The impact of coronavirus will be far higher than expected
In April, the Centre for Policy Studies published the first full estimate of the cost of coronavirus, predicting that borrowing this year could exceed £300 billion.
The OBR’s central estimate is now £322 billion, which does not include the package of up to £30 billion announced by Rishi Sunak last week, or other smaller sums included in the CPS’s original calculation.
In addition, the OBR is forecasting another £277 billion in additional borrowing over the subsequent four-year period, primarily due to tax receipts falling short. The OBR are clear that this means borrowing will not only be vastly higher this year and next but it will be higher on an ongoing basis.
James Heywood, CPS Head of Welfare and Opportunity, said: "This shows that the CPS was right in its report with Sajid Javid last month on the economic recovery, After the Virus, to stress that the hoped-for V-shaped recovery was unlikely and there must be a relentless focus on minimising lasting damage to GDP and the public finances."
Coronavirus is exacerbating existing economic problems
Over the last decade, real GDP growth per capita has been just 1.24% per year. If you wind this back to include the financial crisis and its aftermath, that falls to just 0.4%.
The OBR are estimating that in real terms the economy will be just 1.6% bigger in 2023 than in 2019. When we factor in estimated population growth of roughly 2% over that period, we are looking at per capita GDP being lower in 2023 than in 2019, and that follows a decade of stagnation already.
Alex Morton, CPS Head of Policy, said: "Our economic problems have clearly been exacerbated by coronavirus, but this is a long-term problem – there has not been such a period of stagnation since at least the end of the Second World War. We urgently need growth to return."
Britain’s fiscal health rests on the kindness of the money markets
As the CPS pointed out in 'After the Virus', the costs of servicing Britain’s debts have plummeted in recent years, even as the stock of that debt has hugely increased. This is largely due to the impact of quantitative easing and falls in interest rates. But neither of those are guaranteed to continue forever, as the OBR forecast makes clear.
Nick King, CPS Head of Business Policy, said: "The important thing to focus on right now is growing the economy, rather than the size of the debt. But as we argued in ‘After the Virus’, ministers need to set out a credible route towards fiscal stability once the economy has recovered."
Growth is the only way to fend off tax rises or spending cuts
The OBR report lists many other pressures on spending beyond the coronavirus. For example, under its central scenario, the triple lock (something long criticised by the CPS) “raises state pension spending in 2024-25 by £6.0 billion more than if the pension were raised in line with CPI inflation, £3.2 billion more than if it were just linked to earnings, and £1.8 billion more than under a ‘double lock’ based on just inflation and earnings”.
In the longer term, its conclusion is that stark: “Given the structural fiscal damage implied by our central and downside scenarios, in almost any conceivable world there is at some point likely to be a need either to raise some taxes or to reduce some existing spending commitments to accommodate new ones (for example in health and social care) and to put the public finances onto a sustainable long-term path.”
Caroline Elsom, CPS Senior Researcher, said: "This is why the CPS’s focus on growth is so important. The OBR’s scenarios assume different levels of immediate damage, but identical rates of post-crisis growth. The only way to minimise the harm from the pandemic over the longer term is an obsessive focus on growth, and on the supply side reforms to support it."
Robert Colvile, Director of the CPS, said: "The OBR forecasts today confirm that the situation is even worse than our early estimates, and that difficult decisions will need to be made for many years to come to get our economy back on track. If we are going to right the ship anytime soon, we must have a clear focus on growth, driven by the private sector, with the incentives and flexibility to invest and create jobs. Without higher growth, we cannot pay down our debts or keep funding our public services - this has to be the focus going forward."