Britain’s growth rate will accelerate next year at the fastest rate since official records began as the economy rebounds by 7.3%, according to the government’s independent economic forecaster.
With Covid restrictions set to remain until the summer, delaying the stat of the recovery, the Office for Budget Responsibility said the economy would surge ahead in 2022 at the fastest pace since 1948.
But the OBR warned that debts from the pandemic will cost the equivalent of £14,000 for every household as government borrowing hits a postwar high, according to figures that lay bare the impact of Covid-19 on the public finances.
It said borrowing of £355bn in this financial year would push the annual spending deficit to 16.9% of GDP, its highest level since 1944-45.
A further £243bn of borrowing next year will take the total to almost £600bn over two years.
Outlining the full impact of the pandemic on the public finances, the OBR said the increase in borrowing would also send the UK’s total debt as a share of the economy to more than 100% and keep it there for the rest of the parliament.
Not since 1958 has Britain’s debt-to-GDP level been at such a high level, though the cost of financing government borrowing was at a “historic low”, it added.
The increase in debt was lower than the 19% the OBR was forecasting in November after tax receipts were higher than expected and government spending slightly lower.
But the costs of the pandemic, which were expected to ease in the 2021-22 financial year, will continue to put pressure on the Treasury’s finances after third lockdown and restrictions until at least June forced the chancellor to maintain extra support for businesses and households until the autumn.
A £59bn fiscal stimulus for 2021-22, equal to nearly 3% of last year’s GDP, and the chancellor’s determination to maintain the highest level of public infrastructure spending in a generation, also raised borrowing levels.
The stimulus package, mainly comprising support for businesses, allied to a return of consumer spending, gave rise to a forecast increase next year in GDP growth of 7.3%, which would be the highest for 74 years. This dramatic rebound would follow a 4% increase in GDP during 2021, downgraded from last November’s forecast of 5.4%. Growth is expected to moderate to 1.7% in 2023, 1.6% in 2024 and 1.7% in 2025.
Jonathan Gillham, the chief economist at the accountants PwC, said households will feel the impact of a weaker than expected recovery in 2021.
“GDP per capita is expected to be 1.4% lower, which is roughly equivalent to £450 for each person in the UK,” he said.
“In two years from the start of the pandemic, the expectation is that the economic cost will equate to around £2,200 per person. Government debt has increased by around £14,000 for each UK household.
“The scale of these impacts are unprecedented and have not been felt by the UK economy for 300 years, meaning that the economic outlook remains uncertain.”
The OBR emphasised that the uncertain outlook meant its forecasts remained speculative and highly sensitive to changes in the course of the pandemic and the successful rollout of the vaccine programme.
Richard Hughes, the OBR chair, said there were also risks to the outlook from the chancellor’s spending decisions, which may not reap the dividends the Treasury expects.
He said that while the Treasury has given Whitehall departments more than £150bn this year and next to pay for the costs of the pandemic, “it makes no provision thereafter for any Covid-related costs” even though there will need to be extra spending on education, health and public transport subsidies with reduced income from passengers.
“The government’s own roadmap discusses the potential need for an annual revaccination programme and standing test and trace capacity to keep what is expected to become an endemic virus in check.
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“And the pandemic has left behind a backlog of postponed procedures in hospitals and a generation of pupils who have missed out on up to six months of schooling.
“And having taken the railways back into public ownership and filled the holes in their fare boxes, it is not clear when and if passenger numbers will ever return to levels that will allow this public support to be fully withdrawn.”
Hughes said cuts of more than £10bn from Whitehall budgets in last year’s spending review and a further £4bn in the budget might not be sustainable should the after effects of the pandemic need to be tackled with higher spending on staff and resources.