At the latest Proxima Breakfast Briefing event, we welcomed Paul Johnson, Director of the Institute for Fiscal Studies (IFS), to talk about what COVID and Brexit mean for the UK economic and business landscape. Here are just a few highlights from the session:
Where we were before March
Paul highlighted that we’ve seen slow growth in the UK over the last decade, notably in wages, despite high levels of employment. He talked about the impact of austerity, with public service spending being a fifth lower than it was in 2010.
When COVID hit
Paul discussed that the lockdown of the economy in March saw Britain fall into a significant recession, with the economy shrinking by more than any other OECD country, bar Spain. He described the furlough scheme as the largest government intervention in history and that COVID-19 has led an additional unplanned spending of £200 billion and the largest deficit seen since the World Wars.
COVID economic impact
Paul highlighted the swift economic rebound through June and July but pointed out that it slowed in August and that we are still a long way off a full recovery. Paul said that a 10% reduction in the economy would typically see mass unemployment, but that hasn’t been the case to date – although unemployment is forecast to rise closer to 3 million next year. Paul also noted that the lowest earners were seven times more likely to be on furlough, with many in hospitality, retail, travel, and entertainment services, as well as under-25s, having been disproportionately impacted.
Brexit state of play and impact
Paul outlined that it is likely we will achieve only a limited Brexit deal, which won’t be that different to a ‘no-deal’ in terms of economic impact and nothing like membership of the Customs Union. He reminded the audience of the economic impact following the vote, with increased inflation and reduced FDI. Paul believes the impact of Brexit will be masked by the recovery from COVID-19, but said it will mean a slower economic rebound.
Treasury likely reaction
Paul discussed the estimated £60 to £70 billion spent on job support schemes, contributing to national debt having risen to 100% of national income for the first time for 60 years. He highlighted that this unprecedented level of borrowing has only been possible due to the intervention of the Bank of England. Paul concluded that current levels of borrowing are unlikely to continue and that a £40 to £50 billion rise in taxes from the Treasury is likely, and that he forecasts that the Treasury may well look to raise taxes they have previously raised, such as VAT and pension relief. Although the overall programme of tax rises and changes will likely need to be more extensive than that.
What next for the economy
Paul discussed the hopes for the economy depend on control of the virus and speed of a vaccine. He highlighted that if normality returns in the Spring, unemployment will still reach three million, the highest seen since the early 1990s. Paul concluded that it would likely take another three years before the economy returns to 2019 levels and would be further delayed by lockdowns, and even in 2025, it will remain smaller than it would have had COVID-19 not hit.