Chancellor Wins Praise for Rethink of New Support Scheme but More Could Still be Needed this Winter

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HM Treasury won plaudits Thursday for revamping new support schemes for jobs and businesses undermined by government restrictions, but even this may not be enough to prevent a winter spike in unemployment and wave of company failures, suggesting more action could yet be necessary.

Chancellor Rishi Sunak reduced the required employers' contribution to the job support scheme on Thursday from 33% of hours not worked to just 5%, while increasing the government's to 61.67% of hours not worked up to a maximum of £1,541.75 per month. Employees will work just 20% of their hours.

This ensures employees who earn less than £3,125 per month will continue to receive at least 73% of their normal wages when the new job support scheme opens on Monday, 01 November, but with the employer's burden rising to a lesser extent. 

"We have an economic plan that will protect the jobs and livelihoods of the British people wherever they live and whatever their situation. And just as we have throughout this crisis, we will listen and respond to people’s concerns as the situation demands," Sunak said in a statement to parliament. "I make no apology for responding to changing circumstances."

Source: Pantheon Macroeconomics. 

"It made little sense for employers to use the scheme, as their hourly labour costs would double, if they only employed their staff for one-third of their usual hours. The scheme effectively acted as a tax on firms seeking to keep workers on part-time. Mr. Sunak has seen sense and has slashed the contribution that firms must make," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Staff won't be any worse off compared to the old scheme." 

In addition, employees of companies which have been instructed to close their door as part of government efforts to contain the coronavirus will now have two thirds of ordinary monthly pay funded by the government up to a value of £2,083.33 even though they aren't working any hours. 

"Potential problems remain. Some firms severely affected by social distancing restrictions may be unable to offer workers even 20% of normal hours. But combined with the Job Retention Bonus, the risk of mass job losses in “social consumption” sectors has been reduced," says Martin Beck, lead UK economist at Oxford Economics. "Given a stuttering recovery and the risk of more Covid restrictions, the Chancellor may still be compelled to do more." 

Thursday's changes follow widespread criticism of the earlier job support scheme, and have resulted in reductions to unemployment rate forecasts by both Pantheon Macroeconomics and Oxford Economics. Pantheon's Tombs now looks for the unemployment rate to rise from 4.5% in September to 6.5% by year-end where before it had been seen topping 7.5%, while Oxford's Beck looks for the jobless rate "to peak at just over 7% early next year."

Source: Office for National Statistics. 

As with all forecasts, uncertainty remains, not least of all in this case because Office for National Statistics data showed on Thursday that some 9% of the workforce was still on either partial or full furlough this week and just days before that older and more expensive scheme comes to an end on October 31. 

Furloughed employees have received at least 80% of their ordinary pay and been protected through other inititives like mortgage holidays offered by banks and government bans on evictions of renters, so even after Thursday's changes HM Treasury is still pinching pennies and withdrawing support. This at a time when the economy remains impaired by the government and its litany of so-far, as well as increasingly fruitless attempts at containing the coronavirus. 

"We expect the total fall in employment to reach 1.5 million by spring 2021. That’s a 4% drop in employment and could be consistent with the unemployment rate rising to just shy of 8% in the second half of next year," says Andrew Wishart at Capital Economics, before Sunak's Thursday announcement. "On Friday we are likely to learn that retail sales rose further above their pre-virus level in September as reduced restaurant dining gave consumers more money to spend on goods. But the flash PMIs for October are likely to show that the wider recovery is stuttering, especially in the services sector." 

Source: Office for National Statistics. 

Even with the more generous furlough scheme in full effect and backed by the one-off Eat Out to Help Out initiative, the economy struggled to recover by much in August, while many economists have warned there's at least a risk of a renewed contraction in the final quarter. 

Meanwhile, 17% of companies in accommodation and food services judged themselves to be at "severe risk of insolvency", with a normalisation of road traffic levels not being matched by footfall on high streets and in shopping centres - which remains a long way off pre-pandemic levels. 

This however, was before new government restrictions take effect in Barnsley, Doncaster, Rotherham, Sheffield, and Greater Manchester on Friday and Saturda, after they were placed into the "very high" risk or level three category of a new three-tier system, along with Lancashire on October 17.

Source: Office for National Statistics. 

New measures mean pubs and some other hospitality businesses must close again. But with coroanvirus-related hospitalisations and deaths rising this week other areas of the country could also be at risk from government intervention.  

Barrow-in-Furness, Chesterfield, Elmbridge, Erewash, Essex, London, North East Derbyshire and York were all subjected to level 2 restrictions this week.  

"Now more than 10% of England’s population face these measures with more than half in Tier-2 or higher. In response to rising business pressures again, Chancellor Rishi Sunak has announced further support, including more generous support to try and help Tier-2 business owners and to keep people in work across the country," says Philip Shaw, chief economist at Investec. "It will be interesting to see the surveys of sentiment between now and next month." 

Above: Overview of UK Government's coronavirus dashboard.