Sunak Weighs German-Style Program to Replace U.K. Furlough

U.K. Chancellor of the Exchequer Rishi Sunak is studying proposals for a German-style program of subsidizing workers to stave off a wave of unemployment when his current wage support measures end next month, four people familiar with the matter said.

Sunak’s team has been in talks with business groups and unions on the detail of the plan, which is similar to Germany’s longstanding Kurzarbeit program and would help employees return to their jobs on shorter hours.

Employers would pay them for the hours worked, and the cost of the remaining hours not worked would be split between workers, employers and the government, people familiar with the discussions said.

The Treasury declined to comment on the specific proposals but an official emphasized that Sunak has promised to “act in creative and effective ways” to support jobs. Labor unions want action urgently.

“With the right approach we can stop mass unemployment scarring millions,” said Trades Union Congress General Secretary Frances O’Grady. She called on ministers to “fast-track a new plan.”

The chancellor is facing urgent calls to come up with a blueprint to support jobs and businesses after Prime Minister Boris Johnson imposed new restrictions on the British public in an effort to tackle the surge in coronavirus cases. While the government wants to avoid protecting jobs that will never come back, heightened uncertainty now could weigh on the pound and stifle the U.K.’s economic recovery.

Sunak Weighs German-Style Program to Replace U.K. Furlough

The impact of the latest restrictions will likely reverberate across the economy starting from the fourth quarter and into 2021, damaging the rebound. Economists at BofA Global Research now expect economic growth to grind to a halt over the next six months.

Shutting down industries with high-level social contact, including entertainment and the arts, would lead to a 0.8% contraction in the fourth quarter, according to Bloomberg Economics. Blanket lockdown restrictions for two weeks at the start of October, meanwhile, would cause output to shrink 3.9% before expanding 3.7% in the following three months, BE estimates show.

The furlough program is due to end on Oct. 31, and the chancellor is being pushed by opposition parties and businesses to extend it or replace it with a new initiative, amid predictions unemployment could rise to 3 million people. Ministers have promised to announce “targeted” support.

“We will go forward with further creative an imaginative schemes to keep our economy moving,” Johnson said on Wednesday in Parliament when asked about extending support for business.

One of the people familiar with the discussions over the plans said an announcement could come as soon as this month. The Treasury also aims to extend the deadline for company applications for state-backed loans until the end of November, two people with knowledge of the talks said.

As things stand, the last day to apply for an 80% state-backed Coronavirus Business Interruption Loan is Sept. 30. The deadline for larger companies is Oct. 20, and for 100% government-backed bounceback loans, it is Nov. 4.

The people said that an announcement on loan deadlines had been expected this week, but it may be delayed so that the chancellor can announce a wider economic package that includes a furlough successor at a later date.

European Solutions

Germany’s “Kurzarbeit” support was originally intended to run for 12 months, but was recently extended until the end of 2021 as the government realized that companies need greater help in retaining workers. The subsidies cover the bulk of an employee’s lost pay, and in some cases even increase the longer the furlough situation lasts.

France has extended its emergency furlough program to the end of the year for the worst hit sectors. It has also introduced a longer term program that, on a case by case basis, would share the cost of paying furloughed hours between employers, employees and the state for as long as two years.

Italy, which was among the first countries to be hit by coronavirus, and which implemented a strict lockdown of businesses and people, has spend 100 billion euros so far in stimulus measures to protect its economy. The government pays 100% of wages for companies that have seen revenue decline over 20%, while others are on a complex system where they pay in part.

In Spain, the government is negotiating an extension of its furlough program with unions and business associations. The program is set to expire on Sept. 30 and is likely to be extended through the end of the year.

One option for replacing the furlough program which the U.K. Treasury is looking at comes from the Confederation of British Industry, the country’s biggest business lobby. The CBI is calling on Sunak to introduce a new short-time working program that would support employees returning to work rather than those kept off work.

Employees would work a minimum of 50% of their normal hours, paid for by their company. Payment for the hours they don’t work would be split with the company and government each paying a third of the balance, and the employee forfeiting the remainder.

That’s similar to a proposal from the Trades Union Congress, which helped Sunak draft the initial plan back in March. Under the TUC model, firms would pay employees for the hours they do work, and the Treasury would contribute 70% of their wages for when they don’t, with firms paying another 10%.

Other suggestions include an idea from the Institute for Public Policy Research, to replace the current plan with a Coronavirus Work-Sharing Scheme targeting only jobs and businesses that are likely to be sustainable. The Resolution Foundation has proposed a job-sharing initiative where two people work part-time on the same role, with the state paying for non-worked hours.

Others have suggested extending the current furlough program -- either in full or for the worst-affected industries. Such a move would be relatively inexpensive, according to the National Institute of Economic and Social Research. It says keeping the plan until the middle of 2021 would cost about 10 billion pounds ($13 billion) and pay for itself by reducing long-term unemployment.

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