The horrendous impact of Covid-19 lockdown on the output of the British economy, on jobs and on the public finances, is an indisputable fact of our new lives.
But the scale of the hit, as documented by two reports, is so big that the shock is amplified. No wonder then that ‘hawk’ Chancellor of the Exchequer Rishi Sunak is the loudest voice in Cabinet, urging a time-frame for easing the lockdown. He understands the devastation that has been unleashed.
He wants to protect household incomes from being further savaged, and to restore some kind of stability to financial markets so that pensions are not wiped out.
He will have his job cut out. In its authoritative World Economic Outlook report, the International Monetary Fund detailed how the coronavirus would rob the global economy of £7trillion – more than the output of Japan and Germany combined.
Its chief economist, Gita Gopinath, described the magnitude and speed of economic collapse prompted by the ‘Great Lockdown’ as ‘unlike anything experienced in our lifetimes’.
At the same time, the UK’s independent Office for Budget Responsibility (OBR) made a first official stab at chronicling the damage here, and its findings are sobering.
When, earlier this week, Sunak suggested a 30 per cent loss of Gross Domestic Product (GDP or our total output) in the second quarter (April to June) of this year, I wrote that he was drawing on a worst-case scenario to make the case for a gradual end to lockdown.
After all, a decline in growth on that scale was more than twice what leading City economists were predicting. The OBR, it seems, shares Sunak’s caution – and then some. It has looked at each major sector of the British economy, fed the figures into its model and come up with a jaw-dropping 35pc loss of GDP in the second quarter.
This would add 2m extra British workers to the dole queue, bringing the total number of unemployed up to 3.4m. Britain’s post-financial crisis jobs miracle would be lost in a flash. And the shortfall in tax income as a result of the nation going into slumber, together with the high cost of support measures such as the expensive jobs furlough scheme, sends Britain’s relatively tidy budgetary policy into total disarray at a stroke.
The OBR believes a threemonth lockdown followed by an easing of restrictions over three months would rob the exchequer of £130 billion of taxes this year, with income tax and national insurance down 16 per cent, VAT and excise duties down 21 per cent and corporation tax down 18 per cent.
Extra outlays mean spending for the current year is hitting the stratosphere at £88 billion, or 9 per cent higher than estimated at the Budget, just before the pandemic broke, a short month ago.
To put that in perspective, it matches the cost to taxpayers in the two years immediately following the financial crisis (2008-2010).
It also increases the size of the state to 52 per cent of output which is highest level of expenditure by any British government, Tory or Labour, since the Second World War.
The loss of tax receipts and chunky extra spending push borrowing up to £273 billion, far higher than the £175 billion that the Coalition government inherited from Gordon Brown in 2010. As a percentage of GDP, it takes us back to the years of the Blitz.
The national debt, which represents the accumulation of unpaid borrowings, shoots up to 97 per cent of total output – grim, but not quite as grim as the red ink on Japan and Italy’s balance sheet.
Of course Britain is not alone in seeing its economic prospects devastated by the lockdown as the IMF details: a contraction of 6.5 per cent here compares with 5.9 per cent in the United States, 7.5 per cent in the 19 eurozone countries, and 5.2 per cent in Japan.
The UK will ‘bounce’ back in 2021 with 4 per cent growth, says the IMF, but that’s nowhere near enough to get us back to where we were when the plague descended.
The OBR also offers the nation a hint of a silver lining, arguing that while the Government’s economic interventions are expensive they will ‘limit the long-term damage to the economy and public finances’.
It adds the costs of doing nothing would have been far higher. The OBR’s projections do show government borrowing returning to some kind of normality before the end of the current Parliament.
But, overall, the IMF’s finding that for the first time on record both wealthy and developing nations are in recession at the same time, will mean that pulling out of the current nosedive is going to be a rough ride for everyone.
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