The hit to the UK economy from the coronavirus pandemic is likely to be “way less” than the impact of the financial crisis should the budget watchdog’s predictions come true, the Institute for Fiscal Studies (IFS) think tank has said.
The Office for Budget Responsibility (OBR) yesterday said the economy would likely end up three per cent smaller in the long run due than it otherwise would have been without Covid.
IFS director Paul Johnson today said that would be “painful”. Yet he said that “it is way less than the impact of the financial crisis”.
“And on central scenarios borrowing will be ‘only’ £100bn or so in 2024-25,” he said. He said that is “not a million miles away from either current budget balance or at least stabilising debt as a fraction of national income”.
Yet Johnson also said there are big risks the OBR’s “central scenario”. He said: “Remember that the long term economic, and hence fiscal, hit from the financial crisis was far greater than predicted at the time.”
Debt should be reduced over ‘very long period’
His comments come after Sunak yesterday revealed that government borrowing is set to hit a peacetime record of £394bn this year, according to OBR estimates.
The OBR said it expects the economy to shrink 11.3 per cent this year, its worst collapse in 300 years. It added that the economy would not regain its pre-Covid size until the end of 2022.
The respected IFS think tank today laid out its analysis of the spending plans. It questioned the chancellor’s stated intention not to spend more on Covid next year
Sunak is also likely to end up spending more than planned on non-Covid areas too, it said, with his roughly £10bn planned reduction in day-to-day spending hard to sustain.
It said tax rises were likely to be coming down the line in the future. Carl Emmerson, IFS deputy director, said it was “completely right that government debt goes up a lot” during such a crisis.
He said that it is also “perfectly correct” to try to get debt down again. But he said that this should be done “over a very long period of time”, like after the second world war.