Written by: Jordan Chan
The coronavirus outbreak has transformed our lives in nearly every aspect. The national lockdown followed by social distancing measures and other restrictions have caused unprecedented levels of disruption to business activity and social life. As case numbers declined towards the middle of summer, the government sought to reopen the economy. By October however, case numbers and crucially hospitalisations began to soar. In response, the government introduced a framework for localised restrictions which includes a tiered system of restrictions. The furlough scheme was one of the major financial support packages introduced by the government. It was designed to prevent mass unemployment due to the forced closure of business and restrictions. The scheme however, ends on 31 October. With additional restrictions being introduced however, the government realised the need for additional financial support for businesses. This article will explore the coronavirus financial support packages provided by the government and assess the limitations of such schemes in saving jobs on the high street.
What is furlough?
Furlough is where an employee agrees with their employer to stop working temporarily but remains employed with the company. This measure saw widespread adoption after the pandemic brought on government-mandated lockdowns, which caused business activity to grind to a halt particularly in the leisure and dining industry. Hence the furlough scheme was essentially an emergency measure to protect jobs and soaring levels of unemployment.
Originally the scheme allowed employees to receive 80% of their monthly salary up to £2,500 and has been taken up by almost 12% of the country’s workforce. This amounts to roughly £14bn per month, however it is scheduled to end on 31st October. Hence vociferous debates have been taking place in parliament regarding whether to implement a soft or hard end to the scheme. A more tailored, soft ending would see furlough being phased out gradually and continue operating in industries that have been hardest hit. This would allow struggling enterprises to receive more state aid, buying precious time to potentially restructure debts and sell assets.
However, a hard ending would be more akin to turning off the tap completely, which would likely result in rocketing unemployment numbers. Indeed, a survey from BDO suggests that over 60% of mid-sized UK businesses will be expecting to make redundancies once the scheme ends in October, as businesses prioritise shoring up liquidity and bolstering their balance sheets. Smaller, struggling companies may fare even worse as consumer demand drops and revenues dry up, giving employers a tough decision to deal with. Therefore, in effect, a hard ending could lead to more job losses, and a significant drop in GDP signaling a contraction of the economy and a dramatic weakening of the UK’s stance in the international arena.
How is the furlough scheme changing?
While the government does not call it a furlough scheme, it has essentially the same effect. The Job Support Scheme will now be amended, so from November 1, all workers will be paid two-thirds of regular wages as long as the employer provides 20% of their usual hours. In Tier Two scenarios where businesses remain open but face decreased demand, employers will be required to pay a minimum of 20% of hours an employee works and just 5% of those usual hours not worked. The government will pay the rest to make up two-thirds of regular wages up to £1541.75 a month. If businesses are in Tier Three areas and are forced to close, the government will pay the full two-thirds of wages up to £2,083.33 per month.
Whilst the exact cost to the economy is uncertain due to the constantly changing situation, experts estimate that hundreds of millions would be spent per month. Given that the scheme is 6 months long, it is likely that the total cost would undoubtedly run into billions. Yet economists at the National Institute of Economic and Social Research assess that this extension to the scheme could end up paying for itself since the cost to the public purse would be greater if more people became unemployed, via increased benefit claims. No doubt, this stimulus measure is intended to provide reassurance for employees and employers going into the potentially dark, and gloomy winter months ahead. Whether this will be successful or not, only time will tell.
Sunak outlined that the key recipient of the scheme would be those in ‘viable’ industries, yet he fails to offer clarity or on what this ambiguous definition entails, leaving many bewildered and puzzled. Clearly though, many of the exposed employees in faltering industries will not be eligible for such state aid, and hence, are likely to be made redundant after October if no further intervention is made. Indeed, we need look no further than to our local high streets to see the painful effects of the pandemic and the failings of subsequent furlough schemes. After October Whitbread, the chief operator of Premier Inn and Beefeater, plans to axe 18% of its total workforce, totalling 6000 employees. This consists of 4500 hotel employees, alongside 1500 catering staff. No doubt, many similar establishments within the industry will be pressured into following Whitbread in its cost-cutting measure.
Will it save the high street?
Even prior to the pandemic the high street has been in a state of continual decline largely because of the changing habits of consumers. Indeed, the average high street lost 40 shops in the last 5 years. The figures published by Retail Gazette in 2019 are equally as harrowing: over 135,000 employees were made redundant as a result of the collapse of several large retailers such as House of Fraser, Marks & Spencer, Debenhams, and Toys R Us. As predicted by economists, these numbers are set to rise dramatically due to coronavirus, even given Sunak’s existing furlough schemes.
The steady increase in online shopping, and the decline of the high street, has been heavily accelerated by national lockdowns and disruption caused by the pandemic. As a result, recent months have seen online retailers have greatly increase their market share over traditional brick and mortar stores. A great example is none other than Amazon, whose share price has risen from $1900 in January 2020 to $3530 nine months later. This spectacular increase of 86% is a shared sentiment among similar online retailers such as Shopify and Ocado, with increases of 134% and 128% respectively over the same period.
Indeed, the pandemic saw Ocado, the self-proclaimed ‘world’s largest dedicated online grocery retailer’, announce a strategic partnership with M&S to deliver their food to customers across the UK. As a result, it is clear that the rise of online shopping coincides directly with the decline of the high street, as they are both competing against one another. Through this partnership M&S hopes to increase its reach and customer base through wider delivery networks provided by Ocado. Only time will tell whether this combination has paid off.
Therefore, while state aid is still on offer, the German-style wage subsidies offered by the government is unlikely to save jobs on the high street in the long term. Instead, it is more likely to act as a temporary buffer rather than a permanent solution to the ongoing problem of diminishing pedestrian footfalls and revenues. Even worse, the one-third employer contribution under the new Job Retention Scheme effectively means it is much cheaper for businesses to employ one person full-time than two people part-time, which undermines the very crux of the scheme and weakens its credibility.
The government has clearly taken proactive steps to protect jobs and support the economy as the new restrictions come into place. How effective these measures will be remains to be seen.