In microeconomic theory, opportunity cost is the term used for the potential benefits we miss out on when we choose one path over another.
If a business chooses to develop a new product or service, for example, then it must either redirect resources from another part of the business or expand its capabilities.
Either way, there are opportunity costs.
The UK has made and had to make many choices in the last 12 months, and the latest forecast from the National Institute of Economic and Social Research (NIESR), is beginning to reveal what the opportunity costs might be.
According to the institute, the UK is set to permanently lose between 5 and 8 per cent of national income as a result of the “twin traumas” of COVID-19 and Brexit.
NIESR director Jagjit Chadha described this as “a dire moment in our national history”.
It’s a good way to characterise the implications of such a loss.
UK gross national income (GNI) in 2019 was £2.2 trillion according to the Office for National Statistics (ONS).
That means even a 5 per cent income reduction would represent a £110 billion loss – more than the total estimated cost of the Coronavirus Job Retention Scheme (CJRS) and enough to run the UK education system for a whole year.
It’s also enough to delay investment decisions, hiring intentions and a whole host of other things that are needed to reinvigorate an economy after a systemic crash.
In some ways, this is the real tragedy of the economic crisis – not the loss of what is, but the loss of what could have been.
As minds have rightly been focussed on business that have gone bust and workers that have been made redundant, what about all the businesses and jobs that could have been created?
Such a loss in national income will mean that businesses won’t be incorporated, products won’t be developed, services won’t be provided, and talent won’t be recruited.
These are some of the opportunity costs related to the twin traumas of COVID-19 and Brexit.
The NIESR only expects UK GDP to grow by 3.4 per cent in 2021 – down from 5.9 per cent in the previous forecast.
In this scenario, GDP would not recover to pre-pandemic levels until late 2023.
The downward revision follows indications that the current national lockdown is having a larger impact on economic activity than the November confinement, but a smaller impact than the first lockdown last spring.
It is also becoming clear that our new trade agreement with the European Union is going to mean structural change in terms of how and how much we trade with our nearest trading partner.
These twin traumas will weigh heavily on growth in the short to medium term.
Jagjit Chadha said: “The country is facing the twin traumas of managing two exits. Exit from the COVID-19 crisis and from the European Union.
“Of course, much of the world is dealing with the first and the European Union has also had the latter with which to contend.
“But the UK, and indeed Ireland, is set to lose permanently some 5-8 per cent of national income as a result of the scarring from these events.”
Like everything else, it seems the UK’s economic prospects rest on the vaccination programme and its ability to bring the pandemic to an end both in the UK and globally.
The emergence of new COVID-19 strains, which could reduce vaccine efficacy and prolong lockdown measures, poses major risks to UK GDP.
Conversely, a successful vaccine rollout followed by a permanent easing of social distancing restrictions could see output recovery quicker than currently forecast.
But whatever happens, the opportunity costs of the path we have taken to get through this are significant and will have a long-lasting impact on the UK economy.
The loss of national income will translate into higher unemployment and weaker business sentiment.
The NIESR expects unemployment to climb to 6.5 per cent in 2021, rising to a peak of 7.1 in 2022.
The national debt as a percentage of GDP is expected to reach 109.9 per cent in 2021, following a 17.6 per cent budget deficit in 2020 and rising to a peak of 110.9 per cent in 2022.
Interest rates are expected to be held at 0.1 per cent until 2024, while CPI inflation increases steadily to 1.7 per cent over the same period.
Recovery is expected to be strongest in the production, construction and finance industries and relatively weaker in the public sector, real estate and private trade services.