A Targeted Furlough Scheme to Help the Economy in Downturns

This is a preview from the Quarterly UK Economic Outlook, February 2022

The Coronavirus Job Retention Scheme (CJRS) is an important success story of the Covid-19 pandemic in the UK. The policy supported household finances by guarding employees from redundancy while also relaxing businesses’ financial constraints by lowering their wage bills. However, it is often overlooked that the CJRS was vital in making possible national lockdowns during 2020 and 2021, thereby curtailing the spread of the disease. For a future lockdown to be feasible would require the simultaneous reintroduction of a furlough scheme (Görtz et al., 2021) and there may be applications of a version of this scheme in any future economic downturn. In principle, this could be an automatic stabiliser that complements other fiscal policy responses to a downturn. Germany and Switzerland have long-standing furlough schemes that were successfully deployed during the great recession and have remained in place since. Evidence shows these schemes help firms reorganise their operations during episodes of severe financial distress and that they tend to recover without capital and jobs being destroyed through bankruptcy. These are targeted schemes such that only affected sectors would be eligible. Ultimately, this is a question for politicians who would need to decide whether public finances are able to bear the scheme’s cost.