Comment Blog 7 May, 2020

Job Retention Scheme 2.0

The Government’s Job Retention Scheme, devised and implemented at speed, has been hugely successful in averting a wave of mass redundancies.

Latest data shows that 800,000 businesses have furloughed 6.3 million staff. The Office for Budgetary Responsibility forecasts spend on the JRS for the current 4-month scheme duration at £49 billion – more than three times the annual policing budget, or the equivalent of the entire annual schools budget.

The Treasury is now grappling with how to phase out this eye-watering expenditure without triggering that wave of redundancies and the collapse of thousands of businesses. Clearly, the scheme cannot, and should not, continue indefinitely, but the timing and nature of any withdrawal is key.

Acting too fast – or with a too blunt approach – would undermine the Government’s aim of kickstarting the economy once lockdown measures are eased, and lead to many more families struggling with unemployment. Acting too slowly will further distort the economy, with people remaining on the payroll in zombie jobs – i.e. jobs that will no longer be viable once the state aid is removed – rather than seeking new employment.

The Chancellor is expected to lay out his strategy next week. There is considerable speculation that this will involve a staged reduction in the level of subsidy available, currently set at 80 per cent of monthly salary up to a cap of £2,500. Such a move, if implemented in isolation, would be the sort of blunt tool that risks the economic recovery. A more nuanced approach is needed.

Re-opening the economy, refining the JRS

As lockdown measures are phased out, it is right that the Government simultaneously phases out financial support. But just as the exit is expected to be gradual and sector-specific to minimise the risk of a second peak or overwhelming the NHS, so too must be the reduction in wage subsidies.

Allowing businesses to reopen does not mean a return to normal trading – hence the need for nuance. In many sectors businesses will not be able to operate normally for some time due to social distancing measures. A fraction of footfall means a fraction of revenue, and consumer spending is also likely to be suppressed in many sectors. Given this, staffing at pre-Covid levels will not be necessary, nor will it be affordable. Ideally, firms would retain as many staff as possible, but on reduced hours.

It is better to have two people in work, on reduced hours, than one person in work and the second laid off, likely ending up on the unemployment roll. Retaining both workers means the business is in a stronger position to flex its workforce as the economy strengthens. Workers avoid unemployment and the scarring effect that can have, and, as work is proven to be good for your health, maintain a higher level of mental wellbeing. Both benefits are helpful for the economy.

The Chancellor should therefore refine the JRS to enable part-time working, while tightening the eligibility criteria and beefing up the deterrents to abuse.

Short-time working

As Reform research has demonstrated, this is the approach taken in comparable countries. In France, Sweden and Germany, where companies have had to reduce staff hours, the state covers a proportion of their non-working time. Canada has extended its ‘Work Sharing Programme’ in which employees in an organisation can reduce hours equally to share a reduced workload, and then claim state support to top-up their income. The UK should follow suit.

Simultaneously, the subsidy percentage could be reduced. In Canada 75% of wages up to a certain cap are covered, in France it is 70% of gross earnings, and in Germany it is 60% of net pay, or 67% for people with children.

Minimising abuse

There have been suggestions that subsidising part-time work may be too easily gamed by employers, either by claiming for employees that already work part-time or by claiming for hours that have in fact been worked. That is certainly a risk. But the current scheme is also open to abuse, as HMRC has already acknowledged. Anecdotally it has been suggested that some firms are furloughing workers but then also requiring them to work.

As with any grant, loan or tax scheme, HMRC must be vigilant against fraud. Clear mechanisms should be in place to reduce the risk of unscrupulous behaviour, and clear and serious repercussions must result from abuse. This is exactly the case in those countries successfully running short-time work schemes.

In Germany, for example, the ‘Kurzabeit’ system requires employers and staff to record time sheets to monitor ‘short-time’ working. These are then submitted to the German government for auditing against the monies paid to subsidise part-time working. Fines of up to 10 million Euro can be issued, and both employers and staff can be held liable for fraud. In both France and Sweden, the ministries responsible for the schemes make clear that legal action will be taken in cases of fraud, including criminal. HMRC should be equally clear on the consequences of abusing the system, and advertise them widely – something which does not, to date, appear to have been a priority.

HMRC also has the data to assess the hours any individual works, and for those on fluctuating hours, they can devise an average. If someone usually works, for example, three days a week, then a subsidy would only be claimable if those hours were reduced below that.

Targeting support

The UK has been an outlier in not setting eligibility criteria for accessing the JRS. Any business, regardless of the scale of the financial hit from coronavirus, can furlough staff and claim the state subsidy.

In contrast, the French ‘chomage partiel’ system requires employers to prove that they have been forced to close or reduce activity. Danish companies have to show that they would have needed to make 30 per cent or over 50 employees redundant, due to the crisis. In Sweden, companies accessing support must show temporary and serious financial difficulties.

To avoid unnecessary spending and better manage the cost of a short-time work scheme, the Treasury should now move to a more targeted model of support.

HMRC has data on the use of the furlough scheme among firms, and could use this to restrict access – for example, only organisations that have already had to furlough a certain percentage of staff could be eligible for the next phase of the scheme. Companies who have not already put in a claim for either March or April are unlikely to have serious cash flow issues, although this could of course change depending on how long lockdown measures remain in place.

To avoid excluding companies that have not yet put in a claim, but are experiencing significant financial stress, a second criteria could be used. Given we are now in the seventh week of lockdown, it would not be unreasonable to require organisations accessing the scheme to demonstrate they have taken a financial hit, as other countries do.

In addition, the Government has already said that it will consider the requirements of individual sectors. This is sensible, and eligibility restrictions based on sector-related lockdown measures could also form part of a revised scheme – too early phasing out support in sectors required to remain closed, or functioning with substantial restrictions, would be disastrous.