Unemployment at 4MILLION in a year, GDP to take FIVE YEARS to recover and the biggest peacetime deficit EVER: Budget watchdog's dire predictions as it warns Brits face years of tax rises and spending cuts to pay off Covid bill
The UK faces the biggest peacetime deficit in history with the risk of four million people out of work by next year - and the economy might not recover until 2025.
In a bleak new assessment, the government's OBR watchdog warned tax rises and spending cuts - potentially as much as 7p on the basic rate of income tax - are inevitable as it poured cold water on hopes of a 'V-shaped' bounceback from coronavirus.
It said GDP will fall by up to 14 per cent this year, the worst recession in 300 years, with national debt bigger than the whole economy. Underlining the scale of the hit, government liabilities will be £710billion more than previously expected by 2023-4. That is equivalent to nearly £11,000 for every man, woman and child in the UK.
Output might not return to last year's level until the end of 2024, according to the estimates. Accounting for inflation, the country will still be 6 per cent poorer in 2025 in the gloomiest outcome.
Meanwhile, unemployment could peak at 13 per cent in the first quarter of 2021 - which would mean more than four million people on the dole queue. That would be significantly worse than the 11.9 per cent jobless rate from 1984, and the highest since modern records began in the 1970s. The 'central' forecast is that 15 per cent of the 9.4million furloughed jobs will be lost.
Labour seized on the figures to demand the furlough scheme be kept in place for struggling sectors after its October end date.
The report came as the next head of the OBR warned that the government can no longer rely on inflation to tackle its £2trillion debt pile.
Richard Hughes, who is set to take charge of the Office for Budget Responsibility later this year said previously the 'trick' for politicians had been to whittle down the 'real value' of the country's liabilities.
However, that will not be possible with the massive debts being racked up during the coronavirus crisis as around a third of the stock was now linked to the RPI inflation rate.
The respected IFS think-tank has suggested that tax rises equivalent to £35billion a year will be needed to stabilise the government finances once the immediate crisis subsides.
As an indication of scale, that would be roughly 7p on the basic rate of income tax.
In other twists and turns in the raging coroanvirus crisis today:
- Official figures showed GDP only rose by 1.8 per cent in May and is still nearly a quarter lower than in March, pouring cold water on hopes of a V-shaped recovery;
- The government is set to make masks compulsory in shops from July 24 with £100 fines for not obeying the rules, despite anger from retailers;
- Scientists have warned that a second wave of coronavirus this winter could result in 120,000 hospital deaths;
- The number of people dying of coronavirus rose in Wales during the first week of July for the first time since April, official statistics revealed;
The OBR's downside scenario sees unemployment rising to more than four million next year - with a rate higher than seen in the 1980s
Public debt will soar as the UK reels from the coronavirus crisis, according to the watchdog's central scenario today. By 2023-4 the liabilities will be around £660billion higher than forecast in March before the chaos hit - and that does not include an extra £50billion from the mini-Budget
Output might not return to last year's level until the end of 2024, according to the new OBR estimates. Accounting for inflation, the country will still be 6 per cent poorer in 2025 in the gloomiest outcome
The OBR suggested the national debt will be bigger than the whole economy in all but the most optimistic scenario
A shocking longer forecast from the OBR suggests that national debt will be more than five times the size of the economy by 2070
The UK's debt pile is bigger than GDP for the first time in decades due to the impact of the coronavirus crisis. The chart shows that the debt-GDP ratio has been much higher in the past, but Mr Hughes said inflation could no longer be relied on to tackle it
The update from the OBR today - with outgoing head Robert Chote still in charge - set out three scenarios for the course of the crisis, an upside, a central, and a downside.
The report warned that the 'UK is on track to record the largest decline in annual GDP for 300 years', with output set to fall by 10.6 per cent this year in even its most optimistic projection. The only known harsher downturn was the Great Frost of 1609, which laid waste to swathes of Europe when Britain was still pre-industrial.
On the worst measure, the economy could shrink by 14.3 per cent this year.
Despite a recovery in output starting in May, the OBR said it assumes that GDP for June will be '20 per cent below its level in February'.
The regulator said it therefore expects that GDP will have fallen 21 per cent in the second quarter of the year following a 2 per cent fall estimated by the ONS for the first three months of 2020. That is less than the 35 per cent slump the OBR feared in April, but the recovery is also anticipated to be much slower.
A worst-case scenario would also not see GDP recover to pre-crisis levels until the third quarter of 2024.
The watchdog warned that tax rises and spending cuts are inevitable to balance the books.
'Given the structural fiscal damage implied by our central and downside scenarios, and its implications for long-term sustainability, in almost any conceivable world there would be a need at some point to raise tax revenues and/or reduce spending (as a share of national income) to put the public finances on a sustainable path,' the report said.
The government is expected to borrow £322billion this year due to eye-watering bailouts and lost tax revenue - however that excludes extra spending announced by the Chancellor last week.
The OBR said that Government policy interventions announced before June 26 raised its borrowing projections by around £142billion for the financial year, in its middling scenario.
But measures introduced in Rishi Sunak's summer mini-Budget could add a further £50billion to borrowing.
Shadow chancellor Anneliese Dodds said: 'This OBR analysis is very worrying. Unless the Government takes urgent action, the UK's unemployment crisis is going to get much worse.
'The Chancellor must now listen to calls from Labour, business and trade unions and make the Job Retention Scheme live up to its name. Instead of withdrawing support across the piece, he must target it to sectors where it's needed most.
'If he doesn't act, even more people run the risk of being thrown into the misery of unemployment and our economy will continue to suffer.'
James Smith, research director at the Resolution Foundation, said: 'The OBR's forecasts reiterate the scale of the hit to our economy and public finances from the pandemic.
'With unemployment projected to match - or even surpass - its 1980s peak, the Chancellor has taken a significant gamble in not setting out more support for demand and employment in the hardest-hit sectors of the economy.
'The risk of 1.3million furloughed workers moving straight into unemployment should prompt the Chancellor to consider further action on jobs.'
Separate ONS figures today showed the economy was up 1.8 per cent in May - but has still plunged by nearly a quarter from before lockdown was imposed. The OBR is due to release its latest scenarios for the economy later.
The rise was far smaller than the 5 per cent bump some economists had expected after huge plunges in March and April.
It added to gloom on the stock markets, which had already been spooked by falls in the US overnight.
Tories have suggested the debt should be treated like wartime debt and allowed to subside over decades. But Mr Hughes said that would not work as around 30 per cent of gilts are now inflation indexed.
'There has been a lot of somewhat idle chat about the prospect of inflating our debt away, that we don't have to worry about elevated levels of debt because we can pull the same trick as in the 1950s and 60s of using inflation to erode the real value of our debt,' he said.
'That is not going to work. We have lost one tool we have used in the past.'
Mr Hughes said the decline in GDP would be 'twice as big' as the initial impact of the 2008 financial crisis.
Richard Hughes, who is set to take charge of the Office for Budget Responsibility later this year said previously the 'trick' for politicians had been to whittle down the 'real value' of the country's liabilities
Official figures showed GDP grew by 1.8 per cent in May, although it is still nearly a quarter lower than before the draconian coronavirus restrictions were imposed. In this chart 100 represents the size of the economy in 2016
Figures today showed the economy was up 1.8 per cent in May - but has still plunged by nearly a quarter from before lockdown was imposed
Back in May, the OBR - Britain's fiscal watchdog - predicted GDP for this year would fall by 12.8 per cent - assuming a recovery in the second half.
But Mr Hughes, who is a research associate at the Resolution Foundation think tank and an adviser to the International Monetary Fund, said the prospect of a second wave of coronavirus had 'increased the level of uncertainty' around the UK's economic recovery.
He said: 'Usually you can assume in the course of a recession that once you've turned the corner things are going to gradually get better. And it's all about the pace of that recovery.
'In this context you have divergent possibilities.'
A resurgence in the transmission of Covid-19 and future lockdowns would act as a 'drag on the (economic) output', while a vaccine could result in a 'very rapid recovery of economic activity', he said.
In June, Chancellor Rishi Sunak announced Mr Hughes as his preferred candidate for the position, replacing Robert Chote - whose term comes to an end later this year.
Chancellor Rishi Sunak has laid out a bewildering array of spending and loans to try to prop up the country during the crisis
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