A big day tomorrow as April 12th marks the largest unlocking so far for 2021, and lots of people will be feeling a lot more confident and we will see exactly how the economy starts to unfold within a few weeks time. April figures will be interesting! Many a hair will be cut, many a weight will be lifted (and dropped), and beer gardens will be rammed just as the temperature reaches the heady heights of possibly 10 degrees celsius depending on where in the country you are!
This week we will be spending our time looking at the furlough scheme – and how good or bad it has been, so far – how we measure the success of it – and the current impact on the rental and sales market, and potential future impacts.
I wanted to write this piece because I can’t remember reading more speculation and, frankly, nonsense around a piece of government policy. The most ridiculous statement I’ve heard so far is that it would cost the entire budget of the NHS for one year, within 3 months. Let’s look at the real figures.
When looking at the real cost, there will be some really important caveats to consider. We can (if we are writing clickbait headlines in newspapers/online publications) just talk about the gross cost of furlough. This is a very blunt tool of course. My argument will be more nuanced – I will be looking at the gross cost, the number of jobs saved and thus the money saved in not needing to re-create these jobs (which is very expensive for any government), the amount in benefits NOT paid out because of furlough, and therefore the true net cost (or even the benefit…..you never know…..). The conclusion can then be drawn, in possession of the facts, as to what sort of policy furlough has been.
For a conclusion we will look at the impact on the property market when furlough IS finally wound down – what do I think will happen and why?
Let’s start with the clickbait number – the headline “cost”. The claims so far (to week ending March 15th 2021, the most up to date I can find, is £57.7 billion. Get your head around that for a moment! The pre-covid budget for healthcare in the UK was £150bn pre-covid (£212bn spent in 2020-21) – so “only” a third of the healthcare annual budget spent in one year of the scheme.
Interestingly, the government forecast from the budget has a different methodology to mine proposed above. They forecast a NET cost in the 2021-22 tax year, purely based on the scheme extension to September, of just under £7bn. (there could of course be extensions, more on that later). The budget wording is this: “The costing is estimated by taking the product of the estimated number of employments furloughed per month and average monthly claim. Adjustments are made for estimated tax and National Insurance receipts on salary payments supported by the CJRS and to remove payments to the public sector. “
This makes some sense, because obviously the exchequer is on “cashback” via tax and national insurance – and if everyone on furlough was out of work, they would not be paying tax on income. Not everyone WOULD be out of work of course and many might be pushed into the gig economy, or simply motivated to get another job – vacancies are still around 25% lower year on year, but there are still around 600,000 job vacancies around. Also – important for our analysis – 1.2 million jobs have been lost to end 2020 versus end 2019. That is the figure for the history books.
So how do we know what would have happened with no furlough? We don’t, of course, so we have to look for parallels. I’m going to propose that the US is the best and closest comparable that we have got. There are flaws with that of course – the primary one being the difference in employment law (far easier to hire and fire in the US – and less costly to do so, redundancy protection not comparable between the two), but we have to start with something.
In February 2020 the unemployment rate in the US was 3.5%. The UK was at 3.8% so pretty comparable. In the 2 months that followed, without the furlough support the US managed to shed 23 million jobs or so (net). That represented about 15% of the employed workforce there at the time. The UK moved from 3.8% to 3.9% in the same time period, thanks to furlough. The difference is around 100-150 times as large, which is obviously a totally different ball game.
In the interim period, the US has deployed a truly gigantic amount of stimulus. You cannot compare the figures £ for $, but we can look at percentages of course. Furlough, for its faults, has ensured that money gets into the hands of workers – and as I referred to above, instead of forcing even more people into the universal credit system (which obviously saw far more new claims in a short space of time than it ever thought it would process). The US instead used a “furlough” which would not be our understanding of the word (whereas the whole word and concept actually came from the US in the first place), laying off without pay but allowing tax breaks for the companies keeping workers on. As an example the Cheesecake factory furloughed 41,000 people and had a tax break worth $50m.
Around 20% of the money deployed in the US stimulus has been used to directly protect workers and families. The UK has done a LOT more via loans in percentage terms (bounceback loans, whilst open to criticisms, are still loans and not grants, and whilst payback will not be 100% some of the money will be going back into the exchequer over the next 5-9 years). US GDP “only” dropped 2.3% in 2020 compared to 9.9% in the UK though of course – which shows you how effective, or not, a measure like GDP can be in these circumstances! UK figures at the same time (net costs, actually deployed) were more like 40% of Covid-specific money deployed to workers and families.
The UK cost of Covid by early December 2020 was estimated by the national audit office at around 13.5% of UK GDP – in early October 2020 the US cost was more like 19% of US GDP. So stimulus has been more than 50% larger than the UK intervention.
US unemployment today is at around 6% versus the UK at 5.1%. The level of deterioration from the Feb 2020 levels is 2.5% extra unemployment versus 1.3% in the UK – so about twice as much.
So more money has been spent, per capita, with a worse outcome on employment thus far. This stacks up very favourably compared to the Global Financial Crisis where the US strongly out-fought and out-thought the UK and had a far better and faster recovery period. This looks in doubt this time round, and the US has far larger and more serious inflationary concerns much faster than the UK will do.
So – with a comparable under our belt, how about what would have been spent if there had been no furlough scheme? The average claim so far is around £1250 (half of the maximum average monthly claim) which speaks to how many part time jobs have been furloughed – aside from anything else. Of course a number of sectors have been decimated (hospitality, travel), and many of those have been on the scheme for 12 months now. The average benefits claim for those out of work might be the standard allowance, plus 2 children and housing benefit – which would come to around £750 per capital (figures are not available widely, so I am having to make some assumptions with the best data available!). That could account for up to 60% of the furlough bill so far (although many on furlough will be claiming some of that universal credit I am sure) – but it would seem conservative to suggest 30-40% of the furlough bill would have been spent on other benefits if furlough had never happened.
This number – if we settle on a third given the imprecise nature of the underlying data – is one to remember for the future. That third will be BEFORE the treasury’s “cashback” on tax and national insurance of course (as considered by the treasury in their figures) – and very quickly you will see that quite easily, over half and perhaps even 2/3rd of the furlough money spent is recovered very quickly/in real time compared to other government obligations.
Now that’s before considering the cost of job creation. Back to our UK/US comparison: Using figures from the World Bank and the Bank of England, it can cost between $25,000 and £50,000 to create genuinely NEW jobs going forwards. This might be an overestimate as some old jobs may well come back at cheaper prices (although you could argue the US labour market has reached its new equilibrium by now, and alongside rapid tech advances, working from home, other pandemic-inspired major changes) – so let us use £20,000 as a compromise figure between the two. On this basis the cost to create one million jobs would be around 1% of GDP in the UK – so the GDP cost of repairing/reviving/creating 1.2 million jobs lost is a further 1.2% of GDP (£24bn).
On this basis, in the US, if we use $28,000 as an estimate (using a rough exchange rate), the cost of repairing/reviving/creating the c. 11 million jobs that had gone adrift by the end of 2020 in the US, that would be $308bn or a further 1.5% of GDP. Around 25% more costly than the UK figure.
On all the metrics I can find or analyse, the scheme has to be considered a success compared to the most valid comparison. EU countries could also be better frames of reference (arguably) but stimulus has also been far higher in the EU than the UK throughout the whole pandemic (as a percentage of GDP). France and Germany both started from a higher unemployment rate and also suffered worse figures than the UK in 2020 in terms of deterioration, despite having somewhat similar schemes.
Of course, there is comfort in being one of the better solutions and policies internationally, but that is not the only frame of reference. It isn’t a competition! I have struggled to think of a better alternative since the announcement of the scheme – there have been enough people complaining it has been too generous, and on the other side enough people complaining that it hasn’t been generous enough, to make me feel that it might just about have hit the mark. I think it will be looked back at, over time, as one of the real success stories when we consider the economic policy response to the pandemic nationwide and worldwide.
So – what impact on property once it does finally taper off? There is a significant caveat here to be considered – will it be all over in September 2021? It seems clear that the numbers are running along nicely in terms of vaccinations and resultant lower cases, and the roadmap (that we were assured would be about the data, not the dates!) is on track to stick to the same dates (perhaps there has been an incredible improvement in government modelling that we haven’t been told about!).
The intentions of the chancellor and the treasury were shown in late 2020 as they tried to move from the Coronavirus Job Retention Scheme to the Coronavirus Job Support Scheme (this was blown out by the second wave/new variant, of course). Will the CJRS become the CJSS again in October 2021? The economic performance in the interim will tell a tale, of course, but it could easily be justified. Will it look exactly the same as it was going to in November 2020? Unlikely, but it may not be materially different.
Will there suddenly be a huge swathe of job losses? Does that then filter through to the property crash that many seem to be on the sidelines, waiting for? My personal view is no – absolutely not. A wobble or two is inevitable as long as this all plays out – however, let’s look at a few fundamentals:
Many markets are broken at the moment. Supply and demand have both moved, often in opposite directions. Equilibrium will return and rather than a “new normal” I suspect it will look quite a lot like the old normal. How much stock is in the pipeline that hasn’t been offered to the market? Quite a lot – difficult to put a number on it – and also how long it will be before people who have held stock off the market because of pandemic fears get confidence back.
At least twice the furlough scheme has been at a precipice. Remember it was the evening of Hallowe’en before we knew that there would be an extension into November – FAR too late for many companies to resource plan effectively. It is perfectly possible that many of the probable redundancies were made/have already been made.
Some of the numbers in the scheme will be inflated. Two examples – one is fraud, of course, the other is “strategic furlough” – e.g. Magnet Kitchens furloughed many staff in December and January, historically poor months for them in terms of taking kitchen orders – calculating that the cost saving was better than staying open, and knowing that the other 10 months trading may more than make up for it. Cynical and not within the spirit of the scheme – but within the letter of the law. Thus, the number on furlough is overdeclared.
This is not to make light of the disruption when furlough is over! There will be some. However, I am of the mindset that figures on unemployment have been being forecast on the high side for the past 9 months or so, and revisions should have been down faster and harder.
The beauty of the market is that this is my view, and many will disagree a little, or a lot. What this means is simply – as and when there is a wobble later this year, there are millions of bearish investors waiting to panic (they don’t realise that yet, of course) and see one or two pieces of potentially really bad news and then perhaps some stock will start being dumped. There will, of course, be millions of bullish investors waiting to pounce – but a lot of people tend to talk fairly tough until faced with a really contrarian decision – and then not pull the trigger. Time will tell, in my view……
As always, likes, comments, and shares are much appreciated – I love the side debates that come off some of the comments every week, thanks for reading!
