SEARCH

Furlough Extended: Treasury and Bank of England "Prepared to do Whatever it Takes" says Economist

- Sunak opens the spending taps
- Comes hours after bigger-than-expected cash injection from Bank of England
- But furlough extension could hint at further lock-downs warns Quilter

Sunak

Image © Pound Sterling Live, Image courtesy of Parliament.tv

The UK government's Treasury has announced the furlough scheme will now be extended until the end of March 2021 in order to provide certainty for businesses and employees.

Employees will receive 80% of their usual salary for hours not worked, up to £2,500 a month.

Further measures announced by Chancellor of the Exchequer Rishi Sunak will see the upfront guaranteed funding for the Northern Ireland, Welsh and Scottish administrations increase from £14BNn to £16BN. "This Treasury is, has been, and will always be, the Treasury for the whole of the United Kingdom," Sunak told MPs.

The self employed will see assistance extended via the Self-Employment Income Support Scheme that will now see the third grant covering November to January calculated at 80% of average trading profits, up to a maximum of £7,500.

In order to assist the government in funding their latest announcements, the Bank of England on Thursday announced it would boost quantitative easing (QE) by £150 billion, an amount significantly greater than the £100BN markets were anticipating, and economists are saying this won't be the last expansion.

Quantitative easing sees the Bank buy up the bonds issued by government to fund spending, thereby ensuring the interest paid on those bonds remains contained at sustainable levels.

The increase in its asset buying programme takes the total value of the QE programme to £895 billion and will ensure quantitative easing extends into 2021.

The decision was brought forward from the traditional 12PM slot to 7AM to make way for Sunak's address.

"Policymakers appear keen to present a united front to demonstrate they are prepared to do whatever it takes," says Andrew Goodwin, Chief UK Economist at Oxford Macroeconomics. "The messaging is likely to prove more powerful than the policy change itself."

Analysis from Berenberg Bank shows that there are about £1 trillion worth of government bonds in open circulation and "the government is adding rapidly to the stock via its massive issuance of debt to finance its pandemic policy," says Kallum Pickering, Senior Economist at Berenberg.

The decision to extend the furlough scheme is delivered on the day England goes into a new month-long lockdown and the decision to extend until March has raised questions as to just how long the government intends on keeping the country locked up.

"It’s clear businesses face a long, tough winter already, but extending the furlough scheme for a further five months could reasonably be interpreted as an indication that the lockdown restrictions will continue for much longer than the four weeks originally envisaged. Once more, businesses will face further disruption and uncertainty once the transition period ends at the start of 2021 and the UK finally leaves the EU," says Rachael Griffin, tax and financial planning expert at Quilter.

"For many, the furlough extension means the state of ‘suspended animation’ will continue for much longer, and potentially for a full year after the scheme was originally announced. But the cold reality is that even with the extension, the furlough scheme will not be able to save every job and many people will be asked to take a period of unpaid leave, reduce their pay or accept redundancy and this will put a strain on many people’s personal finances," adds Griffin.

The decisions to increase spending are likely to push up the country's debt burden well above 100% of GDP.

Economic forecasts from the European Commission's Autumn European Economic Forecast published today projects the general government deficit to increase from 2.8% in 2019-2020 to 14.75 % in 2020-2021, significantly higher than at the height of the financial crisis.

The deficit is forecast to fall to 8.25% in 2021-2022 and to 7.25 % in 2022-23.

The additional fiscal measures and the expected fall in GDP lead to an expected general government debt-to-GDP ratio of 107.5% in 2020-2021, up from 84.5% in 2019-2020.

The extension of measures to support the economy by the government today will however mean these debt forecasts are ultimately too conservative. Although, if the economy grows back faster as a result of the measures then longer-term debt projections will ultimately come down.

Theme: GKNEWS