS).

That optimism was misplaced. Additional public health restrictions, including the closure of parts of the economy this month, meant the chancellor’s less generous JSS was inappropriate. It would have meant the loss of many jobs with a long-term future that are not viable in the short-term due to the public health restrictions.

As public health restrictions return to spring levels for November, it seems reasonable that economic support does the same. This is what the chancellor announced last week.

The long extension may be poor value for taxpayer money

However, today’s announcement goes much further. Generous furlough terms will not just be in place in November, but until April (albeit with a review in January). Generous grants under the poorly targeted self-employed scheme will also be in place for the same duration.

This is a much bigger shift in approach from the Treasury. It means that generous support will not only exist while restrictions are in place, but possibly after much of the economy has reopened. The chancellor said in September, when he announced the JSS, that government support should save ‘viable’ jobs. That meant providing less support as restrictions eased so that only those jobs with a long-term future were supported. There was merit to this approach – money spent propping up jobs that will not return is taxpayer money badly spent, because the purpose of the scheme is to retain employer–employee links to encourage a swift recovery.

The new policy will cost many billions of pounds. And, especially if restrictions ease after November, much of this money will be spent supporting sectors relatively unaffected by public health restrictions where many of the furloughed jobs are likely unviable. A recent IfG paper showed that over one million such jobs were being supported by the CJRS in September.  

Economic policy needs to be flexible – and communicated as such

Now is a difficult time to be designing economic policy, when the appropriate response depends so much on the course of the virus and the level of public health restrictions, both of which can change quickly. Flexibility is needed to adjust economic support as the situation changes and this is largely what the chancellor has done over the last couple of months. But the initial policy path proposed in the summer and backed up in September was communicated as a firm, final plan, even though it was contingent on the path of the virus. As a result, subsequent changes to policy have been branded as ‘U-turns’ – confusing businesses and the public as well as reflecting poorly on the Treasury.

Today’s announcement, with its much longer timeframes, is a reaction to that, hoping to avoid the need for further U-turns. But it will be inappropriate if, come February, the virus has receded and the economy is largely open. The lack of targeting by sector makes it even more likely that it will waste taxpayer money on unviable jobs.

The chancellor should announce a clear plan and path for policy, but he should also be clear that it is contingent, not final. Better communication, including about the inevitable link between the course of the virus and the level of economic support, is needed if the Treasury is to fare better over the next six months than it has in the last six weeks.