Opinion

The Guardian view on wage subsidies: unemployment costs too

Almost a third of the UK workforce are now reliant on government support for their income. If it is withdrawn while the economy is hibernating then joblessness will rise

Without the coronavirus wage subsidies covering 10 million people, the UK would have seen, judging by others’ experiences, about one in five workers unemployed. Joblessness matters because it hurts. Unemployment is stressful and damages morale; it increases susceptibility to malnutrition, illness, and mental stress. Society pays a high price for such scarring. That is why the Treasury’s decision to withdraw the wage subsidies over the next few months of the coronavirus pandemic is a risky gamble that, if it fails, could spell disaster.

The chancellor, Rishi Sunak, announced that if companies want to retain government help to pay 80% of an employee’s total wages, up to a cap of £2,500, they must contribute to their wages, pensions and national insurance until October. For the self-employed, state payments will end by September. This is big news. Nearly a third of the workforce are now reliant on government subsidies for their income. About a seventh are on universal credit.

Cutting support can only be sustained if the economy can be roused into life from state-imposed hibernation. Companies will need sales to pay staff. Many companies may not be able to generate income: how many bars and hotels can be run by physically separating their customers? The worry is that some businesses will look at their books – only 43% have cash reserves that would last up to six months – and think they will have to downsize to stay afloat while the economy remains gripped by a viral stupor. It would have made more sense to scale back the subsidies in step with lifting the lockdown. The worry is that Mr Sunak’s expiration of the furlough scheme represents not the sunlit uplands of normal life, but a cliff that many Britons and the economy are hurtling toward.

Unlike many advanced democracies, Britain does not produce up-to-date employment statistics. There are no official numbers on the effect coronavirus has had on unemployment. From what we do know, the consequences are unlikely to be good news. Those losing jobs look certain to struggle to find new ones: while the claimant count rose 856,000 to 2.1 million in April, the biggest monthly rise since modern records began in 1971, there was a 170,000 drop in job vacancies in the three months to April.

The chancellor was expected to spend more than £80bn (about 3.7% of annual GDP) on such support over the next eight months. In withdrawing the wage support he has bowed to the orthodox Treasury view that such spending was unsustainable. Yet there is a strong case to suggest that the scale of the government support for the economy was smaller than in many other countries – and that it should be enlarged, not shrunk. If Mr Sunak has miscalculated and is removing cash too quickly, he risks businesses going under and the spike in unemployment he has been trying to avoid – all of which will make it even harder to escape from the coronavirus crisis.