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The COVID-19 pandemic will “permanently scar government balance sheets” for at least a generation to come, a top economist has warned.
David Folkerts-Landau, group chief economist at Deutsche Bank (DBK.DE), said in a note to clients this week that governments around the world would face “war-time level deficits” for years to come.
The UK government reached as high as 25% of GDP for much of Second World War and 43% during the First World War, according to Jefferies (JEF). It peaked at 10.2% during the financial crisis.
Deutsche Bank forecasts a UK budget shortfall worth 13.4% of GDP in 2020.
It came as the Telegraph reported on leaked Treasury projections suggesting the UK will face a budget deficit of £337bn ($414bn) this year. That is up from a projection of £55bn made in March.
In a “best case” scenario, the deficit would still be around £200bn this year, while in the worst case forecast it would spiral to £516bn. The government is reportedly considering slashing spending and raising taxes in response.
A deficit of £337bn would equal roughly 12% of GDP.
“A highly uncertain and worrying outlook lies ahead, and it is likely that any short-term stability will come at a huge long-term cost,” Folkerts-Landau wrote.
The UK government has so far spent the equivalent of 6.1% of GDP — roughly £170bn — on fiscal stimulus measures in response to the COVID-19 pandemic, according to UBS (UBS). The state has also pledged to stand behind private sector loans to businesses worth £330bn.
The government launched a wide-ranging programme to support the economy through the COVID-19 pandemic in March. However, it was assumed the crisis would run for weeks, not months. Chancellor Rishi Sunak has twice been forced to extend the government’s job retention scheme, at a cost of tens of billions to the state.
As well as spiralling costs, government income is rapidly falling as the economy grinds to a halt. Expectations for future tax receipts are also worsening.
Folkerts-Landau said Deutsche Bank was becoming “increasingly gloomier on the global economy” as the pandemic dragged on. The investment bank slashed its growth forecasts for the UK economy from a slump of 5.5%, forecast in March, to a contraction of 11.5%.
Goldman Sachs (GS) this week also cut its growth forecast for the UK. The bank now expected the UK economy to contract by 10% in 2020, citing “further delays to the announcement of any substantive exit plans” from lockdown. In late March it expected a contraction of just 1.1%.
Neither forecast is as bleak as a scenario set out by the Bank of England last week. While not a forecast, the central bank said its modelling suggests UK GDP could shrink by 14% this year. It would mark the sharpest contraction in 300 years.
Official data, published on Wednesday, shows UK GDP fell by 2% in the first quarter of the year even before the full effects of the pandemic were felt.
The government this week began urging people to get back to work, likely in a bid to get the economy moving again and avoid more pressure building on the public purse.