Now is the right time to phase out the furlough scheme

The Coronavirus Job Retention Scheme (CJRS) – more commonly known as the furlough scheme – has been the government’s most dramatic economic intervention during the coronavirus pandemic. At times it has supported the incomes of over nine million workers while they have been unable to work, either due to government restrictions or low demand. It has been successful in keeping employees attached to their employers and means that unemployment has stayed much lower than in other recessions.

In mid-June, there were still around two million people on furlough, but the government has begun to wind down the scheme. Since 1 July employers have had to contribute 10% of wages for hours their furloughed employees do not work, and the scheme will close entirely at the end of September. Nearly all remaining restrictions in England will be lifted on July 19, but some sectors will not get ‘back to normal’ on that day. So while this is the right time for the furlough scheme to be phased out, the Treasury should be open to additional support on a sector specific basis.

The rationale for the furlough scheme is weaker now that most restrictions have lifted

The furlough scheme was a dramatic but justified response to a recession unlike any other in UK history. Many businesses could not operate normally – or at all – while restrictions were in place, but this was expected to be temporary. Many employees would have been laid off without the furlough scheme, delaying any recovery while businesses spent time and money finding and rehiring workers – some of whom may have become disconnected from the labour market in the meantime.

The furlough scheme was never intended to support jobs that had no prospect of returning, and the movement of employees from failing businesses to more successful ones is an important driver of economic growth. However, the extraordinary nature of the pandemic meant that it was not possible to separate ‘viable’ jobs from those with no future, and many of the jobs that would have been lost without the furlough scheme did have a bright post-Covid future.

Most restrictions have now ended, and in England those that have not will follow on 19 July. Most of those still benefiting from the furlough scheme are now not in the sectors directly affected by restrictions. Only half of those currently on furlough work in accommodation and food, arts and recreation, administrative and support services or aviation – the sectors most heavily affected by ongoing restrictions. The other half of those still on furlough are in other sectors, where restrictions have lifted and vacancies have returned to ‘normal’, pre-pandemic levels. There is little rationale for continued government intervention to subsidise those jobs, even though removing the support may lead to a spike in unemployment. 

Some businesses will continue to be affected by restrictions beyond September

The end of domestic restrictions will not herald an immediate return to normality for the whole economy. International travel will remain affected by UK and other governments’ policies and, while case rates remain high, customers may remain nervous and demand for some businesses may continue to be depressed.

To the extent that these impacts will be temporary, the original rationale for the furlough scheme still applies. The good work of the furlough scheme over the past 18 months could be undone if employees in these sectors are laid off in September, shortly before a ‘return to normal’. This has always been the risk of ending the furlough scheme too soon.

Any extension of support should be sector-specific

As most of the economy returns to normal, a sectoral approach would be a better use of taxpayer money – as we have argued since as early as last October. Some sectors are basically unaffected by the restrictions and furlough support in those sectors is increasingly likely to prop up unviable jobs – wasting taxpayer money and slowing down the economic recovery. At the other extreme, some businesses have been mandated to close temporarily and pulling the rug from under these would risk destroying viable businesses and throwing away the benefits of the last 18 months’ support.

As the divide between affected and unaffected sectors has grown, a one size fits all policy has become inappropriate. This inflexibility led the government to increase employer furlough contributions from July even for those businesses that are still required to be closed.

The Treasury has been resistant to calls for a sectoral approach to furlough throughout the crisis. But it is now time to end the scheme for most parts of the economy, so any additional support should be based on a narrow sectoral focus.