LONDON: U.K. Chancellor Rishi Sunak’s latest salvo against the economic chaos of the Covid-19 coronavirus marks a shift in tactics that risks making a painful spike in unemployment inevitable.
Gone is the furlough programme that may have saved millions of jobs in the early days of the pandemic yet which proved too expensive to last. In its place is a plan to subsidize wages for the next six months.
The new support is only about a quarter of that available earlier in the year, and to get it, employees must work a third of their normal hours, but companies will have to top up their wages -- a bar that will be too high for many that are struggling.
The pulling back of aid suggests Prime Minister Boris Johnson’s government has chosen to stop trying to prevent a surge in joblessness and focus instead on the permanent adjustment of the economy to a weaker growth rate and higher level of unemployment as the virus drags into 2021.
The new plan sets the U.K. definitively on a different course from neighbors such as Germany, which has tried to protect its labor market with support through next year.
"It’s helpful, but not that much given the magnitude of the problems, ” said Peter Dixon, an economist at Commerzbank AG in London. "It only supports people already working in a job, so a lot of companies probably won’t bring their employees back from furlough. We expect unemployment to climb to about 8%, and it might even go higher.”
Sunak’s latest program marks a shift to a more traditional approach for the Conservative party, with all the risks that entails. Margaret Thatcher’s government in the 1980s radically reshaped the economy by allowing struggling industries to die, at the cost of soaring unemployment that proved controversial for years.
"The chancellor’s initial policy response to the economic impact of Covid was bold and compassionate, ” said Helen Barnard, director of the independent Joseph Rowntree Foundation. "The design of this scheme risks undermining its success and leading to more job losses.”
What Bloomberg’s Economists Say...
"We see little reason to change our view that there will be a sharp rise in unemployment in 4Q. Given the likely impact of the latest restrictions on demand and the danger that Sunak’s latest intervention falls flat, the risks to our view are probably tilted to the upside.”
-- Dan Hanson and Jamie Rush.
Analysts were already warning that the number of Britons losing their employment because of the pandemic could swell beyond the current level of 700,000. The risks have mounted in recent weeks amid new infections and enhanced restrictions, but that didn’t stop Sunak from sticking with his pledge to end the previous furlough policy as planned on Oct. 31.
That measure supported more then 9 million jobs -- but at a cost of 39 billion pounds so far. Conservative lawmakers have begun fretting over the mounting aid bill, which pushed the national debt over 2 trillion pounds ($2.6 trillion) for the first time, exceeding the size of the economy.
Sunak said it wasn’t "sustainable” for the Treasury to keep up such spending, while noting the economic situation would have been worse without it.
Under his previous program, the government paid people who were unable to return to their workplaces because of Covid restrictions as much as 80% of their wages. While Sunak said back in March that he couldn’t protect every job, the size and scale of the initiative was certainly an attempt to preserve as many as possible.
Thursday’s package was less ambitious, and when pushed on the outlook for unemployment this year, the chancellor highlighted figures from the Bank of England and Office for Budget Responsibility showing a high, single-digit rate. Such outlooks don’t "make for good reading, ” he said.
The replacement policy will pay subsidies to workers who can return to their jobs for at least a third of their normal hours. The employer will pay the hours they work, and the government and employer will each pay a share of wages for the hours they don’t work. Employees will also take a a hit as some lost hours won’t be compensated at all.
"The economy is going to change and adapt, ” Sunak said Thursday. "I can’t promise everyone can go back to the job they used to have.”
Workers on the new program will be guaranteed at least 77% of their salary, but employers could be on the hook for 55% of wages for staff working just a third of their normal hours.
"The big risk is employers shun his new wage subsidy scheme rather than paying up, ” according to Dan Hanson and Jamie Rush at Bloomberg Economics. - Bloomberg
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