UK could face recession due to coronavirus disruption – Budget watchdog

Thursday 12 March 2020 at 12:02am

Chancellor Rishi Sunak has been warned of a possible recession Credit: Victoria Jones/PA

The UK economy could tumble into recession if the coronavirus outbreak causes widespread disruption, despite the Chancellor injecting £30 billion in the Budget to soften the financial blow, a watchdog has warned.

The Office for Budget Responsibility (OBR) warned that “a recession this year is quite possible” if Covid-19 causes further havoc for businesses and workers as the outbreak reaches its peak in the coming months.

The warning for Chancellor Rishi Sunak comes as the Prime Minister gears up to use Thursday’s emergency Cobra meeting to announce the start of the delay phase for combating the spread of the deadly virus.

As of Wednesday, there were 460 confirmed cases in the UK and eight people had died after contracting the disease.

The OBR has downgraded the UK’s growth prospects in calculations made before the full impact of coronavirus could be reflected in the forecast.

Growth is expected to fall, even before a possible downturn as a result of Covid-19, to 1.1% in 2020, down from 1.2% last year and dramatically lower than the OBR’s previous estimate of 1.4%.

Mr Sunak has been warned by leading economists that, should growth continue to stall, he could be forced to reconsider his heavy spending plans.

The Number 11 incumbent used his first Budget, having only been promoted to the Cabinet position four weeks previously, to announce Government plans for more than £600 billion in capital spending over the next five years.

But Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: “The key risk is that once again growth disappoints, and that this leaves the Chancellor with the choice of whether to rein back again on spending, or to announce further tax rises, or to abandon his fiscal targets and to allow debt to rise further.”

The influential IFS is due to give its full verdict on the Budget at a briefing on Thursday.

Mr Sunak turned on the spending taps on Wednesday as he acknowledged that “for a period it’s going to be tough” with up to a fifth of people off work, supply chains disrupted and consumer spending decreasing.

The Chancellor said there was “likely to be a temporary disruption” to the economy but insisted his plans would bring “stability and security”.

Ministers have already told the country to brace for stricter measures during the delay phase for tackling coronavirus, which could include encouraging employees to work from home, shutting schools and advising elderly people to stay away from social contact.

The Chancellor set out a £12 billion package of measures targeted specifically at the impact of the virus, along with £18 billion of wider spending plans to stimulate the economy.

The Bank of England also announced an emergency cut in interest rates from 0.75% to 0.25% as part of a co-ordinated move with the Treasury.

Mr Sunak splashed out with funding for public services, citizens and businesses set to suffer as the outbreak becomes more widespread and restrictions on activities are imposed.

The Chancellor said: “Taken together, the extraordinary measures I have set out today represent £7 billion to support the self-employed, businesses and vulnerable people

“To support the NHS and other public services, I am also setting aside a £5 billion emergency response fund – and will go further if necessary.”

Other plans represented another £18 billion of “additional fiscal loosening” and “that means I am announcing today, in total, a £30 billion fiscal stimulus to support British people, British jobs and British businesses through this moment”.

Measures announced included:

– A £1 billion business rates holiday in the coming year for retail, leisure and hospitality firms with a rateable value of under £51,000

– The Government fully meeting the cost of providing statutory sick pay for up to 14 days for workers in firms with up to 250 employees, providing over £2 billion for up to two million businesses

– Statutory sick pay available to all those advised to self-isolate, even if they have no symptoms, and sick notes available from NHS 111 rather than a GP

Credit: PA Graphics

– Reforms to the benefits system to make it easier to access funds, providing a £500 million boost to the welfare system along with a £500 million hardship fund

– A new coronavirus business interruption loan scheme offering government guarantees to support banks lending £1 billion to small businesses

– A £3,000 cash grant to businesses eligible for small business rates relief

– A freeze on alcohol duty and a £5,000 business rates discount for pubs

Day-to-day spending is also set to grow at an average of 2.8% as the Tories move away from austerity and attempt to shore up support among the former Labour voters who delivered Boris Johnson’s election victory in December.

Chancellor Rishi Sunak outside 11 Downing Street Credit: Victoria Jones/PA

By the end of the Parliament in 2024 day-to-day spending on public services will be £100 billion higher in cash terms than it is today, the Chancellor said.

Labour leader Jeremy Corbyn welcomed the steps being taken to reduce the economic impact from coronavirus but said the UK was going into the crisis with public services “on their knees” and an economy that was “flat-lining”.