The UK is on track for its largest annual decline in GDP since the Great Frost of 1709.
According to Chancellor Rishi Sunak, output will be 11.3 per cent smaller at the end of 2020 than it was at the beginning, in a painful reminder of the enormous economic damage being wrought on the UK by coronavirus.
The Chancellor made the desperate announcement as part of a wider Spending Review on growth projections, the public finances and Government spending.
He said: “Our health emergency is not yet over, and our economic emergency has only just begun.”
The latest forecast comes from the Office for Budget Responsibility (OBR), which believes that this year’s contraction will be the biggest for more than 300 years.
In its central scenario, the OBR predicts that, after this year’s drop, GDP will grow by 5.5 per cent in 2021, 6.6 per cent in 2022 and 2.3 per cent, 1.7 per cent and 1.8 per cent in the subsequent years to 2025.
Even with strong growth in the new year, the UK is not expected to return to its late-2019 size until Q4 2022.
By 2025, the economy will be around three per cent smaller than predicted in the March 2020 budget, in a sign that the economic damage is likely to be lasting.
Part of that is due to unemployment, which could rise to a peak of 7.5 per cent in Q2 2021 – equivalent to 2.6 million people out of work.
The labour market will then recover slowly, with 4.4 per cent expected to be jobless at the end of 2024.
On the public finances, 2020 will also be a record breaking year.
It will cost the Government £280 billion to get the country through coronavirus and when combined with falling tax receipts and a smaller economy, the budget deficit is expected to reach £394 billion in the financial year 2020/21.
At 19 per cent of GDP, that is a peacetime record. The only time Government borrowing has been higher was in the middle of the Second World War in 1942/43.
The OBR also forecasts that borrowing will remain high in subsequent years – with a £164 billion deficit expected next year alone.
Despite the dire fiscal context, the Chancellor is pressing ahead with plans to increase both capital investment and day-to-day spending.
Departmental spending will grow by 3.8 per cent this year and next – the fastest growth rate for 15 years.
The NHS budget will increase by £6.6 billion next year, with £2.2 billion for schools and £1 billion for criminal justice.
Capital spending will also total £100 billion in 2021, a figure which the Chancellor says is the highest in 40 years.
Of particular interest to the North East were announcements about a new UK infrastructure bank that is to be headquartered in the North of England and will open next Spring.
A new levelling-up fund worth £4 billion will also be made available so that any local areas can bid directly for funding of local projects.
Both the North East England Chamber of Commerce and the Federation of Small Businesses (FSB) described the Spending Review as a missed opportunity.
Jonathan Walker, policy director at the Chamber, said: “While we acknowledge the pressure on the public finances, this statement was a missed opportunity to restore confidence and many announcements were poorly targeted and too short-term in their scope.
“On the face of it, a levelling-up fund sounds good, but is far too small in scale and ambition to be effective.
“The Government’s own documents recognise the particular impact coronavirus has had on northern regions, but we fear £4 billion won’t go very far if spread across the country.”
Federation of Small Businesses (FSB) national chairman Mike Cherry added: “This Spending Review was a missed opportunity to help small business owners – not least those who have been excluded from support measures – and brings the need for a pro-business Spring Budget into focus.
“Rather than being a tax-raising Budget, it must have growth and recovery at its heart.”
Lucy Winskell, chair of the North East Local Enterprise Partnership (LEP) gave her reaction.
She said: “Today’s Spending Review has set out the scale of the challenge we face to recover from the economic impact of COVID-19.
“The Chancellor is expecting to see a decline in economic activity and rise in unemployment with a long-lasting impact for many years.
“He is therefore right to focus on the recovery of the labour market with support for those who lose their jobs or need to retrain and to focus on the levelling up of the UK economy.
“We look forward to more details about the levelling-up fund and the early stages of the UK Shared Prosperity Fund.
“We welcome the confirmation of the financial package to support the ten-point plan for a green industrial revolution.
“The North East has a strong role to play in delivering this plan.”