Wednesday 14 October 2020 11:25 am

OECD: UK should focus on unemployed until recovery established

The UK should do more to help those who have lost their jobs during the coronavirus pandemic and wait to fix the hole in its public finances until the recovery is underway, the Organisation for Economic Co-operation and Development (OECD) said.

The UK’s economy is at “a critical juncture”, the organisation warned in an annual report, as the Covid-19 crisis threatens to worsen existing productivity and inequality problems, while Brexit could also deal a major blow. 

Read more: Coronavirus: UK economy slumped by a fifth in second quarter

“Decisions made now about management of the Covid-19 crisis and future trade relationships will have a lasting impact on the country’s economic trajectory for the years to come,” the report said.

Forecasting that UK GDP will shrink more than 10 per cent this year and only partially recover those losses in 2021, the organisation warned that surging coronavirus cases and the possibility of no post-Brexit trade deal being struck means Britain faces “major downside risks”. 

Britain’s economy shrank the most of any G7 nation in the second quarter and the recovery lost momentum in August, despite government subsidies aimed at boosting the hospitality sector. The UK is now facing a fresh tightening of coronavirus restrictions as infections continue to rise. 

OECD chief economist Laurence Boone said the outlook for the world’s sixth-biggest economy is “exceptionally uncertain”.

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“Actions taken to address the pandemic and decisions made on future trading relationships will have a lasting impact on the UK’s economic trajectory for years to come, so they should be in line with long-term objectives,” he added. 

The OECD forecasts that unemployment in the UK will average 7.1 per cent in 2021, up from 4.5 per cent now.

The £50bn furlough scheme is closing at the end of this month, and is set to be replaced by less generous job support measures. 

“Additional spending on active labour market measures are welcome and further increases would help to accompany unemployed workers in their job search and ease adjustment to new working arrangements,” the OECD said.

The UK is facing its largest ever peacetime budget deficit in 2020, with the Institute for Fiscal Studies estimating it will hit 17 per cent of GDP, while public debt has passed 100 per cent of GDP.

However the OECD said that low borrowing costs would allow for further public spending to mitigate the impact of the pandemic, and that “addressing the remaining structural deficit and

putting the public debt-to-GDP ratio on a downward path” should only become a focus “once the recovery is firmly established”. 

Read more: Andrew Bailey says Bank of England ‘not there yet’ on negative interest rates

“There is room to broaden the tax base once there are clear signs that growth is firming up,” the report said. The OECD noted that, at 33.5 per cent, the UK’s tax-to-GDP ratio remains relatively low compared with many of its European counterparts.

Last month the organisation warned that while the global economy was faring better than originally expected in 2020, the UK was still lagging behind and would take one of the biggest hits from the pandemic of any developed country.