Sunak needs to end furlough and devise help for the next phase of the recovery

Rishi Sunak has a problem. The Chancellor cooked up such a magnificent meal with his furlough jobs scheme that no one wants the feast to end.

Over the last few days, pressure has been mounting on Sunak to extend the government’s job retention scheme beyond the October 31 deadline to prevent a jobs blood-bath. It’s not only opposition MPs and union bosses who are calling on him to prolong the scheme but now backbench MPs as well business leaders have joined in the lobbying.

They warn of a cliff-edge if the jobs retention scheme – which is still supporting up to 2.3 million workers – ends abruptly, leading to thousands more job losses.

There is no doubt the outlook for the autumn is grim: six out ten employers say they do not plan to keep on all their workers if the scheme ends, according to a new BDO survey. MakeUK, the trade association for manufacturing industry, warns of a devastating loss of skills should key sectors such as aviation have to close down because the pandemic is wiping out their business.

Since the pandemic, around 730,000 people have already lost their jobs as a consequence of the lockdown while another 300,000 self-employed are without work.

And it’s going to get worse. The latest figures from the Insolvency Service show that employers notified the government back in June and July that they plan another 300,000 job cuts. (Under the scheme, employers have to tell the government if they want to shed ten or more jobs.)

Heartless though it may sound, the Chancellor should resist these latest calls to extend the scheme, at least in its current form. Prolonging the scheme would put even greater pressure on already stretched public finances – the scheme to date has cost £35 bn.

More pertinently, extending the life of the existing programme would do little to support these struggling businesses over the longer-term as many are already on life-support. Indeed, many of the companies which have been eligible for the furlough scheme were already zombies, and would have gone out of business without the pandemic.

There is also the issue of fraud. HMRC estimates that £3.5bn of the £35bn cost of the scheme may have been paid out either in error or been applied for fraudulently.

That’s why Andy Haldane, the Bank of England’s chief economist, was right this week when he said extending the scheme will only delay an “inevitable” shake-out of businesses struck by Covid-19.

Haldane added that a ‘necessary process of adjustment’ was now taking place, and that extending the scheme would only delay this process taking place.

Instead, Haldane suggested that Sunak should move forward to the next stage of government support, which includes several other schemes being proposed.

Another reason why Haldane is taking what may appear the more brutal approach is because he is more optimistic than most about the UK’s recovery, one which he has been saying for weeks is already proving to be V-shaped.

Nor should we be so gloomy, he says. “ The turnaround in the fortunes of the global and UK economies in the past few months has been quite remarkable. And even now that recovery is not given enough credit and the popular narrative is on the gloomy side of neutral.”

As he pointed out, household spending is back to where it was pre-pandemic, although the nature of spending has changed because of the impact on lockdown on how we work and live.

You can see this in the jobs markets. Over the last few weeks Amazon has announced 7,000 new jobs in the UK while all the big supermarket chains have hired new staff to expand their online delivery services: Morrisons are hiring 6,00 new staff while HS2 has kicked off with hundreds of workers being employed.

So far, Haldane’s optimism that consumers have rediscovered their taste for spending again has proved on the money. The latest figures from the Office of National Statistics out today show that GDP grew by 6.6% in July, the third month in a row that the economy has grown.

Beyond the uptick in growth was the re-opening of businesses shuttered during the lockdown: pubs and restaurants bounced back in July with a whopping 140.8% rise from June. Alcohol was back up by 32.7% while hairdressers and beauticians were also back in business.

Of course, these growth figures are coming back from the depths of lockdown which saw 20% wiped off the UK economy. The economy is still 11.7% below where it was in February and July’s growth was slower than that seen in June, the first month out of lockdown.

If Haldane is right about the recovery, then you might argue that it would be madness to ditch the furlough scheme which is underpinning so much of that confidence by supporting people in work.

But the problem with this approach is that businesses – many of which have adapted so brilliantly to the changing environment – will not be able to adapt properly to the next stage, whatever that may be.

What would be far more effective would be for the government to help in other ways, some of which it has announced such as the KickStart scheme to subsidise companies taking on youngsters on Universal Credit.

As so often happens with such schemes, the programme already looks as though it has become tangled in bureaucracy. Yet it is a great idea and should be extended to those without work from 16 to 30 to ensure the young and vulnerable – and most likely to lose their jobs in the hospitality sector – are helped onto the next step.

To date, Sunak has been exceptionally creative with his emergency measures, working closely with business leaders and the unions to come up with the safety net.

There is so much more he can do with targeted help. As the Treasury Select Committee has suggested today in its new report to help struggling companies and laid-off workers.

They include:

– Consider extending the more generous terms for universal credit.

– Have a plan for helping debt-troubled small and medium-sized companies or risk prolonging the recession.

– Lay out a road map in the autumn budget for repairing the hole in the public finances caused by the pandemic but be wary of raising taxes too quickly.

– Temporarily abandon the triple lock on pensions.

– Explain what the government means by levelling up.

They are all thoughtful measures, and should be considered by Sunak as he prepares for his Autumn Budget if he wants to avoid a meltdown when the furlough scheme ends.

There is much more the Chancellor should consider. Rather than a mad-dash for taxing the rich, the Treasury should look at raising tax incentives to attract more business angels and investors to support start-ups and SMEs to convert debt into equity. Indeed, helping SMEs to raise new capital or those struggling with debt repayments, should be a priority.

Yet businesses and union leaders also have a responsibility. One of the remarkable features of the 2008 financial crash was the way in which many big businesses worked together with unions to minimise job losses with flexibility working and in some cases three day weeks.

The same flexibility should be shown again, and the government should put what pressure it can on both the private and public sector to find creative ways to save jobs.

For many big businesses, getting furlough money from the government has been like giving them free supplies of crack cocaine. And just as hard to be weaned off, as we can seen now in some of the calls from big business and the CBI to keep up the scheme. Many of them don’t need the drugs anymore.

And the Chancellor? Well, he served up a brilliant first course to help so many through the depths of the lockdown. Now Rishi Dishi needs to come up with lots of choices on the sweet trolley to keep off the chill of the winter months.