Ahead of Chancellor Rishi Sunak’s announcements tomorrow afternoon and his ‘plans to continue protecting jobs through the winter’, Luke Morris, Corporate Finance Partner shares his views on what this may mean for businesses.
Early today the Chancellor said on Twitter: "As our response to coronavirus adapts, tomorrow afternoon I will update the House of Commons on our plans to continue protecting jobs through the winter.”
It's widely anticipated that he will provide a wage subsidy for certain people in certain industries who go back to work on a part time basis.
Interesting isn't it? Sunak has, hitherto, been adamant that Furlough “cannot continue forever”. But I don't suppose we ought to be surprised by a U-turn. Only a few weeks ago we were being urged to return to the office and to get our towns and cities humming with activity again. Now we are to stay at home. Only a few weeks ago we were all enjoying £10 off a mid-week trip to our favourite eateries. Now restaurants and pubs must close by 10pm, or risk enforcement action and fines backed by the Armed Forces. Businesses would be forgiven for struggling with the buffeting and absence of clarity.
This is no backdrop for setting a fiscally responsible Budget, so it's no real surprise that the Budget has been cancelled.
So what can we expect tomorrow? During Prime Minister's questions on Wednesday this week, Boris Johnson was urged to act by opposition MPs to prevent what one called a "tsunami of job losses". Sometime ago I wrote about this prospect here: https://www.linkedin.com/pulse/what-next-jobs-luke-morris/
Earlier this week even the ostensibly politically-independent Bank of England Governor, Andrew Bailey, called on the government to “stop and rethink” the ending of the Furlough scheme, though whilst happy to stick his oar in, he rather unhelpfully stopped short of providing any possible solutions.
It's interesting that the press is speculating on the German Kurtzarbeit scheme and its French equivalent, both apparently favoured by various trade unions and similar organisations. The German system has been around since the early 20th Century and is about limited (originally for 6 month periods only) government – or in reality taxpayer – subsidy where a crisis mandates short-time working, allowing employers to reduce employees’ hours whilst keeping them in a job. In many cases the employer will top up the Kurzarbeit payments to 90 to 100% of salary, meaning that people rarely need to severely alter their lifestyles: great for an economy that is dependent on consumer spending. It also provides peace of mind in difficult times – instead of being out of a job people still have a job and can stay hopeful that they will return to full-time work at some point in the future.
Contrast this to the ham-fist of Furlough. When that scheme was initially rolled out here, across the board at a whopping 80%, people were sent home in droves and weren’t allowed to work. (In theory, at least. Earlier this month the government said up to £3.5bn in Coronavirus Job Retention Scheme payments may have been claimed fraudulently or paid out in error).
You can understand why government has pivoted to a more targeted, and tried and tested, measure. How targeted we shall soon discover. And surely eventually the government will have to concede that certain businesses and industries can no longer be propped up?
But there is a caution. Employment law in Germany is quite different. Making wide-scale redundancies because the government has ordered parts of a business to shut down is more or less “verboten”. In times of financial crisis a company has to instead make a so-called “sozialplan” and fire employees based on social criteria: Do they have children to feed? How many years have they already worked for the employer? How easy will it be for them to find a job? This basically means that younger employees without children who may have only been with the company for a few years and presumably will find it easier to find a job elsewhere, exactly the kind of people the company would probably not want to fire if it could choose, have to go.
It's very different in Germany, culturally and politically. Germany is a typical European social democracy with a large welfare system and government occupying almost half of GDP. Private business is encouraged but it is highly regulated and hamstrung by supervisory boards dominated by worker and community representatives, who can overrule the board of directors.
There is a risk of unforeseen outcomes in applying this template to a different culture, politics and economy. To UK employment law.
If you look at it from an accounting perspective, there is no real difference between a UK-styled Kurtzarbeit and a sort of flexible unemployment benefit. It's just a different name, a different presentation, a different spin. But psychologically and politically it can be presented as vastly different. Whilst there is no certainty as to if, or when, an employee will be retained after a period of “UK Kurtzarbeit”, or even how long such a period will last, the employee will still not have technically “lost their job” in the interim. This, much like face mask policy, is designed to give a sense of security and stave off panic. To create stability.
I recollect, during the Brexit debate, that one of the arguments for the EU was around “stability”. It’s overly simplistic to express this way, but there was a sense of a conflict between stability and democracy in that debate.
Stability is top-down: meaning structure, order, standards and codification. But it raises a question mark over the existence of any mandate for the implemented structure from the people.
Democracy is bottom-up: meaning individual freedom and expression, chaotic debate, and unpredictability. But at least people have their say.
We saw at the Brexit referendum how finely balanced that stability/democracy split is to people in our society. Cancelling the Budget and rolling out UK Kurtzarbeit parks the tough decisions for now, and means the spotlight is temporarily taken off how much all of this is actually costing the taxpayer. But for how much longer is this sustainable? I suspect this government is now running businesses’ reserves of goodwill towards it on low.