How will the Government wind down the PUP and wage subsidy scheme?

The phoney war has started on the future of the pandemic economic supports of which the Pandemic Unemployment Payment and the wage subsidy scheme are the most important. But the real war is coming – soon.

The Government has stuck to its script – decisions will be made by the end of May and there will be no “cliff edge” ending of supports. This does not really leave us much the wiser, beyond it being clear that the shutters will not be pulled down suddenly on the schemes at the end of June. Meanwhile the Opposition is demanding that the supports continue for an unspecified time. At the centre of this is the PUP. Moving PUP recipients back to the basic jobseekers rate – €205 for a single person– will be controversial, however slowly it is phased.

With promises made that there would be clarity by the end of May, the Government cannot delay much longer. Distracted by the row over housing, it seems the big decisions have still to be made. The real talking within Government on this is going to have to come to a head in the next week to ten days, with a lot at stake many households, businesses and in the wider economy.

1.The big picture

The pandemic supports are hugely expensive; fortunately the money to pay for them has been borrowed at very low or even negative interest rate. The PUP has cost more than €7.3 billion to date ( this is a gross cost as many would otherwise have qualified for unemployment supports ) and currently supports more than 360,000 people. The wage subsidy scheme has cost €5.5 billion and supports the jobs of around 300,000 people. In addition, a range of less costly business supports have been put in place, including cash payments, tax warehousing, rates waivers and so on. The supports have been vital in keeping people in work and keeping businesses going, thus limiting the long-term damage of the pandemic.

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But starting to wind them down as the economy reopens is hugely complicated. Move too soon and businesses who would otherwise have survived may fail and families face hardship. Move too slowly and unviable businesses will trundle on and costs will mount. Choosing how to direct supports to give the best chance to viable companies is complex; cutting PUP payments to those who cannot get back to work is political dynamite.

Meanwhile Government financial forecasts show the national finances, supported by a return to growth, would start to move back towards balance by the middle of the decade. This is based on the supports being wound down and disappearing completely by 2023. In 2022, just €2.5 billion is pencilled in for ongoing special Covid -19 supports, together with another €1.5 billion for higher job seeker payments. The point is that if the major supports are not wound down, then the Government’s room for financial manoeuvre will be sharply cut in the years ahead.

2. The choices

The Government would appear to broadly have three ways forward. One is a kick to touch – announce that the main schemes will continue largely as they are through the summer, perhaps to the end of August. Access to new entrants could be restricted or ended. This is politically the most straightforward, though of course it does maintain costs at a high level and will probably require extra funding to be voted through the Dáil. The PUP numbers are now falling as businesses reopen. Some businesses are saying they are finding it difficult to get staff as they reopen – it is not clear the extent to which people remain content to stay on the €350 PUP payment for now, or have moved on to other jobs, or in some cases moved back home to other countries during the pandemic. However there may well be an issue about getting people back to work part-time as companies gradually return to trading.

The second approach would be to signal an across-the-board , gradual winding down of the main supports after the end of June, when the main schemes are currently due to run out, probably via a gradual tapering of support levels. When this tapering might start and how quickly it would progress is open to question, given that parts of the economy will remain closed and others will just be reopening in July. Sources say that the wage subsidy scheme and PUP are effectively linked and will have to be wound down broadly in tandem . There is no point, for example, in winding down wage subsidies too quickly and thus making it more difficult for companies in lower wage sectors to afford payments comparable or a bit above PUP rates, for which many will require ongoing wage subsidy support.

Ibec, the business lobby group , has suggested that to help businesses restart it is important that supports are not cut off suddenly – for example at the moment an employee loses PUP when they have any work earnings and the wage subsidy is turned off once turnover exceeds 70 per cent of normal. If employees were allowed to generate some earnings , perhaps as they return part-time initially, and get a PUP top up, with some phasing down of wage subsidy supports as turnover gradually rises, it would help companies to navigate reopening, Ibec has said. Meanwhile supports could remain for longer if full reopening is not managed,perhaps due to temporary setbacks over the summer in the health situation.

As well as starting to reduce payment rates, eligibility criteria could also be tightened. At the moment, for example, to qualify for the wage subsidy scheme, companies must be experiencing a reduction in annual turnover of 30 per cent. This could be increased to continue to support companies that are still operating at low capacity, while excluding those that have now reopened but are not experiencing a bounceback in business. But you can see how complicated this could be.

The third broad route would be to take a sectoral approach, continuing to make the supports available in certain sectors – and to employees in those sectors relying on the PUP – including those still subject to major restrictions such as aviation and events, but gradually withdrawing it from reopened sectors. This might make the most sense economically, in terms of directing supports, but looking at the main supports, the PUP and wage subsidies, deciding which sectors and companies are in or out would be complicated. Nonetheless, there are signs that this approach is one of those being considered and certainly there will be special supports directed at specific sectors,

3, What about the other supports?

There are a range of other supports beyond the PUP and wage subsidy scheme. Perhaps the most significant is the Covid-19 Restrictions Support Scheme (CRSS) which offers payment to businesses equal to 10 per cent of weekly turnover up to €20,000 and 5 per cent of turnover above that, subject to a weekly cap of €5,000. This is based on companies with premises not being able to admit customers, or only being able to do so on a very restricted basis. As companies reopen, does this support fall, or is it restructured in some way to help firms reopen? Chambers Ireland,the umbrella body for Chambers of Commerce, also underlines the importance of the extension of the waiver on local authority rates, vital for many small retailers in particular.

A range of sectoral schemes and supports are also likely, notably in the severely damaged aviation sector whose future is seen as having a wider economic importance and in the arts and entertainment.

4. Where will it leave us?

The longer term economic damage, or scarring, from the pandemic is hard to estimate. The recovery on reopening should be significant, driven in part by huge savings. But as well as the difficulty companies have from the direct impact of the restrictions, many may also face longer-term changes in demand. Some sectors may just be smaller – the pandemic may shrink the physical size of the retail sector, for example, while a longer term move to working from home would have implications for city centre businesses and commercial property.

Forecasters have tentatively estimated that the unemployment rate, now around 20 per cent counting all the people on the PUP, could end the year around 10 per cent. The Central Bank has said that some 100,000 jobs lost in the pandemic may not return. As well as measures to boost growth and general job creation, the other key area required will be a range of measures to support people out of work to find jobs and offer them retraining if needed. More details of this are expected when the Government publishes its National Economic Plan in June.