IFS pre-Budget report warns of difficult choices for the Chancellor

The Institute for Fiscal Studies says that there may be spending cuts in some areas of the Spending Review and Autumn Budget, while the health and social care levy will not be enough to meet spending pressures on the NHS and social care in the medium-term.

The Institute for Fiscal Studies (IFS) has launched its annual Green Budget report, setting out its views on the prospects for the economy and the public finances ahead of the Spending Review and Autumn Budget scheduled for 27 October 2021.

Produced in conjunction with Citi and the Nuffield Foundation, the 427-page report contains detailed chapters on the global and UK economy, the economic and fiscal outlook, the Spending Review, fiscal rules, NHS spending, local government funding in England, tax policies to achieve net zero, and employment and the end of the furlough scheme.

A summary of the key findings in each chapter is set out below, but the key headlines are that COVID has damaged the economy, the fiscal outlook is better than predicted in March but still much worse than pre-pandemic forecasts, and the Chancellor has some very difficult spending choices to make in the Spending Review. 

The IFS cautions that the new health and social care levy will not be sufficient to meet medium-term cost pressures and that ‘unprotected budgets’ continue to be under severe strain, with cuts possible if the Chancellor wants to meet his proposed new fiscal rules.

More detailed analysis goes into spending by the NHS and local government and the implications of net zero for tax policy. A final chapter highlights the mismatch between those losing their jobs and vacancies in a very different employment market following the end of the furlough scheme.

Alison Ring, Director for Public Sector and Taxation at ICAEW, commented: “As ever, the IFS have produced one of the most authoritative analyses of the state of the UK public finances, setting out many of the difficult choices facing the Chancellor in the Spending Review and Autumn Budget.

“The challenge for the Chancellor will be how to address severe spending pressures across central and local government and deliver on ‘levelling up’ and ‘net zero’, at the same time as repairing the public balance sheet and charting a path towards sustainable public finances.”

IFS Green Budget 2021: key points

Citi says the global economy is recovering:

  • Pandemic is not over, but economies are resilient and rebound can become a recovery
  • Supply constraints will restrict growth and higher inflation is likely for some time
  • Risk of fiscal tightening is low and central banks likely to be cautious in exiting monetary support

Citi expects UK economy to be 2.5% smaller in 2024-25 than pre-pandemic forecasts:

  • UK in an imbalanced recovery with fading growth in the winter
  • Profound economic adjustment looms (e.g. less hospitality, more transport and storage). 
  • Brexit leading to supply disruptions and a drop in exports
  • Labour market in process of adjustment, but despite shortage sectors, real-terms pay settlements overall remain broadly in line with pre-pandemic range 
  • Inflation increasing sharply – should be temporary, but there is risk of a wage price spiral
  • Monetary policy constrained, so fiscal capacity needed to stabilise the economy.

IFS says economic and fiscal outlook is better than predicted in March, but still much worse than pre-pandemic forecasts:

  • Deficit in 2021-22 to be £180bn, over £50bn below OBR Spring Budget forecast
  • At 7.7% of GDP deficit remains extraordinarily high – the third highest deficit since WWII
  • Recovery should see current budget be in surplus by 2023-24
  • Upside scenario would see overall deficit eliminated
  • But further lockdowns could see borrowing more than double pre-pandemic forecasts in 2024-25
  • Central scenario would see public debt start to fall, but only gradually
  • Higher interest rates and inflation have increased debt interest costs to around £15bn a year more than expected in March
  • Health and social care levy will need to increase from 1.25% to 3.15% by end of the decade to meet expected health and social care pressures

Fiscal rules are needed, but:

  • Well-designed fiscal rules can help make it harder to borrow for ‘bad reasons’
  • UK has had poorly designed fiscal targets, with 11 new rules in the last seven years – most of which have been missed before being dropped
  • Both Conservatives and Labour appear to favour a current budget fiscal rule
  • Strong case for gilt-issuance to be tilted towards more long-dated index-linked gilts to lock in the current low real cost of more debt
  • Reducing debt should be a long-term target to create more fiscal space for potential future adverse shocks
  • Health, social care and state pensions likely to add 6.1% of national income to costs by 2050
  • Net zero costs likely to peak in 2026-27 at 2.2% of national income
  • IMF says UK has lowest general government net worth of 24 advanced economies
  • A broader focus on wider public balance sheet by government and opposition is welcome
  • Fiscal rules should be seen as rules of thumb and no fiscal target is sacrosanct 

Spending Review 2021:

  • Chancellor faces unpalatable set of spending choices, despite manifesto-breaking tax rise
  • Spending envelope is £3bn a year smaller than pre-pandemic plans, which is a problem when 64% of departmental spending is already protected or otherwise committed
  • Potential cuts in unprotected budgets such as local government, prisons, further education and courts of £2bn in 2022-23
  • More spending room in 2024-25, so potential for Chancellor to re-profile spend to avoid cuts next year with spending more overall
  • NHS and other demands likely to eat into amounts available for unprotected budgets.
  • COVID-19 reserve needed to cover non-NHS virus-related spending
  • Now is time to return to certainty of multi-year budgeting
  • Extending public sector pay freeze risks damaging recruitment, retention and motivation

Pressures on the NHS:

  • NHS already showing signs of strain before pandemic began, with last decade seeing lowest level of spending growth in NHS history
  • NHS entered pandemic with 39,000 nursing vacancies and many fewer doctors, hospital beds and CT scanners per person than in many similar countries
  • NHS funding plans blown out of water by pandemic, with extra £63bn spent in 2020-21 and £34bn in 2021-22
  • Extra funding needed in the next three years of £9bn, £6bn and £5bn – substantial, but manageable, sums. Covered by new health and social levy initial for first two years
  • New funding unlikely to be sufficient in the medium term, with extra money needed from 2024-25 onwards
  • Missed treatments, bringing down waiting lists, demand for mental health services and higher pay all likely to add to spending pressures
  • Some savings from moving to remote outpatient appointments and potential for more from other innovations in the pandemic

Local government funding in England:

  • English councils’ non-education spending almost a quarter lower than 2009-10. 
  • This contrasts with Welsh councils, where spending has fallen by only a tenth
  • £10.4bn in additional funding in 2020-21 covered most in-year COVID-19 pressures
  • But mismatches mean some councils are ‘over-compensated’ while district councils are ‘under-compensated’
  • COVID-19 funding in 2021-22 of £3.8bn expected to be £0.7bn short of what is needed
  • Central government funding currently implies council tax rises of 3.6% a year assuming no further impact on budgets from COVID beyond next April
  • Uncertainties mean that setting firm plans for council funding for the next three years is an impossible task without guarantees from central government
  • Social care funding still allocated based on local populations in 2013 and the delayed ‘Fair Funding Review’ needs to be completed
  • For example, Tower Hamlets’ population is up 21%, Blackpool’s is down 2%.
  • Transition to new system of funding may need extra money to avoid potentially large cuts in some areas
  • Council tax needs reform!
  • More devolution on the agenda – government should develop ‘devolution packages’ rather than have bespoke arrangements for each area
  • Additional £5bn of health and social care levy funding for adult social care is unlikely to be sufficient – an extra £5bn a year could be needed by the second half of the 2020s

Tax policies to achieve net zero:

  • Greenhouse gas emissions fell 38% between 1990 and 2018, the fastest in the G7
  • Emission reductions will have to accelerate from 1.4% a year to 3.1% a year to meet net zero in 2050
  • Many low-cost opportunities to reduce emissions already done, so further reductions will be more difficult
  • Tax rates on emissions vary wildly, so incentives to reduce emissions are highly uneven
  • Renewables attract subsidies paid for by higher electricity prices – may pay-off in long-term but there are risks
  • Carbon footprint higher for higher-income households, but costs take up a bigger share of poorer household budgets
  • Weak incentives to improve energy efficiency
  • International collaboration needed, eg on taxing international aviation

Employment and the end of the furlough scheme:

  • Furlough scheme ended in September at gross cost of £70bn
  • Huge success, but significant challenges remain in the labour market
  • Significant concerns about the employment prospects for the 1.6m on furlough in July
  • Vacancies exceed 1.0m, but mismatch between regions and industries
  • London appears hard-hit on multiple fronts
  • Young people leaving full-time education last year were less likely to get jobs, but employment rates have since fallen back into line with pre-pandemic cohorts

Visit the IFS website to find out more about the IFS Green Budget and to download a copy.

This article was originally published by ICAEW.

ICAEW chart of the week: Banknotes in circulation

Our chart illustrates how banknotes in circulation have grown during lockdown despite a decline in cash usage. Will the new £50 note launched on Wednesday cause a further rise?

Chart showing steady growth in banknotes in circulation from £26bn in 2001 to £69bn in 2017, followed by three flat years including £70bn in 2019, before a jump to £80bn in 2021. The latter comprised £18bn in £50 notes, £45bn in £20 notes, £15bn in £10 notes and £2bn in £5 notes.

At 28 February 2021, there were 357m paper £50 notes worth £18bn, 2,237m polymer and paper £20 notes worth £45bn, 1,540m polymer £10 notes worth £15bn and 407m polymer £5 notes worth £2bn – a total of £80bn in circulation. This excludes around £8bn in Scottish and Northern Irish banknotes and in the order of £5bn in coins.

With around 60m people in England and Wales (as Scotland and Northern Ireland have their own banknotes), this is equivalent to approximately six £50 notes, 37 £20 notes, 26 £10 notes and seven £5 notes per person. Of course, not all of these are in purses, wallets or stuck down the back of sofas – many live in cash drawers and safes at high street banks, retailers and other businesses, as well as a certain proportion that have migrated around the world.

There has been some speculation about the reasons for the jump in cash holdings during the pandemic, which appears counterintuitive given the significant decline in cash usage as contactless and online payments have become more popular. Part of this may be hoarding in the context of a national emergency, while others have speculated that criminal enterprises have struggled to launder cash at a time when many retail businesses have been closed. Another potential driver is the crossover between the old and new £20 notes, with the polymer £20 launched in February 2020 while the paper note it replaced is still in circulation. With the announcement that both £20 and £50 paper notes will be withdrawn in September 2022, there is likely to be a flood of cash coming back to the Bank of England next year.

The new Turing £50 note completes the changeover from paper to polymer, joining the Churchill £5, the Austen £10 and the Turner £20 polymer notes. The Adam Smith £20 note and the Boulton-Watt £50 note are the last paper notes still in circulation.

Speaking at Bletchley Park, where Turing carried out his famous codebreaking work, Bank of England Governor Andrew Bailey said: “Our banknotes celebrate some of our country’s most important historical figures. That’s why I am delighted that Alan Turing features on the new polymer £50 note. Having undertaken remarkable codebreaking work here at Bletchley Park during the Second World War, he went on to pioneer work on early computers, as well as making some ground-breaking discoveries in the field of developmental biology. He was also gay and was treated appallingly as a result. Placing him on this new banknote is a recognition of his contributions to our society, and a celebration of his remarkable life.”

More information on banknotes is available from the Bank of England.

This article was originally published by ICAEW.

ICAEW chart of the week: UK inflation

This week’s chart takes a look at UK inflation following news that the annual rate of inflation more than doubled in April to 1.5%, more than twice the 0.7% reported for the previous month.

Chart: CPI increasing from less than 0.5% in Apr 2016 to over 3% in Oct 2017 before falling to close to zero in Oct 2020, zigzagging to 0.7% in Mar 2021 and then jumping to 1.5% in Apr 2021. 

Compared with five year annualised rate gradually increasing from 1.5% in 2016 to close to just under 2% now.

The headline rate of inflation doubled this week from 0.7% to 1.5%, giving rise to concerns about the economic recovery. Economists aren’t getting worried just yet, but are they right to be so sanguine? 

This scale of this jump partly reflects the timing of the first and current lockdowns, as inflation is typically measured by comparing prices with the same month a year previously, with significant changes both this year as the UK started to emerge from its third lockdown and a year ago as it was entering its first. Some commentators have pointed out that the temporary cut in VAT on restaurant food and leisure activities help prevent the jump from being even higher.

Our chart compares the annual rate of Consumer Price Index (CPI) inflation with a more stable measure, which is the annualised rate of CPI inflation over a five-year period. This is less susceptible to short-term swings in the economy, but as the chart shows, medium-term inflation has been gradually rising over the past five years even as headline rates on an annual basis fell over the last four years before the pandemic.

This perhaps explains some of the relaxed responses from economists about the sudden burst in inflation in the last month, given the annual rate of increase still remains below the medium-term trend, despite the current extraordinary economic circumstances.

Of course, that is not to say that inflation might not become a problem as the UK emerges further from lockdown. Many businesses have closed over the last year, particularly in the retail sector, while those that have survived will be looking to repair their balance sheets – a recipe for higher prices as constrained supply meets higher post-lockdown demand from consumers. Only time will tell whether this will feed into sustained higher levels of inflation or will jump be a temporary adjustment that falls out of the headline rate again in a year or so’s time.

ICAEW chart of the week: UK monthly GDP

This week’s chart takes a look at the rebound in UK gross domestic product in March 2021, despite the country remaining in lockdown.

Chart showing GDP between Mar 2019 and April 2021: from approximately £195bn a month for the first year, before dipping to just over £145bn in April 2020 and then recovering to around £185bn, then falling to just under £180bn and return to almost £185bn in April 2021 with a monthly increase of +2.1%.

UK GDP jumped 2.1% in March 2021 according to the Office for National Statistics. A positive sign but, as our chart of the week illustrates, there is still a long way to go to get back to pre-pandemic levels of economic activity. 

The #icaewchartoftheweek is on the economy this week, taking a look at how the latest economic statistics from the Office for National Statistics indicate a rebound in GDP in March 2021 even as the country remained in lockdown. This is a positive sign as the UK starts to emerge from the pandemic and people start to return to ‘normality’, albeit a new normal that is likely to be different to what came before.

However, the chart also makes clear how far the UK still has to go to return to pre-pandemic levels of economic activity, with the anticipated square-root shaped recovery stopped in its tracks in the last quarter of 2020 as COVID-19 resurged and restrictions on daily life were reimposed. The 2.1% real-terms growth in GDP in March follows a pattern of ups and downs in recent months with a fall of 2.2% in November, an increase of 1.0% in December, a fall of 2.5% in January, and an increase of 0.7% in February.

With the progress made in combating the virus over the last few months enabling lockdown restrictions to be progressively lifted across the UK, the hope is that March will be the second month on a more sustainable upward curve.

This chart was originally published by ICAEW.

Spending Review 2020: public finances dominated by COVID aftermath

26 November 2020: The Office for Budget Responsibility presented its latest economic and fiscal forecasts to accompany yesterday’s Spending Review. As expected, the forecasts were far from pretty.

In its latest economic and fiscal outlook, the Office for Budget Responsibility (OBR) confirmed that economic and fiscal damage from the pandemic is severe and will have a lasting effect. 

The fiscal watchdog now expects to see a sea of red ink across the first half of the coming decade: a £394bn deficit (19% of GDP) this year and the UK still running a fiscal deficit of over £100bn in five years’ time. This will be a decade after the point at which a previous Chancellor, George Osborne, hoped to have eliminated the deficit completely.

This is the highest ever fiscal deficit experienced in peacetime by the UK and reflects an additional £21bn for the cost of extending the furlough scheme across the winter and £30bn in anticipated write-offs of CBILS and other lending packages.

The fiscal pain is expected to continue into the next financial year starting on 1 April 2021, with the government planning an additional £55bn in COVID-related spending. This is offset to an extent by £10bn in lower departmental budgets, partly as a consequence of the one-year public sector pay freeze. The government says that despite this, ‘core day-to-day department spending’ is growing at 3.8% a year on average in real terms from 2019-20 to 2021-22.

Deficit to remain high for years to come

Table 1 below highlights how the deficit is forecast to be £164bn next year and to remain at over £100bn over the rest of the forecast period. This is despite GDP recovering in 2021-22 to the same level as last year (about 4% lower once inflation is taken into account) with the Chancellor hoping for strong growth to continue into 2022-23 before returning to trend after that.

Table 1 - OBR November 2020 summary economic and fiscal forecasts to 2025-26.

Click on link to ICAEW website for a readable version of this table.

The Spending Review boasts that it includes £100bn of central government capital investment in 2021-22, a £27bn real-terms increase compared with 2019-20. This reflects planned increases in previous budgets, with no new funding included in yesterday’s announcement. There are concerns about how deliverable the government’s capital investment plans are, with the OBR increasing its estimate for capital budget underspends and scaling back expectations of local authority and public corporation capital expenditure by £4bn in 2021-22 and by £3bn in subsequent years. These are both likely to reduce any positive impact that may come from the £4bn ‘levelling up fund’ announced by the Chancellor

Table 2 summarises the changes between the pre-pandemic forecasts presented in the Spring Budget in March 2020 and the latest forecasts published yesterday.

Table 2 - OBR November 2020 changes since March 2020 pre-pandemic forecasts

Click on link to ICAEW website for a readable version of this table.

Table 3 illustrates how debt is expected to increase from £1.8tn in March 2020 to £2.3tn in March 2021 and to continue to grow to £2.8tn by March 2026, in excess of 100% of GDP throughout the next five years.

Fortunately for the government, the cost of the additional borrowing required to fund the deficit has continued to fall dramatically, with central government debt interest falling from £37bn in 2019-20 to £18bn in 2021-22, before gradually rising to £29bn in 2025-26.

Table 1 - OBR November 2020 public sector net debt to 2025-26

Click on link to ICAEW website for a readable version of this table.

Martin Wheatcroft FCA, external adviser to ICAEW on public finances, commented: “The Spending Review was pretty much as expected, with COVID-related spending extended into the next financial year and the trailed public sector pay freeze allowing the government to maintain its capital investment ambitions.

However, buried in the detail is an expectation by the OBR that it will be difficult to deliver those plans on schedule. Combined with lower capital expenditure by local government and public corporations, the hoped-for economic boost could prove elusive.

With the spending side buttoned-down for now, the focus will move to how the Chancellor plans to close the gap between receipts and spending, with the prospect of tax rises on the horizon. It is important the government takes this opportunity to develop a long-term fiscal strategy to address the long-term unsustainability of the public finances that needed addressing even before the pandemic added to the scale of the challenge.”

This article was originally published on the ICAEW website.

ICAEW chart of the week: UK claimant count

13 November 2020: The claimant count soared at the start of the pandemic but levelled off since then. Will a wave of redundancies see it climb again over the winter?

UK claimant count. Jan 2019: 1,012,000 (597,000 men, 415,000 women) - Mar 2020: 1,240,000 (724,000, 516,000) - May 2020: 2,663,000 (1,620,000, 1,043,000) - Sep 2020: 2,634,000 (1,571,000, 1,063,000).

This week’s #icaewchartoftheweek looks at the claimant count, an experimental statistic compiled by the Office for National Statistics (ONS) that seeks to reflect those on Universal Credit who are not in employment or who are required to search for work, in addition to those receiving Jobseeker’s Allowance.

As the chart illustrates, the claimant count had already been on an upward path prior to the pandemic as Universal Credit rolled out across the country, reaching a total of 1,240,000 on 8 March before jumping to 2,663,000 a couple of months later in May during the first lockdown. The number has moved around a little since then, dropping slightly to stand at 2,634,000 on 8 October, comprising 1,571,000 men and 1,063,000 women.

The rapid rise in claimants has not been reflected in the same way in the unemployment statistics, which increased less dramatically, albeit still significantly, from 1,355,000 in March to 1,661,000 in September 2020. This suggests around 300,000 of the increase in the claimant count is down to greater unemployment, with the balance of approximately 1,150,000 arising from ‘underemployment’ as claimants have had their hours and/or pay levels cut taking them below the relevant Universal Credit thresholds.

The recent rise in redundancies – up to a record 314,000 in the quarter to September – is likely to add further to the claimant count over the winter, although the extension in furlough arrangements until next March may constrain that rise to a certain extent.

News that a vaccine is on its way may well be positive for the second half of 2021, but in the meantime it is going to be a hard winter for many.

This chart was originally published by ICAEW.

ICAEW chart of the week: Quarterly GDP

2 October 2020: The latest statistics for the UK economy generate a grim graphic for the #icaewchartoftheweek.

Chart showing GDP by quarter from 2018 Q1 to 2020 Q2: £528bn, £533bn, £539bn, £542bn, £548bn, £551bn, £556bn, £558bn, £556bn, £476bn.

According to latest numbers from the Office for National Statistics (ONS) released on 30 September 2020, GDP for the second quarter to June 2020 fell to £476bn, a 14.5% fall in economic activity compared with the previous quarter, which in turn was 0.5% lower than the last quarter of 2019.

This week’s chart not only illustrates the damage done by the coronavirus pandemic to the economy in the first half of 2020, but also highlights how poorly the economy was performing in past couple of years, with seasonally-adjusted GDP increasing by an average of 0.8% a quarter from £528bn in the first quarter of 2018 to £558bn in the fourth quarter of 2019.

These percentage changes do not take account of the effect of inflation, with the ONS reporting a headline fall of 19.8% in real GDP in the second quarter and a 2.5% drop in the first quarter on a chained volume basis (the method used by the statisticians at the ONS to adjust for the effects of changing prices and output levels across the economy). Average quarterly real economic growth in the seven quarters to Q4 2019 was just 0.3% and around half that on a per capita basis.

The two pieces of good news are that the decline in GDP in the second quarter was less steep than originally feared, while we also know that the economy has recovered to a significant extent in the third quarter to 30 September, although we won’t know by how much until the statistics are published in November. Unfortunately, with local lockdowns across the country, the likelihood is that it will be sometime before our lives return to normal.

This chart was originally published on the ICAEW website.

ICAEW chart of the week: public sector employment

25 September 2020: The #icaewchartoftheweek is on headcount in the public sector, which increased by 115,000 to 5,508,000 in the year to June 2020.

Chart showing change in headcount from June 2019 to 2020: NHS +88k, other health & social work -7k, education -9k, police +12k, forces +4k, civil service +11k, public admin +8k, other +8k = +115k.

Employment on a full-time equivalent (FTE) basis also increased over the last year, with an increase of 118,000 from 4,485,000 FTEs in June 2019 to 4,603,000 FTEs in June 2020.

The NHS workforce jumped by 55,000 in the first six months of 2020 and by 88,000 in the year to June as the coronavirus pandemic accelerated recruitment of health workers. The NHS is the one part of the public sector that has seen consistent headcount growth over the last decade, with 1,782,000 employees at June 2020 compared with 1,558,000 a decade ago. This has been partly offset by a fall in other health and social workers of 7,000 to 208,000 in the year to June, which is 191,000 lower than the 399,000 employed in June 2010.

Public employees working in education also fell by 9,000 to 1,487,000 in June 2020, bringing the total fall over the last decade to 198,000, driven by a combination of cuts in education funding and the reclassification of further education colleges to outside the public sector.

Police numbers (including civilian staff) have started to increase again, with a headcount of 261,000 in June 2020, up 12,000 over a year previously. However, this is still significantly below the 292,000 that were employed in June 2010. HM Forces numbers also started to increase again after a long period of decline, with the approximately 4,000 service personally added to reach 156,000 still substantially less than the 197,000 serving in June 2010.

Civil Service numbers increased by 11,000 over the year to 459,000, with Brexit being a major contributor to the increase from the low-point of 416,000 employed in June 2016, by still significantly below the 517,000 civil servants working in June 2010. Other public administration headcount increased by 8,000 to 614,000 in June 2020, down from 682,000 a decade previously.

The number of other public sector workers increased by 8,000 in the year to 541,000. This is substantially below the 1,105,000 employed in other categories in June 2010, principally because ten years ago the public sector included housing associations, Royal Mail, Direct Line, Lloyds Banking Group and Northern Rock all of which have since been reclassified to the private sector. (Royal Bank of Scotland and Bradford & Bingley remain in the public sector).

Adjusted for reclassifications, total public sector headcount is 215,000 lower than it was a decade ago, reflecting an increase of 224,000 in NHS employees and a net decline of 439,000 across the rest of the public sector.

With Brexit preparations accelerating and the NHS under severe pressure as we approach winter, it is likely public sector employment will continue to rise in the near future.

This chart was originally published on the ICAEW website.

ICAEW chart of the week: A square root-based recovery?

17 July 2020: Debate rages about which symbol to attribute to the shape of the economic recovery.

Chart on OBR Real GDP growth forecast. Shows huge economic hit in the first half of 2020 with potential recovery paths to Q1 2025. Upside scenario returns to previous trend by 2021, central scenario recovers but not fully, and downside is even worse.

The #icaewchartoftheweek is on the economy this week, with the Office for Budget Responsibility indicating that hopes of a sharp V-shaped recovery have receded. Instead, their central scenario is for a square root-based recovery – with economic activity recovering less quickly than originally hoped and not to the same level predicted before the pandemic took hold in the UK.

According to the OBR, quarterly GDP fell from £558bn in the fourth quarter of 2019 to £432bn before inflation in the second quarter of this year, a drop of almost 23% in the level of economic activity. Under the OBR’s central scenario GDP in real-terms is not expected to get back to where it was until the fourth quarter of 2022. At a predicted £584bn (excluding inflation) in the first quarter of 2025, GDP would be 3% lower than where it was predicted to be prior to the pandemic.

The OBR hasn’t completely ruled out a V-shaped recovery as a possibility and their upside scenario would see the economy returning to the previous trend by the second quarter of 2021. However, with job losses starting to accelerate, such a speedy return to trend seems increasingly unlikely.

The good news is that the OBR’s downside scenario, for which no symbol has yet been assigned, is not as shallow as the dreaded U-shaped recovery that some economists are worried about. In the downside scenario, economic activity recovers by the middle of 2024, unlike a U-shaped recovery that might extend into the second half of the 2020s.

In practice, the fortunes of different sectors of the economy are likely to vary, with some suggesting the recovery is more likely to be K-shaped, with some sectors stalling just as others emerge to grow back strongly following the end of the lockdown. The Government will be hoping that the fiscal interventions it has announced to support the hospitality, leisure and housing sectors in particular will help prevent the ‘full K’.

This chart of was originally published by ICAEW.

ICAEW chart of the week: Economic lockdown

19 June 2020: Economic contraction sees monthly GDP per capita decline from £2,790 in February 2020 to £2,100 in April 2020.

UK GDP per person per month - April 2019: £2,740 +£50 = Feb 2020: £2,790 - Mar £160 - Apr £530 = April 2020: £2,100.

The #icaewchartoftheweek is on the economy this week, illustrating how average GDP per person per month increased from £2,740 in April 2019 to £2,790 in February 2020, before contracting sharply in March and April.

The increase of £50 per person in economic activity between April 2019 and February 2020 was predominately driven by inflation, with per capita economic growth of less than 0.4% over the 10 month period. This reflects just how weak the UK economy was immediately before the pandemic.

The modest increase up to February 2020 is dwarfed by the dramatic changes seen as a consequence of the pandemic, with severe curtailments in many parts of the economy leading to a 5.8% fall in economic activity in March and a further 20.4% in April according to provisional numbers from the Office for National Statistics.

Monthly GDP was estimated to be £183bn in April 2019, £187bn in February 2020 and £141bn in April 2020. The population was projected to be just over 66.7m in April 2019, rising to 67.0m by February 2020, before increasing very slightly in March prior to the lockdown and then falling a little in April.

The #icaewchartoftheweek is on the economy this week, illustrating how average GDP per person per month increased from £2,740 in April 2019 to £2,790 in February 2020, before contracting sharply in March and April.

The increase of £50 per person in economic activity between April 2019 and February 2020 was predominately driven by inflation, with per capita economic growth of less than 0.4% over the 10 month period. This reflects just how weak the UK economy was immediately before the pandemic.

The modest increase up to February 2020 is dwarfed by the dramatic changes seen as a consequence of the pandemic, with severe curtailments in many parts of the economy leading to a 5.8% fall in economic activity in March and a further 20.4% in April according to provisional numbers from the Office for National Statistics.

Monthly GDP was estimated to be £183bn in April 2019, £187bn in February 2020 and £141bn in April 2020. The population was projected to be just over 66.7m in April 2019, rising to 67.0m by February 2020, before increasing very slightly in March prior to the lockdown and then falling a little in April.

The dramatic transformation in the UK economy wrought by the lockdown is now extremely visible in the statistics, but it will take some time for the post-lockdown economic position to emerge in order to be able to see how much permanent damage has been done.

This article was originally published by ICAEW.