Britain’s economy will recover faster than expected from the pandemic with unemployment and ballooning debt levels also lower than first feared, according to the UK fiscal watchdog.
The Office for Budget Responsibility (OBR) has said it now believes the economy will return to its pre-Covid level at the “turn of the year”, around six months earlier than predicted in March, as it delivered a raft of economic upgrades.
Predicted long-term scarring effects of Covid-19 on the economy have also been scaled back by the independent forecaster, which has revised it down from 3% to 2%.
But the OBR figures also revealed pain in store for household and public finances from soaring inflation, with the latest prediction showing the rate of Consumer Prices Index (CPI) is set to jump from 3.1% to an average of 4% over 2022.
With speculation mounting that the Bank of England may have to act as soon as next month to control rocketing prices, the Chancellor warned that even a one percentage point increase in interest rates would cost the country £23 billion in payments on its debt mountain.
But Rishi Sunak has been offered some welcome room to manoeuvre as rebounding growth means the OBR now sees borrowing falling consistently from last year’s peacetime record.
The OBR is now forecasting that gross domestic product (GDP) will grow by 6.5% in 2021, up sharply from the 4% predicted in March.
Next year’s GDP outlook has been downgraded to 6% from 7.3% forecast in March, though the OBR has upgraded its forecast for 2023 to 2.1% from 1.7%, with expansion now expected at 1.3% in 2024 and 1.6% in 2025.
The bounce-back and enormous furlough support is also helping the UK jobs market weather the pandemic, with the OBR now expecting the unemployment rate to peak at 5.2%, down from 5.6% previously and the 12% initially feared.
Mr Sunak outlined new fiscal rules, called the Charter for Budget Responsibility, which will look to ensure day-to-day spending is no longer funded via borrowing and for underlying debt – currently around 100% of GDP – to fall.
He said his fiscal rules have all been met, thanks to sharply lower borrowing forecasts, with the OBR now saying it believes borrowing will fall to 7.9% of GDP this year, from the 10.3% or £234 billion previously predicted.
Borrowing will then drop to 3.3% of GDP next year, then 2.4%, 1.7%, 1.7% and 1.5% in the following years, according to the OBR.
This sees lower than feared borrowing in each year under the forecasts and down from the record of more than £350 billion amassed in 2020-21 after mammoth emergency pandemic support.