Why the furlough reforms risk a hard landing for the economy

As any astronaut knows, coming back down to Earth is just as dangerous as taking off.

Those hazards will have been in the minds of Treasury officials as they designed the details of how the government’s jobs furloughing scheme will be withdrawn.

Take away the subsidy from firms too rapidly and you risk a spike in joblessness as companies sack furloughed workers that they can no longer afford to keep on.

Take it away too slowly and not only do the costs to the taxpayer spiral but you also risk distorting the economy – with workers effectively prevented from moving from firms without a realistic future to ones that may have one.

It’s a perilous balance – and one that would tax the minds of even rocket scientists.

So how does the Treasury approach, unveiled today, fare?

Allowing furloughed workers to return to work part-time from July (a month earlier than previously announced) is the most encouraging element of it.

If firms can make some use of workers – even if not full-time – it makes no economic sense to prevent or discourage them from doing so.

The tapering of the subsidy from August – with the effective costs per employee borne by employers (including pensions and employer national insurance contributions) rising from 5 per cent to 23 per cent – will be much more contentious, especially since it will apply to all firms regardless of which sector they are in.

The harsh reality is that many pubs, shops and restaurants – industries that are likely to see their customer flow disrupted by social-distancing requirements well into the autumn if not beyond – will not be able to bear these new costs and will lay workers off.

Officials stress that hospitality companies have already benefited from special help in the form of grants and business rates relief. But the Treasury’s decision not to design a sector-by-sector tapering system might well come back to haunt it.

The aggregate job losses resulting from this subsidy withdrawal have not been estimated by the Treasury. There could be hiring by other firms to offset any hospitality and retail losses. But a summer major wave of redundancies in the service economy is something that will be – and should be – keeping policymakers up at night.

The tapering of the parallel subsidy scheme for the self-employed – reducing their payment from 80 per cent of average profits to 70 per cent – does not pose the same risk in terms of redundancies. And the confirmation of its extension, like the furlough scheme, is welcome.

It’s worth remembering that the self-employed are not prevented from taking on work if they can find it while still receiving the benefit. Nevertheless, the subsidy’s taper will reduce the incomes of many self-employed people unless their orders are recovering relatively strongly by the early autumn.

And that’s the central assumption of policymakers in designing the withdrawal plans for this unprecedented job-market support – that the lockdown will be history and customers and orders will be flowing steadily back for companies, that the market will be able to take over from the state as the source of workers’ income.

We must hope that this assumption is correct because, if not, the landing for the jobs market risks being hard indeed.