The chancellor has extended the government’s coronavirus wage subsidy scheme for workers until the end of October despite its spiralling cost, as he attempts to prevent a wave of job losses in the summer.
In a surprise move that underlines the likely duration of the economic crisis, Rishi Sunak said the unprecedented scheme would continue until the autumn, despite its eye-watering cost.
With 7.5 million workers having their wages paid by the taxpayer, Paul Johnson, director of the Institute for Fiscal Studies, said the total cost of the scheme could now amount to more than £80bn.
“To put that in context, in eight months, that is more than we spend on the education system in an entire year, it’s many times what we spend on the police, it’s many times more than we spend on social care, it’s about half what we spend on the whole NHS in a year,” he told the BBC. First launched in March, the scheme had been due to close at the end of June.
Sunak said there would be no changes to the system, in which the government pays 80% of furloughed workers’ wages up to £2,500 a month, until the end of July. From August, the scheme will continue for all sectors and regions, but with greater flexibility to allow firms to bring staff back to work as the lockdown eases and the economy reopens. Under the current scheme furloughed employees cannot work.
The chancellor also said that from August, employers would need to “share with the government the cost of paying salaries,” in an indication that the level of state support would gradually taper away. The scheme is currently costing the government about £14bn a month. It is supporting about 7.5m jobs at almost 1m companies.
Official figures will give an early glimpse of the heavy economic toll of the shutdown on Wednesday, when the first estimate of GDP for the first quarter of the year is revealed.
While it will only include the early stages of the lockdown, it is likely to show a sharp decline in activity, as businesses had begun to be shuttered and consumers confined to their homes.
A source suggested reports on Tuesday night of a £337bn budget deficit were in line with some internal predictions.
Sunak told the BBC he found the prospect of a wave of job losses heartbreaking: “We already know that many people have lost their jobs, and it breaks my heart. We’ve seen what’s happening with universal credit claims already. This is not something that we’re going to wait to see; it’s already happening.”
He added: “There are already businesses that are shutting. There are already people who have lost their jobs. And as I said, that’s heartbreaking to me and that’s why I’m working night and day to limit the amount of job losses.”
The Department for Work and Pensions has said there have been 1.8m claims for universal credit since mid-March.
Sunak’s announcement of an extension to the furlough scheme came just ahead of a key deadline this weekend for firms to avoid starting redundancy consultations for job losses at the end of June. However, several key details about the future of the scheme are still missing. It is understood the Treasury will consult with employers’ groups about how companies might contribute to the cost of furloughing before providing an update later this month.
The shadow chancellor, Annaliese Dodds, welcomed the extension, calling the furlough scheme “a lifeline for millions”.
But she warned of job losses if struggling firms are forced to make a significant contribution. “The government must clarify today when employers will be required to start making contributions, and how much they’ll be asked to pay. If every business is suddenly required to make a substantial contribution from the 1 August onwards, there is a very real risk that we will see mass redundancies.”
Although details have yet to be published, Sunak told the BBC the Treasury would be “taking on the lion’s share” of the cost, with businesses expected to meet the rest, so that workers still receive 80% of their usual salary.
Speaking in the House of Commons, Sunak said he expected employers to “share the burden” with the state.
The government could still face a rapid rise in unemployment if companies balk at the prospect of contributing large sums, given the length of time it could take to fully reopen the British economy.
Another major stumbling block could materialise if the Treasury insists companies across all sectors of the economy make contributions, even though lockdown controls will be lifted earlier for some businesses than others in England. Leaders in Scotland, Wales and Northern Ireland are also moving at different speeds to the government in Westminster.
Kate Nicholls, chief executive of Hospitality UK, which represents the pubs, bars and restaurants that are expected to reopen last, said: “The full 80% may need to be extended past July for some businesses in sectors like hospitality that will still operate at much reduced levels of trade, or not yet be able to open.”
Concerns had been rising over the cost of the furlough scheme following rapid take-up, with a price tag almost as much as the monthly bill for running the NHS. The scheme has been much more widely used than initially expected by the Treasury. Almost a quarter of all workers in Britain were furloughed by their employers within the first two weeks of the scheme’s launch in mid-April.
While the overall price tag for the scheme will steadily rise until October, the ultimate cost depends on how much support the government decides to offer for this period.
Business leaders and trade unions broadly welcomed the move to extend the scheme. Frances O’Grady, general secretary of the TUC, said it would come as a “relief” to families across the country.
“Changing the rules to allow part-time working is key to enabling a gradual and safe return to work. And maintaining the rate at 80% is a win for the pay packets of working families,” she added.
Carolyn Fairbairn, director general of the CBI, said it was essential that government support schemes adapt in parallel to economic activity slowly recovering. However, she warned that employers would still need to see more detail about how they will contribute to the scheme.
There are also fears that increased flexibility of the scheme from August could introduce the risk of abuse by some employers. John Phillips, acting general secretary of the GMB trade union, said muddled government guidelines over the gradual lifting of restrictions could make matters worse. “Many well-intentioned employers, who want to keep their staff furloughed, will find themselves competing with unscrupulous companies who want to drag their staff back before it is safe to do so,” he said.
The extension could also fuel increasing divisions in society without significant further interventions by the government. While company employees can receive 80% of their usual pay up until October, the chancellor did not provide an update for the self-employed. Millions of people are also expected to fall through gaps in the safety net, having instead to rely on the benefits system, which provides much less support.
Due to launch on Wednesday, the support package for people working for themselves was designed to provide income support for the three months to May, with an option to extend the scheme “if necessary”. It is understood the government is now preparing an update for the self-employed.
Sunak added: “I am extending this scheme because I won’t give up on the people that rely on it. We stood behind Britain’s workers as we came into this crisis, and we will stand behind them as we come through the other side.”
The SNP’s economic spokesperson, Alison Thewliss, warned that the scheme must take account of the different speeds at which Scotland and Wales are likely to reopen their economies.
“Crucially, the scheme must remain in place and fully funded for as long as each of the four nations of the UK require it. People in Scotland, Wales or Northern Ireland must not be penalised if changes to the lockdown are made at a different pace,” she said.