By Paul Hannon 

LONDON -- The British government reversed course to join other European countries in offering extended help to businesses forced to cut back on the hours worked by their employees.

The decision underlines the difficulty of withdrawing costly support while Covid-19 continues to spread. The steps come with the virus showing a sharp resurgence in the U.K., which has prompted the government to impose a new set of restrictions on the economy and led some forecasters to predict a further downturn in the economy later this year. Britain has suffered the highest death tally 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.

But the government Thursday altered course to give an additional six months of support for firms that can't offer full-time work to their staff. The decision came after the resurgence of the virus prompted fresh restrictions on a range of activities requiring close physical proximity.

"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."

As it offered further support to businesses, the government shifted the approach of its previous 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 GBP47 billion, equivalent to $60 billion -- was keeping some people in "zombie" jobs with no long-term future in the post-Covid economy.

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 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 scheme fell to 14% in August from 17% in July.

One consequence of Europe's furlough schemes 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 schemes 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 schemes 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, and which fail.

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

(END) Dow Jones Newswires

September 24, 2020 09:44 ET (13:44 GMT)