The Covid-19 pandemic is set to deal a lasting blow to the UK economy and labour market, according to Chancellor of the Exchequer Rishi Sunak at his Spending Review, with economic output not expected to return to pre-pandemic levels until the end of 2022.
- The UK economy is expected to shrink by 11.3% this year
- Unemployment is tipped to peak at 7.5% in Q2 2021
- Borrowing is set to reach its highest-ever peacetime level
The Covid-19 pandemic is set to deal a lasting blow to the UK economy and labour market, according to Chancellor of the Exchequer Rishi Sunak at his Spending Review, with economic output not expected to return to pre-pandemic levels until the end of 2022. The Chancellor said: “This is an economic emergency. That’s why we have taken, and continue to take, extraordinary measures”.
“In 2025, the economy will be around 3% smaller than expected in the March Budget”
The UK economy is forecast to contract by 11.3% this year, representing its steepest drop for over 300 years. Although growth is predicted to recover to 5.5% in 2021, rising to 6.6% in 2022, economic output is not expected to return to pre-crisis levels until the fourth quarter of 2022. The Chancellor warned of “long-term scarring” from the pandemic, commenting: “In 2025, the economy will be around 3% smaller than expected in the March Budget”.
Borrowing is forecast to reach its highest-ever level for peacetime, rising to £394 billion in 2020, which is equivalent to 19% of GDP. Meanwhile, underlying debt – which strips out the impact of Bank of England’s asset purchases – is predicted to be 91.9% of GDP this year, rising to 97.5% of GDP by 2025/26.
The rate of unemployment is expected to peak at 7.5% in the second quarter of 2021, with 2.6 million people out of work. There will be a widespread pay freeze for public sector workers, although NHS workers and those earning below £24,000 per year will receive an increase. The National Living Wage will rise by 2.2% to £8.91 per hour.
The Chancellor also announced £2.9 billion for the Government’s three-year “Restart” scheme aimed at the long-term unemployed, and £1.6 billion for its “Kickstart” scheme for young people at risk of long-term unemployment. A new “Levelling Up” fund worth £4 billion will finance upgrades for local infrastructure projects. A package of funding for health and social care includes £18 billion for coronavirus testing, vaccines, and PPE, alongside an additional £3 billion to support the NHS.
The measures in the Spending Review were generally welcomed by the Confederation of British Industry (CBI), which nevertheless warned: “Ambition must be matched by action on the ground”. Elsewhere, the British Chambers of Commerce (BCC) commented: “With an uncertain winter ahead, the government will need to maintain an open mind on providing further support to businesses struggling to survive”.
