Editor in Chief (interim) AccountingWEB
Share this content

Gloomy OBR scenario dents government confidence

​The Office for Budget Responsibility (OBR) this week speculated that the UK economy would suffer a 35% downturn in the quarter from April to June as a result of COVID-19.

15th Apr 2020
Editor in Chief (interim) AccountingWEB
Share this content
Chancelllor Rishi Sunak at 14 April coronavirus daily briefing
Rishi Sunak_BBC

In a bracing coronavirus scenario published on Tuesday (14 April), the OBR anticipated a large “but hopefully temporary” shock to the economy. 

The government’s measures to support individuals and businesses will have important short-term budgetary costs, but “should help prevent greater economic and fiscal damage in the long term”, the OBR report predicted.

Three-month lockdown scenario

To model the economic disruption and impact on public finances of the outbreak, the OBR assumed the country would be in lockdown for three months, with the restrictions on activity being lifted progressively over the subsequent three months. 

Among their key predictions, the forecasters estimated:

  • Real GDP would fall 35% in the second quarter, bouncing back quickly afterwards

  • Unemployment would rise to 2m (10%) in the second quarter, declining slowly after that

  • Public sector net borrowing would hit  £273bn in 2020-21(14% of GDP), an increase by £218bn compared to the OBR’s March Budget forecast

  • Public sector net debt would rise to 100% of GDP in the following months, ending the year at 95% (the Budget forecast had previously predicted 77%) because of the lower GDP, higher borrowing and the Bank of England’s policy measures

In his Downing Street coronavirus briefing on Tuesday afternoon, Chancellor Rishi Sunak (pictured above) emphasised that the OBR scenario “was not a forecast” and that the anticipated impacts of the virus would be temporary.

“We’re not just going to stand back… We want to get people back to work and revive the economy,” he said.

Under prompting from BBC political editor Laura Kuenssberg, the Chancellor admitted, “This is going to be hard. It’s not abstract… [the JRS is about] ensuring fewer people are unemployed and remain attached to their company. I very much hope the measures will allow us to do as OBR said and bounce back.”

With political journalists probing him on the impact of borrowing on long term government deficits, Sunak responded that his policies were addressing what happens in the real economy with businesses and jobs.

There would be a significant increase in borrowing this year, but the OBR concurred this was the right decision, he added. “If we get a swift bounce back, public finances should return to a normal position fairly quickly.”

Increasingly tentative messages

The OBR scenario appeared to signal the end of the Chancellor’s post-Budget honeymoon period. With the Prime Minister still recovering from his bout with the virus, the various substitute ministers showing up at the Downing Street briefings have been dishing up increasingly tentative defences of government policy.

A well meaning appearance by small business minister Paul Scully at a QuickBooks town hall meeting on Wednesday morning did little to dispel that impression.

In the unprecedented situation, Scully admitted, “We are feeling our way through with your support and your input.”

He continued: “We can talk about really big telephone numbers, but we’ve got to make sure it works and systems are in place. With the job retention scheme, we’ve effectively got to reverse engineer the PAYE system to pay that out."

During his briefing, the small business minister mentioned seven different mechanisms: business rates holidays and small business grants from local councils; VAT and income tax payment deferrals; the job retention and self employed income support schemes; R&D tax credits and the coronavirus business interruption loan scheme. 

The variety and complexity of all these support schemes were adding to the fragmentation and confusion of the government’s response. Touching on some of the difficulties that were being encountered, the minister told viewers, “We are coming up with all the schemes and businesses aren’t getting the money. We have to find out where those blockages are.”

In the case of the much-criticised CBILS project, Scully said, “We’ve had to change [it] because we’ve listened to you and we found out it was too cumbersome to get those loans. We went back and made it quicker, removed guarantees and don’t want you to go through the route of looking for commercial products before getting loans.

“We’ve seen a quadrupling of take-up of those loans in the past week and expect that to accelerate.”

Senior ministers were working around the clock to mitigate the effects of the crisis on health and livelihoods, he continued. “When we emerge we need to make sure there is an economy that is able to bounce back and that the people you employ are protected as well.”

Additional reporting by Valme Claro.

Replies (10)

Please login or register to join the discussion.

avatar
By Sanjeev Nanda
16th Apr 2020 10:13

UK parliament announced today that they have no intention to exit the Covid lockdown anytime soon, yet neighboring country Germany, will begin slowly, yet cautiously lifting the quarantine soon enough. The UK begin reconsidering doing what Germany is doing right now, to avoid a sharp sharp decline in recoverable income. To keep afloat, take-away chains have proposed re-opening soon enough. Steps like these are the need of the hour, along with through testing and crowd management.
~Sanjeev Nanda

Thanks (0)
Replying to Sanjeev Nanda:
avatar
By NeilW
17th Apr 2020 09:56

Sanjeev Nanda wrote:
yet neighboring country Germany, will begin slowly, yet cautiously lifting the quarantine soon enough.

How does that square with Merkel saying that if they raise R0 to 1.3 Germany will run out of medical capacity by June?

Merkel is urging caution - because we don't have enough data to make safe decisions.

Thanks (1)
Replying to Sanjeev Nanda:
avatar
By meadowsaw227
17th Apr 2020 10:02

It is a sad indictment of our society when we re opening take away chains is the "need of the hour" .
Haven't missed them at all and as for football etc ……………...

Thanks (0)
avatar
By NeilW
17th Apr 2020 09:54

Good job the OBR hasn't a clue what it is talking about then.

Quite why people hang on forecasters using models that never reflect reality and then refuse to filter forecasters who constantly get it wrong is quite astonishing.

Almost like they want to hear a religious pronouncement about how a system that relies upon pushing bank loans to people who don't want to borrow is going to magically start working properly again.

It isn't. Interest rate targeting doesn't work. How many more times does it have to fail before people abandon it?

Thanks (2)
By k743snx
17th Apr 2020 10:10

All this reminds me of the "bleedin' obvious" quote from Fawlty Towers.

Thanks (1)
avatar
By Michael C Feltham
17th Apr 2020 11:54

Members might be interested in analysis I published elsewhere, a few days ago.

"Though the office concludes that the GDP will “bounce back quickly” in the third quarter, it still predicts that for the year as a whole the UK will face a 13 per cent fall in GDP, a steeper decline than was experienced during either world war or the financial crisis of 2008."

I wish!

Government in the UK has totally failed to grasp a core reality of UK commercial activity, now, for more than 30 years.

SMEs (Small to Medium Sized Businesses) on Government's OWN stats, create circa 49% of private sector GDP: and circa 48% of Private Sector employment. The UK SME Business Population figures demonstrate a VAT majority are what are called Micro Businesses or class Size Zero: i.e. One Man Bands.

The Lockdown has decimated this sector: yet Government, despite all the posturing of the Chancellor about financial aid, has in truth provided little. The banks have virtually avoided extending the CBILS loan scheme to hundreds of thousands of small businesses, which are totally desperate for capital to tide them over.

As more SMEs collapse, past ever recovering, then the net result will be a massive increasing number claiming benefit: whilst employees already receive 80% of wages/salaries, the Self Employed must wait until June for any cash payments! It becomes a domino effect: a small business goes down and no longer purchases goods/services from other businesses: thus the problem rapidly escalates.

I believe the end will be far worse than all the pundits predict: mainly because so many of the small "businesses" are far from essential: Personal Trainers, Nail Bars, etc.

In terms of monetary, fiscal and debt areas, the Western World's totally false construct banking and financial services were simply Smoke and Mirrors.

Now the long-building collapse will ensue.

If the Fed, B of E, ECB etc think they can slide out of this by "clever" monetary manipulations such as QE, Magic Money and so on, then the end result will be Hyper Inflation and endless collapses...

The UK will suffer, I fear, a fast building Domino Effect: as increasing numbers of SMEs fail, then their suppliers will fail too.

Blasé politicians cling onto the fallacious belief, that they can enjoy a continuum of their flawed socio-economic model, by simply raising taxes plus evermore Sovereign Risk Debt to fund it.

Not this time, I fear...

Thanks (2)
Replying to Michael C Feltham:
avatar
By dgilmour51
17th Apr 2020 12:14

I'm with you on this analysis.
Trouble is that for 30 years the amount of practical wealth creating experience of both HMG and the civil service mean that their fiscal policies have been led by the even less worldly swivvle-eyes of HMRC.
For years HMG has got away with unknowingly swizzing anybody not conforming to HMRCs preferred [largely due to indolence] 'employee model' because they don't know enough to see through the 'fairness mist'.
And your point that many of the services they make available are effectively sinks for disposable income arising from wealth creation underscores that HMG cannot have its eye on the ball because it dosn't actually know what the ball is.

Thanks (0)
Replying to dgilmour51:
avatar
By Michael C Feltham
17th Apr 2020 12:27

".........disposable income arising from wealth creation..."

Or more correctly, debt redistribution?

And here's the nub: UK plc has utterly failed to actually create any fresh, new wealth. Making oneself wealthy by property speculation is not wealth creation!

In 2003/4, ONS's Annual Survey of UK wealth, reached the startling conclusion that circa 68% of TOTAL UK "Wealth" was represented by the value of Residential Property!

Perhaps equally as fictitious, is government employees income being included in GDP stats.

Thanks (0)
Replying to Michael C Feltham:
avatar
By flightdeck
17th Apr 2020 12:34

Bang on. They are clueless.

But surly it is dawning on them now? My spending has reduced to household bills and supermarkets. The good news is I am spending 1/4 of what I used to. The bad news is I am spending 1/4 of what I used to time. Times this by the population ...

Thanks (0)
avatar
By Kieran Burns
17th Apr 2020 14:26

As an Accountant in Ireland who worked for many years in England, Europe and the US, I think anyone criticizing the OBR and others who are forecasting a bleak economic activity for the next 12-24 months is like blaming the weatherman for the weather.

Most world economies were fragile at best before this pandemic, and the negative impact it will have on already weak global economic activity is being overlooked while everyone deals with the health crisis. But the health crisis, will be followed by an equally bleak wealth crisis, and while 2019 was dominated by Brexit, and 2020 by Covid 19, 2021/22 will be dominated by Recession/Depression especially among retailers, hotels, airlines, travel industry, gyms etc etc.

Thanks (0)