Rishi Sunak Warned ‘Premature’ End to Furlough Risks 10% Jobless Rate

Chancellor of the Exchequer Rishi Sunak’s “premature” withdrawal of government support means U.K. unemployment will rise above 3 million before the end of 2020, according to an influential think tank.

The warning from the National Institute of Economic and Social Research comes as the government prepares to wind down its furloughing plan, which has helped support the wages of 9.5 million jobs, next week. The program is set to end in October, a plan that Chief Secretary to the Treasury Steve Barclay -- Sunak’s No. 2 -- reiterated on Tuesday, saying the chancellor had been “clear” on the matter.

An extension would prevent joblessness hitting 10% and be relatively inexpensive, Niesr said in a report Tuesday. The think tank said keeping the plan running to the middle of next year would cost about 10 billion pounds ($12.9 billion) -- a sixth of the cost of the initial support -- and pay for itself by reducing long-term unemployment.

“The scheme was intended by the chancellor to be a bridge through the crisis and there is a risk that it is coming to an end prematurely and this increases the probability of economic scarring,” Niesr Deputy Director Garry Young said.

With more companies announcing plans to shed workers as the program approaches its end, Sunak is coming under more pressure to at least shield the most vulnerable parts of the economy. Niesr sees the jobless rate dropping to 6.4% next year, still well above current levels of 3.9%.

Losing Skills

“The rationale behind the furlough scheme was retaining the link with the job,” Barclay said in a question-and-answer session after delivering a speech to the think tank Onward. “If you stretch the elastic of that too long, then people start to lose their skills.”

However, he offered some solace to the worst-hit industries, suggesting that assistance packages similar to the 1.7 billion pounds provided to the arts will be possible. Not extending furlough doesn’t mean “that targeted measures won’t be taken where there is a strong business case for doing so,” Barclay said.

In a sign of the longer-term impact on the crisis, Niesr predicts the economy will shrink 10.1% in 2020, and only grow 6.1% the following year. The level of economic activity in the final quarter of last year is not likely to be regained before the second half of 2023, while government debt as a share of economic output will stay above 100% next year.

©2020 Bloomberg L.P.

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