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18 December 2020
Yesterday, the Chancellor of the Exchequer Rishi Sunak formally announced a one-month extension to the Coronavirus Job Retention Scheme in a move to provide firms with access to continued financial support until the end of April 2021.
The Coronavirus Job Retention Scheme was first launched on 20 April 2020 and was originally due to end in June 2020. However, it has now been extended four times in an effort to minimise potential job losses and relieve financial pressures faced by employers.
To date, over 1.2 million employers have benefitted from the furlough scheme with 9.9 million workers receiving furlough payments funded by the taxpayer. In short it has been overwhelmingly successful since the programme began.
But are we stretching financial credibility by continuing to extend emergency taxpayer funded programmes initially designed to last no more than 90 days?
To answer this question, it’s important to understand that the furlough scheme is just one part of over 140 individual measures the government has taken to provide support during the pandemic.
To date the government has spent a staggering £280bn on measures to fight Covid-19 including £73bn of support for jobs, £127bn of additional funding for public sector and £66bn of support for businesses.
Set against these additional costs, the government is also set to receive £100bn less in taxation as incomes and profits fall while consumers pay less VAT as a result of continued disruption in the hospitality and retail sector.
With more money going out and less coming in the government has only one option - to borrow.
Those who are quick to borrow, are often slow to pay.
In November, the Office for Budget Responsibility estimated that public sector borrowing would be £394bn due to Covid-19. To put that into context: before the crisis, the government was expecting to borrow around £55bn for the financial year.
That represents 15% of UK GDP and it is also the highest borrowing figure ever seen outside wartime and accounts for £3 in every £20 of economic activity.
For the time being, there is broad agreement that is it better to borrow to support the economy.
These policies continue to provide a vital lifeline to people and businesses during the downturn and provide a bridge across the pandemic. It is also hoped that they will allow the economy to remain intact for a swift when the threat of Covid-19 recedes.
Nonetheless, they also raise questions about the long-term costs of record debt levels.
At present, the UK Government has committed to doing everything it takes to support the economy in the interests of public health – but the longer emergency support continues the higher the eventual bill will be.
As a result, much depends on how long the pandemic will last and how quickly we can return to normal.
If the economy bounces back, then tax revenues will rise and outlays fall, helping to bring the deficit and debt down. While it might seem an optimistic scenario, an effective vaccine rollout programme could make this a reality.
This seems to be the current thinking of the government.
In such circumstances, continued taxpayer support will seem like a small price to pay to avoid large scale unemployment and insolvencies. While interest rates are at historic low levels, it makes sense to borrow from the immediate present to protect the near future.
For the time being, we feel this is the right decision.
There is no doubt that the furlough support package comes at a considerable cost to the taxpayer. This cost has escalated quickly over the past year and continues to rise prompting the government to borrow far more than anticipated.
However, we should remember at this time that the alternative choice – to remove support from individuals and businesses while lockdowns persist – would create a far worse situation for those already vulnerable.
We believe everyone has the right to be repaid what they are owed but not at any price.
That’s why we welcome the continued commitment of the government to support individuals and businesses seeking to rebuild their lives as well as their financial positions as we approach the end of a challenging year.
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