Ending furlough scheme will fuel unemployment, think-tank warns

UK unemployment will rise to 10 per cent of the workforce by the end of the year because of the government’s decision to bring a premature end to its furlough scheme, the National Institute for Economic and Social Research has warned.

Publishing its latest quarterly forecasts, the think-tank said on Tuesday that its main scenario was for UK output to fall by 10 per cent in 2020, and to remain 6 per cent below its pre-coronavirus trajectory in 2024.

In this scenario, unemployment would rise above 3m to almost 10 per cent, its highest rate since the early 1990s — and although the jobless rate would recede after that, it would not return to pre-Covid lows by 2024.

Many of these jobs could have been saved if the government had kept its Job Retention Scheme open until the middle of next year, instead of ending it in October, Niesr argued, pointing to survey evidence suggesting that almost a fifth of employees were still on furlough in the first half of July.

Chancellor Rishi Sunak has resisted calls to extend the scheme further, saying it would be irresponsible to leave people “trapped in a job that can only exist because of a government subsidy”. Instead, he has offered employers a £1,000 bonus for each furloughed worker they retain.

Garry Young, Niesr’s deputy director, said the bonus payment was not high enough to make much difference, and that this approach was likely to lead to higher unemployment and a greater loss of productivity over the long-term because some workers would find it hard to re-enter the labour market, while companies would lose staff with skills tailored to their jobs.

“GDP would be permanently higher by not having these scarring effects,” he said, adding that extending the furlough scheme — at an estimated net cost of about £10bn — “would have been relatively inexpensive and would have limited the rise in unemployment.”

Niesr’s central forecast is for public sector net debt to reach 105 per cent of GDP in 2021 and to remain around that level for several years — assuming that the government brings current spending down to slightly below the levels expected in the March budget, and raises taxes enough to make up for a smaller economy.

But Mr Young said the extension of the furlough scheme would have come close to paying for itself, because it would have led to a stronger economy and higher tax take in the long run.

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