Coronavirus: UK inches away from pay subsidies in bid to contain jobs blow

Rishi Sunak asked firms who have furloughed employees to begin contributing to wage-subsidy plan

Rishi Sunak passed some of the burden of supporting furloughed workers onto their employers starting from August. Bloomberg

The UK's Chancellor of the Exchequer, Rishi Sunak, kept the spending taps firmly on as he announced plans to taper his job support program, unveiling only an incremental withdrawal in a bid to avert a mass wave of unemployment this summer.

Self-employed workers will be offered a further grant in August covering three months of earnings to help them weather the coronavirus lockdown, under plans outlined on Friday. Meanwhile, Mr Sunak asked the one million firms who have furloughed employees onto his wage-subsidy plan to begin making a contribution.

His proposals will leave the government paying 70 per cent of workers’ wages in September, and 60 per cent 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.

The two plans are currently supporting 10.7 million jobs, and have come at a cost of almost £22 billion. The government’s fiscal watchdog was already saying the final price tag could be around £95 bn - 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 eye-watering costs 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 Mr Sunak to lay out how he intends to foot the bill.

Members of Parliament and ministers in Mr Sunak’s Conservative Party have privately voiced concerns about the costs of keeping millions of people at home, effectively on the government payroll.

Mr Sunak’s concern is that businesses brought to their knees by the lockdown might starting firing workers if support is withdrawn too aggressively.

Bank of England Governor (BOE) Andrew Bailey said this week that benefit claims data suggest unemployment has already reached 10 per cent - higher than the BOE forecast in a scenario earlier this month - meaning a further surge once the furlough scheme is wound down could leave more out of work than during the Great Depression.

A survey from the Institute of Directors this week 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 per cent or more. Meanwhile, the Office for National Statistics said over 40 per cent of companies will run out of cash reserves within six months, rising to almost 60 per cent for those that have ceased trading.

On Friday, Mr Sunak said workers furloughed as a result of the virus would continue to receive 80 per cent of wages through October. Starting in August, firms will start to gradually take on some of the burden, beginning with paying National Insurance and pension contributions, before eventually reaching 20 per cent of their total wages when the plan ends in October.

In practice, the plan is even more gradual, since 40 per cent of employers using the program aren’t currently claiming for NICs or pensions, meaning they won’t see an increase in costs until the autumn.

From July, when 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.

Mr Sunak also extended support for people who work for themselves, offering a second grant covering 70 per cent of three months’ trading profits. That will be capped at £6,570 in total, a slight tapering from the £7,500 in the first tranche, but almost equal to the amount a furloughed employee can claim.

Lobby groups and labour 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, fuelling a debate about whether Mr 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.