Anika – Year 9 Student
Editor’s Note: Aspiring young economist Anika, still ‘only’ in Year 9, explores the UK furlough scheme implemented in response to the Covid-19 pandemic. Anika presents her argument as a series of thoughtfully posed questions, and evaluates the relative merits of Chancellor of the Exchequor Rishi Sunak‘s programme through comparison with similar schemes implemented in other developed nations. This is Anika’s second publication in The GSAL Journal; you can read more from Anika here. Is she a future Young Economist of the Year in the making? CPD
[Featured image: Rishi Sunak. (Flickr: Creative Commons)]
The coronavirus pandemic has brutally hit economies worldwide: the British economy is no exception. To protect the economy, the British government has introduced the furlough scheme, which should help to reduce the unemployment rate due to Covid-19.
What is the furlough scheme?
The noun ‘furlough’ refers to a leave of absence due to special requirements of a company or employer. Under this scheme, the UK government is paying 80% of an employee’s salary up to £2500 every month to prevent a massive increase in unemployment. This means that the employer no longer has to pay their employees but is able to retain them. The cost of the furlough scheme is appraised to be around £60 billion to Exchequer. However, this money is coming from the taxpayers who are continuing to work hard and risk their lives during this pandemic. These taxpayers’ money is providing an income for those who are not able to work rather than in development work like building new roads, funding schools or health services. This inspires the question; why work if money could be earned without working?
Why did the government introduce this scheme?
This is a deplorable time and hardworking employees are losing their jobs without being at fault. Consequently, they will then struggle to support themselves and their families. Many people will benefit from the furlough scheme, as it is a source of income during this rough economic period. This has helped employees working under companies who have been struggling due to the economic impacts of Covid-19. People, who are at risk of losing their jobs, need support economically from the government and therefore can now retain their jobs without the risk of unemployment.
Why is it controversial?
On the contrary, many people feel that the furlough scheme is very unfair as they have to continue working for only 20% more salary when others are at home getting 80% or more of their normal salary. Moreover, in order to work, they are not only putting their own lives at risk but the lives of everybody in their household. Furthermore, in order to pay for the furlough scheme, the tax burden is likely to increase in the future for all those working, meaning that their income will be much lower for the work that they are doing. Keyworkers may then lose the incentive to work with risk, which can greatly influence essential services delivered every day during quarantine.
What have other countries done?
Many countries have used various schemes to prevent an economic collapse; however, are any of these plans effective? Germany is using the ‘Kurzarbeit’ scheme, which is estimated to cost over 40 billion euros (a similar cost to the UK scheme). This scheme covers over 10 million workers and has already proven effective after it was used during the 2008 banking crash. It pays up to 67% of wages of employees with children and 60% of those without, the maximum being €6,700. To reduce the cost, the German government have allowed employees to work part time rather than forcing them to stay at home like the UK. Since lockdown is easing, it would be profitable to implement this scheme in the UK and it would prove more effective as it would reduce the cost of the furlough scheme for the British government.
The US is using the Federal pandemic unemployment compensation program (FPUC), which supports over 30 million employees. It is a part of the US congress 2.2 trillion dollar Covid rescue program. In total, this scheme has given a lending program to businesses, cities and states worth $500 billion and for smaller businesses, a $367 billion fund. This plan also provides $130 billion to hospitals and the unemployment insurance, which has expanded (as described below).
The FPUC uses two techniques to provide a suitable amount of money to all households. Firstly, it expands the regulations to be eligible for unemployment benefits, so workers who may not have originally been eligible now benefit from an extra $600 per week until 31st July. The second technique is one-time cheques sent by the government to households depending on their situation. The government has sent cheques of $1200 to individual households with income of less than $75,000 per year, $2,400 for couples who earn less than $150,000 with an additional $500 for every child in the household. Unfortunately, this scheme has not been proven very efficient, and so the US government has received a lot of criticism for not spending money in the correct sectors that need it. A reformation is in need and the White House National Economic Council has said that a new method would be contemplated in early June.
Canada is providing a taxable benefit of $2000 every 4 weeks for up to 16 weeks for workers whose income has been affected by Covid-19. For every child an extra $300 was provided. For people who rent homes, a mortgage payment delay is available for up to 6 months, but must be agreed between the lender and homeowner. The Canadian government is supporting everyone who may be in difficulty during this time. Over $570 billion dollars has been payed to businesses and $107 billion to individuals and $85 billion in deferrals and tax. Therefore, being predicted to cost $765 billion in total, but on the contrary it has been one of the most effective schemes in the world in protecting the economy and is cheaper than other schemes that are not as effective e.g. US Covid Rescue Program.
A way forward?
The British furlough Scheme is effective and cheaper than most other countries; however, they could implement techniques from other countries into their plan. I think that since lockdown is easing and the Covid-19 numbers are decreasing, people should now be allowed part-time jobs, like in Germany. This will help to ease pressure on the government, reduce tax on the public as well as slowly easing people into life after quarantine. They should also reduce the percentage of money paid by the furlough scheme from 80% to 60% as currently, it is very unfair to keyworkers and people would still be able to live comfortably. As a whole, in comparison to the world, I believe that the furlough scheme is very cost-efficient and effective, but could be made more beneficial due to the change in circumstances.
Bibliography
- https://www.theguardian.com/money/2020/may/12/how-the-uk-furlough-scheme-compares-with-other-countries
- https://www.bbc.co.uk/news/world-us-canada-52579200
- https://www.canada.ca/en/department-finance/economic-response-plan.html#:~:text=Individuals%20and%20families&text=We%20are%20providing%20a%20taxable,working%20due%20to%20COVID%2D19.&text=This%20benefit%20was%20delivered%20as,not%20need%20to%20re%2Dapply.
- https://www.wilsoncenter.org/article/infographic-canadas-covid-19-economic-response-plan
- https://www.theguardian.com/world/2020/mar/25/senate-passes-coronavirus-stimulus-package
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