Budget 2021: UK set for 'swifter and more sustained recovery'

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3 min read
A pedestrian crosses London Bridge with the Shard tower in the background. Photo: Tolga Akmen/AFP via Getty
A pedestrian crosses London Bridge with the Shard tower in the background. Photo: Tolga Akmen/AFP via Getty

The UK government's top economic forecasters upgraded their predictions for Britain's economy on Wednesday.

The Office for Budget Responsibility (OBR), the government appointed spending watchdog, said the outlook for economy had improved thanks to the faster-than-expected rollout of vaccines across the UK.

The OBR predicted a "swifter and more sustained recovery than expected, albeit from a more challenging point than we forecast in November."

OBR chief Richard Hughes said developments in the UK economy had "broadly matched our downside scenario" since November due to the emergence of the new Kent strain of COVID-19 and the return to lockdown at the start of January.

The OBR now forecasts GDP growth of 4% in 2021, which was weaker than its last forecast of 5.5% made in November.

However, the successful rollout of vaccines means the OBR is now predicting a rapid rebound as restrictions ease. Boosts in the budget such as the extension of furlough and new tax breaks for business investment will also supercharge growth, the OBR said.

However, the spending watchdog upgraded forecasts for growth next year, predicting GDP expansion of 7.3% in 2022.

The UK is now expected to recover to its pre-COVID peak by the middle of next year, six months earlier than previously forecast.

UK chancellor Rishi Sunak said growth would be faster, the peak of unemployment was now set to be lower, and wages and household incomes were set to be higher.

“Our response to coronavirus is working," the chancellor told parliament.

Watch: UK economy to return to pre-COVID GDP by mid-2022

The OBR's update was published alongside the chancellor's annual budget. Rishi Sunak announced billions more in spending to help support the UK economy through the final stages of the pandemic and plant the seeds of an economic bounce back.

The OBR said the budget "extends rescue measures, stokes economic recovery, and begins [the] fiscal repair job." Sunak announced targeted tax rises alongside additional spending, notably a 6 percentage point increase in corporation tax to 25%.

The public sector deficit is forecast to reach over £350bn ($489bn) in the current financial year due to sky-high COVID-19 spending. UK national debt has already risen above £2tn and the OBR expects it to remain above 100% of GDP until at least 2026, which is the end of its forecast horizon.

“Repairing the long-term damage will take time," the chancellor said in parliament.

Hughes said that while borrowing was cheap now due to low interest rates, the cost of debt servicing could go from a “minor relief to a major headache” when interest rates begin to rise.

“All other things being equal, if interest rates were to rise a full percentage point, this would cost and additional £20bn and be sufficient to wipe out all of the additional corporation tax revenue raised by the chancellor in this budget," he said in a press conference after the budget.

COVID-19 means the UK economy is forecast to 3% smaller than it otherwise would have been by 2026, the OBR said.

Watch: What is a budget deficit and why does it matter?