The cost of the UK's furlough scheme - where's the money coming from?

Furlough is currently costing the Exchequer around £14bn per month. Following the extension of the scheme through October, and the additional cost of 15bn for small companies and £10bn for the self-employed, the Office for Budget Responsibility estimates that the total cost of COVID-19 related employee support measures will amount to over £100bn, while the budget deficit is projected to rise to a total of £300bn. 

For reference, that’s around about 15% of GDP, nearly four times the cost of the much-debated HS2 line, more than six times the cost of the entire Trident nuclear weapons programme, and more than double the cost of the 2008 bank bailout. 

While HS2, Trident, and the bailout have been much debated, it’s harder to argue against the necessity to support the millions of workers who have found themselves temporarily - or permanently - out of a job.

Nonetheless, we’re talking sums of money so large that they’re almost incomprehensible. I read a few things recently that got me to thinking about the cost of this and how we’re going to pay for it so this week I thought I’d share a little of what I found.

Tax rises are on the horizon

The Financial Times published a great article today which examined some of the likely tax rises which could help to plug the hole in public finances being left by the furlough scheme, and full credit goes to the FT for the figures in this segment.

Income Tax

HMRC estimate that a 1% rise in the basic rate of income tax could raise £4.7bn, while a 1% rise on the higher rate to 41% would raise an additional 1bn. Changes to National Insurance also appear likely, and experts have speculated about the introduction of a flat rate of 12% National Insurance Contributions (NICs,) which would see those earning £100,000 per year lose out to the tune of £5,000 per year. 

Other possibilities include aligning the threshold for NI contributions with the £12,500 personal allowance, which would constitute a significant tax reduction for lower earners or introducing NICs for workers over pension age.

Rishi Sunak already warned the self-employed about the possibility of an increase in NICs for self-employed workers to help pay for the self-employment income support scheme (SEISS). This could take the form of a rise from the 9% NICs which self-employed earners currently pay to 12%, which would put them in alignment with contributions paid by employees. The Institute for Fiscal Studies had previously argued for the government to go even further by making self-employed workers pay both employer and employee NICs in what would constitute a crushing blow for the self-employed.

Pensions, Wealth Taxes and More 

Decreases to pensions and increases on Capital Gains Tax and Private Residence Relief have also been discussed as possible avenues to fill the coffers. Perhaps most interesting is a potential “wealth tax”, which could take the form of a one-off levy on assets of 1-2% that could raise £300bn. However, there are issues surrounding the practicality of this approach given that high earners would certainly seek to evade the charge by transferring assets overseas. Another option would be an “NHS surcharge” of between 1 and 5% on all income and capital gains, which is considered to be a more politically viable option.

Budget cuts

Whether you agree with austerity or not, we can all acknowledge that Conservative governments aren’t typically shy of “trimming the fat”, and the 2008 crisis and subsequent election of the coalition government produced a decade of controversial austerity policies. While the political appetite for austerity is not what it was ten years ago, it’s hard to imagine that spending decreases won’t form some part of the Exchequer’s measures to plug the hole.

As early as last month, the Local Government Association wrote to the Local Government Secretary, Robert Jenrick, asking for guarantees that central government is “willing to do whatever it takes” to support local authority finances. The LGA expressed concerns that councils might be forced into “extreme cost-cutting” measures, a suggestion echoed by the Labour opposition in an analysis reported yesterday by The Guardian in which Labour estimates that local authorities could be forced into spending cuts of up to 20%. 

Politics aside, and focusing back on the training industry, even pre-virus the government has shown itself willing to make big cuts in training expenditure: see the February announcement that the adult traineeship budget is to be cut by over 50%, while changes to apprenticeship funding rates have been recently discussed that could see funding decreases of over 40% for some standards. 

Given that these kinds of changes were already on the table, we shouldn’t be surprised if the government engages in further cost-cutting exercises which could be hurtful to the industry. Add this to a likely decrease in employer training spend given the tightened purse strings all round and we’re looking at a potentially massive decrease in overall training spend. 

Bad times for SMEs

A survey conducted by Opinium in March found that 7% of SMEs had already closed permanently while another 12% were expected to do so in the following month. Those in the industry already know that providers are far from immune to the economic effects of COVID-19, and providers who want to avoid the same fate need to be making plans now to cut costs and make up the difference in any lost income. Training industry spend is a zero-sum game, and the winners will be those providers who get out of the gate early by diversifying their income and adopting innovative approaches.

As always, I’m available if you’re looking for advice or guidance about how to prepare your business for any coming decrease in training spend. Get in touch now to schedule a consultation about your options.