Coronavirus (COVID-19) - extending the Coronavirus Job Retention Scheme: analysis

Summary

The fiscal response to COVID-19 has been unprecedented in scale and scope. Both the UK and Scottish Governments have provided significant support to help protect jobs and enable business to survive. The economic policy response is largely reserved and the Scottish Government does not have the full suite of fiscal powers to fully respond to the economic challenges it is facing.

The UK Government’s Coronavirus Job Retention Scheme (CJRS) has been the largest intervention, with the UK Government paying out almost £4 billion in a single week at its peak. The costs were highest during the most stringent restrictions, and have since fallen, reflecting both the return of employees to work and the reduction in the share of support coming from government. The Office for Budget Responsibility (OBR) estimates that scheme costs will fall to around £3.5 billion per month (after tax) in October, when government will be paying 60% of wages.

The CJRS is playing a key role in mitigating the impact on unemployment which is reflected in the low rates of unemployment across the UK. The UK Government has announced the scheme will close on 31st October 2020. Data published by HMRC show that the scheme has protected 779,500 Scottish jobs, around 32% of the total Scottish workforce. Although the number of people furloughed has fallen as the economy has reopened, more than 217,000 jobs in Scotland are still estimated to be supported by the scheme. Given the high number of furloughed workers, the closure of CJRS could precipitate a surge in unemployment.

The purpose of this paper is to explore the costs and benefits of extending the CJRS on a temporary basis through undertaking economic modelling of the impact on unemployment and employment over a three year period. The modelling suggests that

• Extending the CJRS on a temporary basis for eight months could reduce unemployment in Scotland by 61,000 through the first half of next year.
• The direct cost of extending CJRS for eight months for Scotland is estimated to be around £850 million.
• Even though this is only a temporary extension of the CJRS, it has a persistent, positive impact on the labour market, preventing unnecessarily higher levels of unemployment over the next few years.
• Wider economic benefits from the extension mean that it could pay for itself, increasing GDP and potentially lowering debt as a share of GDP.
• With Covid-19 cases on the rise, it may prove impossible for certain sectors to resume economic activity in a way that is economically viable before the current employment support schemes are due to expire in October 2020. Many of these businesses will have a viable long-term future, but only if they continue to be supported.
• This will help keep people in jobs while sectors of the economy currently unable to fully open recover and lead to sustained economic benefits at a relatively small cost.
• Of course, the furlough scheme cannot continue indefinitely and this paper has explored an extension to the end of June 2021. Some other countries have longer extensions planned, such as Germany (to the end of 2021) and France (to end June 2022).