Coronavirus· Labour market Three big decisions for the Chancellor on the future of the Job Retention Scheme 28 May 2020 by Daniel Tomlinson Daniel Tomlinson The Chancellor will be announcing details for ‘Phase 2’ of the Coronavirus Job Retention Scheme (JRS) later today or tomorrow. With 8.4 million jobs furloughed – one-third of all private sector employees – any changes to the JRS will have a big impact both on the scale of the unemployment crisis and on the speed of the economic recovery. None of this is easy. Here we set out three big decisions confronting the Chancellor, and some of our proposals on how he could proceed. 1. Employer contributions – how much, and how soon? Rishi Sunak has already announced that from 1 August firms will have to ‘share’ in the cost of furloughed wages, with detail to follow by the end of May. The signs so far are that all parts of the economy will be subject to the same cost amount of cost sharing from August. But this approach comes with big challenges, primarily because this crisis is at its heart sectoral, with variation in output falls across sectors estimated to be six times larger than in the financial crisis. A one-size-fits-all approach will mean trading-off between a cost sharing contribution that’s high enough to incentivise most businesses to return staff to work, but low enough not to cause excess redundancies from the hardest-hit sectors (hospitality and leisure). It’s not at all clear what this figure is, or if it even exists. Even a small contribution of 5 per cent applied in August could be high enough to lead to a wave of redundancies for the estimated 2.5 million employees in the hardest-hit sectors. But that at the same time, only requiring a small contribution from the firms in the bulk of the economy might not do enough to encourage swift returns to work, slowing the pace of the economic recovery. If the Chancellor takes this uniform approach, then it would be wise for him to err on the side of caution, starting with a small cost sharing element and increasing in gradually throughout the Autumn. The harmful effects of elevated unemployment on individuals and the macroeconomy must be avoided as much as possible. A better approach would be to treat the hardest-hit sectors of the economy differently from the rest. While economic activity in the bulk of the economy should be well on its way towards normal in August, hospitality and leisure activity is still likely to be heavily restricted. Social distancing will have more of an effect on supply and demand in these sectors than elsewhere, not least because these sectors will only be allowed to open up (according to the Government’s current plan) from July, later than the rest of the economy. For these reasons, it seems sensible to delay the point at which firms in these hardest-hit sectors need to start cost sharing. This will give businesses more time to adapt to the new reality – and hopefully give demand more time to return too. We suggest starting low and introducing a cost sharing rate of 10 per cent into the scheme from August for the bulk of the economy, and increasing this slowly over September and October until the scheme closes. We’d delay this approach for the hardest-hit sectors by two or three months. If the Chancellor is not prepared to introduce sectoral differentiation to the JRS then it’s likely he’ll have to offer these sectors some other form of support in the coming months in order to fend off excess redundancies and business closures. Such support might not formally be called a JRS, but in effect it will be a backdoor to a scheme with similar objectives. 2. Flexible furloughing – grand designs? The Chancellor also has a big decision to make on how to design the ‘flexible furlough’ element of the scheme. Fortunately, Government top-ups for those on ‘short-time work’ are common in many other countries, so there is lots of international evidence for the Chancellor to draw on here. The key decision is how much flexibility to provide to firms and employees. If the Chancellor wants to focus on minimising the risk of fraud, then he could require minimum furlough lengths of one-week or one-day, because it’s much easier to track weeks or days worked, than individual hours. However, it seems likely Rishi Sunak will opt for a fully-flexible scheme, allowing employees to work any number of hours a week spread out over any number of days – and for the JRS to top-up 80 per cent of lost pay relative to usual. This full-flexibility will best support economic recovery, and for this reason is the preferable approach. But it should be combined with a ramping up of anti-fraud enforcement measures, including naming and shaming of fraudulent businesses, significant fines, and HMRC writing to employees on a risk-assessed basis setting out the hours and days that their employer has claimed they were working and asking for confirmation of the accuracy of such claims. There also needs to be easy and direct route for employees to raise concerns with HMRC. Flexible furloughing should be introduced as soon as possible, as it will support the recovery by encouraging firms and individuals to make safe returns to active employment. If implementing a fully-flexible scheme will take until August, the Chancellor could consider reducing the minimum furlough length from three weeks to one as an interim measure. 3. No new furloughs – how and when? The Chancellor also needs to close the scheme to new entrants. Businesses that haven’t made use of the scheme to-date shouldn’t need to use it in the future. Closing the scheme to new business applicants from 1 July, or sooner, seems sensible. And while those businesses already using the scheme should be able to continue doing so until it closes, it makes sense to prohibit any further increases in the number of people furloughed. Allowing firms to rotate staff on-and-off furlough, therefore limiting the total number of furloughs rather than prescribing that no new employees can be furloughed, is a sensible approach. This would spread out the costs of non-working between employees within firms, rather than concentrating it on a smaller number of staff. Obviously, these new rules should not apply where individuals cannot work as a direct result of non-economic interventions in their lives to protect the community. This includes those caring for children usually at school, and those who need to isolate when asked to as part of the test and trace program. Continuing to provide an 80 per cent earnings replacement for those affected in either of these ways will both support living standards and encourage compliance with test and trace – which is crucial to the health and economic recoveries.