A surge in U.K. unemployment is virtually inevitable after Chancellor Rishi Sunak reduced the government’s defense against the economic chaos of the coronavirus. Gone is the furlough program that may have saved millions of jobs in the early days of the pandemic yet which proved too expensive to last.
In its place is a plan to subsidize wages for the next six months, a move that Goldman Sachs economists say could tip an additional 2.2 million out of work. The new support amounts to about a quarter of that available earlier this year. To get it, employees must work a third of their normal hours, but firms will have to top up wages — a bar that will be too high for many which are struggling, according to Bloomberg Agency.
Goldman Sachs forecasts around 1.3 million workers will continue to benefit from the new approach after October, but the shift for others from furlough to unemployment will propel the jobless rate to 9% — more than double the current level.
The pulling back of aid suggests Prime Minister Boris Johnson’s government has chosen to stop trying to prevent a surge in joblessness and focus instead on the permanent adjustment of the economy to a weaker growth rate and higher level of unemployment as the virus drags into 2021.
It sets the U.K. definitively on a different course from neighbors such as Germany, which has tried to protect its labor market with support through next year. “It’s helpful, but not that much given the magnitude of the problems,” said Peter Dixon, an economist at Commerzbank AG in London. “It only supports people already working in a job, so a lot of companies probably won’t bring their employees back from furlough. We expect unemployment to climb to about 8%, and it might even go higher.”
Sunak’s latest program marks a shift to a more traditional approach for the Conservative party, with all the risks that entails. Margaret Thatcher’s government in the 1980s radically reshaped the economy by allowing struggling industries to die, at the cost of soaring unemployment that proved controversial for years.
“The chancellor’s initial policy response to the economic impact of Covid was bold and compassionate,” said Helen Barnard, director of the independent Joseph Rowntree Foundation. “The design of this scheme risks undermining its success and leading to more job losses.”