Oxford University Centre for Business Taxation
As the UK lockdown begins to ease, everyone hopes that the economic recovery will take the form of a sharp rebound. Given that average real wages have only just recovered to their 2008 levels following the financial crisis, a sharp rebound from an even more severe crisis would be extremely welcome.
But it cannot be left to chance. There is enormous uncertainty for business about future economic conditions. That uncertainty is compounded in many businesses by the lack of financial resources, following a period of low, or zero, revenue. Such circumstances do not appear promising for an immediate bounce-back. So government policies will be vital in making that more likely.
Many factors will be important for any recovery, including stimulating aggregate demand and re-establishing supply chains. The single most important factor is likely to be getting people back to work – being productive, and in turn creating greater aggregate demand and re-establishing supply, whilst also contributing to government finances through taxes. But many businesses may not be in a position to re-employ their furloughed employees, or to take on new employees.
The governments’ Coronavirus Job Retention Scheme (CJRS) has been a bold, and welcome, initiative that has created an incentive for businesses to furlough, rather than lay off, their employees. Empirical evidence of the effects of similar schemes suggests that it will be beneficial. Firms can avoid the cost of re-hiring and re-training when economic conditions improve, and employees can avoid the long-term career costs of being laid off.
But those benefits only apply if the furloughed workers are re-employed. There is a clear danger that gradually requiring employers to contribute to the cost of the scheme from August will lead to more lay-offs. And simply ending the scheme – as currently scheduled at the end of October – is likely to result in many businesses being forced to lay off workers – worsening, rather than improving, the economy at the very point at which the recovery is needed.
It is welcome that the government has already announced that the scheme will be extended to employees who return to work part-time, in that support will be given for the hours in which employees are not working. That helps businesses – especially in the hospitality sector – slowly return from the lockdown, whilst social distancing measures remain in place. My colleagues and I have recently advocated such an extension.
But that may not be enough. If firms cannot work at full capacity, then closing the scheme will still result in lay-offs. We therefore also propose that the government should go further and offer support to businesses to re-employ furloughed workers (or hire new workers); that is, to contribute to the cost of hours worked as well as hours not worked.
Suppose for example, that an employer was considering rehiring an employee, but that given the new conditions, she could only work at 70% of her normal capacity. Without government support that worker might well be laid off. But if the government offered support of 30% of her wages for every hour that she did work, the employer should be willing to contribute the other 70%. Such support might make a considerable difference to whether the worker is laid off or not.
In macroeconomic terms, it would help boost both demand and supply. Working even at 70% capacity generates private income that would otherwise be lost; and as that income is spent there would be a general boost to demand. Also, supply chains would be supported through relaxing the likelihood of constraints as some businesses were unable to continue. Both effects would contribute to strengthening any recovery.
Obviously such a policy would be costly. It would almost certainly mean the government supporting some of those who would be re-employed anyway. But there may also be a saving compared to the cost to the government of supporting those who are not working.
To moderate the costs the policy would need to be for a well-established fixed period. The size and duration of the support required is debatable. In the absence of an explicit subsidy, a smaller measure would be a holiday from employer’s national insurance for re-employed or new employees.
To ensure that firms are not free-riding on the subsidies, additional regulations might need to be introduced to allow the government to claw back support if businesses did not continue to employ a worker for a period after the subsidy was withdrawn. There may also need to be restrictions on the use of the funds; for example, a limit on dividend payments and share repurchases.
Twelve years is a very long time to wait for wages to recover from an economic crisis. We surely need to aim to do better this time. The UK government has shown that it is prepared to introduce radical policies during the worst of the crisis – it will also need to do so to stimulate a rapid recovery.
Recent relevant research from the Centre for Business Taxation:
Discretionary Fiscal Responses to the Covid-19 Pandemic, Michael P. Devereux, İrem Güçeri, Martin Simmler and Eddy Tam, Oxford Review of Economic Policy, June 2020.
Tax Policy and the COVID-19 Crisis, Richard Collier, Alice Pirlot, John Vella, Intertax, forthcoming.
COVID-19 Challenges for the Arm’s-Length Principle, Matt Andrew and Richard Collier, Tax Notes, Volume 98, Number 12, June 22, 2020.
 This is analysed by Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Iván Werning (2020), “Macroeconomic implications of covid-19: can negative supply shocks cause demand shortages?”, NBER working paper 26918.Back to top of article