Why the coronavirus job retention scheme needs reform

Why the coronavirus job retention scheme needs reform 1

The coronavirus job retention scheme has persuaded businesses to retain employees. Credit: PA

The road to that unmentionable destination, the lockdown “exit”, is long and will take at least nine months.

Which means economic recovery will be longer still. And that requires the Chancellor to plan now to make the decline and recovery as benign as possible.

Probably the most important economic therapy (and certainly the most expensive) has been the Coronavirus Job Retention Scheme, which has persuaded hundreds of thousands of businesses to retain millions of employees on their books, rather than sacking them – but which urgently needs a redesign for the next phase.

That is what business leaders and some ministers tell me. And they have a point.

There are three issues of concern.

1) Unlike in Germany, businesses applying for cash from the UK government to furlough or rest their employees can start – and in some cases have started – the 45 day consultation period that precedes any decision to make staff redundant. In other words, the UK scheme is only a temporary life support scheme for employees, and if it is suddenly withdrawn, savage redundancies will follow very fast.

2) Unlike in Germany and Ireland, the scheme does not allow staff to move from full time to party time work. They have to stop work altogether. And if (when) there is a slow recovery in the UK, the UK scheme will surely have to be redesigned so that the Treasury can subsidise wages of workers who return to work for fewer than full hours – or else risk seeing wholesale redundancies as employers cut employee numbers to match declining revenues. It would be better, arguably, to retain more employees working initially part time than return only a few workers to full time working.

3) The UK scheme does not discriminate between businesses prohibited by government ordinance from functioning, such as pubs and restaurants, and those CHOOSING not to operate, like some manufacturing and construction businesses. The point is that any employer can apply to furlough staff, whether or not there is a formal requirement on them to cease trading – which made sense in the first phase of the lockdown, when the priority was to dramatically suppress the spread of Covid19, but may need to be re-evaluated, now that the rate of transmission of the virus has fallen very significantly.

The Treasury will presumably consider how to redesign the scheme so that it does not provide a perverse incentive for companies to choose to stay in the deep freeze, rather than thaw and start to operate again as the lockdown constraints are modified.

All of this is tricky and very expensive.

But just as there is an imperative to save lives in the short term, there is an associated imperative to make sure Treasury medicine revives rather than induces chronic economic torpor.

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