The economy is bouncing back, but the UK recovery lags behind the rest of the English-speaking world

We are regaining lost ground, but the numbers tell a truer story than the words of Rishi Sunak, writes Hamish McRae

Rishi Sunak’s cuts are mostly coming through in 2023 and beyond (AFP/Getty)

With one bound the chancellor is free – or so it would seem, listening to Rishi Sunak deliver the budget. But as always, the numbers tell a truer story than the words. And the numbers say that, while the forecasts for the UK’s recovery have been upgraded, that is only because they were unduly negative in the past – and there will still be a massive tightening of fiscal policy next year.

The economy first. Start with a simple measure: when will the UK economy get back to its pre-pandemic size? The Office for Budget Responsibility (OBR) now thinks it will be at the end of this year, instead of well into 2022. That’s a relief, and we should get there at about the same time as Germany and France. But the US got back to its pre-pandemic size in the middle of the summer. So too did Canada and Australia. So the UK performance, while all right by European standards, is not so impressive compared with the rest of the English-speaking world. And of course China, the world’s second-largest economy, was above its pre-pandemic level well before the end of last year.

The projections for the budget deficit have changed: it is now forecast to be 7.9 per cent this fiscal year, coming down to 3.3 per cent next year. That too is much better than the OBR projected in the spring, and is roughly the same as the latest numbers for Germany and France. The German finance ministry now thinks the deficit will be about 7.5 per cent of GDP this year, falling to 3.25 per cent next, while for France the equivalent figures are 8.1 per cent and 5 per cent. For the US, given the conflict in Congress, the figures are unclear, but for what it is worth, most recent official projections are for a deficit of 10.3 per cent of GDP and 4.6 per cent in 2022.

So the picture emerges that the UK economy is now expected to perform much the same as other large developed countries, instead of rather worse than them as was forecast in the spring. We had a deeper dip than most, but we are now regaining lost ground and are back in the middle of the pack.

What next? The most important thing to look at will be the scale of the long-term damage. The OBR thinks that this scarring effect will be equivalent to 2 per cent of GDP, not 3 per cent as it thought before. That sounds better, but not great. However, to put that in perspective, the loss of output that resulted from the banking crash of 2008-09 was more like 10 per cent. So we will lose the equivalent of one year’s growth, not the equivalent of five years’ growth. Repairing the damage this time will be much less painful than it was between 2010 and 2020.

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There will, nevertheless, be pain. Taxes are going up, as the chancellor acknowledged, to the highest level for at least 60 years. If you look at the detail of his proposals, the cuts that he spoke about are mostly coming through in 2023 and beyond. So one practical question for next year is whether people will carry on spending, running down the savings they built up during the lockdowns, in the face of high inflation. If consumption growth falters, growth will falter too. And if inflation goes higher than expected, interest rates will go higher too – increasing the cost of servicing the national debt.

In short, the numbers do look better than before. But the chancellor is not through this one yet by any means, and neither are we. There are still many difficult months ahead.