United Kingdom

How to read the budget watchdog's numbers for the economy

The scale of the challenge facing the Chancellor to restore the health of the public finances will be revealed by the budget watchdog alongside today’s Spending Review.

The Office for Budget Responsibility (OBR) will unveil new forecasts on the black hole in the country’s coffers caused by runaway borrowing. The OBR is the Treasury’s official independent forecaster and will reveal important figures on the deficit, debt and the economy. Here are the numbers to look out for in today’s update:

Deficit

While the deficit will quickly shrink after the pandemic, public debt will be left at its highest levels since the 1960s.

The total debt the UK owes is typically measured as a share of the economy - debt to GDP. In August, the OBR expected this to jump to 106pc of GDP, a sharp rise from its forecast at the March budget of 77.4pc. In cash terms, the UK’s debt pile is already at £2 trillion, according to the Office for National Statistics.

The Government will need to rein in annual borrowing to stop this rising further after the pandemic. The Resolution Foundation expects the OBR to reveal that the size of the state as a proportion of GDP is set to soar this year, from 40pc of GDP to around 60pc. The only time Government spending made up a bigger proportion of the economy was in 1943 and 1944, at the height of the Second World War.

GDP and unemployment

In addition to the debt and spending numbers, the OBR will also reveal its forecasts for growth and unemployment. Given the unprecedented uncertainty, the OBR outlined three different paths for the economy in its Fiscal Sustainability Report in July: an upside, central and downside scenario.

With a second lockdown sending the recovery back into reverse and the Chancellor extending the furlough scheme into next year, the OBR is likely to revise these figures.

Back in July, its central scenario predicted that unemployment would peak at 12pc while GDP would collapse 12.4pc in 2020. That would be followed by a rapid recovery for the economy, with growth hitting 8.7pc in 2021 and unemployment returning to 5.3pc by 2024. However, in that outcome GDP was still 3pc lower by 2025 than it was in its March forecast.

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Economists already know that the deficit this year will hit eye-watering levels after the Chancellor’s huge spending splurge to protect jobs and businesses.

Forecasters will be keeping a close eye on the OBR’s borrowing predictions for future years as this will hint at the permanent hole in the public finances left by Covid. The deficit is the Government’s annual shortfall as spending exceeds tax revenue.

The pandemic has simultaneously caused a collapse in tax take and a surge in spending with the Treasury using expensive policies, such as the furlough scheme, to prop up the economy.

Back in August, the OBR predicted that public borrowing to cover the shortfall would hit £372.2bn in 2020-21. The deficit as a share of GDP was expected to reach 18.9pc as the output part of this equation has tumbled.

However, it will revise these numbers to account for new spending announcements and the second lockdown, with some forecasters expecting borrowing to hit £400bn.

Perhaps more important will be the deficit figures for the coming years. This will show the lasting damage that Covid has done to the country’s accounts. 

With the economy likely to be smaller than pre-virus levels for some time, borrowing is going to remain high even after the health crisis has passed. Economists call this damage the structural deficit, and warn tax rises or spending cuts will eventually be needed to bring this down.

Debt to GDP

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