Rishi Sunak said the new scheme would be open to workers across the UK even if they were not in the furlough programme © POOL/AFP via Getty Images

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Rishi Sunak has set up a dramatic moment of truth for Britain’s Covid-battered jobs market, as he confirmed plans to end the £39bn furlough scheme and replace it with a German-style wage subsidy plan.

The chancellor said that from October 31 the taxpayer would no longer pay part of the wages of an estimated 3m employees who could not work; instead the Treasury would only step in to subsidise people who worked at least a third of their usual hours.

Mr Sunak, setting out a winter economic plan that could cost up to £10bn over the next six months, has in effect presented employers with a decision within weeks on which jobs remain viable.

With public spending still busting government limits, the deficit was on course to hit £400bn this year, a record amount in peacetime.

“I cannot save every business. I cannot save every job,” Mr Sunak said, adding that it was “impossible” to predict how many jobs the government’s new wage subsidy scheme would save.

Mr Sunak’s plan shifts the burden of supporting jobs affected by the pandemic away from the taxpayer and on to the employer. Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said many jobs would be lost in the coming months.

He said the chancellor was “trying to plot a difficult path between supporting viable jobs while not keeping people in jobs that will not be there once we emerge from the crisis”.

Under the new job support scheme, which will begin in November, the government will help subsidise jobs where employees work reduced hours. Employees unable to work any of their normal hours will not be eligible.

The programme would be open to workers across the UK even if they were not in the “job retention scheme”, the programme that originally paid 80 per cent of the wages of those on furlough. Treasury officials estimate that perhaps 2m-4m part-time workers might be helped by the new scheme.

By the end of October, when the furlough scheme ends, the level of state subsidy will be at 60 per cent of wages for people not at work. Mr Sunak’s new wage subsidy scheme will slash government support per job to a maximum of 22 per cent.

The chancellor’s allies estimate the new scheme would have a monthly cost of about £300m for every 1m workers. If 3m joined the scheme it would cost the Treasury almost £1bn a month, instead of about £4bn for the furlough scheme in the past four-week period.

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Those eligible for the job support scheme will receive their pay for hours worked from their employers and, for the remaining hours, the government and employer pay a third of the wages each while the employee would forgo the final third.

Companies would also be able to claim a £1,000 “job retention bonus” — announced by Mr Sunak in July — if they bring people back from the furlough scheme and keep them on their books until the end of January.

The chancellor also announced to MPs that restaurants, hotels and cinemas would continue to pay value added tax at 5 per cent — rather than the usual 20 per cent — until March 31 next year, at an estimated cost of £835m.

The total cost of Mr Sunak’s new “winter economic plan”, including the job support scheme, is unlikely to exceed £10bn, a relatively small figure in the context of wider government spending on tackling the effects of the virus, which has now topped £200bn.

Separately, the government announced fresh support for self-employed workers but only at 20 per cent of average monthly trading profits. Earlier support schemes for the self-employed were set at 80 per cent and 70 per cent of trading profits.

The chancellor said the government would extend the life of four loan schemes, which have already backed £58bn in lending to companies through government guarantees, until the end of November. He meanwhile promised a new successor loan scheme that will begin from January.

Bounce-back loans, targeted at SMEs, could be extended from six years to 10 years, cutting repayments by about 40 per cent. Self-assessed income taxpayers can extend their outstanding tax bill over 12 months from January under the new programme.

The time that companies and households have to pay deferred value added tax and self-assessment income tax bills will also be extended.

Thursday’s package followed this week’s announcement by Mr Johnson of new coronavirus restrictions across England. The measures, expected to last six months, include a 10pm pub curfew and tighter curbs on weddings.

Kate Nicholls, UKHospitality chief executive, said the employee support was a move in the right direction, but the sector needed more targeted backing given that almost 1m people in hospitality were still on furlough. Mr Sunak has left the door open to offering further economic help.

Carolyn Fairbairn, director-general of the CBI, which had advised the Treasury on the new scheme, said it “will save hundreds of thousands of viable jobs this winter”. She added: “It is right to target help on jobs with a future, but can only be part-time while demand remains flat.”

Letter in response to this article:

Sunak plan creates incentive to lay off workers / From Professor Michael Devereux, Director, Oxford University Centre for Business Taxation, Associate Dean for Faculty, Saïd Business School, Oxford, UK

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