The furlough scheme should be phased out gradually rather than allowed to expire suddenly, the Institute for Fiscal Studies (IFS) has warned the chancellor.

With many of the support measures introduced in response to the pandemic set to expire shortly, they should be extended in some form, and phased out gradually rather than coming to an abrupt halt, the IFS said.

However the IFS also warned the economy will not be able to adjust properly as long as the furlough scheme remains in place.

The report states: “This furlough scheme should be phased out as restrictions ease. It should not be cut completely in one go. Nor should it be extended much beyond the point at which most restrictions are eased, otherwise it will actually choke off recovery. A much more tightly targeted version may be needed where activity is more restricted for longer: perhaps the aviation and airport industry for example.”

The study, which examines the options facing Number 11 Downing St ahead of the Budget next week, suggests a failure to maintain employment support would risk a spike in the jobless rate above its current 5% as struggling companies collapse under the weight of additional wage pressure.

IFS director Paul Johnson said the chancellor’s second budget should seek to strike a balance between targeted help and “weaning the economy off blanket support”.

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.