Robert Peston

Has the furlough scheme removed the incentive to work?

Has the furlough scheme removed the incentive to work?
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Before the government announced its Covid-19 economic safeguarding scheme to pay up to £2,500 a month to 'furloughed' or rested employees – the 'Coronavirus Job Retention Scheme' – a number of business owners and managers talked to me about their creative ideas to continue operating and trading on a different model after lockdown.

But as soon as they were told that they could in effect shut down and still pay something to their staff with government subsidies, they gave up on those imaginative routes to operating and went into hibernation. For example, the PM in a press-conference before he became ill, tried to encourage pubs, cafes and restaurants to convert into home delivery services. A few did. Most didn't.

The point is that any new welfare programme – even in a period of acute crisis – has to take account of the CBA factor, and the furlough programme may not have been weighted enough toward encouraging economic activity.

It's why, a few weeks ago (as you may remember) I floated the idea that a more sensible route to subsidising incomes during this crisis would be to institute a temporary universal basic income for all workers. The difference between that basic income and the furlough is that with the former, there would be an incentive to keep working – because for anyone earning through work, the basic income transfer from the state would be receivable but part of taxable income, so repayable. Receiving the income support would not be conditional on being compelled to stop working.

You may have noticed that I am still working (for which I am so grateful!). Under a universal basic income scheme, I would receive the income credit (unless I explicitly refused to take it), but would be obliged to repay all of it through the tax system (either PAYE or self assessment). The point is that this would be a genuine safety net that still provides an incentive to work. Whereas the furlough scheme is a straightforward bribe to stop working.

And there are a number of very obvious costs with being paid not to work, for all of us: the reduction in overall economic activity is likely to be magnified by furloughing, depressing tax revenues even more than would otherwise be the case; and once businesses atrophy, reviving them is hard, which is horrific for employees and owners.

Which takes me from what the Treasury might have done better to what it should do next. Because a huge looming question is whether the furlough scheme should cease after three months and what should replace it.

The big point is that many businesses may have had their wage costs subsidised, but their fixed costs - rent for example - remains a huge and painful liability at a time when revenues are non-existent. Many will collapse under the weight of their growing debts.

And even if they succeed in tapping the government's emergency loan schemes to temporarily cover these unavoidable costs, once the lockdown eases - and the constraints on our freedom of movement progressively ease - the idea that the economy will snap back to normal is wholly unrealistic.

Any recovery is likely to be slow and painful, because for many businesses supply chains are seriously impaired and will take some time to be repaired, and also the confidence of customers is badly shaken. For example, the idea that we will be flocking back to bars, restaurants, shops and cinemas any time soon, even when they are allowed to open, is for the birds. We've all acquired precautionary habits that will prove hard to break.

Which means that the furlough scheme - the incentive to stop working - may soon have to be replaced with a much more generous scheme to subsidise work and employment than provided by universal credit.

The new furlough payments system being created by HMRC to transfer money directly to companies to cover the costs of individuals who are paid to do nothing at home may have to be changed into a scheme to subsidise their wages AT WORK, for as long as it takes for economic activity to recover.

Because as many employers (big and small) tell me, if the furlough scheme is simply switched off in three months, they will have no choice but to sack many of those who are currently furloughed. And on the assumption - according to the Resolution Foundation - that somewhere between 7m and 10m people are being furloughed, the UK would be looking at levels of unemployed running into the numbers of millions we haven't seen since the 1980s and possibly not since the 1930s.

So, for the avoidance of any doubt, when we talk about the imperative of planning now for how to protect our health as and when lockdown is eased gradually in coming months, enormous pains will have to be taken to ensure generous remedial help is provided to employers, so that a lethal epidemic doesn't turf us into the abyss of an economic depression.

Written byRobert Peston

Robert Peston is Political Editor of ITV News and host of the weekly political discussion show Peston. This post originally appeared on his ITV News blog

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