The UK fiscal watchdog, the Office for Budget Responsibilty has painted an alarming picture of the impact of the coronavirus crisis.

In a report released this morning it predicts that the UK economy could shrink by a third during this quarter as the Covid-19 lockdown continues, joblessless would rise to ten per cent, and the government’s deficit could surge by over £200bn.

The authors say that they do not attempt to predict how long the economic lockdown will las, that is a matter for the Government, informed by medical advice. But, to illustrate some of the potential fiscal effects, they have assumed a three-month lockdown due to public health restrictions followed by another three-month period when they are partially lifted.

The key indicators of the report say that real GDP falls 35 per cent in the second quarter, but bounces back quickly. Unemployment rises by more than 2 million to 10 per cent in the second quarter, but then declines more slowly than GDP recovers.

Public sector net borrowing increases by £218 billion in 2020-21 relative to its  March Budget forecast (to reach £273 billion or 14 per cent 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.

Evidence from past pandemics, they say, suggests that the economic impact of the coronavirus will arise much less from people falling ill or dying than from the public health restrictions and social distancing required to limit its spread.

“This will reduce demand for goods and services and the ability of businesses and public sector institutions to supply them. That means lower incomes, less spending and weaker asset prices, all of which reduce tax revenues, while job losses will raise public spending.”

Anneliese Dodds MP, Labour’s Shadow Chancellor, responding to OBR figures, said:

“Behind these very concerning figures lie many businesses which have gone bust and many people who have lost their jobs.

“Labour has been working constructively with Government on its economic support package. It is clear that additional action needs to be taken to increase the take-up of the different measures. We have called for urgent action in relation to the loans scheme in particular, as take-up is worryingly low.

“It is absolutely critical that government now does all it can to minimise the depth and length of the economic impact from necessary anti-Coronavirus measures.”


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