“Spend now, pay later”: this was the Guardian’s front-page reaction to Rishi Sunak’s 2021 Budget. Rarely has a headline been truer.
Sunak’s announcement included few immediate measures to tackle the UK’s budget deficit (which is forecast to reach £355bn, or 17 per cent of GDP, this year). Yes, there were some tax increases, such as raising corporation tax from 19 per cent to 25 per cent (and the knock-on effect of freezing income tax thresholds). This will not happen now, but rather in the hopefully warmer economic climes of 2023.
It is understandable, of course, that Sunak wants to focus on the immediate cure rather than long-term rehabilitation. Britain is enjoying a successful vaccine roll-out and the government has shared its plan for a return to some form of normalcy in the summer.
Epidemiologically speaking, Covid-19’s impact may already have peaked. But economically speaking, it has not. The latest forecast from the Office for Budget Responsibility (OBR), Britain’s independent fiscal watchdog, suggests that UK unemployment will surge this year.
Its central forecast suggests that the rate of joblessness will stabilise in spring and early summer before surging in the autumn as government pandemic support schemes, such as the furlough programme, end. The OBR forecasts that unemployment will reach 164 per cent of pre-Covid rates – those seen in the first quarter of 2020 – in the closing months of this year. At present, unemployment is at 131 per cent of the pre-Covid rate.
The OBR suggests that while unemployment will rise rapidly (peaking at 6.5 per cent), it will fall much more slowly, eventually reaching a more normal level (4.5 per cent) by the beginning of 2024. It will take until 2023 for unemployment to return to its current level, and it won’t be until the following year that it is near its pre-Covid level. Even then, unemployment will be higher than it was before the pandemic.
The OBR in its executive summary of the Budget was explicit that Sunak’s efforts to contain both the coronavirus crisis and its economic consequences had “delayed, rather than avoided” some of the costs, which will include not just higher unemployment rates but also business insolvencies.
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This raises the question of whether the government’s proposed path back to normality may benefit some people earlier than others, and whether some will regain pre-Covid “normality” at all. The OBR’s central forecast anticipates that GDP will return to pre-Covid levels by 2022, while employment will continue to lag. This means that Britain’s economic recovery is likely to be disproportionate. Specific industries and communities that have proved vulnerable to the economic impact of the pandemic are less likely to revert to pre-Covid stability, or will take much longer to do so. Avoiding permanent damage to those industries may require drastic intervention from central and local government, if it can be avoided at all. The government’s attempts to refocus the economy away from south-east England and the financial sector, for example, may need to be put on hold while other regions recover.
These are deep structural problems that have not yet been addressed. If the OBR is right, they will be with us soon and for a long time to come: it will take much more than Sunak’s Budget to rebuild the British economy.