The Chancellor’s pledge — a new deal for workers. But will it work? 

As the new restrictions for the hospitality sector were announced early in the week and we saw a reversal of the encouragement to go back to work, one could be forgiven for being somewhat confused as to the path ahead.

Add to this the new “Rule of 6” and the alarm bells started ringing about where the economy might be going. If the new rise in Coronavirus cases had been predicted, then some help would surely have been part of the government’s planning. But the government seemed reluctant to come forward with a new scheme, insisting that the furlough period would not be extended.

Not surprisingly businesses and individuals started questioning the strength and sustainability of the bounce-back which Andy Haldane, the Bank of England’s Chief Economist was enthusiastically welcoming just a few weeks ago. There are now indications of a slowdown in manufacturing, and nervous consumers have lost some confidence. UK surveys suggest that one in three companies intend to shed labour before the end of September, adding to the large number of planned redundancies already announced.

It is not surprising then that the clamour for additional help increased and not just from opposition parties. They were joined by the TUC and by trade bodies such as the CBI, the BCC and the Small Firms Federation, as it became  obvious that something would have to replace furlough. That scheme had paid the wages — or a good proportion of them — for some 9.5 million workers, and had partly recompensed some 2.6m self-employed for loss of earnings.

Why was there a delay? After all, other countries such as Germany and France had already announced extensions to their own schemes of up to two years. But the cost of the scheme has been £39 billion and rising, even though it had been reduced month by month. A further concern was its effectiveness — HMRC estimated that some 5-10 per cent of the furlough money was either claimed fraudulently or paid in error. And third, there was concern that all it did was allow so called “zombie firms” and “zombie jobs” to continue, even though they had no chance of survival.

Ideally any new measures would have to identify the “deserving” firms and those with the greatest need. That’s hard to do normally and it’s especially difficult in the middle of the type of crisis we now face.

But further help was inevitable as the outlook deteriorated. The monthly cost was in any case declining — the number of workers on furlough is now around 3 million, and the scheme was becoming less generous. A number of firms have even been paying the furlough money back. The new scheme will cost even less, as the government has opted for a system similar to those adopted by the French and Germans. This supports firms that employ workers part-time rather than paying them to keep them on the payroll, but not working.

under the new rules, companies are expected to pay a much higher share of the wage bill. They will now contribute to the cost of employing workers for a minimum 30 per cent of their normal hours and the government will provide an extra third, up to a limit of just under £700 a month. The cost to the Exchequer is therefore greatly reduced. Some estimates suggest that the new scheme will only cost a maximum of £5 billion or so over six months, though this has to be counterbalanced by more generous coronavirus relief loan schemes. There is also a job retention bonus scheme of £1,000 per worker which is running in parallel. Larger firms, which have seen increases in turnover, will be excluded which, again, will reduce the cost.

On the face of it, the new scheme answers some of the earlier concerns. But will it do the job? With firms shouldering more of the cost, the likelihood is that redundancies will rise. Many companies in sectors such as tourism and hospitality will simply close, despite an extra six month extension of the lower 5 per cent VAT rate. Whole areas of the creative, sports and cultural sectors that have been particularly hit by the new restrictions are receiving nothing extra. And the six month duration of the new job support scheme may be too short to see firms through what are likely to be turbulent months, exacerbated by the end of the Brexit transition period.

The November budget has been cancelled. But expect more emergency winter statements from the Chancellor in coming months.