Unemployment will rise to highest level since 1993 if furlough scheme ends in October, economic researchers warn

The government’s decision to end its furlough scheme in October is a “mistake” and will likely see unemployment rise to nearly 10 per cent this year, Britain’s oldest independent economic research group has warned.

The National Institute of Economic and Social Research (NIESR) forecasts that unemployment levels will then recede in 2021 if the economic recovery gathers speed, but will remain around two per cent higher than than if the scheme were extended, at around 6.4 per cent.

Based on these forecasts and Office for National Statistics data, The Independent estimates that this rise in 2021 would roughly equate to an additional 700,000 people losing their jobs.

Quarterly unemployment has not hit 10 per cent since John Major was in power in 1993, following the recession sparked in part by the UK’s disastrous membership of the Exchange Rate Mechanism.

Some 9.5 million people are currently protected by the coronavirus job retention scheme, which has so far cost £31.7bn, the Treasury’s latest figures show.

Extending the furlough scheme beyond the end of October would be relatively inexpensive and may pay for itself by preventing a rise in long-term unemployment, according to NIESR.

“The planned closure of the furlough seems to be a mistake, motivated by an understandable desire to limit spending,” said NIESR deputy director, Garry Young, who described the programme as an “undeniable success” in preventing job losses.

“The scheme was intended by the chancellor to be a bridge through the crisis, and there is a risk that it is coming to an end prematurely and this increases the probability of economic scarring.”

As he announced the termination of the furlough scheme in his “mini-budget” earlier this month, lamenting that “we can’t protect every job”, Rishi Sunak unveiled a £1,000 job retention bonus to incentivise firms to keep employees on once furlough is wrapped up.

However, the head of head of HM Revenue and Customs swiftly cast doubt on the replacement scheme, warning it was “highly uncertain” how much it would cost and how many jobs it would actually protect.

Mr Young added: “The incentives offered to employers by the Job Retention Bonus look too small to be effective given the uncertainty about the economic outlook ─ a one-off payment of £1,000 per employee compared to an average wage of £530 per week.”

The UK’s economic outlook remains extremely uncertain and “depends critically” on the effectiveness of policies to manage the economy and keep the Covid-19 infection rate to a minimum, NIESR said.

The researchers predict that UK GDP will fall by 10 per cent in 2020, before increasing by six per cent the following year.

However, the level of economic activity seen in the final quarter of 2019 is not likely to be regained before the second half of 2023, NIESR said.