What could be the impact of the furlough scheme ending?

By Mr Bankruptcy

25th August 2020

When the Chancellor announced the Job Retention Scheme, commonly known as furlough, millions of employees and businesses breathed a sigh of relief as it provided some short-term security whilst the UK and the world adjusted to managing the global Covid-19 pandemic. Now that the furlough scheme is due to end, what impact is it likely to have?

Why was furlough introduced?

The Government introduced the furlough scheme to pay the majority of wages for employees who were prevented from working due to Covid-19, to prevent businesses from having to make mass redundancies. An estimated 10 million workers had up to 80% of their wages paid by the government up to a £2500 monthly limit. The cost to the country so far is a staggering £34.7 billion and it is estimated that the total cost will be £80 billion.

This offered a lifeline for many people and businesses, but is due to finish at the end of October.

Predictions for the end of the furlough scheme

In order to avoid a mass of redundancies when the furlough scheme ends, business recovery needs to justify pre-lockdown levels of employment, but this may not be the case for many employers. In research, 51% of business leaders say they will have to make redundancies within three months of furlough ending, and unemployment is likely to rise to around 10% this year as business make redundancies at the end of the furlough scheme.

Should furlough continue?

The National Institute of Economic and Social Research argues for extending furlough to summer 2021 will protect millions of jobs, but it also argues that continuing furlough is only delaying the inevitable.

Continuing schemes to support for businesses may be hiding so-called “zombie firms” and “zombie jobs”, that are no longer viable and are only being propped by the support offered by banks and Government during lockdown. If this is the case when these additional schemes end, we should prepare to also see a rise in business insolvency.

As millions or workers and businesses see the Government’s financial support withdrawn there is real concern that there will be a substantial debt crisis as the economy continues to get back to its feet. Even as we see lockdown easing, I get the sense that we’re not out of the woods yet and there are still many difficulties ahead.

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