In line with the Chancellor’s Budget on Wednesday (March 3), the Office for Budget Responsibility (OBR) published a wide-ranging and illuminating forecast looking at the state of the UK economy and public finances, and the economic outlook for the next five years.
It is the first forecast from the OBR since November last year, when the fiscal watchdog revealed that the coronavirus pandemic had delivered the largest peacetime shock to the global economy on record.
Now that the dust has settled, the scale of the worldwide economic contraction in 2020 has become clear for the first time.
According to the OBR, world GDP shrank by a record 3.5 per cent.
It was a lot worse for the UK, which recorded a 9.9 per cent annual decline, the biggest loss in national output since the Great Frost of 1709.
The forecast wasn’t just bad news though.
Headline unemployment is now only expected to rise to a peak of 6.5 per cent by the end of 2021, thanks largely to the Coronavirus Job Retention Scheme (CJRS) being extended until September.
This still equates to another 500,000 people being out of work, but is 340,000 fewer than predicted in the November forecast.
UK GDP is also expected to recover six months faster than previously forecast, returning to pre-pandemic levels in the second quarter of 2022.
The growth trajectory for the next five years is as follows – a 4 per cent increase this year, 7.3 per cent in 2022, 1.7 per cent in 2023, 1.6 per cent in 2024 and 1.7 per cent in 2025.
Alongside these more positive predictions for output and employment, the OBR has done some analysis on the Government’s new tax regime.
It estimates that freezing the income tax personal allowance and higher rate threshold in cash terms for four years will bring more than 1.3 million people into the tax system and create 1 million higher rate taxpayers by 2025/26.
The policy will raise £8 billion a year in additional tax receipts for the Exchequer.
Raising the headline rate of corporation tax from 19 to 25 per cent from April 2023 will raise even more money.
The first Chancellor to do so since Denis Healey in 1974, Sunak’s hike will generate £17 billion a year by 2025/26 and take corporation tax as a proportion of GDP to its highest level since 1989/90.
Offsetting these measures to some degree is the two-year temporary capital allowances super deduction scheme.
In the financial year 2021/22 and 2022/23, companies will be able to offset 130 per cent of investment spending on eligible plant and machinery against profits.
The super deduction is expected to cost £12 billion a year and bring business investment forward from future periods.
On the public finances, the OBR believes that headline UK national debt will remain over 100 per cent of GDP for at least the next five years, peaking at 109.7 per cent in 2023/24 – its highest level since 1958/59.
Borrowing a peacetime record of £355 billion this financial year will also push the deficit six times higher than in 2019/20.
With the Bank of England’s base rate at a record low of 0.1 per cent though, the cost of servicing Britain’s historic debts will actually fall to just 2.4 per cent.
The OBR believes this will equate to debt interest spending of £13.4 billion in 2023/24, and £5.6 billion in 2024/25.
Looking ahead to UK GDP for the first quarter of 2021, the OBR forecasts a 3.8 per cent contraction.
This will mean that output is still 11 per cent below pre-pandemic levels a full 12 months on from the beginning of the crisis.
Analysis shows that consumers and business are adapting to public health restrictions, however, with only retail sales rising from 15 per cent to 36 per cent since the first lockdown and the proportion of businesses closed or paused trading falling from 24 to 11 per cent.
The OBR has bad news for Brexit believers, forecasting a long-run loss of productivity of around 4 per cent compared with remaining in the EU.
These are just some of the key points from the 222-page OBR economic and fiscal outlook March 2021.
Read the full forecast here: https://obr.uk/efo/economic-and-fiscal-outlook-march-2020/