In Focus Risk


Focus on growth


Recent figures from the OBR show more about the financial cost of the COVID-19 pandemic, now the country needs economic growth


Robert Colvile Director, Centre for Policy Studies


In April, we published the first full estimate of the cost of coronavirus, predicting that borrowing this year could exceed £300bn. The Office for Budget Responsibility’s


(OBR) central estimate is now £322bn, which does not include the package of up to £30bn announced by Rishi Sunak last month, or other smaller sums included in the CPS’s original calculation.


year. If you wind this back to include the financial crisis and its aftermath, that falls to just 0.4%. The OBR are estimating that in real terms


the economy will be just 1.6% bigger in 2023 than in 2019. When we factor in estimated population


growth of roughly 2% over that period, we are looking at per capita GDP being lower in 2023 than in 2019, and that follows a decade of stagnation already. Our economic problems have clearly


If we are going to right the ship anytime soon, we must have a clear focus on growth, driven by the private sector, with the incentives and flexibility to invest and create jobs. Without higher growth, we cannot pay down our debts or keep funding our public services – this has to be the focus going forward


In addition, the OBR is forecasting


another £277bn in additional borrowing over the subsequent four-year period, primarily due to tax receipts falling short. The OBR are clear that this means


borrowing will not only be vastly higher this year and next but it will be higher on an ongoing basis.


Exacerbating existing problems Over the last decade, the UK’s real GDP growth per capita has been just 1.24% per


40


been exacerbated by coronavirus, but this is a long-term problem – there has not been such a period of stagnation since at least the end of the Second World War. We urgently need growth to return.


Fiscal health As we pointed out in ‘After the Virus’, the costs of servicing Britain’s debts have plummeted in recent years, even as the stock of that debt has hugely increased. This is largely due to the combined


impact of quantitative easing and falls in interest rates. But neither of those are guaranteed to continue forever, as the OBR forecast makes clear. The important thing to focus on right


now is growing the economy, rather than the size of the debt. But ministers need to set out a credible


route towards fiscal stability once the economy has recovered.


Growth The OBR report lists many other pressures on spending beyond the coronavirus. For example, under its central scenario, the triple lock (something long criticised by the CPS) “raises state pension spending


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in 2024-25 by £6.0bn more than if the pension were raised in line with CPI inflation, £3.2bn more than if it were just linked to earnings, and £1.8bn more than under a ‘double lock’ based on just inflation and earnings”. In the longer term, its conclusion is that


stark: “Given the structural fiscal damage implied by our central and downside scenarios, in almost any conceivable world there is at some point likely to be a need either to raise some taxes or to reduce some existing spending commitments to accommodate new ones (for example in health and social care) and to put the public finances onto a sustainable long-term path.” This is why our focus on growth is so


important. The OBR’s scenarios assume different


levels of immediate damage, but identical rates of post-crisis growth. The only way to minimise the harm from


the pandemic over the longer term is an obsessive focus on growth, and on the supply side reforms to support it.


Summary The OBR forecasts last month confirm that the situation is even worse than our early estimates, and that difficult decisions will need to be made for many years to come to get our economy back on track. If we are going to right the ship anytime


soon, we must have a clear focus on growth, driven by the private sector, with the incentives and flexibility to invest and create jobs. Without higher growth, we cannot pay


down our debts or keep funding our public services – this has to be the focus going forward. CCR


October 2020


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