{"id":17666,"date":"2021-02-26T11:05:02","date_gmt":"2021-02-26T11:05:02","guid":{"rendered":"https:\/\/ounews.co\/?p=17666"},"modified":"2021-02-26T11:05:02","modified_gmt":"2021-02-26T11:05:02","slug":"furlough-scheme-uk-has-to-extend-it-but-there-are-serious-risks","status":"publish","type":"post","link":"https:\/\/www.open.ac.uk\/blogs\/news\/arts-social-sciences\/furlough-scheme-uk-has-to-extend-it-but-there-are-serious-risks\/","title":{"rendered":"Furlough scheme: UK has to extend it, but there are serious risks"},"content":{"rendered":"

Dr Alan Shipman, senior lecturer in economics<\/a> at The Open University<\/a>, writes about the risk surrounding another extension of the UK furlough scheme.<\/p>\n

Finance ministers usually rejoice when businesses and employees alike both plead for a signature scheme to be extended. But for UK chancellor Rishi Sunak, demands to continue the country\u2019s Coronavirus Job Retention Scheme, AKA the furlough, beyond March are as financially uncomfortable as they are politically hard to resist.<\/p>\n

Originally launched<\/a>\u00a0in April 2020, the scheme\u00a0has broadly paid<\/a>\u00a080%\u00a0of wages<\/a>\u00a0for up to 10 million employees prevented from working during the pandemic. This is largely why\u00a0UK unemployment<\/a>\u00a0was 5.1% in the last quarter\u00a0of 2020<\/a>, which is comparable with\u00a0boom years<\/a>\u00a0like 2001-02 and 2006-07, despite the\u00a0worst economic slump<\/a>\u00a0for over three centuries. Contrast this with furlough-less America, where\u00a0unemployment jumped<\/a>\u00a0from below 4% to 15% in the first coronavirus wave.<\/p>\n

Sunak is\u00a0duly expected<\/a>\u00a0to extend the scheme one more time at his budget announcement on March 3. But the immediate political reward brings high economic risks.<\/p>\n

The \u00a370 billion gamble<\/h2>\n

The furlough, and accompanying income support for the self-employed,\u00a0is forecast<\/a>\u00a0to cost \u00a371 billion in the financial year ended April. It was one of the biggest single contributors to the record \u00a3271 billion of public sector net borrowing in the first ten months of 2020-21.<\/p>\n

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\"Rishi<\/a>

Bumper spending: Rishi Sunak.\u00a0PjrNews\/Alamy<\/p><\/div>\n

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To justify such largesse, the chancellor must ensure a high proportion of furloughed employees return to a privately paid job \u2013 which they would otherwise have lost \u2013 when public funding is withdrawn. The strategy will look particularly inspired if the economy roars back to growth in the second half of 2021, as shoppers freed by vaccination hit the high street with money they couldn\u2019t spend under lockdown.<\/p>\n

Bank of England chief economist Andy Haldane\u00a0has likened<\/a>\u00a0the economy to a \u201ccoiled spring\u201d, which could rapidly reverse 2020\u2019s\u00a09.9% GDP drop<\/a>\u00a0once the pandemic subsides. Unlike the 2007-09 downturn, many households have been able to strengthen their finances in lockdown \u2013 by\u00a0\u00a3125 billion to \u00a3250 billion<\/a>\u00a0on the Bank\u2019s estimates.<\/p>\n

The furlough can ensure that a spending boom has productive results, by ensuring that staff in shuttered manufacturing, retail, hospitality and transport businesses are quickly back in place to meet the demand. This would give the Treasury some immediate payback via tax revenues.<\/p>\n

Zoom vs zombie economy<\/h2>\n

But if jobs don\u2019t return for long enough to repay their furlough cost, Sunak will be accused of spending lavishly just to postpone unemployment for a year \u2013 and freezing many workers in pre-pandemic posts that\u00a0may soon be<\/a>\u00a0displaced by rapid technical change.<\/p>\n

Even before the pandemic, a\u00a0significant number<\/a>\u00a0of \u201czombie firms\u201d were being kept alive by the rock-bottom interest rates in the years after the 2007-09 financial crisis. Furlough\u00a0has arguably further<\/a>\u00a0propped them up when a shakeout\u00a0would have been<\/a>\u00a0healthier. The outlay could instead have been focused on firms whose markets are sure to return, and the\u00a0many self-employed workers<\/a>\u00a0unable to access government funding, who may not stay afloat long enough to see their markets reopen.<\/p>\n

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\"Suit<\/a>

The rest is not history.\u00a0Andril Drachuk\/Alamy<\/p><\/div>\n

To the extent that furlough keeps established employees in place, it also limits opportunities for school and university leavers, on top of a year\u2019s disrupted study. Youth unemployment had <\/span>already returned<\/a>\u00a0as a problem after 2007-09, and 18-24-year-olds \u2013 along with low-paid and minority-ethnic employees \u2013\u00a0<\/span>have suffered the worst<\/a>\u00a0pandemic job losses. The longer he furloughs older workers, the more Sunak will also have to spend on training and recruitment subsidies to help their children and grandchildren into work.<\/span><\/div>\n<\/figure>\n

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An MMT gesture?<\/h2>\n

Given these risks, the chancellor is fortunate to be running unprecedented\u00a0peacetime deficits<\/a>\u00a0at a time when new public debt can be issued at\u00a0near-zero interest rates<\/a>. Private investors still buy it because the Bank of England can keep absorbing previously issued government bonds via quantitative easing, with\u00a0\u00a3290 billion<\/a>\u00a0added to the central bank balance sheet in 2020.<\/p>\n

The Bank has already\u00a0handed back<\/a>\u00a0the interest it was owed by the Treasury, and could write off more government debt in future.\u00a0Modern money theory (MMT)<\/a>\u00a0argues this is permissible because governments can always meet obligations in their own currency because they can print more of it. This now has cross-party political appeal, even if still treated with trepidation in the Treasury.<\/p>\n

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