UK economy can’t recover until furlough is “phased out”

The government must set out a plan to phase out furlough schemes because the economy “cannot adjust and recover” until most of this support has been removed, the Institute for Fiscal Studies (IFS) has warned.

Ahead of the March budget, the organisation said that while support for households and employers needs to be extended with better targets, it is important for recovery that the furlough scheme is phased out “as soon as conditions allow.”

It said that support measures introduced to the pandemic are set to expire soon, but that they should be phased out gradually rather than coming to an “abrupt halt.”

But, it said, the economy won’t adjust properly as long as the furlough scheme remains.

"This will be just Rishi Sunak’s second Budget, but his 15th major fiscal announcement. In it he needs to strike a balance between continuing support for jobs and businesses harmed by lockdowns, and weaning the economy off blanket support which will impede necessary economic adjustment. Any significant continuation of the furlough scheme must be limited and carefully targeted,” said Paul Johnson, IFS director.:"In the recovery phase he needs to support jobs and investment, but also crucially needs to recognise and address the multiple inequalities exacerbated by the crisis."

He explained: “Fiscal policy should lean against the effects of looser monetary policy which has again benefited the older and wealthier at the expense of the younger and poorer. And he will need to allocate substantial sums to help the health, education, justice and local government systems deal with ongoing consequences from the pandemic.”

Johnson said that the UK faces huge economic uncertantities, as the economy adjusts to the triple challenges of Brexit, Covid recovery, and the move to net zero.

“It is possible that that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord,” he added: “But that is not a central expectation: more likely we are on track for ongoing unsustainable deficits. For now, Mr Sunak needs to focus on support and recovery. A reckoning in the form of big future tax rises is highly likely, but not as yet inevitable."

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