The economy has proved surprisingly resilient
The current lockdown will probably cause the OBR to forecast a fall in GDP in Q1 2021. However, the economy proved surprisingly resilient in the last quarter of 2020, and vaccines are being rolled out earlier than the OBR previously assumed. So it is likely to revise up the speed of the recovery later this year – and may also bring forward to early 2022 the point when it expects the economy to regain its pre-crisis size.
The Chancellor decided in late December to extend the life of the job retention scheme and government-backed business loans. And a weak start to the year for the economy will also push up government borrowing. However, the deficit in the first nine months of 2020–21 came in much lower than the OBR expected last November, so EY ITEM Club thinks the OBR’s forecast for borrowing this year will be little changed from November’s £394b (19% of GDP). And a stronger rebound in H2 2021 should mean the forecast deficit in 2021–22 will be revised down (excluding any new Budget measures).
Fiscal policy will remain the main lever
The continued low-interest rates environment means fiscal policy will remain the main macroeconomic policy lever for the foreseeable future. But a relaxation of COVID-19 restrictions should trigger a robust consumer recovery, as households release savings accumulated during lockdowns. This suggests there is little case for the Budget to include big, across-the-board stimulus measures. But there is a convincing argument for more nuanced support, focused on the three priorities highlighted above.
Household and business support may be in the final phase as we move into recovery
What will this mean in terms of specific announcements? The Chancellor may set out what is hopefully the final phase of support to households and firms, including a further extension to the furlough scheme, and possibly extending the temporary £20 per week increase in Universal Credit. He may also look to reduce economic ‘scarring’ through active labour market policies such as reskilling displaced workers. New ‘Eat Out to Help Out’-style schemes may be an option to support the rebound in consumer spending. And spending more on infrastructure and R&D could help to offset any COVID-19-related damage to the capacity of the UK economy.