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The Chancellor needs to reduce furlough expenditure – what are his options?

As the cost of running the furlough scheme heads towards £50bn, the Chancellor needed to look at how cost could be reduced but this needs to be balanced against protecting businesses, says Heather Self.

The furlough scheme has been the standout success and a central component of the Government’s package of business support measures, but as the Government starts to ease the lockdown measures and counts the cost, it was inevitable that Chancellor Rishi Sunak, would need to scale-back support.

The cost of the furlough scheme running to the end of June could be over £50bn, which is five times the original estimate when the scheme was first announced. Therefore, it is not surprising that Rishi Sunak wants to start considering how the cost can be reduced.

The Coronavirus Job Retention Scheme (CJRS) was introduced at great speed and has, on the whole, been a great success – it has been relatively easy for businesses to understand and operate, and claims have been processed promptly. But it is hugely expensive (the cost is estimated at £8bn in the first month) and the Government has indicated it wants to “wean off” business from the system as the economy returns to normal.

So, what are the Chancellor’s options?

  • Stop the system completely at 30 June – this is likely to lead to significant redundancies. Businesses which are not yet able to reopen – either fully or partially – will not be able to run the risk of employing people with no work to do, without a clear path back to something like normal operating. It would undo all the good that CJRS has done in preserving jobs so far. We do not think the Chancellor will opt for this.
  • Retain the system on a sector basis, for businesses which cannot viably reopen – such as the pub and restaurant sector. This has attractions, but still means a hard landing for others. It will also be difficult to define affected sectors accurately, leading to some hard cases at the margins.
  • Reduce the rate of CJRS, perhaps to 60% rather than 80% of wages. This would be simple to operate but would mean real hardship for many employees unless employers agree to top-up their wages. Under the current system, a furloughed employee is not able to carry out any work at all for their employer.
  • Increase the flexibility, by allowing some part-time working matched by a top-up. This would be a gentler way of easing business back to normal, but it may be more difficult to achieve without making the system much more complicated.

Decisions will have to be taken soon, as any business which may need to consult employees about redundancy from the end of June will have to start the process in the next few days.

Increased flexibility, coupled with some additional support for specific sectors, would be the best way to achieve the Chancellor’s aim. Reduce the CJRS headline amount but allow workers to work part time. The level of support could then be reduced gradually – perhaps to 60%, 40% and then 20% over a period of months – as businesses gradually build back up to full operations.

There is still the issue of the Self-Employed Income Support Scheme (SEISS). This has not been extended beyond its original date of 31 May, but many unincorporated businesses are also still suffering. It remains to be seen whether this will also be extended, but given that the SEISS permits people to continue working in their business (unlike CJRS) a simple reduced level of grant, or an extension of the original scheme for a short period, seems the most likely option.

Contact us

If you would like to discuss any of the above or have other queries about how you can make the right decisions for the future of your business and your income, please contact your usual Blick Rothenberg contact or Heather Self.

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