By Ben Kerrigan–
The Office for Budget Responsibility is assessing the impact the coronavirus lockdown could have on the economy. The Office says GDP could fall by 35% in the second quarter of, the coronavirus outbreak will substantially raise public sector net borrowing and debt, primarily reflecting economic disruption.
The Office for Budget Responsibility said the response to Covid -19 will also have substantial direct budgetary costs, but the measures should help limit the long-term damage to the economy and public finances the costs of inaction would certainly have been higher . The Office said a three-month lockdown due to public health restrictions followed by another three-month period when they are partially lifted. For now, we assume no lasting economic hit.
The OBG which is assessing the overall prospects for fiscal sustainability more broadly, admitted that early vintages of the official statistics will also be more uncertain than usual. It states that Real GDP (overall output) falls 35 per cent in the second quarter, it will bounce back quickly and that exponential rises in unemployment are offset by policy measures support households and companies’ finances through the shock.
The extensive report said that evidence from past pandemics suggests that the economic impact of the coronavirus will arise more from the public health restrictions and social distancing required to limit its spread of the coronavirus than from those falling ill or dying. The economic impact will reduce the demand for goods and services and the ability of businesses and public sector institutions to supply them.
That means lower incomes, less spending and weaker asset prices, all of which reduce tax revenues, while job losses will raise public spending. The Government’s policy response incorporates increased public spending, tax cuts and holidays, and loans and loan guarantees – most of which are designed to support household incomes and to limit business failures and layoffs. Public sector net borrowing increases by £218 billion in 2020-21 relative to our March budget forecast (to reach £273 billion or 14 per cent of GDP), before falling back close to forecast in the medium term. That would be the largest single-year deficit since the Second World War.
The net effect of the coronavirus impact and the policy response is likely to be a sharp (but largely temporary) increase in government borrowing that will leave public sector net debt permanently higher as a share of GDP. However, the longer the period of economic disruption lasts, the more likely it is that the economy’s future potential output will be ‘scarred’ (thanks to business failures, cancelled investments and the unemployed becoming disconnected from the labour market).
The analysis is presented as an initial exploration of the coronavirus outbreak, given the fact that there are few relevant precedents to inform any assessment of the outlook. Any reliable assessment will depend on the success of the public health measures in containing the outbreak. The intangibles make forecasts uncertain, according to the report but rather presents an illustrative scenario based on particular assumptions regarding the duration of the measures and their economic impact.
The report gives credit to the implemented policy actions so far which it states will directly help support the incomes of individuals and businesses while the public health restrictions are in place, as well as improving the availability of finance. They should also help to limit any long-term economic ‘scarring’ – for example, due to cancelled business investment, widespread business failures and the unemployed losing contact with the labour market. Such scarring would both harm future living standards and increase the structural budget deficit.