16 Apr 2020 | Posted In Money advice news

Think tank the Resolution Foundation has published a report on the next steps in the economic response to Coronavirus.

The report introduction reads:

“The Government has responded to Coronavirus by shutting down large parts of the UK economy, and socialising the costs of doing so through a package of fiscal support to firms and individuals unprecedented in size and scope. Given uncertainty about how long public health restrictions will need to be in place, economic policy makers need to be prepared to manage what could be a protracted period of disruption to lives, livelihoods, and finances.

“To support policy makers as they manage the economic fallout from this crisis, this paper examines the economic and fiscal implications of three different scenarios for the length of time for which social distancing measures need to be in place: three, six, and 12 months. It also discusses how governments can mitigate and manage possible tensions between their health, economic, and fiscal policy objectives.”

Key findings include:

  • Social distancing measures are estimated to reduce economic activity initially by around one-third while they are in operation.
  • Depending on whether such measures are in place for three, six, or 12 months, the resulting fall in GDP in 2020 could be 10, 20 or 24 per cent, respectively. Annual falls in GDP of this magnitude have not happened in the UK for over three centuries.
  • Unemployment peaks at almost 2 million (5.4 per cent) under the three-month scenario but rises to almost 5 million (14.1 per cent) in the six-month scenario and over 7 million (20.8 per cent) in the 12-month scenario.
  • Inflation and interest rates are expected to remain low, but increases in either would represent a significant additional risk to the economic and fiscal outlook.
  • The contraction in economic activity, coupled with the Government’s £400 billion policy response, puts extraordinary pressure on the public finances in all three scenarios, with the costs divided roughly evenly between the economic shock and the policy response.
  • Public sector net borrowing reaches 11 per cent of GDP in a three-month scenario (higher than during the financial crisis), 22 per cent of GDP in the six-month scenario (higher than at any point in peacetime), and 38 per cent of GDP in the 12-month scenario (higher than the UK has borrowed in any single year its history).
  • Debt rises above 100 per cent of GDP in all three scenarios, peaking at 106 per cent in the three-month scenario, 129 per cent of GDP in the six-month scenario, and 167 per cent of GDP under the 12-month scenario. These are levels of public indebtedness not seen for generations.
  • The Government faces as an extraordinary financing requirement this year ranging from 16 per cent of GDP in the three-month scenario, to 27 per cent of GDP in the six-month scenario, to over 40 per cent of GDP in the 12-month scenario.
  • Despite the debt-to-GDP ratio more than doubling in the most extreme scenario, the proportion of government revenue devoted to paying debt interest actually falls below the pre-outbreak forecast under all three scenarios.
  • However, an unexpected rise in inflation or interest rates could significant increase the burden of servicing the Government’s higher stock of debt, at a time when fiscal policy needs to focus on supporting the economy and safeguarding long-term fiscal sustainability.

Read the full report here.