Rishi Sunak faces a race against time to avoid furlough redundancies

For 3m workers and Rishi Sunak, the clock started ticking at midnight on Wednesday. It marked exactly 45 days before the furlough scheme’s end on Oct 31 – the minimum consultation period for firms making more than 100 redundancies.

Some 10pc of the workforce remains on the Government’s emergency wage subsidy and vulnerable to job losses that have hit employees at the likes of M&S, British Airways and Pret a Manger in recent months.

More help may be on its way from the “whatever it takes” Chancellor, however.

The mood music in government appeared to change this week as a second wave of Covid-19 cases in the UK took off and more unemployment pain was revealed.

Official figures showed 700,000 workers had dropped off payrolls since Covid struck, with forecasters expecting the jobless rate to top 8pc – levels last seen in 2012. More support could help persuade firms to shelve their redundancy plans.

Sunak and the Prime Minister hinted last week that more job support was in the works.

The Chancellor sought to draw a line under his flagship furlough scheme but vowed to be “creative” in battling rising unemployment, calling it his “number one priority”.

When quizzed on the scheme’s end last week, the Prime Minister also signalled more help was coming, promising to show “great creativity” and to “fight for every sector of the economy”.

A menu of options to battle the fast-escalating unemployment crisis is under discussion by officials, with hopes of a successor to the furlough scheme growing by the day.

Yet swathes of the workforce, particularly retail, hotel and food production workers, remain on the job retention scheme.

Furlough dilemma as new-look economy emerges

“The Government is going to need to do something to support wages in the most disrupted sectors,” says Tony Wilson, head of the Institute for Employment Studies.

“But they are on the horns of a dilemma here because a lot of what is happening now is longer-term restructuring and it doesn’t do anyone any favours trapping people in jobs that aren’t viable.”

The Chancellor has faced mounting pressure from MPs and businesses to extend the wage support for the hardest hit sectors. His first attempt to ease the transition from furlough through his Plan for Jobs received a lukewarm response, particularly the badly targeted £1,000 job retention bonus economists warned would not save roles.

“It looks like the momentum [behind a furlough successor] is gathering pace and we are also suddenly in this second wave. You get a feel for these things with the type of people coming out saying stuff,” says one senior Labour source. “Some of the noise we are hearing is that some businesses expect it.”

Sources with knowledge of government talks say there has been “increasing appetite” for a successor to the furlough scheme, particularly in the last two weeks.

The runaway success of the Eat Out to Help Out scheme has emboldened officials, one source says.

They add: “It was a big, strong intervention that worked, that appears to have changed a few minds in Treasury... The door seems to be open for new ideas.”

Three main options lie on Sunak’s desk: end, extend or replace the furlough scheme. The key question for the Chancellor is how different will the post-pandemic economy be?

“The key dilemma, and no one knows the answer to this, is whether we are in a temporary change for the sectors worst affected or a more permanent structural change,” says Clare McNeil, associate director at IPPR. “Your solution really depends on your reading of the future labour market.”

The arts, entertainment, food and accommodation sectors were the worst-hit UK industries according to July data.

The Treasury and the Bank of England have argued the jobs market needs to be weaned off furlough even as the likes of France and Germany extend their equivalent schemes.

Officials say it would be detrimental to keep workers in suspended animation, holding them back in so-called “zombie jobs” that might not exist in the new economic normal.

Let nightclub bartenders or airline cabin crew staff seek new work in growing sectors, such as delivery or tech, the theory argues.

Covid has also merely accelerated structural shifts taking place in other sectors, such as high street retail.

“The scheme as it stands does need to stop as it is essentially holding the labour market in the position it was in March,” says James Heywood at the Centre for Policy Studies.

“There’s only a certain amount of time you can do that before you start holding the economy back.”

Heywood says “focus needs to shift towards new job creation”, such as making “temporary but significant cuts to employers’ national insurance to cut the cost of hiring people”.

Calls for more training to help career shifts

He also proposes boosting support for training and job matching to help workers find new careers.

Letting nature take its course in the jobs market comes at a cost though, particularly for workers.

Soaring unemployment would weigh on the wider economy’s recovery, workers would need retraining and it would still cost taxpayers through the rise in jobless benefits.

Currently the Bank of England believes the unemployment rate could hit 7.5pc by the end of the year.

“Getting people back into work once they enter unemployment takes a long time,” warns Daniel Tomlinson, an economist at the Resolution Foundation.

Perhaps more importantly, demand for many services will return after Covid and possibly as soon as next year if a vaccine is available.

If Covid can be suppressed, drinkers will flood back to pubs, West End theatres will fill up again and holidaymakers will jet out to Europe’s beaches. The transition in demand would only be temporary, meaning it could be more effective to prop up wages for longer.

“If you didn’t do something of this kind, you will need to see virtually unprecedented levels of sector switching [by workers],” says McNeil.

Furlough extension could prove cheaper than expected

A straight extension of the scheme is deemed politically unpalatable within the Treasury but the cost may be smaller than many think.

The scheme has been the most pricey of the Covid-19 economic response with £35bn doled out to almost 10m workers.

However, the continuing cost has been declining as more furloughed employees return and the scheme is tapered. Employers now contribute to furloughed workers’ wages, with the state paying 60pc of pay and other tax and pension costs, compared to 80pc at the scheme’s start.

Morgan Stanley estimates that the net cost of a six-month extension would be just £3bn, given laid-off workers would need state-funded jobless benefits.

Anneliese Dodds, the shadow chancellor, warns the “furlough cliff edge risks a jobs crash this autumn”.

She adds that “any action the Government takes now will be too late for many furloughed workers” as companies are already putting in place redundancy plans.

Areas with the highest percentages of employees on furlough in August:

Time to target worst-hit sectors

A new, more targeted wage support is seen as more politically realistic, with MPs and business groups rallying around the idea of a pared-back scheme.

Labour has called for “new targeted support” for industries most affected, while the Confederation of British Industry has proposed help more targeted at firms in need, but on less generous terms to ensure “zombie jobs” are not propped up.

However, Philip Hammond, the former Tory chancellor, warns against “throwing good money after bad” and says a targeted approach is “virtually impossible”.

He says: “Treasury wisdom ... painfully learned through the Seventies and Eighties is that when industries need to restructure, you need to recognise that.

“The longer you delay, the more public money you pour into trying to pretend that failed businesses are viable and unemployed people are actually employed, the more difficult it is to actually recover.

“Many of the people shaken out of the labour market in the Eighties never worked again because they were trapped in non-viable industries for 15 years.”

The Federation of Small Businesses has nevertheless urged officials to consider a furlough successor that helps firms in local lockdowns and in sectors still facing national restrictions.

Officials are studying plans to ensure new job support is targeted at the worst-affected businesses, not just certain sectors, and considering how training could contribute to an employment recovery.

“I would be very surprised if the Chancellor didn’t come back with some more announcements,” says Tomlinson.

“There will be different, more targeted intervention because if you did nothing at the end of October, it would be quite likely we would see a large increase in redundancies.”

The stakes could not be higher for Sunak, and he has weeks rather than months to stop companies pressing ahead with redundancies. The clock is ticking.

Additional reporting by Russell Lynch