The Office for Budget Responsibility has partially revised up its economic forecasts, and now expects GDP to return to pre-pandemic levels by mid 2022 - six months earlier than previously predicted.
Chancellor Rishi Sunak said in the Budget that the recovery would be “swifter” and “more sustained” than had been expected at the time of his November statement, but there was mixed news on the expected shape of that growth.
The OBR now expects unemployment to peak at 6.5 per cent, rather than its previous expectation of 7.5 per cent.
But the forecaster has revised down its expectations for 2021, predicting the economy will grow by 4 per cent this year, down from a previous forecast of 5.5 per cent. While it now anticipates growth of 7.3 per cent next year, up from a previous forecast of 7 per cent, the 2023 estimate has fallen from 2.3 per cent to 1.7 per cent.
In three years' time the economy is still expected to be three per cent smaller than would have been the case if the pandemic had not happened. Official data shows the economy has shrunk by 10 per cent as a result of the pandemic.
Sunak said the total of government spending on the pandemic will be £407bn.
He noted that the cost of UK government borrowing over 10 years has risen by about 0.5 percentage points over the past six weeks. This does not affect money that has already been borrowed, the interest rate on that is fixed, but rather it increases the interest rate on money borrowed in future.
Gerard Lyons, chief economic strategist at Discretionary fund house Netwealth, said that neither stimulus measures to encourage economic growth, nor tightening measures to reduce the deficit, are needed right now.
He said the huge volume of savings built up in the economy will act as a stimulus when the economy opens, while growth will naturally see the deficit decline.
Mr Lyons said: “The ratio of debt to GDP is now above 100%, the last time it was at a comparable ratio was in the early 1960s when debt to GDP was still falling from its peak after the Second World War.
Our experience then, of reducing the ratio of debt gradually, while the economy grew solidly, is a useful reminder for now and suggests that there is no need to panic.”
Samuel Tombs, chief UK economist at Pantheon, said UK government gilt yields have risen slightly since the Chancellor began speaking. He believes this is because borrowing next year will be higher than forecast.
Higher borrowing causes yields to rise as it means the government will increase the supply of gilts in the market, pushing down the price of existing gilts, and moving yields upwards.