Coronavirus: Lengthy period of austerity after pandemic ‘not done deal’ government’s forecaster says

UK economy now ‘past the worst of it’ after shrinking by a third in the last quarter, says OBR chief

A lengthy period of austerity following the coronavirus crisis is “not a done deal”, the head of the government’s official economic forecaster has said.

While the economy may have been a third or more smaller than normal during the last quarter, the UK was now past “the worst of it” and people should not “panic” about years of recession and cutbacks of the kind seen after the 2008 financial crash, said Robert Chote, the chairman of the Office for Budget Responsibility (OBR).

Mr Chote’s comments came after Boris Johnson told Conservative MPs in a video call that he would not order austerity cuts to pay down the massive debts - estimated at more than £300 billion - built up during lockdown, but would press ahead with plans for investment in infrastructure projects including Northern Powerhouse rail and broadband.

In an article in the Mail on Sunday, the prime minister acknowledged that some members of the public feel “frustrated” with the gradual “baby steps” out of lockdown which he has announced.

But he added: “We are trying to do something that has never had to be done before - moving the country out of a full lockdown, in a way which is safe and does not risk sacrificing all of your hard work.

“I recognise what we are now asking is more complex than simply staying at home, but this is a complex problem and we need to trust in the good sense of the British people.”

Meanwhile, CBI director general Carolyn Fairbairn warned that business does not want the government to rush out of lockdown.

Dame Carolyn told Sky News’s Sophy Ridge on Sunday that it was a “false dichotomy” to regard public health as being at odds with the needs of economic health.

“You cannot have a strong economy without public safety,” the CBI boss said. “The worst thing that could happen would be another lockdown. These two objectives go hand in hand.

“We should not be seeing these two things in conflict.”

Mr Chote told BBC1’s Andrew Marr Show that the aftermath of the outbreak would inevitably see a massive increase in public debt.

But he said that low interest rates meant this was not necessarily “too much of a problem”.

“We’re certainly going to see – temporarily – a higher amount of Government borrowing,” the economist told Marr.

But he added: “The fact that the level of debt goes up on its own doesn’t necessarily mean you have to have the sort of austerity that followed the financial crisis.

“Much more important to that is whether you have this effect of scarring of the economy. If the economy is permanently smaller then you get permanently less tax revenue.

“Do we come out of this with a much bigger debt interest bill? At the moment it’s relatively cheap for the Government to borrow so hopefully that won’t be too much of a problem.

“Then also there will be political choices coming out of this. Do we want to spend a higher proportion of national income than we went in for example on health and social care?

“All of these things together will shape the fiscal challenge for the Government coming out of this. A post financial crisis-style extended period of austerity is not a done deal.”

Regarding the UK’s economic recovery, Mr Chote said: “People shouldn’t panic in the sense that we know the economy, probably at its worst last month, may have been a third or so smaller than it normally would have been in terms of the output of goods and services and people’s spending.

“But that should be the worst of it and we now go into a period of recovery as the restrictions are loosened.”

Outlining factors critical to the economic health of the UK, he highlighted the pace on which public health restrictions are relaxed, as well as people’s behaviour.

He added: “If you allow people back into the workplace, back into shops, back into restaurants, will they actually go? Will they feel too nervous?”

Dame Carolyn said that businesses were thinking about protecting furloughed jobs for the future, adding it required a “cautious, careful restart”.

She said: “This week, I think from the business perspective, has been a week of glimmers of light at the end of the tunnel.

“We had the encouragement at the beginning of the week for businesses to get back to work, they are following that putting safety first… but what we are concerned about is the policies need to be co-ordinated across transport, across schools, across the devolved nations.

“If we do not have consensus that will undermine confidence amongst workers, consumers and people in general.”