From a growth viewpoint, the March EFO is marginally more upbeat than the previous version, issued in November 2020. The rapid rollout of effective vaccines and the government’s new “roadmap” for a route out of “lockdown” is seen as offering better prospects for a consumption-led recovery.
The £125bn savings “pile” built up by more fortunate citizens is seen as strategically-important, if it can be “unlocked” by businesses.
Overall, however, the document makes gloomy reading, laying bare the fiscal impact of Coronavirus. Before the pandemic, national debt was thought to have peaked at 85% of GDP and expected to fall steadily in the medium-term. Now, debt stands at 100% of GDP and is expected to rise to 110% by 2024.
Beyond that, debt is expected to fall, but in the meantime, vulnerability to interest rate increase will be a serious worry and even a fairly small increase in interest rates would wipe out the benefit of the government’s recent policy changes, requiring still more aggressive actions.
The EFO also draws attention to the social harms done by Coronavirus in terms of education, non-emergency healthcare and so on.
Forecasting approach
- (foreword) As in November, the OBR has provided three alternative forecasts – Downside, Central and Upside
- (foreword) Only the Central forecast has been updated – the other two remain the same
- (foreword, para 2.7) The Central forecast incorporates the current government “roadmap” out of “lockdown”
- (para 2.11) Some lockdown measures may remain in place until 2022, however
- (para 1.9) The course of the pandemic remains the biggest single economic uncertainty
- (para 1.9) It is possible that the virus will “fizzle”, giving a quicker-than-expected recovery, or it may return strongly
General situation
- (Chart C, para 1.1) The UK has been hit extremely hard by the pandemic versus other advanced countries, economically and biologically
- (para 1.13) GDP fell by 10% in 2020, the biggest drop on record
- (para 1.3) Vaccine rollout gives reason for optimism, however – the Central forecast is now somewhat more optimistic than before
- (para 1.7) Public debt is now over 100% of GDP
- (para 1.42) Public finances are very vulnerable to even small increases in interest rates
- (Chart G, para 1.20) Businesses have adapted to trading under “lockdown” 36% of retail sales are now online vs 15% pre-virus
- (Chart B, para 1.21) The new trade deal with the EU resolves uncertainty, although border disruption has been greater than expected
- (Box 2.2, table A) The new trade deal is fairly “typical” vs others, offering only weak coverage for services
- (para 1.25, 2.42, 2.70) Future population may be lower than expected due to reduced net migration
Fiscal situation
- (para 1.5) The need to manage debt means that the overall tax burden on the economy will grow
- (para 1.5) By 2025-26, tax will be at the highest level since the late 1960s, at around 35% of GDP
- (para 1.37) There is no provision in the Budget for pandemic-related spending after 2021-22
- (para 1.36) There is no provision for spending to regain lost ground in public services (eg: delayed NHS treatments)
- A spending review is planned for 2021
Economic forecasts – revised Central scenario
- (Chart 2.7) GDP in Q1 2021 is expected to be weaker than forecast in November
- (Chart 2.7) GDP will grow slightly more strongly than forecast in November from mid-2021 into 2022
- (Chart 2.17) Average earnings will rise at about the rate previously expected, with no benefit from stronger-than-expected recovery
- (Chart 2.14) Unemployment will rise from 5.1% in Q4 2020 to 6.5% in Q4 2021, before falling slowly to c4% by 2026
- (Chart 2.18) CPI inflation will remain moderate in 2021 an 2022, returning slowly to target by 2026 (this is less bullish than the B of E view)
- (Chart 2.3, para 2.20) Outlook for Sterling is marginally stronger than in November
- (Chart 2.11, para 2.55) Special Budget measures are expected to drive a recovery in business investment
Fiscal forecasts
- (para 1.38) Public sector net debt is expected to peak at around 110% of GDP in 2023-24, before falling slowly
- (para 1.44) Government targets for fiscal management are expected to be missed – by wide margins