It just keeps on getting worse. Like the death toll from Covid-19 itself, forecasts for the economy in the wake of the crisis keep on creeping upwards. Today, the Office for Budget Responsibility (OBR) forecasts that UK GDP could contract by 35 per cent by June if the lockdown continues until then, before 'bouncing back quickly'. Unemployment could rise, it says, by two million, with the unemployment rate climbing to 10 per cent. That is quite a shock given that on the eve of this crisis we were celebrating the highest employment ever and the lowest unemployment in 45 years.
The 35 per cent contraction is making all the headlines today – as well it might. The OBR does forecast, however, an equally rapid recovery in growth so that by the end of the year annualised growth will be running at pretty much the same as it was before the crisis: somewhere between 1 and 2 per cent. Given the vast number of businesses which are facing bankruptcy if the lockdown continues for weeks, this seems quite an optimistic forecast. I can see large businesses bouncing back – or at least those which have not gone under in the meantime – but what will the lockdown do for smaller businesses? What about all those small-time entrepreneurs who put in their time, money and energy to find the rug pulled from beneath them? It is going to take more than a few months to restore their entrepreneurial spirit.
What is most eye-catching of all about the OBR’s forecast is the bit which hasn’t been so prominently reported. It is now forecasting public sector borrowing in 2020/21 to come in at £273 billion. This is nearly twice the deficit that Gordon Brown left behind in 2010 – and which, of course, led to a decade of ‘austerity’. If that was austerity, I don’t know what you call what we are now facing. There will have to be deeper cuts, greater tax rises or a combination of both.
One of the reasons that borrowing will be so high is that the Cameron/May/Johnson governments never succeeded in balancing the books – in spite of all the complaints about austerity. Originally, George Osborne was planning to close the deficit by the middle of last decade. But that kept being put back and back – and then abandoned altogether. This year, before the crisis, the government was planning to run a £44 billion deficit. Go into a recession with any deficit at all, as Brown proved, and you face a serious budgetary crisis.
Boris Johnson came to Downing Street thinking that he could finally shake off the charge of austerity: that he could open the public spending taps and run a perpetual deficit, so long as it was manageably small. That may have seemed tempting, with interest rates on the floor. But in the space of a few weeks that option has disappeared. Boris is either going to have to turn on the printing presses and risk hyper-inflation – or he is going to have to run an austerity government, whether he likes it or not.