OBR sees huge Covid-19 impact on GDP and jobs

The Office for Budget Responsibility said under its "reference scenario" real economic output would plunge by 35% in the second quarter but then bounce back quickly. Unemployment would rise by more than 2m to 10% in the same period and decline more slowly than GDP recovers, the OBR projected.

The economy would shrink by 12.8% in 2020 but then grow by 17.8% the following year, it said.

Stressing that it was not making a prediction, the OBR said under its scenario public borrowing would jump by £218bn to reach £273bn or 14% of GDP in the 2020-21 fiscal year before dropping close to forecast in the medium term. That scenario would be the biggest single-year deficit since world war two, the OBR said.

Public sector net debt would rise sharply under the OBR scenario because of lower GDP, higher borrowing and the effect of Bank of England policy measures. Public debt would be more than 100% of GDP during the year but end the year at 95% versus 77% in the OBR's budget forecast.

Borrowing would fall back relatively quickly once the crisis has passed and policy actions have unwound but net debt would remain about £260bn higher four years later, the OBR said.

The OBR's scenario shows the public finances hit by a plunge in economic output and spending by Chancellor Rishi Sunak to support households and businesses during crisis. It assumes three months of heavy restrictions followed by three months for the economy to return to normal.

The OBR said: "The spread of the coronavirus will substantially raise public sector net borrowing and debt, primarily because of the associated economic disruption. The government’s policy response will also have substantial direct budgetary costs … The immediate cost of the government’s actions may be high, but we can be confident that the cost of inaction would ultimately have been much higher."

Jonathan Portes, professor of economics at King's College London, tweeted: "Big OBR call here is not the huge fall in output this quarter … That's already baked in. It's their assumption of a sharp V-shaped recovery meaning economy is back on trend in 2021 [with] no lasting economic impact."

The OBR's chiefs have urged the government to "spray" the economy with cash and worry about the public finances later to prevent permanent economic damage as a result of businesses and households going bust. The result of inaction would be a lasting reduction of the UK"s tax base and economic potential, they told MPs.

"The scenario should not be taken as our view of the most likely path for the economy and public finances," the OBR said on Tuesday. "We are not yet in a position to form any such judgement, as we have no basis for knowing how long the most stringent public health measures will remain in place."