Wednesday 13 May 2020 1:03 pm

Scrapping the furlough scheme would have been a disaster

The author is a researcher at think tank Reform
Researcher, Reform

Businesses can breathe a little easier today. Fears that the Chancellor would cut back on the furlough scheme that is subsidising wages for a million businesses were put to rest as he confirmed that it would run into the Autumn. After days of mixed messages, Rishi Sunak’s reassurances that the withdrawal of support would not outpace the withdrawal of lockdown and social distancing measures is welcome.

In truth, the Chancellor had little choice.  The alternatives – floated in the press – were unthinkable.

Read more: Sunak announces extension to furlough scheme

Complaints that employers had become ‘addicted’ to state aid were misguided. The Government actively encouraged widespread take-up in order to protect businesses and household incomes. It is thanks to this scheme that we have avoided a massive wave of redundancies.

Prematurely cutting back support would simply have triggered that wave and weakened businesses’ ability to bounce back when the time comes. The Chancellor understands this, and it is good that he has held his nerve.

While the headlines have focussed on the scheme’s five-month extension, another fundamental shift is the introduction of short-time working from August. With retail, hospitality and leisure businesses shut down for at least another ten weeks and uncertainty about how consumers will behave when they re-open, flexible support will be vital.

Short-time working will allow businesses to re-open gradually and flex staffing in line with demand. This was Reform think tank’s key recommendation for the next phase of the scheme, and could see millions of jobs protected. It is far better to have two people remaining in employment working part-time than one person working full time and the other being laid off.

We are yet to see the precise detail for changes coming in from August, but there are two issues on which the Chancellor has so far been silent: targeting and fraud. With a potential price tag of £100 billion, the Government should urgently consider how to ensure taxpayers’ funds are being spent appropriately.

Currently, the UK has not attached any eligibility criteria to the JRS. Any businesses – regardless of the scale of the financial hit it has taken – can furlough staff and claim the generous subsidy. This stands in stark contrast to other countries.

In France employers have 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. And in Sweden, companies accessing support must show temporary and serious financial difficulties.

It makes absolute sense that a restaurant told to close its doors in March should be able to access support for as long as trading is affected, but it is questionable whether global law firms or hedge funds need taxpayer subsidies. In the next phase, support should be more targeted.

The Government should also ramp up its efforts to prevent fraud. As with any large Government grant scheme, the Job Retention Scheme is vulnerable to abuse. There is already anecdotal evidence that some unscrupulous employers are furloughing workers but still requiring them to work.

In Germany, where short-time working is allowed, businesses are required to fill in time sheets for their workers that can be audited. And both employers and employees can be held liable for any fraudulent claims. Fines of up to €10 million can be issued.

HMRC should send a similarly clear message that fraudsters will be pursued with heavy penalties. In France and Sweden there are criminal consequences, advertised clearly, for those who flout the rules.

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.

The Government has once again held to its promise to do “whatever it takes” to get businesses and workers through this crisis. That’s welcome. But the Chancellor must ensure that this commendable approach is not in fact free cash for all.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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