So long, Fur-well!: Furlough Scheme comes to an end

October 10, 2021

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3 min read

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What's going on here?

The UK’s £70bn Coronavirus Job Retention Scheme (furlough) set up by Chancellor Rishi Sunak came to an end on Friday 1st October after supporting 11.6m jobs throughout the pandemic. The scheme came into force on 20th April 2020 and helped businesses retain employees by paying 80% of wages for furloughed workers.

What does this mean?

The furlough scheme formally ended last week for the remaining 1m workers that were enrolled on the scheme. Employers furloughed employees to reduce business operation costs, maintain cash flow in the economy, and limit pandemic-related unemployment.  Businesses are now liable for 100% of employees’ wages, so with the scheme at an end, there is now increased financial pressure on businesses that were already struggling. Many sectors such as travel were only in the early stages of post-pandemic recovery after other restrictions were lifted. These businesses will have to rebalance their books now costs have increased.

What's the big picture effect?

We will see increased unemployment as firms’ operational costs rise, because UK economists don’t think economic growth will be great enough in October to allow the full re-employment of those on furlough. This could be prevented, however, by firms instead opting to keep workers on at reduced hours and/or pay instead of redundancy. Both scenarios will see less money going into workers’ pockets and so will be followed by an uptick in Universal Credit (UC) claimants. UC encompasses payments for those out of work and smaller top up payments for those in work but on low pay in the form of a single monthly payment. The number of claimants rose 50% from August 2020 to August 2021 to 6.6m and this number is likely to rise again as furlough ends. 

Relatively, now isn’t such a bad time to be a jobseeker as vacancies have hit over 1m for the first time since 2001, when job vacancy records began. The sectors with the most unfilled jobs are health and social work and hospitality but specialised workers will struggle a lot more to find employment because there is a disparity between the sectors with the most vacancies and those with the highest rates of furlough. For example, in July roughly 50% of all UK air travel staff were furloughed and 25% of travel agents, compared to a cross-sector average of 5%. Because of the unpredictability of the pandemic, international travel may completely bounce back soon or alternatively, a new variant might throw the economy into disarray and more financial intervention could become necessary.

For now, we can expect that less specialised workers will find work again soon, but those with narrower specialisms will be unemployed for longer. Being out of work for longer periods makes it much harder to re-enter full-time permanent employment but we won’t know the full impact of this for another few years. However, as the economy bounces back with the high volume of spending over the festive period and the correlating influx of temporary jobs, many specialists may decide to switch careers for a few months. 

The anticipated job losses will be combined with other government squeezes on income: the end of the £20 temporary rise in UC and a higher energy price cap. As jobseekers and those on low income lose £20 a week on UC, the average household will see their annual energy bill rise £139. This means the poorest in Britain will have to cut back on spending even more and household debt may increase as families turn to lenders for support. Increased household debt makes the economy more vulnerable to external and internal shocks and if borrowing from banks, increases bank exposure and risk. Loan defaults may spiral, generating cross-sector unemployment and business restructuring and/or insolvency. As people have less money left over, inflation may decrease if people spend less on non-essentials.

The government’s economic choices may hurt them at the ballot box – the Conservatives improved their support amongst poorer voters in 2019 compared to 2017, but as they feel the pinch we could see a party switch or voting disenfranchisement. As British politics moves away from the Brexit dichotomy, traditional class politics will see a resurgence and so these economic issues will have more impact in the future than in 2019.

In the aftermath of furlough, as businesses’ operating costs rise there will be job losses and reduced hours leading to more people claiming UC. The true economic effect may be masked until the new year by the festive period’s high spending and temporary jobs, but in the coming weeks we will see people struggle to make ends meet and household debt could rise as a result.

Report written by Phoebe Turner

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