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The Furlough Scheme: A One Year History

Introduction:

The Furlough scheme was introduced in March last year, it is a Job Retention scheme designed to maintain employees living standards during the pandemic by subsidising 80% of workers wages.


The scheme began in March 2020 and new data from the Office for National Statistics includes the cumulative number of payments made under the Furlough scheme up to the 15th March 2021, marking one year of the Furlough scheme.


So, using the data provided by the ONS we will take a look at the history of the Furlough scheme, explaining the different data trends, as well as looking at the impacts and future effects.

Beginning:

After its announcement on the 20th of March, the Furlough scheme saw 4.8 million claims on March 23, this increased to 6.8 million by the end of March.


The announcement of Furlough had both individuals and employers scrambling to Furlough workers as COVID cases in the UK began to ramp up with 22,000 cases at the end of March 2020, an increase from 35 cases at the start of the month.


Because of this high spread of the virus, economic agents, especially consumers were uncertain about their future health as there was a lack of knowledge around the virus.


The concerns which households had over their health consequently caused a large influx of panic buying at the start of the pandemic as consumers stockpiled goods and services.


However, these buying sprees began to slow in later months as more information came out about the virus as well as restrictions being placed by supermarket firms limiting the number of goods and services consumers could buy.


On the 23rd of March, Boris Johnson addressed the nation stating that “from this evening I must give the British people a very simple instruction - you must stay at home.”


If this advice was taken to heart by the British public, the number of Furlough claims would have likely increased after March and April as non-essential businesses would have seen a fall in demand, forcing them to cut costs by placing workers on Furlough.


Instead, the data shows that after April to July, the total number of individuals furloughed decreased in waves at the end of each month, this is most likely due to the nature of how the ONS publishes its figures.


Nevertheless, why were there decreases in Furlough payments despite the government advice?


Beginning: April to May

After looking back at previous headlines, it seems that the stagnation, as well as peak, and then slowly decrease in payments from April to May could be attributed to irrational behaviour.


Previous news headlines show that individuals were still going outside despite government warnings, for example, a tweet from Brighton & Hove city council urged households to stop congregating at the beach.


Similarly, the Bristol City council released a tweet urging households to stop going to public parks as they were “very busy.”


So, despite government warnings, the morale of some British consumers seemed to be unaffected as some continued enjoying their summer and making the most of the nice weather.


This means consumers continued to purchase goods and services from non-essential establishments, causing a reduction in Furlough claims as establishments were busier than anticipated.


Beginning: May to June

The number of employments furloughed decreased slowly, before a fall of around 670,000 employments between the end of May and the start of June


The May to June decrease was likely attributed to the UK economy regaining confidence despite worsening public health.


In May, past headlines show that European countries were relaxing lockdown restrictions, with bars and restaurants reopening in Italy, then, in June, the EU announced that from the 1st July it will allow travellers in from an initial list of "safe" non-EU countries.


Additionally, the UK saw school pupils returning to schools in Wales and additional shops were opening in Scotland.


The positive news surrounding implying an optimistic European economy, as well as increased economic activity in Scotland, would have resulted in a rise in confidence in the UK economy, hence leading to increased spending by consumers, the main proponent of aggregate demand as it makes up 66% of UK’s real GDP.


Because of this, shops would have gotten busier, and, to accommodate the extra demand, they would have had to either employ additional workers, or they could bring in workers who are Furloughed back to full-time, leading to a drop in Furlough claims.


Overall, between the end of May and the start of June, Furlough employment decreased by a total of 670,000.


Eat out to Help out: July to September

The “Eat out to Help out” scheme, which was announced in July, gave a financial discount to consumers of 50% off food in establishments that were associated with the scheme.


Because of its month early announcement, restaurants and other similar establishments proceeded to bring workers back in full-time to prepare for the increase in demand for their services which the scheme would bring in.


Due to restaurant meals being price elastic, as they are a luxury more than a necessity, the scheme was a success as the financial incentive massively increased aggregate demand within the economy as consumers went out to spend.


Consequently, due to the increased consumer spending, confidence, as well as spending of other economic agents, increased.


This is because an increase in consumer spending resulted in establishments becoming busier as they have to supply more goods and services, causing an increase in the demand for labour, decreasing Furlough claims and increasing investment spending.


As a direct result of this, firms have to also import more raw materials from foreign nations as they expand their operations, so, because both consumers and businesses are more active, the government would have seen an increase in VAT revenue.


It is reported that the “Eat out to Help out” scheme generated £250 million of revenue for the government.


This confidence from the scheme likely carried on over to September where the economy was somewhat back to normal, especially with schools and colleges being on-site.


New Restrictions: October to February

After the confidence boom due to the “Eat out to Help out” scheme, the number of Furlough payments decreased from 6.8 million on the 30th of June to 2.4 million on the 31st of October.


However, in October, Prime Minister Boris Johnson announced a four-week lockdown.


The lockdown involved the closing of pubs, restaurants, gyms and non-essential shops, but schools and colleges were allowed to stay open.


The announcement also stated that there will be a Furlough extension to November.


The Furlough extension combined with the announcement of the lockdown caused Furlough claims to drastically increase to 3.7 million at the start of November, the employment claims remained steady until the end of December where there were 4.0 million employment claims.


There were no drastic increases or decreases in Furlough claims between October and December as consumers were unable to generate demand for non-essential services due to the restrictions, and, the forward guidance provided by the government made it so each firm that required Furlough, applied for it in early October.


However, there was another drastic increase in the number of Furlough claims in February as the government decided to increase the four-week lockdown.


Once again, due to the forward guidance provided, after this initial rise, the number of claims is predicted to slowly decrease from February to March as the economy opens up due to the provision of the government roadmap.

The number of Furlough employments peaked at 8.9 million on the 8th of May 2020, in February 2021, they sit at 4.7 million.


The Future:

With the provision of information by the government, such as the roadmap, the number of Furlough claims will likely decrease in the future.


The government roadmap plans on opening non-essential shops on the 12th of April, a decision which will likely lead to a large reduction in Furloughed workers as these establishments will see an increase in demand.


Additionally, recent economic indicators show that the UK economy is having an increase in confidence as road traffic, credit card payments as well as the number of ships coming in and out of the country is also increasing.


Therefore, firms are already displaying signs of confidence as they are becoming busier, and, once restrictions are fully lifted, this will be amplified as eager consumers will go out to treat themselves with their pent up savings.


However, with the Furlough scheme being around for a year, has the private sector become over-reliant on the government subsidy?


The subsidy has massively reduced costs for firms over the past year, and, if cut, it will lead to these businesses experiencing massive increases in their costs which could potentially lead to an economic shock.


If this were the case, the government has already put measures in place to prevent this economic shock from happening. Rather than forcing firms to pay 100% of their employees wages, the government plans on drip-feeding these costs to firms by slowly reducing the subsidy until firms can fully pay their workers wages.


From July 2021, the level of grant will be reduced each month and employers will be asked to contribute towards the cost of furloughed workers’ wages. The contribution required will be 10% of wages for hours not worked in July and August 2021, rising to 20% in respect of September 2021.


The decision will not only prevent an unemployment shock from happening but will also decrease the number of individuals on Furlough.


Conclusion:

Despite the cut in wages which Furloughed workers experience, the government subsidy has enabled individuals to have an equitable standard of living during the pandemic.


The industries which have made the most use of the scheme are the ones in the tourism, hospitality and food or accommodation sectors. Due to their large labour supplies, these industries have low wages compared to other areas.


Because of this, the individuals working in these sectors likely do not have a large amount of savings, resulting in them having little to no safety net.


So, the Furlough scheme, despite putting a large dent in the government’s debt, has enabled these individuals to somewhat maintain their living standards, thus protecting the most vulnerable people in our society.


It is a good thing that the Furlough scheme is here, it shows that the government has learnt from some of its mistakes from the 2008 Financial crisis, and, it shows that Economics should not be a study based on solely making the most money, or acquiring the most capital.


Once Economics becomes a science purely based on numbers, it is no longer normative, it no longer supports the best interests of the many, but the few.


So, let the Furlough scheme be an example that economics should stay like this as there are too many who use the study to further their own agenda and to selfishly grow their own wealth; once Economics ignores ethics, it becomes a numbers game, so let us keep it normative, and keep it as the most ethical science there can possibly be.

 

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