U.K.’s Sunak Faces Tough Choices on Job Furlough Program

(Bloomberg) --

Rishi Sunak’s tenure as U.K. Chancellor of the Exchequer is reaching a defining moment as he decides whether millions of workers living off government aid should soon begin fending for themselves in a crippled economy.

In just over two months, his furlough plan that pays up to 80% of an employee’s salary will finish. Sunak has dismissed mounting pressure to extend the program, whose cost is about 35 billion pounds ($46 billion), albeit rising more slowly than before.

The hard line by the Conservative chancellor has raised the stakes at a time when reversing his stance would add to a list of embarrassing government U-turns. But ending furloughs could condemn millions to a sudden cash shortfall, and even a jobless future. Having helped vulnerable Britons with aid, Sunak has also put their fate in his hands.

The ultimate danger is that the labor-market fallout from ending support might entrench the U.K.’s recession. That could invoke memories of Margaret Thatcher’s government, whose economic transformation in the 1980s set foundations for future growth at a cost of eye-watering unemployment that tarnished the Conservatives’ political brand for years.

“This decision may be one of the most important decisions Sunak makes in this crisis,” said Carsten Jung, a senior economist at the Institute for Public Policy Research. It “will probably determine the shape of the labor market for the better part of the next five years. Once unemployment goes up, it’s really hard to get it back down.”

In a year when Prime Minister Boris Johnson’s government has bounced from crisis to crisis, Sunak’s furlough plan was a rare success, raising the chancellor’s profile compared with colleagues. The program’s scale surprised economists, supporting 9.6 million jobs and preventing mass unemployment.

Labor Market Risk

But the Bank of England still sees joblessness reaching 7.5% this year, almost double the current level, and warns the labor market poses the biggest risk to any economic recovery.

Sunak’s key problem is that restrictions to control the virus may persist after his aid program finishes at the end of October. Around 12% of the workforce is furloughed, and the IPPR estimates 3 million people will be relying on the plan at its conclusion, two-thirds of whose jobs would be sustainable if help were extended.

With the government’s autumn budget around the corner, Sunak is under pressure when it comes to the country’s public debt, which now stands above 2 trillion pounds. He’s threatened to withhold funding for infrastructure projects that don’t meet certain efficiency criteria, the Telegraph reported.

Sunak also may pause pension protections to help the recovery, the Times reported on Sunday. These plans are being resisted by Johnson amid fears that could lead to a backlash from older voters, the paper said.

Taper Timetable

Sunak’s options range from carrying through his plan to end furloughs, to extending them after all, even only partially, or replacing them with something else. Other countries from Germany to Canada are already preparing to swallow the debt cost of shifting support programs further into the future.

As the clock ticks for Sunak, here’s a look at what U.K. think tanks are suggesting he should do.

Do Nothing

With public debt at such elevated levels, Sunak could simply let the plan expire and hope other measures announced this summer will support jobs. They include a 2 billion-pound program to pay wages of more than 200,000 young workers, and a 1,000-pound bonus for firms that keep on employees returning from furlough.

“The government cannot continue to underwrite the wages of large portion of the economy,” said Ben Harris-Quinney, chairman of the Bow Group, a think tank close to the Conservative Party. “The alternative is worse: a debt crisis similar to post-2008.”

Another argument against any extension is that it could prevent the economy readjusting to a new reality, delaying painful restructuring.

But Luke Raikes, research director for the Fabian Society -- a group close to the opposition Labour Party -- insists the consequences of a sudden end to furloughs would still be “severe” as joblessness spirals. He says the government should then devote extra aid to the unemployed and ramp up investment in skills and training, particularly for young workers and those over 50.

Extend the Plan

At the cost of a political about-face -- and yet more debt -- Sunak could keep furloughs going for longer.

Such a move would be relatively inexpensive, according to the National Institute of Economic and Social Research, an independent research group. It says keeping the plan until the middle of 2021 would cost about 10 billion pounds and pay for itself by reducing long-term unemployment.

An alternative option offered by the Resolution Foundation is to maintain furloughs in sectors most damaged by the crisis.

“A slower phase out for hard-hit sectors like hospitality, retail and leisure will be evidently sensible,” said Daniel Tomlinson, a senior economist there.

Something New

Sunak could end furloughs while keeping some aid in place by unveiling a totally new program.

One idea from the IPPR is to replace the current plan with a Coronavirus Work-Sharing Scheme targeting only jobs and businesses likely to be sustainable. It would run through March and cost 7.9 billion pounds.

The Resolution Foundation proposes a job-sharing initiative where two people work part-time on the same role, with the state paying for non-worked hours. It also suggests a subsidy plan for firms in hard-hit sectors.

“We need a new innovation for the second part of the crisis,” said IPPR’s Jung. “If there’s a way to help hold onto workers, it would really make a huge difference.”

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