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No UK economic recovery to pre-Covid levels until 2022, says OBR

By Michele Maatouk

Date: Tuesday 14 Jul 2020

No UK economic recovery to pre-Covid levels until 2022, says OBR

(Sharecast News) - The UK economy is unlikely to recover to pre-Covid levels until 2022, according to the Office for Budget Responsibility, while the budget deficit will hit its highest level in peacetime.
In its latest fiscal sustainability report, the OBR said its central scenario is for the economy to regain its pre-virus peak by the end of 2022.

In its downside scenario, however, output will recover even more slowly, returning to its pre-virus peak only in the third quarter of 2024. The upside scenario would see activity rebound relatively quickly, recovering by the first quarter of next year.

"The coronavirus outbreak and the public health measures taken to contain it have delivered one of the largest ever shocks to the UK economy and public finances," the OBR said.

It said the UK is on track to record the largest decline in annual GDP for 300 years, with output falling by more than 10% this year in all three scenarios and contracting by a quarter between February and April.

"This delivers an unprecedented peacetime rise in borrowing this year to between 13 and 21% of GDP, lifting debt above 100% of GDP in all but the upside scenario. As the economy recovers, the budget deficit falls back. But public debt remains elevated, continuing to rise in the central and downside scenarios."

The OBR also highlighted the need for a rise in taxes and spending cuts.

"In the short term, the government understandably remains focused on controlling the virus and reviving the economy," it said, pointing to the £30bn rescue package announced by Chancellor Rishi Sunak last week.

"But at some point, given the structural fiscal damage implied by our central and downside scenarios, the longer-term pressures on spending, and the range of fiscal risks we identify, it seems likely that there will be a need to raise tax revenues and/or reduce spending (as a share of national income) to put the public finances on a sustainable path."

Rain Newton-Smith, chief economist at the Confederation of British Industry, said the latest OBR analysis reflects the scale of the economic harm caused by the pandemic.

"We're not out of the woods yet - firms continue to struggle with cash flow and weak consumer demand. The Chancellor's Summer Statement took important action to flatten the curve of unemployment but more may be needed.

"Economic recovery is the key to balancing the public finances over the longer term and the Autumn Budget is likely to be too early to make significant inroads through tax rises and public spending cuts. It will take several years for the UK economy to recover to pre-crisis levels and ensuring a jobs rich recovery must be the number one priority by supporting business to thrive."

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