Rishi Sunak: UK economic emergency ‘only just begun’

LONDON — The U.K.’s coronavirus “economic emergency has only just begun,” Chancellor Rishi Sunak said as he unveiled a one-year government spending review with a stark warning of the need to balance the books in years to come.

According to the independent Office for Budget Responsibility’s forecast, the U.K. economy will have contracted by 11.3 percent by the end of 2020, “the largest fall in output for more than 300 years,” Sunak said. Economic output is not projected to return to pre-crisis levels until the end of 2022.

Unemployment is forecast to continue rising, peaking at 7.5 percent, or 2.6 million people out of work, in the second quarter of 2021.

“The economic damage is likely to be lasting,” Sunak said. “Long-term scarring means in 2025, the economy will be around 3 percent smaller than expected in the March [2020] budget.”

The U.K. is forecast to have borrowed £394 billion this year to pay for the unprecedented levels of state intervention to protect jobs and combat coronavirus, Sunak said, equivalent to 19 percent of GDP — the highest in the country’s peacetime history.

Sunak will come under increasing pressure to balance the needs of an economy shattered by the pandemic and a desire by many Conservatives to balance the books.

He defended the government’s emergency measures, but signaled that tax rises or spending cuts would be needed to bring down the national debt.

“This situation is clearly unsustainable over the medium term,” Sunak said. “We could only act in the way we have because we came into this crisis with strong public finances and we have a responsibility once the economy recovers to return to a sustainable fiscal position.”

Sunak confirmed that public sector pay will be frozen this year, with an exception for NHS workers and the lowest paid, while the U.K.’s longstanding target of spending 0.7 percent of GDP on overseas aid will be reduced to 0.5 percent. He said the target would be “difficult to justify to the British people” at a time of such domestic hardship but insisted the U.K. would remain the second highest aid donor among G7 nations.

Despite the grim forecasts, Sunak set out significant additional spending to help public services in the final months of the pandemic crisis: £18 billion will be allocated for spending on testing, personal protective equipment and vaccines in the coming year, while the NHS will receive an additional £3 billion, transport £2 billion and local councils £3 billion.

A three-year program worth nearly £3 billion will be established to help the long-term unemployed back into work.

Aside from the huge spending on COVID-recovery measures, the OBR forecast suggests public spending on other initiatives has been cut, according to the Institute for Fiscal Studies’ Paul Johnson. He told the BBC: “The chancellor sounded very generous in terms of the huge amounts he is putting towards the COVID-related need this year and next … but not so generous if you look at everything else.”

“We actually see quite big cuts to public spending over the next few years relative to what was planned back in March,” he added. “I think that’s unlikely, to put it mildly. So I think there are some questions here about how well this set of numbers will work through into the medium run.”

The OBR report also flags that Brexit uncertainty could yet have a significant impact on the British economy, particularly if the U.K. government doesn’t strike a deal with the EU. The OBR’s central forecast assumes a Brexit trade deal is agreed, but the independent fiscal watchdog also set out an alternative scenario in which a deal is not achieved. “This would further reduce output by two per cent initially and by 1.5 percent” by the end of the forecast, the OBR said.  

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