Grim economic news is something we have had to get used to in the past two months but yesterday was something of a body blow.
Chancellor Rishi Sunak’s announcement that he was extending the jobs retention scheme until October is the most ominous of all the amendments and additions to the bailout for the economy since lockdown began on March 23.
As welcome as it may be for employers and the 7.5million furloughed workers taking advantage of the biggest jobs subsidy in British history, it betrays the deep-seated fear in Whitehall and across commerce as to the scale of the damage – now and in the longer term – being inflicted by the pandemic.
The hugely expensive decision to turn an emergency measure, designed to see UK Plc through the peak of Covid-19, into a commitment that could stretch to six months suggests a public health crisis and economic meltdown far worse than first imagined.
Chancellor Rishi Sunak announced the government furlough scheme will be extended to October as opposed to the expected deadline of June
It also raises the acute danger that large swathes of the workforce on furlough will lose any sense of the work ethic.
Forecasters at the Office for Budget Responsibility (OBR) and the Bank of England have been unsparing in their assessment of the impact of Covid-19 on national output.
The OBR projected a catastrophic 35 per cent fall in the current second quarter of the year. And the Bank projected a downturn steeper than anything since its records began in 1706.
But both organisations ‘rose-tinted’ the aftermath with suggestions that, with the right budget support, there would be a so-called V-shaped recovery with output surging by as much as 15 per cent in 2021.
Sunak’s statement suggests otherwise.
Keeping as many workers as possible on payrolls – with up to 80 per cent of wages guaranteed up to £2,500 per month – was the right thing to do if the intention was to bring all businesses out of hibernation before the summer.
By extending it to October, the Government seems to be accepting that the pandemic is far from over, while its 60-page ‘road map’ published on Monday makes clear that it will be a couple of months at least before retail, hospitality, travel and leisure sectors start opening up.
The extension also recognises that making factories, offices and shops ‘safe’ workspaces is going to be enormously difficult, especially for smaller companies.
As a critical part of Britain’s services-dominated economy, UK-based airlines might be expected to be grateful for the furlough plans.
But they’ve recognised faster than most that life after Covid-19 is never going to be the same.
Rather than keeping unwanted staff on furlough, British Airways is making 12,000 (out of 42,000) staff redundant.
Harsh though their actions may be, the airlines are simply being realistic. They are taking action now to survive in the post-Covid era.
Other less robust and perhaps more cynical employers would rather keep staff on extended furlough, with the taxpayers picking up the bill, than make the hard but ultimately inevitable decisions.
One FTSE-100 chairman, with 130,000 employees worldwide, told me that the group had planned large-scale redundancies, but after taking advice it had decided to place the workers on furlough – until the scheme runs down – rather than face the political outcry over big sackings.
The furlough extension does at least offer a short-term glimmer of light to the £70billion hospitality industry which was warning that 50 per cent of staff would have to be made redundant at the end of June had furlough not been extended.
Clearly, a ‘cliff-edge’ end of furlough on June 30 was a dangerous prospect and weaning firms and workers off government help was always going to be painful.
However, the big danger, as Thatcherite think-tank the Institute of Economic Affairs warns, is that all the extended furlough scheme does is ‘delays readjustment to a changed economy’.
By stretching the scheme, the risk is of creating a dependency economy less competitive and less fit for purpose for a global Britain outside Europe.
Moreover, the risk to the stability of the public finances of extending the furlough plan – which has already cost the public purse £10billion, now likely to rise to some £70billion, equivalent to half the annual NHS budget – cannot be underestimated.
Some might argue that this is a small price to pay in ‘wartime’ for keeping the economy together, that long-term interest rates are at a record low and the borrowing can be paid off over time.
But furlough is just one part of a rescue plan where the eventual bills could run into the hundreds of billions.
Extending the scheme may soften the agony of a slump but will do little to encourage a robust recovery of output, employment and incomes.