CORONAVIRUS

Coronavirus: Public sector facing largest budget deficit since WWII

An “illustrative scenario” published by the Office for Budget Responsibility suggests that the economic impact of coronavirus will be felt for years to come.

Coronavirus: Public sector facing largest budget deficit since WWII
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The Office for Budget Responsibility was set up in 2010 to provide independent analysis of the UK’s public finances. In the past it has been mainly tasked with scrutinising the government’s policy costings but with coronavirus predicted to hit the economy hard it has published an analysis of the UK’s economic future.

In their report the OBR assumes that the UK will have an enforced shutdown for three months before a further three months of looser restrictions. They describe it as “a scenario rather than a forecast” with “broad-brush estimates” but it is one of the first UK studies into the long-term effects of the coronavirus outbreak and the related lockdown measures.

It is those measures that are likely to have the greatest impact on the economy with simulations by the OBR and the World Bank both suggesting that the public health restrictions could be “responsible for around 90 per cent of the hit”.


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Sectors hit hardest by coronavirus

The sectors likely to be hardest hit are the ones that require the most human interaction and are most affected by the lockdown. The Education and Accomodation & Food Services sectors suffer most in this scenario with economic output falling by 90% and 85% respectively.

Oil prices have already seen a sharp decline, a trend that appears likely to continue throughout 2020. Their modelling suggests that the sterling oil price will fall to £27 a barrel for 2020-21, compared to £41 a barrel as was previously forecast.

This would mean a fall in the price of petrol with the cost in the UK approaching £1 a litre for the first time since 2016. The lower oil prices will also result in less corporation tax being paid, down by around 18% when the dip in profits is included.

This, coupled with a greater strain on public services due to the lockdown measures that Prime Minister Boris Johnson described as “unprecedented in peacetime”, mean the UK’s borrowing will soar.

The scenario published by the OBR sees a rise in government borrowing to “£273 billion (14 per cent of GDP) in 2020-21 – the highest deficit since the Second World War, and well above the financial crisis peak.”

Given the uncertainty surrounding the future of the coronavirus and of the government’s response to it, the analysis offered by the OBR is not a forecast, but an illustration of the scale of the disruption. They will be monitoring all new data available and will look to update their analysis when appropriate.

Full details and accompanying spreadsheets are available on the Office for Budget Responsibility’s website.

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