U.K. Extends Covid-19 Support to Businesses for Six Months

Britain has already suffered the highest death toll of any European country, and the size of its economic contraction in the three months through June was more than double that of the U.S. and exceeded only by Peru and India.

After resisting an extension of support for businesses beyond the end of next month, the government shifted course on Thursday to give an additional six months of support for firms that can’t offer full-time work to their staff.

“Back in March, we hoped we were facing a temporary period of disruption,” said Rishi Sunak, the government’s Treasury chief. “It is now clear that for at least six months the virus and restrictions are going to be a fact of our lives.”

In joining other European governments in lengthening the support period of businesses, the government changed the approach of its previous furlough program. Instead of covering as much as 80% of wages for workers who had been idled, the new program will now cover two-thirds of the wages lost by workers who are working at least a third of their normal hours.

The wage-subsidy program, which mimics job-support measures in Germany and other European countries, should cost the treasury less than the furlough program and is aimed at supporting jobs that are viable over the longer term. Economists had said the earlier program—which is set to cost £47 billion, equivalent to $60 billion—was keeping some people in “zombie” jobs with no long-term future in the post-coronavirus economy.

Mr. Sunak estimated that the new job scheme would cost £300 million a month for every million workers who are covered. But even with that help in place, he acknowledged that unemployment would continue to rise. “I can’t save every job,” he said.

Mr. Sunak announced the extension to lawmakers, having canceled plans to present a longer-term program for fixing the government’s finances in November, citing the uncertainty caused by the pandemic.

The new package, which included an extension of cuts to the sales tax, is a response to a darkening economic outlook, which will be complicated by the U.K.’s transition to new rules in its trade with the European Union from January.

“We know the coming months are going to be tricky,” he told reporters. “If you’re asking me if I’m ready to do more as the situation evolves, of course I am.”

The U.S. government has spent hundreds of billions of dollars on loans for struggling businesses and enhanced benefits for laid-off workers during the pandemic. European governments, by contrast, have largely sought to encourage companies to keep people on the payroll even when they have little or no work to do.

Their job-retention programs—which have already cost tens of billions of dollars—typically involve payments to companies of most of the wages of idled workers, if those companies can show their revenues have fallen significantly.

Many of those measures were launched as economies were locked down in April, and were only intended to last for between three and six months. But most have been extended as it has become clear that the pandemic will cause severe disruption for some businesses and their workers until a vaccine becomes widely available, a development that governments hope to see in 2021.

According to a survey by the U.K.’s Office for National Statistics, 11% of workers were still on furlough in the second half of August, equivalent to around three million people. By comparison, the ONS estimates that the U.K. lost just 730,000 jobs between March and July. Economists warned that ending government support could lead to the loss of almost 2 million jobs. The Confederation of British Industry, which represents 190,00 U.K. businesses, said the extension would “save hundreds of thousands of viable jobs this winter.”

In Germany, Europe’s largest economy, the share of workers being supported by the government’s short-term program fell to 14% in August from 17% in July.

One consequence of Europe’s furlough programs is that official measures of unemployment have risen only modestly since the pandemic struck, a contrast with the U.S., where jobless rates have soared.

Economists at UBS estimate that if the furlough programs hadn’t been in place, the eurozone’s unemployment rate would have peaked at 20% during the second quarter, above the 14.7% reached by the U.S. in April.

While Europe’s furlough programs help keep unemployment down, some economists and policy workers worry that they may also trap workers in jobs that don’t have a future, and keep businesses afloat that should go under.

But with new infections rising, few governments appear willing to step aside and let markets once again decide which businesses should flourish or fail.

Write to Paul Hannon at paul.hannon@wsj.com