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How Rishi Sunak is set to follow his furlough scheme with wage subsidies

Why is Rishi Sunak launching a wage subsidy scheme?

Article originally published by The Telegraph. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

The Job Retention Scheme closes at the end of October-and the Chancellor is set to announce a wage subsidy scheme to help workers

Rishi Sunak will today announce a replacement for the furlough scheme as part of a new economic rescue package.

A wage subsidy scheme will top up the pay of people who work at least half their normal hours in an attempt to avoid mass redundancies when the furlough scheme ends next month.

Why is Rishi Sunak launching a wage subsidy scheme?

The Chancellor has a problem. His furlough scheme, which successfully protected millions of jobs through the first lockdown, closes at the end of October.

It has been winding down since August, encouraging people to go back to work and limiting the bill to the Treasury, which currently stands at £40bn.

But a resurgence in the virus means new restrictions have been introduced, so the crisis is not over yet.

The problem is urgent. About a tenth of business employees were still on furlough at the start of this month, according to ONS surveys, amounting to around 2.2m people.

By the end of next month their employers will either have to take them fully back on to the payroll, or make them redundant.

If coronavirus measures begin to lift, letting more staff in industries such as hospitality and leisure get back to work, then this might, just about, have been enough time to save those jobs.

As it is, new restrictions will limit demand for workers in pubs and restaurants. Venues such as sports stadiums have been forced to abandon plans for reopening even with highly limited audiences. Fresh instructions to work from home will hit businesses in towns and city centres, or those catering to workers on office parks.

Pressure has been mounting to extend the Job Retention Scheme (JRS) or replace it with a new system of support.

The wage subsidy scheme will top up the pay of people who work at least half their normal hours.

It comes after Sunak cancelled the October Budget, and on Wednesday tweeted: "Tomorrow afternoon I will update the House of Commons on our plans to continue protecting jobs throughout the winter."

How might the wage subsidy scheme work?

Sunak is studying a model under which employers pay 100 per cent for hours worked, with the Government paying a proportion of the remaining full-time wage.

In one example, the Government and employers would share the cost of paying a worker two thirds of their "missing" wages. Employees would have to work at least half their contracted hours to qualify, and a cap was expected on the maximum top-up available.

How have other countries used wage subsidies?

Other nations with furlough schemes more like Britain’s have extended their programmes.

Australia, for instance, offers a similar though less generous 'JobKeeper' programme, offering A$1,500 (£825) a fortnight, falling to $1,200 a month from the end of September.

This has been extended to March 2021.

Germany has a more established 'short time work' system, or kurzarbeit, under which workers whose hours have to be cut because of weak demand in a recession receive top-ups from the Government.

France's partial unemployment scheme allows companies to slash staff hours by up to 40pc for as long as three years. The government chips in enough to ensure employees receive almost the entirety of their normal wages.

Meanwhile, the Confederation of British Industry (CBI) has suggested Sunak could top up wages for workers who can work at least half their regular hours. The year-long subsidy would see the Treasury split the cost with the company to pay staff for two-thirds of their unworked hours.

Trade union TUC would go further than the CBI, recommending employees whose hours are cut are paid 80pc of their salaries, or 100pc if they are on minimum wage.

The idea is that laying off skilled workers in a downturn risks being unable to re-hire them in the recovery, wasting time, effort and skills. It also makes investment in heavy machinery less risky.

On the other hand, it might not suit the UK’s economic model, or the services industries that are currently most depressed by the anti-Covid measures.

Tony Wilson, chief executive of the Institute for Employment Studies, notes that the cash paid through Germany’s scheme flows straight to workers, so it only benefits bosses who cannot cut employees’ hours. By contrast employers in the UK’s leisure and entertainments industries can simply keep workers on shorter days.

“I am not sure a short-time working scheme is the answer at all. That would make sense where labour markets are less flexible,” he says.

“The alternative is a straight subsidy, to pay a percentage of wage costs of employees. That way, you can encourage employers to keep people at work, so you don’t end up pulling the stool away at the same time as we are shutting down parts of the economy.”

What else could the Chancellor announce?

A rise in unemployment benefits

One option open to Sunak is similar to the US model. This involved no furlough at all, but instead beefed up unemployment benefits.

Joblessness spiked sharply, then fell back rapidly as the economy reopened. But the damage is still significant, with the unemployment rate at 8.4pc in August, down from almost 15pc in April. Still, that is more than double the 3.5pc low in February.

It is a model that plays to the relatively smaller state, flexible traditions of the world’s largest economy, promoting the possibility of workers moving to new jobs instead of being given a potentially false hope that their old position will still exist.

Britain also has a relatively flexible market, and the bigger the changes facing the economy, the more valuable it could be.

"There is a real risk that many jobs in the UK economy, particularly in the hospitality sector, are not viable in their current form, and so the design of the furlough scheme may lock these people into jobs that don't exist, delaying the recovery," says Matthew Oxenford at The Economist Intelligence Unit.

On the other hand, it would not match the UK’s actions so far in the pandemic, and could make the JRS look wasteful if the Treasury has spent heavily to retain jobs and now simply scraps the scheme.

"However, given that demand and job growth are likely to remain suppressed for some time, especially as restrictions tighten, the Treasury is likely to need to provide additional financial support to households," says Oxenford. "This could take the form of massively expanded unemployment insurance, a part-time wage subsidy scheme, or other creative solution."

Currently the Bank of England predicts the unemployment rate will hit 7.5pc at the end of the year. That is more than double its current rate but an improvement on a prediction of 9pc made in May.

This article was written by Tim Wallace from The Telegraph and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to

Article originally published by The Telegraph. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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