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Coronavirus inflicts catastrophic damage to economy

Jobcentre - Yui Mok /PA
Jobcentre - Yui Mok /PA

More than four million people could be out of work at the end of 2020 as the taxpayer-backed furlough scheme shuts down and employers sack staff whose jobs were destroyed by lockdown, the fiscal watchdog has warned.

The catastrophic blow to the economy from coronavirus means tax receipts will plunge even as state spending surges, according to the Office for Budget Responsibility (OBR) - sending borrowing rocketing to a post-war high at almost one-fifth of GDP.

These brutal forecasts mean that debt could surge to more than five times annual economic output over the next 50 years without severe cuts, major tax rises or a sudden revival of growth.

Robert Chote, chairman of the OBR, said: “The pandemic has prompted a much larger and swifter decline in GDP than we saw in the financial crisis."

It leaves the Government on track to borrow around £372bn this year, with a deficit double the size hit in the peak year of the financial crisis after a raft of banking bailouts.

At the same time unemployment will rise far higher than the 8.5pc reached in 2011 as businesses go bust or axe staff to survive.

Overall, economists expect 15pc of the 9.4 million people who have been put on furlough to lose their jobs - about 1.4 million people.

The jobless rate could hit 11.9pc, the OBR predicts, matching the peak level suffered in the recession of 1984.

Three decades ago that rate took the number of unemployed to more than 3.2 million. Now, with a bigger population, just over four million would be on the dole.

Coronavirus is forcing the structure of the economy to change radically, meaning some jobs and businesses will disappear as high streets are deserted and panicked consumers shun airports and train stations.

Sir Charlie Bean at the OBR said that some retail and leisure businesses are likely to find their business model is no longer viable, with prolonged social distancing making it impossible to run a profit. If no vaccine is found, mask-wearing and shunning human contact may be part of life for decades to come.

He said: “This structural change may imply longer periods in unemployment as workers transfer from those sectors which are contracting to those which are taking their place. That is something which wasn’t so obvious after the financial crisis.

“A lot depends on the pandemic itself. If there is an early resolution of the medical issues, as in our upside scenario, you may need relatively little restructuring of the economy.

"But living with Covid-19 for many years without effective treatment may require a much more fundamental change in the way the economy works.”

Under the OBR's central forecast, unemployment will fall over the coming years back to 5.1pc in 2025. This is still well above the 50-year low of 3.9pc reached at the start of this year.

If the economy takes longer to recover, unemployment could keep on rising to peak at 13.2pc in the opening months of 2021.

However, the jobs market could be restored rapidly if the UK bounces back quicker than expected. The jobless rate would hit 9.7pc in the three months to September under the OBR's best case as more furloughed workers get their jobs back.

Unemployment could then get back down to 4pc in early 2022 in a remarkable restoration, with the economy effectively be back on its pre-pandemic track by the end of 2021. This success depends on a vaccine being made available rapidly.

It is not the OBR’s main forecast, with the body instead expecting GDP to take a permanent hit of more than 3pc as a result of the pandemic.

In all of its scenarios, the public finances are expected to be crushed for decades after Mr Sunak ploughed billions of pounds into saving jobs.

Over the next 50 years national debt could rise from its current level of more than 100pc of GDP to between 320pc and 522pc, the OBR said, leaving Britain at the mercy of the international markets nad in danger of going bust.

Avoiding this fate will require decades of austerity, either through tax hikes or spending cuts.