The Office for Budget Responsibility’s (OBR) latest outlook points to the biggest economic contraction in 300 years and unemployment matching its 1980s peak, highlighting the Chancellor’s gamble in not taking a bolder approach to tackling Britain’s jobs crisis, the Resolution Foundation said today.
In three scenarios for the length of the crisis and the extent of the scarring effects, the OBR’s latest outlook for the economy points to a GDP hit of between 10.6 and 14.3 per cent this year – the worst contraction since the 13.4 per cent fall in 1709.
These scenarios come with big rises in unemployment. Even in the OBR’s most optimistic scenario, unemployment is projected to rise to nearly 10 per cent – much higher than its financial crisis peak of 8.5 per cent.
But in the downside scenario, which is consistent with lockdown measures being re-imposed to some degree (although notably not a second wave), unemployment rises to over 13 per cent – comfortably surpassing the 1980s unemployment peak of 11.9 per cent. Its central scenario of 12 per cent would match this peak.
The OBR also highlights the huge fiscal hit from the pandemic, with its central scenario pointing to the biggest peacetime increase in borrowing – reaching over £350 billion this year (compared to the £55 billion forecast by the OBR in March).
The Foundation notes that the OBR’s central scenario of one in seven, or 1.3 million, furloughed workers moving onto unemployment shows the Chancellor has taken a big gamble in not announcing bolder measures to support demand and employment in the hardest-hit parts of the economy.
It adds that the lasting economic damage from the pandemic, coupled with demographic trends that place even more pressure on the public finances and the Prime Minister’s ruling out of a return to austerity, means the Chancellor will face a huge political challenge of delivering the significant tax rises likely to be required to put the country’s public finances on a sustainable long-term footing.
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 1.3 million furloughed workers moving straight into unemployment should prompt the Chancellor to consider further action on jobs.
“And whatever path our recovery takes, the Chancellor faces the huge political challenge in future of setting out the tax rises that will be needed to get the public finances back on a sustainable footing.”