Britain’s Giant Furlough Program Is Only Just the Start

(Bloomberg Opinion) -- When Boris Johnson said “we must act like any wartime government,” he also meant Britain must spend like one — and the prime minister has certainly lived up to the promise. His Chancellor of the Exchequer Rishi Sunak told Parliament on Tuesday that Britain had one of the most comprehensive financial relief plans for the Covid-19 outbreak anywhere in the world. That was no exaggeration.

The mix of cash grants, tax cuts, loans and other support has cushioned the blow of the lockdown for workers, kept British businesses from folding and built a level of public support that wasn’t warranted by the U.K.’s disastrous early handling of the public health crisis. But the largess has made some of Johnson’s fellow Conservatives uneasy. They argue that so much interventionism is distorting the market, creating a dependency on benefits, propping up failing firms and building a mountain of debt that will burden future generations.

Worse, they fear the sugarcoating has generated so much support for Johnson’s lockdown that people are reluctant to return to their jobs. That would prolong the economic pain.

While the arguments in favor of Sunak’s approach are the more compelling in these times, the worriers shouldn’t be dismissed entirely. Rolling out these spending measures is much easier than figuring out when to end them or how to help workers and businesses adjust to the post-pandemic economy.

At the heart of Sunak’s plan is the Job Retention Scheme, a furlough program under which the state pays 80% of wages up to 2,500 pounds ($3,064) a month. On Tuesday, the chancellor extended the plan through to October, dispelling rumors that he would taper the support after June. He did, however, make two crucial changes. The plan will become more flexible from August, so that workers can be part-furloughed and work part-time, something many businesses have been asking for. He also said companies will have to shoulder more of the cost burden.

The scale of the furlough program shows Johnson and Sunak are serious about stepping in where the market can’t. The government is supporting 7.5 million furloughed private sector workers and nearly 1 million businesses. By comparison, there are 5.4 million public sector workers in the U.K. The National Health Service, which provides health care to the entire country, costs the taxpayer about 11 billion pounds a month; the pandemic jobs program alone costs 8 billion pounds a month.

Even if it can borrow easily and cheaply now, the government doesn’t want to be in the business of propping up defunct industries or sectors. Britain did that with coal for too long. Industries that have leaned most heavily on the furlough scheme tend to be those, such as the hospitality sector, whose futures are up in the air. Many of those jobs may disappear anyhow.

But which ones? If this pandemic has left any writing on the wall about the shape of the future economy, nobody has deciphered it yet. There are simply too many unknowns to make the call of who deserves help and who doesn’t. The furlough program at least buys time for everyone.

Having workers tied to their jobs and able to return is far more efficient than forcing people to find new jobs or reapply once conditions pick up. It’s arguably more cost effective than mass bankruptcies and millions registering for unemployment support, which would almost certainly overwhelm an already flawed welfare system.

It’s also sound social policy and smart politics. The long-term costs of job uncertainty are devastating, as studies of the U.S. federal government shutdown in 2013 have shown, with negative effects lasting for some time even among those employees who return to work. By providing relief now, the government may limit the financial and emotional scarring from the coronavirus outbreak.

Some workers no doubt find furloughed life a pleasant improvement. Strip out the costs of transport, daily coffee shop visits and other expenses and life becomes cheaper. While the monthly payment ceiling makes sure nobody is living in luxury, many families can get by on 80% of their wages.

That isn’t the same as saying furloughed employees are suddenly carefree. A survey by London’s Volcano Coffee Works, a small business that petitioned Sunak for changes to the furlough law, showed more than half of workers don’t believe they will meet their monthly expenses if the payments are reduced. Another study of the 2013 U.S. government shutdown, in which 850,000 workers were furloughed, found most didn’t have enough of a financial cushion to cover two weeks’ expenses.

The furlough scheme preserves “the dignity of work,” as Sunak put it Tuesday. It will also go a long way to erase the bitter memories of Conservative-inflicted austerity policies and keep onside the former Labour Party voters who helped Johnson win the general election. 

There’s no question that some companies will be insolvent, however. A paper from the University of Chicago’s Becker Friedman Institute estimates that the residual effects of the pandemic will lead to permanent job losses in the U.S., reaching perhaps 42% of current layoffs. April has already seen the most corporate defaults globally in a single month (32) since the financial crisis. Economic data released Wednesday showed that the U.K. economy plunged nearly 6% in March. This could be the country’s deepest recession in more than three centuries.

To prepare for this, Britain urgently needs a better system for helping workers to retrain, acquire new skills and find jobs. The U.K. spends less on vocational skills and labor market support than its main competitors. Those worst hit by this pandemic — low-skilled workers in poorer parts of the country — are the least likely to receive training under the current system.  

A well-designed wartime spending splurge is justified, but only if the government is preparing for what follows. Helping workers transition to the post-pandemic economy is the real challenge. Otherwise, even Sunak will run short of things to hand out.

Elaine He provided a chart for this column.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.

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