(Bloomberg Opinion) -- Back in March Boris Johnson promised that his government would put its arms around every single British worker. On Thursday, his Chancellor of the Exchequer Rishi Sunak signaled that the embrace is now over, although at least he hasn’t replaced it with a cold shoulder.
It’s been obvious for a while that the Covid-19 economic crisis won’t be over by Halloween, when the U.K.’s successful furlough program is due to end. Many called for the program to be extended, as France and Germany have done, or at least tailored to help struggling sectors such as travel and hospitality and preserve what Sunak has called “the dignity of work.”
Sunak resisted for a mixture of understandable reasons. Furlough was always meant as a temporary measure designed for the extreme conditions of peak lockdown. Now the economy has reopened to some extent, it’s obvious that some businesses are failing for structural reasons. It makes little sense to keep pouring money into jobs that will disappear anyway.
Political logic also weighed against extending the furlough program. The scheme was sweeping, and hugely expensive. It supported up to 9.6 million jobs at its peak and costs about 4 billion pounds ($5.1 billion) a month. Plenty of Conservatives worried that this was saddling the country with yet more debt and would become difficult to unwind. To extend furloughing after so many vows to end it would have been a flagrant U-turn for the Chancellor. Sunak is spoken of as a successor to Johnson, so he won’t want to have repeated the prime minister’s many policy reversals.
And yet, in abandoning furloughing, he has replaced it with another — less expensive — job-support scheme. This was inevitable after Johnson imposed new restrictions on the country’s economy as new Covid cases surge. It’s a welcome decision. Sunak has listened to the calls to prevent a massive spike in unemployment.
The photo op before his Thursday announcement of the new plan said it all: He was flanked on one side by the head of the Confederation of British Industries, representing large employers, and on the other by the head of the Trades Union Congress. This was a de facto mini-budget that would seek to please both fiscal conservatives and the demand from businesses and workers for robust intervention.
Did he succeed? Probably in the short term, although the next few months are going to be far trickier for Sunak than the first phase of the pandemic.
Instead of paying furloughed employees up to 80% of their salary (up to a total of 2,500 pounds a month) while they’re not working, his new Jobs Support Scheme will only top up the wages of people who are doing reduced hours. Now, staff will have to work at least a third of their normal hours (paid for by their employer) and they’ll receive 77% of their normal wages (paid by the government and the employer up to a total of just under 700 pounds a month) to cover the hours when they’re not working.
Sunak also extended other relief measures for businesses, such as VAT at 5% for the hospitality sector and his pandemic business-loan schemes. Together the measures looked compassionate and conservative — something Conservative leaders like David Cameron and Theresa May attempted but never achieved. The government appears committed to supporting jobs, but not at the cost of a huge structural deficit.
At least that’s the hope. While the job support plan might help avoid a sudden unemployment shock when the furlough program ends in October, it lacks the simplicity and scale of the earlier measures, so there may be unhappy consequences. Also, even though the wage-support measures will be much cheaper than furloughing, they won’t prevent an inevitable rise in joblessness. That will increase welfare costs.
The program stops short of the IMF-lauded German short-time work program — known as “Kurzarbeit” — but it was clearly the inspiration. Several European countries, and Japan, have similar systems to keep jobs warm during economic emergencies. Germany’s is credited with saving at least 400,000 jobs during the financial crisis.
As a Thatcherite chancellor who’s moving Britain’s economic policy toward European levels of interventionism, Sunak will be very aware that new spending tends to be sticky. That was no doubt one reason he wanted to end the furlough plan. He’s right to believe that “tough choices” can’t be put off.
But there are questions about whether even a Kurzarbeit-lite approach will work in Britain.
In Europe, wage-support schemes are attractive because of the high cost to employers of sacking people. Britain’s competitive advantage has been its more flexible labor market, which makes redundancies much easier. This might lessen the appeal of Sunak’s reduced-hours wage support. An employer who brings a worker back for a third of the time will still have to pay 55% of their wages. So a company with two furloughed employees might simply make one redundant and bring the other back full-time rather than pay 110% of their wages for two-thirds of the work.
Even with the new support, Britain is probably set for jobless levels it hasn’t seen since the financial crisis. It’s almost certain Sunak will have to return with more support for the unemployed and more money for skills training. The spending on jobs support, by some estimates approaching 9% of GDP, is far from over and it will get much harder to please all sides.
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.
For more articles like this, please visit us at bloomberg.com/opinion
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.