The furlough scheme was the right response to coronavirus – but it must not outstay its welcome

The Coronavirus Job Retention Scheme (CJRS) – which pays 80% of the wages of furloughed employees, up to a cap – is by some distance the largest intervention the UK government has launched for this or any crisis, ever. Don’t be fooled by rival headline numbers, like the £330bn set aside for bank loan guarantees, or similarly scary figures from the financial crisis of 2008-9. Only a fraction of that £330bn will be paid out, and financial schemes are in any case built from money meant for repayment or an equity stake. The CJRS is pure ‘goodbye-money’, simple spending like that devoted to salaries or benefits. If it were a department, its £40bn estimated quarterly cost would make it the largest in Whitehall, just beating health and social care into second place.  

So it is quite natural for there to be serious discussion of how such a gigantic bandage can be removed from the economy without severe damage to the wounds beneath.

The job retention scheme must change and eventually cease in its current form

As my report on coronavirus bailout policy argues, the dilemma for government is that the economic rules of engagement have changed radically, but only temporarily. The initial priority of preserving jobs and companies against heedless destruction has to evolve: because the lockdown is evolving; because there can be no recovery without workers being encouraged back into work; because coronavirus will have changed the structure of the economy itself. Ultimately, no government can keep paying millions of workers around seven percent of pre-crisis GDP in return for doing nothing.

Despite its size, the greatest damage associated with the CJRS is not so much its fiscal cost as what it represents – a payment for inactivity. During the very worst of the health crisis, this payment could be seen as an investment in the health of the country, as the inactivity drives down the infection rate. But outside these special circumstances, just about any other use of the resources would be a giant improvement.

Hence the CJRS must change and eventually wither away.

Continued uncertainty makes it harder to plot an exit from the CJRS

This week the government announced measures to ease the lockdown, but in a way that leaves irreducible uncertainty in the months ahead, as restrictions might yet tighten again if infection rates start to rise. Layered onto this is uncertainty about how the public will react to new freedoms, workers’ willingness to return to work, and how strongly the economy will recover from the deepest and sharpest contraction in modern history.

Inherent uncertainty creates a significant difficulty for business – which needs to make staffing decisions in advance – and also the Treasury, which would design one system if it thought conditions were going to last three months, and quite another if it were 12 months.

The announcement on Tuesday May 12 to extend the CJRS until October reflects this uncertainty. Extension itself is welcome, as otherwise companies would have been confronted with the decision whether or not to make staff redundant, long before they can be confident of the economic conditions framing this decision. More significantly, the chancellor unveiled two modifications to the scheme that may help to prepare for its gradual disappearance. Companies will be asked to contribute an as-yet unspecified proportion of the costs of the furlough from August, but also from that date the scheme will begin to offer support towards part-time work too.

The CJRS has to be removed in a gradual and calibrated way

The chancellor’s announcement paves the way for an eventual CJRS exit strategy that is gradual and calibrated, rather than a hard stop. This is sensible.  Revenues for the most affected companies are not going to return as abruptly as they disappeared, and without this support the binary choice between keeping and laying off staff is just too stark. Too many companies would be forced into redundancies immediately.

Two gradualist techniques have been rejected, at least for now: lowering the amount that employees receive (instead, companies will have to contribute as the government’s support falls away) and altering the scheme according to the sector in question. Cutting what people receive when many of them are still not safe to work would be harsh, though this may come into play as the economy recovers. At first glance, though, rejecting a sectoral approach is more surprising. Coronavirus hits different industries in a highly uneven way; some carry on much as before, with more remote working, while others like hospitality and air travel have seen revenues almost wiped out. Their recoveries will be similarly uneven, and so one might think their support mechanisms should mirror this, too.

But while the government’s initial support package did indeed emphasise help for retail, hospitality or leisure sectors, the logic should not necessarily extend to the recovery phase. As the economy starts to restructure after the recession, keeping existing sectoral patterns of employment in place ceases to be a feature and becomes a bug. The workers currently furloughed should start looking towards the expanding parts of the economy. As Jonathan Portes and Tony Wilson say of the CJRS^[1], “for those where there are likely to be large and lasting shifts in demand, it will need to encourage job creation in growing sectors and to facilitate the movement of workers from declining ones or from unemployment.”.  

How much does the CJRS impede the natural workings of the labour market?

During the unnatural conditions of the lockdown, it is very hard to tell how much the CJRS is impeding normal labour market activity. Given its sheer size there is huge value to the government learning more. It is one thing for a scheme to make up the incomes of workers forced into unavoidable inactivity – quite another for such payments to cause the inactivity in question.  

In some ways the scheme is well-designed not to incentivise unnecessary inactivity or hinder the reallocation of workers to sectors where jobs are available. There is no rule against furloughed employees seeking paid work elsewhere while their furlough continues, although some employers may not consent to this where it involves the staff member working for a competitor. In principle, a period of paid furlough provides a great opportunity for a worker to look for other work. Employers also have no bias in favour of the furlough; they have other costs to pay and would much rather have their workers working than doing nothing.  

However, in practice the furlough scheme may encourage or enable workers to remain inactive longer than is desirable. Many may prefer the apparent safety of their current job to the uncertainty of taking a new one. There is also growing anecdotal evidence that some employers are struggling to persuade furloughed workers to return to work, with employees citing concerns about risks to their health as a reason not yet to return.

Taking a gradualist approach, so long as the labour market is working, the ideal outcome would be for CJRS to wither away through naturally lower uptake (as Resolution Foundation modelling suggests it might). As opportunities to work arise again, and the scheme becomes less generous, employer and employee choices will veer away from furlough and back towards ordinary employment. Or, more bleakly, some workplaces will conclude that they cannot indefinitely keep operations running and the promise of renewed employment to their workforce, and switch towards redundancy.

A gradualist approach should be the top priority for the Treasury. Ultimately, it is workers not being able to work that is the true net cost for the country, not the payments they are provided. The added flexibility that Rishi Sunak has announced is a useful step forward. In the months ahead further tweaks may be required to continue to wean the economy off the CJRS. Alongside further reduced generosity and more support for part-time working, they should develop new conditions and freedoms around the CJRS that guide the worker back towards work. These might include:

-        Allowing employees the alternative of a single lump sum to cushion a job move

-        Making furlough payments transferable to a new employer

-        Maintaining the generosity of the CJRS for a finite period if it is match-funded by employer investment in retraining

 It is extremely difficult to develop such ideas at speed. Like the CJRS itself, any such proposals are bound to be full of deadweight costs – payments to encourage activity that might well have happened anyway. But there is one factor that the government has on its side: the firepower. If an improving economy or slightly tougher conditions reduced calls on the CJRS by just a quarter, the savings would run into the billions. For context, the total budget for the National Retraining Scheme, the government’s flagship programme “to help adults retrain into better jobs and be ready for future changes to the economy”, is £100m. That is what the CJRS currently spends in around seven hours. 

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1. https://www.prospectmagazine.co.uk/economics-and-finance/coronavirus-covid-19-job-retention-scheme-work-exit-strategy-economy