UK inches away from pay support in bid to contain jobs hit

Bloomberg

UK Chancellor of the Exchequer Rishi Sunak kept the spending taps firmly on as he announced plans to taper his job support program, unveiling an incremental withdrawal in a bid to avert a mass wave of unemployment this summer.
Self-employed workers will be offered a further grant of as much as 6,570 pounds ($8,082) in August to cover another three months of earnings to help them weather the coronavirus lockdown. Meanwhile, Sunak asked the 1 million firms who have furloughed employees under his wage-subsidy plan to begin making a contribution.
Sunak said workers furloughed as a result of the virus will continue to receive 80% of wages through October, but firms will start taking the burden of their National Insurance and pension contributions in August, before paying 10% of workers’ wages in September, and 20% the following month.
The Chancellor also responded to business calls by making the program more flexible to allow furloughed employees to work part-time from July — a month earlier than previously planned.
“These measures have been on a scale unmatched by any government in recent history,” Sunak said. “Today a new
national collective effort begins to re-open our country and kickstart our economy.’
The two jobs’ plans are currently supporting 10.7 million jobs, and have come at a cost of almost 22 billion pounds ($27 billion). The government’s fiscal watchdog had already said the final price tag could be around 95 billion pounds — an estimate that could prove conservative given it was based on a more aggressive taper rate and only the initial tranche of self-employed support.
The cost of both programs could easily breach 100 billion pounds, about 11% of total government spending in a normal year and equivalent to the amount spent on the National Health Service, according to the Institute for Fiscal Studies. .
The eye-watering cost of the government’s response will mainly be met by a wave of borrowing that threatens to dwarf anything seen during the financial crisis, increasing pressure on Sunak to say how he intends to foot the bill. Members of Parliament and ministers in Sunak’s Conservative Party have privately voiced concerns about the costs of keeping millions of people at home, effectively on the government payroll.
“People want to work, no one wants to be at home on furlough,” Sunak said.
Sunak’s concern is that businesses brought to their knees by the lockdown might starting firing workers if support is withdrawn too aggressively.
“There will be hardship ahead for many. That rests heavily on my shoulders. I am very conscious of that,” he said. “I am working as hard as I can to get them back into work, good work, as quickly as possible.”.
Bank of England Governor Andrew Bailey said this week that benefit claims data suggest unemployment has already reached 10% — higher than the BOE forecast in a scenario earlier this month — meaning a further surge once the furlough program is wound down could leave more out of work than during the Great Depression.
A survey from the Institute of Directors showed a quarter of firms using the furloughing plan can’t afford to take on any of the cost of paying their workers, and only around half could provide 20% or more. Meanwhile, the Office for National Statistics said more than 40% of companies will run out of cash reserves within six months, rising to almost 60% for those that have ceased trading.
“This is a much more gradual tapering than many were expecting, reflecting the concerns our members have raised,” said Edwin Morgan, director of policy at the Institute of Directors. “Despite this, there’s no masking the fact that if demand doesn’t pick up, many will still struggle to keep hold of all their staff through the Autumn.”
In practice, the plan is even more gradual, since 40% of employers using the program aren’t currently claiming for NICs or pensions, meaning they won’t see an increase in costs until the fall.
From July, when the plan will be closed to new entrants, firms will also be allowed to bring back workers on a part-time basis, and claim support for the hours for which they are furloughed.
Sunak also extended support for people who work for themselves, offering a second grant covering 70% of three months’ trading profits. That will be capped at 6,570 pounds in total, a slight tapering from the 7,500 pounds in the first tranche, but almost equal to the amount a furloughed employee can claim.
Lobby groups and labor unions welcomed the plans, with the Confederation of British Industry saying businesses will feel supported as Britain begins to lift the restrictions in place since March 23.
Total borrowing this year is expected to top 300 billion pounds in the current fiscal year, fueling a debate about whether Sunak, who only took up the role in February, will eventually need to hike taxes or impose more austerity to help reduce the deficit.
For now though, his task is made easier by the government currently being able to borrow at very low rates. That’s largely down to the BOE’s asset-purchase program, which economists expect to be expanded next month.