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‘On the ball’: How the UK’s 80% salary subsidy works

COVID-19 is rewriting the rule book in nearly all aspects of daily life and the British response shows the once-in-100-year pandemic is also laying waste to ideology. Direct wage subsidies would normally be anathema to the party of Margaret Thatcher but these are far from normal times. Sunak and Johnson have pushed the break-glass-in-emergency button and sent a powerful message that they will not hesitate to adopt once unthinkable tactics to save businesses and jobs.

“These last 10 days have shaken our country and economy as never before,” Sunak says. “We have put aside ideology and orthodoxy to mobilise the full power and resources of the British state.

“What we have done will, I believe, stand as one of the most significant economic interventions at any point in the history of the British state and by any government anywhere in the world.”

The scheme has two key intentions: to support workers during the crisis but to also retain the crucial connection between worker and employer so that the eventual reopening of the economy is as swift as possible.

It applies to anyone who has been asked to stop working but remains on the payroll – otherwise known as a “furloughed worker”. Companies will pay those workers 80 per cent of their standard wage, and that will then be reimbursed by the government. The payments are capped at £2500 ($5000) per month, per employee, and will be backdated to March 1.

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Sunak went further this Thursday, unveiling a second program to extend even more generous support to up to 3.8 million self-employed workers like cleaners, plumbers, electricians, accountants, musicians, hairdressers and taxi drivers.

Anyone who makes a profit of up to £50,000 a year and can prove they have been affected by the economic downturn will be eligible for direct cash grants worth 80 per cent of their average monthly trading profit over the past three years, again capped at £2500 per month.

The grant will give just as much to those who have seen only a small fall in profits as to those who have lost all of their income. Institute for Fiscal Studies economists Stuart Adam and Helen Miller summed it up this way: “Some people, including those whose profits fall by less than 80 per cent as a result of the coronavirus and those whose profits were falling, will be better off than they would have been without coronavirus.”

To prevent a flood of people registering as self-employed to claim the grants, only those who are already in self-employment and lodged a tax return in 2019 will eligible, meaning someone who recently started their own business will be left out.

The twin schemes are more generous than what governments have offered in nearly all other European countries. The question is whether Britain’s very broad strategy is better than the more surgical approach of other countries like Australia.

Central London is close to empty as the effects of a government-ordered lockdown are felt.

Central London is close to empty as the effects of a government-ordered lockdown are felt.Credit:AP

Matthew Lesh, the head of research at the London-based free-market Adam Smith Institute, backs Sunak and Downing Street despite the unprecedented state intervention in the economy: “I think most conservatives or classical liberals or libertarians can understand quite well that there is a role for government during emergencies like wars and pandemics,” he said. “This is exactly when you want the government to step in.”

The biggest flaw with Britain’s approach is the time it will take to get the money flowing. The furloughed worker scheme will not be operational until late April because a brand-new system has to be built to process the payments. To make ends meet in the meantime, Sunak is urging businesses to dip into their cash reserves, take advantage of the government’s deferral of tax payments until 2021, or access low-interest government loans.

Treasury will contact self-employed Brits directly, point them to an online form and pay the grant directly into their bank account. But work on setting up that digital infrastructure will also take months and those payments probably won’t arrive until June.

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Australian Treasurer Josh Frydenberg cites this time gap as a reason why the Morrison government didn’t follow the UK model and instead chose to deliver payments to businesses through the existing tax system.

Professor Chris Rowley of the University of Oxford’s Kellogg College describes Sunak’s plan is “visionary and bold” but says the fine print is key.

“The scheme was dreamt up from scratch in just a couple of days in a great show of conceptual skills [but] the mechanics are unlikely to be operational until late April. So, companies, managers and leaders do actually need to think, be creative, take some responsibility and hold their nerve.”

Some employers haven’t been convinced to sign up and hundreds of thousands of workers appear to have already been sacked.

Nearly 500,000 people applied for Britain’s so-called universal credit payment in nine days – more than 10 times the usual number. The payment to working-age Britons was introduced in 2013 by merging six major benefits including income support, child tax credits, housing assistance and employment support.

Long lines outside Centrelink offices in Australia made international news but the same scenes have not been repeated in the UK. People applying for universal credit normally have to attend a meeting at a job centre but that requirement has been dropped amid the outbreak and applicants now have to call a number to make a phone appointment. However people have to wait for hours for help and the payments take weeks to arrive.

Consultancy firm Capital Economics thinks the furloughed workers scheme will end up costing tens of billions, but spare hundreds of thousands from joining the unemployment queue. Capital is forecasting Britain’s unemployment rate to rise from about 4 per cent to 6 per cent due to the crisis but says unemployment would have probably hit 8 per cent if not for Sunak’s interventions.

The Centre for Economics and Business Research believes the Euro zone GDP will contract 9 per cent year-on-year in the second and third quarters, leading to an overall reduction in 2020 of 6 per cent.

Consultancy firm Capital Economics thinks the furloughed workers scheme will end up costing tens of billions, but spare hundreds of thousands from joining the unemployment queue.

The centre’s deputy chairman, Douglas McWilliams, says Britain and the wider world are facing the worst crisis since the Great Depression and warns wage subsidies will need to be backed up by more government support as lockdowns ease.

“I’m a fan of [the scheme], I think it will certainly help do the job but I suspect we may need even a little bit more once the shops and things start reopening to kickstart the recovery,” McWilliams says.

“It may be some sort of tax holiday or something like that. We have to assume that people are going to be a bit nervous about purchasing big-ticket items when their finances have been damaged a fair bit and when they’re not entirely certain about their job prospects.”

McWilliams heaps praise on Sunak for acting swiftly and generously but says the chancellor had plenty of help.

“The people who are really responsible for this are the civil servant Treasury officials who are sometimes good and sometimes less good,” he says. “They’ve understood the depth of the problem here very quickly and come up with big measures to cope with it.

“This time they have really been on the ball.”

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