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The Treasury’s plans to “prematurely” end the government’s coronavirus furlough scheme will spark mass unemployment this autumn, one of the UK’s leading economic think tanks has warned.

In its latest report, the National Institute of Economic and Social Research (NIESR) calculated that the jobless rate would surge to around 10% of the country’s workforce – equivalent to three million people on the dole – by the end of the year.

NIESR praised the government’s coronavirus job retention scheme but called on chancellor Rishi Sunak to extend it into next year and abandon his plans to wind it down next month and scrap it completely by the end of October.

Labour’s shadow chancellor Anneliese Dodds said that the figures showed that the Treasury’s failure to tailor its scheme to specific sectors could prove “a very costly mistake” for people’s jobs and the economy.

Fresh Treasury figures released on Tuesday showed that, as of July 26, 9.5m workers were on the furlough scheme, with 1.2m employers taking part. The cost to the taxpayer to date totals £31.7bn.

But the think tank said extending the programme until the middle of next year would dramatically cut the number of redundancies, be “relatively inexpensive” and by preventing a rise in long-term unemployment would have “paid for itself”.

Garry Young, NIESR deputy director, said: “The planned closure of the furlough seems to be a mistake, motivated by an understandable desire to limit spending.

“The scheme was intended by the chancellor to be a bridge through the crisis, and there is a risk that it is coming to an end prematurely – and this increases the probability of economic scarring.

“The scheme has been an undeniable success in terms of keeping furloughed employees attached to their jobs.”

The think tank also forecasts that UK GDP is set to fall by 10% in 2020, before increasing by 6% in 2021.

Treasury chief secretary Steve Barclay refused to reconsider the furlough withdrawal plan, saying the rationale was keeping a link between staff and their jobs. “If you stretch the elastic of that too long, then people start to lose their skills,” he told an event hosted by the Onward think tank.

But Barclay did offer some hope to the worst-hit sectors of the economy, suggesting that assistance packages similar to the £1.7bn provided to the arts will be possible.

Not extending furlough doesn’t mean “that targeted measures won’t be taken where there is a strong business case for doing so,” he said.

A Treasury spokesperson said: “Our job retention scheme has protected 9.5m jobs across the UK and we have extended it until October – meaning it will have been open for eight months, supporting businesses as the economy reopens.

“It is in no one’s long term interests for the scheme to continue forever, and right that state support is slowly reduced as we focus on getting furloughed employees back to work.

“As part of the next phase of our economic plan to rebuild and recover the country’s economy, we recently announced our Plan for Jobs. We have made up to £30bn available to support, protect and create jobs, helping ensure people and businesses can come back from this crisis.”

Shadow Chancellor Anneliese Dodds told HuffPost UK: “Labour has warned again and again that cutting off furlough support for every sector of the economy in one fell swoop risks a jobs crisis.

“The government’s rushed decision to hand over a one-off, blanket bonus to businesses across the country rather than target support where it’s needed most may prove a very costly mistake.

“Unless the government changes tack, people will lose jobs they might have otherwise kept, viable businesses will go to the wall for reasons beyond their control, and the road to economic recovery will be longer than it needed to be.”

Shadow Treasury chief secretary Bridget Phillipson added: “Steve Barclay’s admitting what everyone knows: the one-size-fits-all Tory policy simply won’t match the challenges we face ahead.

“We urgently need tailored support for the sectors that need it most. It shouldn’t have taken the government months to work this out.”

Acting Lib Dem leader Ed Davey said: “Covid-19 confronts us with the most serious recession in 300 years. To get through it we must not simply rebuild, but create a better, greener and fairer economy.

“There are serious questions about the government’s handling of the pandemic that will have to be addressed in an immediate independent inquiry.

“Delaying lockdown back in March and the absence of an economic contingency plan could mean that the economy has suffered needless damage.”