Furlough Woes

I know. Another whingy post about the UK Gov business support schemes for the covid19 lockdown. I recently blogged about the major problems of the Coronavirus Business Interruption Loans Scheme (CBILS). There’s no way of spinning or positioning that to make it look acceptable, CBILS is an utter disaster from beginning-to-end that needs to be overhauled entirely.

The government furlough scheme, officially the ‘Coronavirus Job Retention Scheme’ (CJRS), isn’t a total disaster. I’m sure it will be quite useful to some companies. Not ours – sadly – but some.

Do you know what’s really at the heart of my problem with the British furloughing scheme though? Germany. Let’s be honest, as a modern Nation-State, they’re just better than us aren’t they? Yes I know. Bloody annoying. This blog post is going to explain a couple of massive flaws in the UK furlough scheme, and at the same time I’m going to contrast them with what Germany are doing.

Now the real kicker for me isn’t being beaten by the Germans again. I’ve gotten over that. It’s that we KNEW the German approach works. Because they’ve used it before. In fact their scheme has been in place, used on-and-off, for over a decade.

We could have copied them, or we could have at least learned from them. Just like we could have adopted the South Korean approach to the covid19 epidemic itself. An approach they themselves had developed from previous experiences with fighting the SARS and MERS corona-viruses.

But we didn’t did we. We’ve gone our own way, again. Reinventing the wheel and coming up with a bent triangle.

The heaviest criticism I’m hearing about the furlough scheme is coming from the ‘Newstarter Furlough’ campaign. To summarise the problem there… people starting a new role after 28th February are excluded from the furlough scheme. Now, don’t get me wrong, this sucks for the people involved. But this is one of the ‘cracks’ the government and abiding media are referring to. I think the crack should be filled somehow, but people also have to realise that there *has* to be a cut-off somewhere. If there wasn’t a cut-off date then every man and his dog could jump on the furlough scheme. And you’ve got to believe that someone would try to register their dogs to get some of that sweet furlough cash. To avoid fraudulent claims, the government simply has no choice to cut-off the furlough scheme. And the end of February makes sense since it was the last payroll date before the job retention scheme was announced.

So… sorry folks. If you have fallen foul of new-starter furlough problem – I’m really sorry things are crappy for you, but unfortunately this blog is not about your specific cause. Good luck though, hope you manage to figure things out and get the support you deserve.

I actually have two completely different, much more central problems with the furlough scheme.

Two Major Flaws

The easiest way for me to describe the problems is to use real world examples.

Scenario 1: High-Skilled Employees

Let’s say we have a software developer. To keep the arithmetic easy, we’ll say their annual salary + NI contribution = £60,000 per year or £5,000 per month.

Now the furloughing scheme will pay the developer £2,500 per month. But, the condition of the scheme is that the employee is not allowed to work.

So as an employer I am left this choice:

• I refuse the scheme, and during a time of major financial hardship and serious cashflow shortages, I carry their full salary unaided. But I get 100% productive output from the employee.
• I take the scheme, and while my cashflow burden is halved (assuming I honor their salary to not screw over my employee), the terms of the scheme mean that the employee cannot work. So I pay £2,500 for nothing. 0% productive output. This is terrible value.

So even though the software developer is fully capable of performing 100% productive output. As an employer in a financially difficult situation, I have to take one of two crappy options.

Actually I have a third option: make the employee redundant. So I can pay £2,500 for zero productive output, or I can pay £0 for zero productive output. Hmm which is better value? Just as well for my employees that I’m not a cynical bastard (or desperate).

 

Scenario 2: Reduced Workload. 

Let’s say our business can work remotely. It’s part of the information economy and is mostly computer based. But the world is in lockdown. A quarter of our customers have furloughed their staff and have temporarily closed their doors, another quarter is in major financial distress, another quarter is open and functioning but being more cautious than normal about making purchases.

Let’s say our team has a sales person, accounts person, customer support person and an operations person. These are roles whose level of business activity directly correlates to the level of customer activity. Customer activity is down but it’s not gone.

We need a sales person, even if they only spend 4 hours a day working. We need an accounts person, even if they only have a couple of hours of jobs to do. We need customer support, we need operations. But we don’t need them 100% of the time.

The furlough scheme gives me two crappy options again.

1. I either furlough my sales person and no longer close any sales.
2. Or I pay 100% of their salary and only get 50% of the normal return.

Same goes for my other employees in accounts, customer support and operations.

Now you might argue that these are all just made up scenarios designed to exploit the weaknesses of the scheme. But (you may have guessed it) they aren’t, I am actually describing the kind of issue facing my company right now. But pretty much every business will have to make at least a few decisions based on those two crappy options. Or indeed take the third road: redundancy.

What’s the alternative?

Well in the real world: Fraud. I’m sorry, but if the government thinks people aren’t going to exploit their furlough scheme they are wrong. Businesses all over the country are going to “furlough staff” but keep them working. They’re going to break the rules. Shock, horror! Massive nation-wide fraud.

For what it’s worth, we’re not going to. But I’d be lying if I said it hadn’t crossed my mind. But here’s the thing: Why is government financial support for non-furloughed staff so terrible? Why is it better for the government to help pay for our employees to sit on their backsides for 3 months than it is to help pay for them to be a little bit productive in a difficult financial climate? Does the government want to keep the economy moving?

The government has created one of the greatest disincentive schemes of all time. Not for the workers – for the employers.

The government actually knows this and has already set-up a furlough fraud “whistleblower hotline”. Great priorities in a major crisis, folks. Perhaps it would be more prudent to adopt a scheme that didn’t create such perverse disincentives in the first place. A scheme that actually helped companies and employees.

What’s the *real* alternative? 

Kurzarbeit. Obviously. Logical folk, the Germans. We should pay more attention to them.

Kurzarbeit, “short-time” in English, is a scheme used in Germany and Austria which allows employers to temporarily reduce the working hours of their employees in times of financial hardship. The government then tops up most of the employees lost pay. What’s so great about kurzarbeit is that it’s brilliantly flexible and elastic. It doesn’t create the same weird disincentives of the UK furloughing scheme. And it also allows German and Austrian companies to rapidly spring back into full productivity after the lockdown or recessionary period is finished.

The schemes even have a special condition which means if the employee spends their extra time off undergoing training they can receive further top-ups to their salaries. Pretty cool stuff.

Kurzarbeit is already proven. It helped save over half a million German jobs in 2009, and financially supported another 1 million others. It doesn’t take a paragon of logic to understand its benefits over the furlough scheme. But in any case, let’s look at my two scenarios again.

Scenario 1: High-Skilled Employees

Before I had to make a choice between 100% pay for 100% productivity but at a time of serious financial risk – or – pay 50% salary for 0% productivity. With kurzarbeit we would be able to provide 50% pay for 50% productivity, and the government would top up the rest for the employee. The perfect compromise.

Scenario 2: Reduced Workload. 

Before we had to make a choice between 0% pay but 0% productivity when the business really needs 50% productivity from the employee to keep functioning. Or 100% pay for 50% productivity while it’s quiet. With kurzarbeit, again I get the perfect compromise of 50% pay for the 50% productivity the business actually needs the employee to do.

Kurzarbeit is better for the employee, better for the company, and both those things combined are ultimately better for the short, medium and long-term economic health of the country.

Consequences

USA

The USA’s model is essentially to do as little as possible. There is no serious employment support scheme to speak of. Assuming no major intervention happens soon, the consequences to the US will likely look something like:

Short-term result:
Massive unemployment in the order of several tens of millions of people losing their jobs. Cascading social nightmare of medical bills from the covid19 epidemic and people losing employment-linked health insurance. Massive increase in personal debt. Mortgage, loan and rent defaults.

Long-term result:
Significant over-supply of job-seekers vs available jobs. A race-to-the-bottom wage competition in certain industries and job roles. Increased inequality. Lower average disposable income causing long-lasting contraction of US economy. Economic impact lasting perhaps as long as 5-10 years.

Germany

In massive contrast to the USA, Germany was both very responsive to the outbreak itself and also in its financial interventions. Not only was it quick to deploy the financial support programs it has also been extremely effective at making sure the money makes its way to businesses and employees as quickly as possible. The same cannot be true for the UK (e.g. CBILS), and the US is an unmitigated disaster.

Short-term result of German strategy:
Very low unemployment. Continued stability. Next to no issues around personal debt or bankruptcies. No ongoing health crises. Very little impact on mortgage and loan defaults etc.

Long-term result:
As soon as the epidemic subsides Germany will spring back into action and the engines of their economy and productivity will start firing on most cylinders again. Germany’s domestic economy in particular is likely to recover very quickly.

 

UK

The UK seems to be sat somewhere in the middle of Germany and the USA. It has managed some limited financial support for business. CBILS is a disaster, but the small business rates relief grant has been well received by micro businesses, and despite its massive flaws described in this blog post the furlough scheme is still going to be moderately effective. But unemployment will be worse than Germany, as will the speed of recovery. I mean, a workforce that’s sat watching day-time TV or doing sudokus for 3-months is unlikely to leap into action when the lockdown is relaxed. It’s going to take weeks or even months for people to pick up all the loose threads they dropped before the lockdown.

How serious and how long the UK’s economic impact will last probably depends most on the outcome of the CBILS problems. Providing an employee retention scheme is helpful, but if the underlying employer is failing then it’s all for nothing. At the moment hundreds of thousands of businesses are at critical risk of financial distress and insolvency unless something is done about it. Let’s hope the government is listening to the criticisms and sorts it out ASAP. If it doesn’t, the UK may more closely resemble the USA than Germany post-covid19.

Final thoughts

Now I’m not an economist and these outcomes are only sandbox economics. Obviously the real world economy is much more complex and there are many chains of interactions that will play a role on the real outcomes of each country. For example, and somewhat ironically, even though Germany is likely to pull through the crisis very effectively domestically, the massive impacts to the US economy and pretty serious impacts to the UK and othe European economies who handled Covid19 less well, will have a major knock-on effects on Germany’s exports. Doh! Es tut mir Leid. (Sorry!).

It might be too late for us to adopt kurzarbeit at this point in the covid19 crisis, but it’s a great tool to have in our national belt should we have long-lasting economic issues in the fallout of covid19. Or indeed in any future financial crisis and recession. And you know there are going to be more, so let’s get more prepared next time. In the meantime, let’s remain pragmatic and keep our minds and options open.

In my experience one of the worst things you can do in any executive capacity is cling on to a poor decision out of fear of looking bad for changing your mind. A bit of pride will need to be swallowed by people in the Treasury, in particular. The whole country depends on it.