The British economy is on the rise edge of a recession while it also goes through weeks financial volatility following the launch of the government’s unfunded growth plan last month.

The government’s strategy is to boost growth in the medium to long term, but households and businesses are already suffering from rising bills and an uncertain economic outlook.

And once Britain succeeds in taming inflation and serious supply chain disruptions, the industry will need to ramp up manufacturing and services to meet growing demand. However, a shortage of skilled workers – that is, a reduction in staff during the economic crisis – may prevent the industry from doing so. As a result, companies need a strategy that helps them cut costs when times are tough, but they also need the ability to ramp up operations quickly once the economy picks up.

A targeted leave program can mitigate these recessionary effects for now and help companies prepare for a future recovery in demand. With the right design, such a system could cost up to 60% less than the £70 billion leave scheme introduced during the COVID-19 pandemic.

Remember the flight chaos last summer? A short-term work schedule, such as a Leave Initiative, for example, would have allowed airports and airlines to send employees on leave until last Easter, before increasing the workforce once it became clear that travel was increasing. Countries such as Germany and Switzerland are already using such programs successfully as a permanent tool to mitigate the negative effects of the recession.

If properly designed, a targeted leave scheme could also do much to alleviate the UK’s current economic woes. Not only will this provide a safety net for households on extremely tight budgets, but it can also help companies that need to cut temporary workers to handle a reduced flow of materials or goods due to bottlenecks in the supply chain. Once production returns to normal levels, it will also prevent labor shortages.

Of course, the UK has deployed a leave scheme to great effect during the COVID-19 pandemic. Amid a sharp rise in unemployment as companies shut down during national lockdowns, the Coronavirus Job Retention Scheme (CJRS) allowed UK companies to use PAYE to designate some or all employees as “leave workers”.

These individuals were granted temporary leave but remained on the company’s payroll. The government paid 80% of their wages, up to £2,500 a month, as well as social security and certain pension contributions. Employers can choose to pay the remaining 20%, although most choose not to.

The program, which ran from March 20, 2020 to September 30, 2021, was used by 1.3 million employers and supported 11.7 million jobs – about a quarter of the workforce took at least one leave during the pandemic. The CJRS was an important source of financial support for households and businesses during this period.

After the pandemic restrictions were lifted, the leave scheme further helped revive economic growth. Maintaining employer-employee relationships allowed companies to quickly resume operations without spending time and expense to hire new employees.

But it was an expensive scheme overall, costing nearly £70 billion, or 8% of government spending by 2021. As well as fraud cases in which employees were forced to keep working while on holiday, such systems can artificially prop up zombie companies that would otherwise not would not have survived. This hinders productivity growth and prevents better companies from increasing their market share.

The CJRS was set up with great haste and placed an unsustainable burden on the state budget. A more focused approach could build on the CJRS and improve its design to maximize support for households and businesses while using taxpayers’ money more wisely.

How would a targeted vacation policy work?

  • The UK government will contribute 80% of a worker’s monthly wages on leave, up to a maximum of £2,500

  • an additional 20% contribution for minimum wage holidaymakers could potentially be funded through compulsory employer payments

  • Eligibility would be based on a 15% year-over-year decline in business income last month

  • Compliance will be verified by random inspections by HM Revenue & Customs (HMRC), with fines for abuse of the system.

Our research shows that a targeted vacation plan should include the effective elements of the CJRS, supplemented by controls for employers to monitor entitlement and compliance, and to support workers at the poverty line.

Even small income shocks can cause problems for low earners. The 20 percent pay cut under the CJRS has left more than 80 percent of those entitled to minimum wage leave in dire financial straits. A targeted system would protect workers against the poverty line by providing for a 100% wage contribution. The additional 20% paid to these workers may be granted by the government or employers as a condition of being allowed to post workers. Applying this targeted program during the pandemic would have cost only 1% of CJRS’s total spending in 2020 and 2021.

As in other countries, eligibility will be verified using management accounts and bank statements to demonstrate the 15% drop. If a large number of companies apply, the system can be based on a self-assessment combined with subsequent HMRC inspections. This approach is applied in Ireland and such features ensure that companies in the sectors and regions hardest hit by the economic crisis receive support quickly, but also that taxpayers’ money is spent wisely.

cost to the taxpayer

The £70 billion wage subsidy paid by the government during the COVID-19 crisis is equivalent to 8% of annual GDP – support that is unattainable in the long term.

By restricting eligibility to only those companies seeing a 15% drop in sales, we calculated that total spending on the pandemic leave scheme would have fallen to £27.98 billion – 60% less than total spending on the CJRS .

The combination of limited costs for taxpayers and large benefits for households and businesses make targeted leave schemes an attractive policy measure to mitigate the negative impact of the current crisis and future recession on households and businesses.

Christoph Görtz, professor of macroeconomics, University of Birmingham; Danny McGowan, Professor of Finance, University of Birminghamand Santosh Koirala, Associate Professor, University of Birmingham

This article has been republished by The Conversation under a Creative Commons license. Read the original article.