Scenario modelling by the Office for Budget Responsibility (OBR) suggests the UK faces the biggest economic shock in 300 years as a result of the current pandemic, with GDP falling 35% in the second quarter, unemployment rising by over two million, and the largest deficit in the government’s finances since the Second World War
The OBR’s scenario shows real GDP falling 35% in the second quarter, but says it will bounce back quickly. Unemployment is set to rise by more than two million to 10 % in the second quarter, but then declines more slowly than GDP recovers. However, unemployment will not return below 4% until 2023.
Public sector net borrowing will increase by £218bn in 2020-21 relative to the OBR’s March Budget forecast (to reach £273bn or 14% of GDP), before falling back close to forecast in the medium term. That would be the largest single-year deficit since the Second World War.
The sharp rise in borrowing this year largely reflects the impact of economic disruption on receipts (with smaller effects from policy measures like the business rates holidays) and policy measures that add to public spending (with smaller effects from higher unemployment).
The OBR estimates public sector net debt will rise sharply in 2020-21 thanks to lower GDP, higher borrowing and the accounting consequences of the Bank of England’s policy measures. It will surpass 100% of GDP during the year, but is set to end it at 95% (versus 77% in the Budget forecast) as the economy recovers. It remains 10% of GDP above the Budget forecast in 2024-25, at around £260bn.
The OBR’s predictions are a scenario rather than a forecast, based on the illustrative assumption that people’s movements (and thus economic activity) would be heavily restricted for three months and would get back to normal over the subsequent three months.
The body, which provides analysis of the public finances, said there are few relevant precedents to inform any assessment of the outlook, which will in any case depend on how successful the public health measures are in containing the outbreak, meaning there are huge uncertainties both around the impact on the economy and what that would mean for the public finances.
Commentators have suggested that its outlined scenario would put the UK on course for the biggest annual decline in the economy since 1709.
Analysis by the International Monetary Fund (IMF) has estimated $9 trillion (£7 trillion) of output will be lost this year and next, equivalent to the combined economies of Germany and Japan. It expects global GDP to fall by 3% in 2020, the biggest drop in almost a century.
Speaking at the daily government coronavirus update, Chancellor Rishi Sunak agreed that the OBR’s figures ‘suggest the scale of what we are facing will have serious implications for our economy here at home, in common with other countries around the world.’
Sunak said: ‘These are tough times – and there will be more to come. As I’ve said before, we can’t protect every business and every household.
‘The second point I want to make is that we’re not just going to stand by and watch this happen.
‘Our planned economic response is protecting millions of jobs, businesses, self-employed people, charities and households.
‘The OBR today have been clear that the policies we have set out will do that.’
Mel Stride, chair of the Treasury committee, said: ‘The OBR’s figures are extraordinary yet unsurprising.
‘A key assumption made by in the OBR’s scenario is that there is no long-term economic scarring. The effectiveness of government action to support businesses and individuals will be key to helping to achieve this and soften the long-term economic hit.
‘The scale and speed of the government’s moves to support the economy are bold and welcome, but the Treasury committee has identified a number of critical areas where we believe further significant support needs to be provided and without delay.’
A group of 250 accountancy firms have written a letter to the Chancellor, co-ordinated by Countingup a banking and accounting provider to sole traders, warning that more needs to be done to support those businesses left behind by the job retention scheme (JRS) and self-employment income support scheme (SEISS), and urging greater clarity on the process and timings of JRS and SEISS grants.
One of the biggest area of concern raised by accountants was small businesses with directors remunerated primarily through dividends, as well as the newly self-employed and those who historically had tradable profits of over £50,000 but now, due to the impact of Covid-19, have zero or much lower tradeable profits.
The letter also highlights the uncertainty about when the SEISS will commence operation, as there is no date currently given, and the lack of clarity around eligibility criteria.
In addition, the letter cites confusion around the definition of ‘trading profits’ used in the SEISS, stating: ‘Is it box 23 or box 28 of the SA103(short) or something else? If it’s taxable profit (box 28) then self-employed sole traders who need to buy expensive capital items and make use of taxable allowances (e.g. haulier contractors) will have lower grant claims, unfairly.’
Finally, the quarterly CBI/PwC Financial Services Survey shows business optimism in the financial sectors sector was already declining, ahead of the coronavirus crisis.
The research with over 100 firms found that business volumes, profitability, and employment are all tipped to fall over the next quarter. Investment plans for the year ahead have also deteriorated. Furthermore, the value of non-performing loans also ticked up sharply in the past quarter.
While 12% of firms said they were more optimistic about the overall business situation compared with three months ago, 53% were less optimistic, giving a balance of -41%.
Rain Newton-Smith, CBI chief economist, said: ‘The bulk of the survey took place before social distancing measures were ramped up, but there were already signs of the Covid-19 pandemic leaving its mark. Expectations for business volumes and headcount weakened, non-performing loans rose sharply, and firms are planning heavy cuts to investment in the year ahead.
‘With the bulk of the economic hit from the virus still to come, it’s vital the sector is properly supported in their day-to-day activities, and equipped in continuing to deliver. Financial institutions are the main funnel for business in accessing government support, and therefore vital for the recovery of the economy beyond the pandemic.’