UK chancellor of the exchequer Rishi Sunak unveiled the government’s Winter Economy Plan in the House of Commons on Thursday.
Sunak confirmed plans to end the furlough scheme, which has cost almost £40bn to date and replace it with the Jobs Support Scheme, effectively a wage subsidy plan. It is designed to protect viable jobs across companies facing lower demand over the winter months due to Coronavirus.
Under the scheme, which will run for six months, the government will subsidise employees’ wages for those working at least a third of their usual hours. All smaller businesses can apply, along with larger ones that have seen revenues fall.
The policy shift amounts to a switch from the government carrying the burden of job support in the economy, to burden sharing between the government and employers. It is an acknowledgement that many jobs no longer exist outside the artificial protection of the furlough scheme. The wage subsidy can be used alongside the £1,000 “job retention bonus” — announced in July.
The government has also extended the temporary 15% VAT cut to 5% for the tourism and hospitality sectors to the end of March next year acknowledging the pandemic has severely affected the sector.
The application deadline has been extended for the four government loan schemes, which have now lent £58bn. These include the Bounce Back Loans and the Coronavirus Business Interruption Loan Scheme, which also now have increased loan durations from six to ten years, and with increased repayment flexibility.
These measures were part of a coordinated attempt to soften the impact of the new national restrictions – expected to be in place for at least six months – and include a 10 pm curfew on pubs and restaurants and the U-turn on encouraging workers back to offices.
UK government’s Covid support now 8.9% of GDP
Capital Economics has forecast that these measures could cost up to £5bn, taking the total cost of the government’s Covid-19 support to around £200bn (8.9% of GDP). This spirals to £370bn when the adverse effects on the public finances from the weak economy are factored in, Capital Economics said.
Many inside and outside government expect tighter restrictions to follow, which will add to the darkening economic outlook.
This effectiveness of the government’s new restrictions will be measured by the degree to which the rise in new Coronavirus cases is mitigated. The Chancellor will come under pressure for more support if new cases continue to rise.
It is a precarious balancing act between judicious use of public finances, public health, and economic recovery. This picture will be significantly impacted by the availability of a proven vaccine, for which tentative, cautious hope remains. Boris Johnson’s government is less focused on preventing a surge in unemployment and business closures and has pivoted to adapting to a permanent adjustment of the UK economy, with a weaker growth rate and higher levels of joblessness, not to mention the spectre of no trade deal with the EU before year-end. The Winter Economy Plan marks a step-change in policy approach, which will no longer prevent struggling businesses from collapse. In that context, it is a return to Thatcherite economics.