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The End of the Furlough Scheme

Thursday this week marked the end of the furlough scheme in the UK. The British government had set up the scheme in March 2020 at the start of the pandemic. The scheme meant that the government covered 80% of the wages (up to a total of £2,500 per month) of employees who were unable to work due to lockdown. The government later introduced a flexible furlough which allowed firms to open up partially and pay employees part-time whilst the government would cover the rest of the hours.


Since the start of the pandemic, the scheme has helped pay the wages of around 11.6 million people in the UK and it is estimated that it prevented a further rise of unemployment in the UK by 2 million. The scheme in total has cost the British government £70 billion.



In August, the government had reduced their spending on the wages of employees to 60% and employers had to cover the other 20%. As the scheme finished on Thursday, it is estimated that nearly 1 million people were still depending on furlough to some degree.


There had been calls on the government to extend the furlough scheme further because certain companies in some industries were struggling due to the impacts caused by Covid-19. One sector which was particularly struggling was the travel industry because of lower demand in the UK. this was a result of less travel in and out of the country due to the consumers’ fear of having to quarantine because of the traffic light system for international travel. There is a fear that there will be a sudden rise in costs for firms as they have to pay the wages of employees again in full; this will lead to them having to lay off more workers in order to break even as their revenue is not likely to rise sharply as demand for international travel still isn’t at pre-pandemic levels. Even the Bank of England has predicted a small rise in unemployment due to the rise in costs for firms within the economy.


However, the government believes that the UK is now ready to end the furlough scheme as we have opened up from lockdown and the economy is booming. Due to the successful vaccine rollout in the UK, firms no longer need to be shut and are able to operate at full capacity as the overwhelming majority of the population has protection from infection. The opening up has led to the expansion of the economy and so more people have been employed and some employees even received wage rises. This increase in disposable income for consumers has increased aggregate demand within the economy and so firms are receiving even more revenue and expanding even further. This has led to a record number of job vacancies in the UK. Having said this it is likely that it will not be as simple as unemployed people going into these new vacancies. This is because some people will be occupationally immobile (meaning that they don’t have the skills for a job) or they may be underemployed (meaning they may be overqualified or not working as many hours as they may wish).


The end of the furlough scheme also means a reduction in government spending. The UK general government gross debt at the end of the financial year ending in March 2021 was £2.23 trillion - this is 106% of GDP. This included a rise in borrowing during the pandemic and a major part of that was the furlough scheme. The government needs to eventually pay back what it borrows with interest. This is especially important now that the Bank of England is considering a rise in interest rates in order to combat inflation caused by raising aggregate demand. This would increase the government’s debt repayments by £25 billion which would mean that there is a larger opportunity cost. Higher debts may also lead to adverse effects in the future as the government uses measures such as tax rises or austerity in order to make repayments more manageable. This would then reduce the purchasing power of households. This is why it is crucial for debt not to rise to an unsustainable level and therefore why the furlough scheme needed to end at some point even if it may lead to some unemployment.


In the long term, there have been calls by unions to a form of this scheme in order to deal with further crises.

 

Written by Florian Mihindukulasuriya Thiserage

Researched by Jonas Theaker

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