The chancellor has warned that the "economic emergency" caused by the coronavirus crisis has “only just begun”, with experts forecasting the economy will remain scarred until 2025.
Official forecasts from the Office for Budget Responsibility now predict the economy will shrink by 11.3 per cent this year, marking the largest fall in output for more than 300 years.
Speaking in the House of Commons today (November 25), Rishi Sunak said the economy was expected to start to recover in 2021, growing 5.5 per cent in that year, and continue expanding over the rest of the five-year forecast.
However, Mr Sunak stressed that economic output would not return to pre-Covid levels until Q4 of 2022 and that the economic damage was “likely to be lasting”.
He added: “Even with growth returning, our economic output will not return until Q4 2022.
“The economic damage is likely to be lasting. There will be long-term scarring, and in 2025 the economy will be 3 per cent smaller than it was expected to be in the March budget.”
The forecast also suggested a no-deal Brexit would further reduce output by 2 per cent initially and by 1.5 per cent by 2025.
Earlier this week, Bank of England governor Andrew Bailey said the long-term economic effects of a no-deal Brexit would be “worse than Covid”.
The OBR predicts unemployment to jump to 7.5 per cent next year, peaking in Q2, which would mean 2.6m people were out of work.
Unemployment figures are then forecast to fall every year to reach 4.4 per cent by the end of 2024.
It is expected the government will borrow £394bn this year, or the equivalent of 19 per cent of GDP — the highest level of borrowing in the UK’s peacetime history.
Borrowing will then fall to £164bn next year, £105bn in 2022/23 and then remain at around £100bne every year for the remainder of the forecast.
Mr Sunak said: “As high as these costs are, the costs of inaction will be much higher.
“But it is not sustainable in the medium term and we could only act this way because we came into this crisis with strong finances.
“This is an economic emergency, that’s why we continue to take extraordinary measures, and it is clear those measures are making a difference.”
The OBR said the government’s economic response had protected jobs, incomes and businesses, noting that business insolvency rates had fallen compared to last year.
To move some way towards decreasing public spending, Mr Sunak today announced a public sector pay freeze, excluding some NHS jobs and those who earned below £24,000.
He also scrapped the government’s pledge to spend 0.7 per cent of the UK’s national income on foreign aid, dropping that figure to 0.5 per cent in 2021 and remaining at the lower level until the fiscal situation allowed.
Elsewhere, he announced a £1bn social care boost, £18bn for coronavirus testing, PPE and vaccines and an extra £3bn for the NHS.