"A Tax on Employers" - Economists say Sunak's Job Scheme Won't Stop Tide of Job Losses

- New job support scheme a 'stealth tax' on employers
- Will help to "concentrate employment"
- Treasury's ambitions clipped by surging government debt

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Chancellor Rishi Sunak's Winter Plan for the economy hasn't done enough to prevent a wave of Job losses over coming months say Economists, and is being branded a tax on employers by one economist who has crunched the numbers.

"While the Chancellor announced some modest further support yesterday, the big picture is that fiscal support will fade over the autumn causing many more job losses to be realised," says Andrew Wishart, UK Economist at Capital Economics.

Sunak announced a fresh financial support package for the economy on Thursday afternoon, with a Job Support Scheme (JSS) being the flagship initiative. The scheme is intended to extend government support for jobs beyond the ending of the furlough scheme in October.

"From 1 November, for the next six months, the Job Support Scheme will protect viable jobs in businesses who are facing lower demand over the winter months due to Covid-19," said Sunak in the House of Commons.

This is a six month scheme eligible to employees who work a minimum of 33% of their prescribed hours.

For remaining hours not worked, the government and employer pay 1/3 of the wages each, so employees working 33% of their hours will receive at least 77% of their pay.

The scheme therefore effectively asks employers to pay 55% of an employers wages, for 33% of previous output.

"The new Job Support Scheme is significantly less generous than the furlough scheme, with the bulk of the burden on the employer. On top of this, firms may be better off not using the scheme in some instances. This means that unemployment is still likely to rise," says Amarjot Sidhu, Economist at BNP Paribas in London.

The scheme was said to be partly based on Germany's long-established Kurzarbeit, which economists have described as being effective.

The key difference between Kurzarbeit and Sunak's latest initiative is the German scheme doesn't require employers to contribute.

"The scheme effectively is a tax on employers seeking to reduce workers' hours. It will help to concentrate employment, not maintain aggregate headcounts," says Samuel Tombs, Senior UK Economist at Pantheon Macroeconomics. "We doubt that the new Job Support Scheme, announced by the Chancellor yesterday, will hold back the tide of redundancies over the coming months."

"Employers' contributions under the U.K. scheme mean that those suffering much weaker demand will be better off employing fewer people on a full-time basis, instead of keeping all workers on part-time," says Tombs in a note out on Friday.

To illustrate the point, Tombs uses the example of an employer at a small retailer where staff were furloughed whilst non-essential shops were forced to close between March 23 and June 15 and where it is assumed sales still are 50% below pre-Covid levels.

"The firm could employ all their staff on 50% hours, or they could fire half of them and employ the remaining five people on a full-time basis. The latter option would minimise their total labour costs over the next six months, even after tax savings and the £1,000 per head Job Retention Bonus are taken into account," says Tombs.

Pantheon Macroeconomics forecast the unemployment rate will rise to about 8% by the end of this year, from 4.1% in July.

The limits to the Treasury's ability to support the economy were laid bare by the latest set of public finance data, released by the ONS on Friday.

The government borrowed £35.9BN from financial markets in August as it continues to count the cost of staving off an economic meltdown due to the lockdown and restrictions it has introduced to try and stem the spread of covid-19.

The figure of £35.9BN is up from the £5.4BN borrowed in August 2019, which takes the current fiscal year to £173.5BN according to the ONS. This is an all-time borrowing record in cash terms and what will concern the Chancellor of the Exchequer is there are still seven months in the fiscal year to go.

Economists at Bank of America this week cut their growth forecasts for the UK economy, warning the country faces up to six months of economic stagnation.

"Higher Brexit uncertainty and fading fiscal support," are cited as reasons. Regarding Sunak's new support schemes, BofA's UK Economist Robert Wood says, "the new short-time working scheme will do little to prevent unemployment rising in our view."

"In our view the new JSS provides relatively weak incentives," says Wood. "This employer contribution differentiates the UK scheme from, for instance, the German scheme and substantially reduces the likely effectiveness of the UK scheme at preventing unemployment rising".