UK borrowing to hit record £394bn as economy shrinks 11.3 per cent
Government borrowing is set to soar to a peacetime record of £394bn this year while the economy will contract at the fastest pace since the 1700s thanks to the coronavirus pandemic, according to bleak predictions from the UK’s budget watchdog.
The figures from the Office for Budget Responsibility (OBR) show that unemployment is expected to peak at 7.5 per cent next year, putting 2.6m people out of work.
Read more: Follow our Live Blog of Rishi Sunak’s announcement of the Government’s spending review
Chancellor Rishi Sunak revealed the watchdog’s latest predictions as he unveiled the government’s 2021-22 spending plans in parliament.
He allocated £55bn to tackle the virus next year. And he said he was honouring the government’s previous promises to boost spending on public services, with a 3.8 per cent increase next year – the fastest rate in 15 years.
Sunak said: “Our health emergency is not yet over, and the economic emergency has only just begun. So our immediate priority is to protect people’s lives and livelihoods.”
This “emergency” drove Sunak to find some savings. He cut the overseas aid budget from 0.7 per cent to 0.5 per cent, saving £4bn next year. And he put in place a public sector pay freeze, excluding NHS staff and the lowest paid.
The OBR said it expects the government to have spent £281bn more than last year as a result of tackling coronavirus. Meanwhile, receipts are expected to have dropped by £57bn, with a smaller economy meaning a lower tax take.
Government borrowing is expected to hit £394bn this year – 19 per cent of the size of the whole economy and the highest level since the second world war.
Forecasts for public sector net borrowing, then and now
| July estimates | November forecasts | |
| 2020-21 | £322bn | £394bn |
| 2021-22 | £154bn | £164bn |
| 2022-23 | £132bn | £105bn |
| 2023-24 | £123bn | £100bn |
Source: Office for Budget Responsibility
Borrowing will remain elevated for the foreseeable future, coming in at £164bn next year and around £102bn by 2025-26.
The OBR said it expects the economy to shrink an enormous 11.3 per cent this year, the biggest contraction in 300 years. It is then likely to grow 5.5 per cent next year.
Its growth prediction for 2020 is in fact an improvement on the 12.4 per cent contraction it foresaw in July.
Yet the watchdog now thinks the economy will bounce back more slowly next year, having previously estimated it would grow 8.8 per cent in 2021.
The OBR said the economy would not reach its pre-coronavirus size until the final quarter of 2022. And it said that in five years time, the economy will be around three per cent smaller than it otherwise would have been.
However, high levels of uncertainty caused the watchdog to lay out different scenarios. It said a highly effective and quick vaccine could mean the economy is the same size as originally expected in five years’ time.
Yet it said a no-deal Brexit could knock a further two per cent off the size of the economy next year, and 1.5 per cent over five years.
The report said the government should have no problem maintaining the record levels of public borrowing.
It said that interest payments on the public debt were in fact set to drop to record lows within the forecast period. This is in large part thanks to the Bank of England’s record bond purchases, which keep interest rates low across the economy.
Yet the increase in borrowing does “render the public finances more vulnerable to changes in financing conditions and other future shocks,” the OBR said.