Why I was wrong to support winding down the furlough scheme

When the facts change, I change my mind. Two months ago I wrote for this publication that the government was broadly right to end the furlough scheme, which comes to an end—at least in principle—on 1^st November. With what we know now, that looks to have been the wrong call. So where do we stand?

Originally, many of us hoped for a “V-shaped” recovery—that is, that lockdown would definitively suppress the virus, so after a very sharp economic contraction resulting from the pandemic and the restrictions that were necessary to contain it, things would return more or less to normal. On that basis, introducing furlough so that businesses didn’t have to sack workers during the pandemic was the right thing to do; but once it came to an end there would have been no obstacles, political or economic, to ending the scheme.

By August, this seemed less plausible: while the virus had indeed largely been suppressed, and most restrictions had been lifted, the economy was far from normal, with offices mostly empty. But that still didn’t mean the right response was necessarily to extend furlough.

As I argued then, to the extent that the aftermath of the pandemic leads to permanent—or at least prolonged—shifts in demand, then extending furlough means that we are paying for people to do jobs that will no longer exist. That doesn’t make sense on either an economic or a personal level.

So I argued that the right thing to do was to couple the phasing out of the furlough scheme with help for people to get new jobs. Sadly, even when that seemed like the right strategy, the measures Rishi Sunak announced in September—inadequate and temporary—didn’t measure up, as almost all labour market analysts said at the time.

And since then we have gone backwards. Not only has the virus returned, but the uncertainty is if anything greater than in either March or August. Will there be a permanent shift towards remote working, with the associated consequences for offices and city centres? Will trade, travel, tourism and immigration rebound, and if so over what time period? This will depend both on the course the virus takes, the speed and efficacy of vaccine development and roll-out, and the behavioural responses of business and individuals.

Economically—as well as socially and psychologically—that poses a problem. What the economy needs now and over the next few months is investment in the broadest sense, from businesses and workers, in starting or restarting businesses, job creation and retraining. But how to make specific choices? Should a café or a restaurant try to stick things out at its current location, or adjust to new patterns of demand? Should an airline steward try to live off savings and government support until he’s rehired, or retrain as a care worker?

Given these uncertainties, it is entirely rational for the private sector not to invest—for both businesses and individuals to wait and see and to try to keep their options open. But what’s rational for the private sector is very unlikely to be the right thing for the economy as a whole. At best, it means we’ll stay stuck in economic limbo, with a very slow recovery; at worst, it means permanent economic damage, with viable businesses and jobs being destroyed while new ones are not created, leading to long-term unemployment.

It’s generally accepted now that in order to minimise the medium- to long-term economic damage, the government has to be the “spender of last resort,” allowing the deficit to rise to sustain incomes, viable businesses and overall demand. But what’s perhaps less obvious is that the government also needs to be the insurer of last resort. When heightened risk means that it is rational for the private sector to invest less than we need, it falls to government to socialise those risks. Not because government is any more likely than the private sector to “pick winners,” but because its size, ability to diversify and tax-raising capacity means that it can better afford to absorb the cost of the inevitable “losers.”

In this context, my view from August that prolonging the furlough scheme would be counterproductive looks misplaced. But if you are going to wind it down, the question is what replaces it. Some continued support for struggling but—we hope—viable businesses is still necessary. The chancellor’s latest announcement is a welcome step in that direction, by paying a much greater share of wages for firms that are keeping people on. That should encourage at least some of those who are uncertain about whether or not to keep people on to take that risk, at least for a few months.

Tony Wilson of the Institute for Employment Studies and I argued in May that the government should offer a choice of continued generous subsidy for short-time working—the policy the government has belatedly introduced—or a lump-sum grant to workers to help with retraining or starting a new business. While we now have the former, the latter is still lacking. Beyond helping workers, the government should also be prepared to take on risk by taking equity stakes—both in existing businesses that have benefited from government loans but may not be able to pay them back, and in new start-ups.

And moreover, there are areas where the government can itself provide certainty. The renewed commitment to decarbonisation by 2050 and the knowledge that we need to improve and expand the care system mean that some growth areas, at least, can and should be safe bets—if the government makes them so. Instead it seems to be putting off big spending decisions, with the planned multi-year Spending Review reduced to a temporary stopgap.

After the initial, commendably bold response to the crisis, the chancellor and the Treasury seem—very much as in 2009-10—to have retreated into their comfort zone. The argument appears to be that economic uncertainty means it would be foolish to spend too much money now, or to make long-term spending commitments. But this is precisely the wrong way round. Instead, the government needs to do whatever it can to reduce that uncertainty, or we will all collectively pay the price.