The mounting cost of government schemes to help Britain through its worst recession in more than three centuries has risen by £20bn in the past two weeks and will result in a budget deficit of nearly £300bn in the current financial year, a report has forecast.
Fresh figures from the Office for Budget Responsibility, the independent body responsible for forecasting the public finances, showed that measures such as the Treasury’s furlough scheme will total £123bn, up from £103bn in late April.
The figures come days after the chancellor, Rishi Sunak, said the government would continue with its wage subsidy scheme until the end of October, with employers expected to bear some of the cost from August.
With state spending soaring and tax revenues badly affected by the lockdown of much of the economy, the OBR said it was expecting the government to borrow £298.4bn in 2020-21, up from £273bn at the end of April and £55bn at the time of Sunak’s budget on 11 March. If the OBR’s forecast proves correct, then government borrowing would reach more than 15% of GDP, a post-war record.
The Institute for Fiscal Studies, a think tank that specialises in analysing the state of the public finances, said that while big by UK standards the scale of the government support for the economy was smaller than in many other countries.
Isabel Stockton, a research economist at IFS said: “The UK government’s package of support for households, business and public services in response to the coronavirus is of a scale without precedent in the UK. But it is not large compared with the responses set out by governments of some G7 economies.
“It’s also important to remember that the pre-existing benefit system in the UK focuses on supporting families with children, offering less support to childless workers who become unemployed than the benefit system in, for example, Germany, France or Italy. This means that the UK would, if anything, need a larger bespoke package than those countries to guarantee a similar level of income support to all types of workers.”
Although Britain has slowly started to return to work this week, the OBR is still pencilling in a 35% decline in output in the second quarter of 2020. It is then assuming a rapid bounce back, with growth of 27% in the third quarter. Unemployment is expected to peak at 10% in the current second quarter before falling to 8.5% in the third quarter and 7.3% in the final three months of the year.
The Bank of England shares the OBR’s view that the economy will recover quickly from the Covid-19 restrictions of activity, with all the lost ground made up by the end of next year.
Even so, the governor Andrew Bailey believes Britain will suffer permanent, if so far unquantifiable damage, from a recession that the Bank expects will see the economy shrink by 14% this year.
Bailey said on Thursday in a webinar organised by the Financial Times there would be some scarring, damage caused to the UK’s supply capacity, by the crisis. The governor said he did not know yet whether the Bank’s forecast of a 25% fall in output in the current quarter would be too gloomy or too upbeat.
The Bank has cut interest rates to a record low of 0.1% as part of its response to the pandemic but Bailey said the Bank was not yet thinking about negative official borrowing costs.
While not ruling out negative rates, the governor said it was “a very big step” and not something that the nine-strong monetary policy committee was contemplating.
Thomas Pugh, an analyst with consultancy Capital Economics said the Bank would be reluctant to use negative interest rates. It said this would have a harmful impact on bank profits and the MPV preferred to use further quantitative easing, the bond buying scheme by which the Bank injects money into the economy.
