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.
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.
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