Phase out furlough gradually and keep universal credit uplift, says IFS

Continued support needed as economy recovers, says think tank

The chancellor is preparing for the Budget on 3 March (Getty)

Rishi Sunak should keep the £20 benefit increase and only unwind the furlough scheme gradually, the Institute for Fiscal Studies (IFS) has said.

The non-partisan think tank said it is “vital” that the furlough scheme, which has supported 10 million jobs during the pandemic, does not come to an abrupt halt. Ministers currently plan to end the scheme on 30 April.

In a report compiled with Citi Research ahead of the Budget on 3 March, the IFS called for furlough to be phased out “as soon as conditions allow” so that the economy can properly adjust.

There are concerns that while furlough has been vital for keeping unemployment low it is also protecting some jobs and companies which have no future.

Lower-income households are at higher risk of losing their jobs as “deferred” company failures begin to occur, the IFS said. Its report reiterated its warning against introducing tax rises before the economy reaches a state where it is stable and growing.

IFS director Paul Johnson said that Chancellor Rishi Sunak's second Budget – but 15th major fiscal event – should strike a balance between supporting jobs and businesses and getting the economy standing on its own feet, and that it should set out to secure the recovery, not fix the public finances.

“Any significant continuation of the furlough scheme must be limited and carefully targeted,” he said.

“In the recovery phase, (Mr Sunak) needs to support jobs and investment, but also crucially needs to recognise and address the multiple inequalities exacerbated by the crisis.

“Fiscal policy should lean against the effects of looser monetary policy which has again benefitted the older and wealthier at the expense of the younger and poorer.”

A move to keep the £20 rise in universal credit in place would cost around £6.5bn in the long term. But removing it could see some single, childless adults see their income fall by a fifth, the IFS said.

Last weekend, the government revealed that the NHS had administered 15 million first-dose vaccines to people across the UK.

But the Citi analysts said that while the vaccine is likely to underpin a rapid recovery, such a recovery will ultimately be incomplete.

They added that substantial reconfiguration will be necessary over coming years.

Even by the end of 2021, the economy is likely to still be 3 per cent below its pre-pandemic level, according to the central scenario forecast by the analysts.

Borrowing is expected to hit around £400bn during the current financial year, the highest level in history apart from during the world wars.

Citi forecasts that borrowing will still be around £130bn a year in four years' time, around double pre-pandemic levels.

Because of low interest rates, the cost of borrowing is historically low. However, the Chancellor's hopes of balancing the books while also ending austerity would suggest that HM Revenue and Customs might need to raise a further £60bn through taxes.

This figure is shrouded in uncertainty, the experts warned.

Mr Johnson added: “In all this (the Chancellor) is facing huge economic uncertainties as the economy adjusts to the triple challenges of Brexit, recovery from Covid and the move to net zero.

“It is possible that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord. 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.”

Additional reporting by PA