Government borrowing could skyrocket to a peacetime high of over £370bn this year as the UK economy suffers its worst economic crash in 300 years, the UK’s budget watchdog has said.
The Office for Budget Responsibility (OBR) presented three scenarios, each of which said the UK economy would shrink more than 10 per cent in 2020.
In the “central scenario” GDP is likely to drop by an enormous 12.4 per cent. Unemployment would surge to 12 per cent by the end of the year from below four per cent.
Government stimulus measures and a collapse in tax revenues will deliver an “unprecedented” rise in borrowing. The budget deficit is set to jump to between 15 and 23 per cent of national income this year, the OBR said. That is much higher than during the financial crisis.
The OBR said that the government can currently afford high levels of debt due to record-low interest rates. But it warned higher taxes and/or spending cuts would eventually be needed to keep the public finances under control.
The report came as official figures showed the UK economy grew by 1.8 per cent in May, far less than expected after April’s crash of 20.3 per cent. Chancellor Rishi Sunak said the “figures underline the scale of the challenge we face”.
UK economy to recover slowly
The OBR produced three different scenarios for the path of the economy and public spending to reflect very high levels of uncertainty.
In the central scenario, the UK economy would only recover to its pre-coronavirus size by the end of 2022. UK GDP would be three per cent lower in 2025 than originally predicted before coronavirus hit.
In this case, unemployment would remain elevated at 10.1 per cent in 2021 with 3.5m people out of work. Around 15 per cent of the roughly 9m people “furloughed” under the job retention scheme would become unemployed.
Growth bounces back very sharply in the “upside” scenario. This would leave little economic “scarring” as unemployment stayed low and the economy returned to its pre-coronavirus size at the start of next year.
Yet the economy would only recover by 2024 in the “downside” scenario. Around 4m people would be out of work in 2021 and UK GDP would be six per cent smaller in 2025 than originally envisaged. OBR boss Robert Chote said the downside scenario was “by no means a worst case”.
To try to prevent a jobs crisis the chancellor has pumped record amounts of stimulus into the economy. This is includes a £30bn package unveiled last week.
Budget deficit to hit highest peacetime level
The OBR said today that the extra spending is set to push public borrowing this year to more than £370bn. That would be by far the highest ever peacetime level.
The extra borrowing would be fuelled by a slump in tax receipts of £133bn as the economy shrinks and people lose their jobs.
On top of this, the OBR said the government would have to borrow around £190bn more than originally planned for economic support policies. These include the costly job retention scheme which has paid “furloughed” workers’ wages.
In the central forecast, the deficit – the gap between government income and spending – is set to remain above £100bn for the next four years.
High deficits will keep the overall pile of debt bigger than 100 per cent of GDP until at least 2025. That is up from 89 per cent of GDP in 2019-20.
The government currently enjoys record low interest rates on its debt, thanks to the Bank of England’s interventions in the bond markets.
But the OBR said such conditions are unlikely to carry on forever. It said that “at some point” it “seems likely that there will be a need to raise tax revenues and/or reduce spending… to put the public finances on a sustainable path”.