Furlough – friend or foe?

The coronavirus pandemic has caused major disruption to the business world.  In an effort to support the economy, businesses and jobs, the government introduced the Coronavirus Job Retention Scheme (CJRS) or as it is more commonly referred, Furlough.

The scheme was hailed as a lifeline to many businesses and their employees and the chancellor, Rishi Sunak has committed to its expansion until October 2020, but in a reducing capacity.  The cost at an estimated £100bn is eyewatering.  With opinions divided on the scheme, Pulse Cashflow look at whether we think Furlough is a friend or a foe to UK Businesses.

A friend?

When lockdown was implemented, many employers were forced to close the doors on their business whilst others were able to continue by enabling their employees to work from home but potentially with a surplus of resource as business and income levels dropped.  In normal circumstances, employers would look to cut their costs in a downturn with payroll at the top of the list as one of the largest expenses.  So, as businesses took a downturn due to Covid-19 and lockdown, employers would have no choice but to cut the size of their workforce putting many individuals and their families under financial strain with the prospect of rising personal debts.

The furlough scheme prevented this with the Government covering 80% of the wages (with some employers topping this up to 100%) of staff unable to work preventing them from being at risk of redundancy.  Employers were able to choose to furlough employees with the hope that economic conditions would improve so that employees could return to work.

A knock-on effect of the furlough scheme also meant that people who may not be working still had income which they could spend.  We saw a dramatic rise in online shopping, throughout lockdown which helped many businesses keep going and keep employing their staff as they worked through these uncertain times.

In this sense, the Furlough scheme has been a welcome lifeline to many UK families and has kept more people in jobs, kept the unemployment rate lower than it could have been and prevented personal debt levels from reaching the levels that they could have.

On the face of it, the Furlough scheme appears to have many positives and could therefore be viewed as a friend.

A foe?

The scheme has eased the pain being felt by businesses across the UK but at what cost?

Economists are now estimating the cost of this 7-month scheme could be in the region of £100bn.

This is tax-payers money and although rightly put to good use as we have discussed above, it will no doubt have a negative effect on the UK economy.  It is a vast sum of money and will increase our budget deficit to record breaking levels.  These monies will need to be recouped and the easiest strategy to do this will be through tax increases.  VAT, Corporation Tax, and personal tax will no doubt all see increases over the coming years.

In these uncertain times, it is difficult to predict how the economy will fare in the short, medium and long term and how quickly conditions will improve.  This will prove challenging and may increase uncertainty and impact on confidence levels.

Getting employees back into the workplace is another challenge.   The pandemic has fast forwarded the remote working debate with many employers grappling with the when and how employees return to the workplace if at all.  Many firms are reviewing their need for space and looking at options of reducing or removing physical offices.  This must be creating a high level of concern with the commercial property market and the knock-on impact to pension funds which hold large commercial portfolios.

Firms emerging from this economic crisis may have to re-assess their needs based on current levels of trading and may not be able to return to their entire pre-furlough workforce, or indeed at the same level of compensation. Some firms are already discussing shortened hours with their employees to help them get through the next 12 months.  Therefore, employers must be careful not to make promises of return to work as normal until they are in a position to do so.

Friend or foe?

So, friend or foe?  Pulse Cashflow would say both. The Furlough scheme has had a very useful impact on preserving jobs and giving firms space to continue trading with reduced costs.   By helping to maintain demand and employment, it has avoided a bigger immediate economic crash and it is therefore hard to argue that Furlough hasn’t had a beneficial impact on our economy in the interim whilst responding to COVID-19. The millions of jobs it may save in the short term and the families it has supported is a remarkable achievement.

However, with the scheme due to end 31st October 2020, and further measure and lockdown restrictions coming into force as the crisis continues, we must brace ourselves for the what next.  As we write there is some good news on surges of growth in specific sectors and long may this continue.  However, there are also many mixed messages as to how deep or severe any recession may be.  From the scare mongering “deepest recession in 300 years” to a “bumpy or smooth exit from the pandemic with a slower and more gradual period of austerity”

What is sure is that the UK will have amassed an immense budget deficit, and with a business population that will also have taken advantage of the other government supported loans there will be large sums of borrowed money which will need repaying. It is inevitable that we will have to pay this huge borrowing back eventually, meaning we will all be affected, and our economic growth will be stifled.

We have also accelerated many changes in both our personal and business lives – some of which may prove to be more permanent than others.

Over the coming months, we will eagerly watch the latest growth and economic indicators to assess the longer-term extent of the damage in the UK.

16/10/2020