Rishi Sunak is preparing to publish what allies describe as a “scary” outlook for the UK economy in next week’s spending review, containing the largest downgrade in economic performance and the public finances since the second world war.
When the chancellor delivers his statement to the House of Commons next Wednesday, the spending plans will be based on forecasts showing the economy will still be suffering the effects of coronavirus by the likely time of the next election in 2024.
The Office for Budget Responsibility, which independently produces the government’s forecasts, is on course to follow the Bank of England in predicting the UK economy will contract close to 11 per cent in 2020, the worst annual performance for more than 300 years.
Boris Johnson is attempting to “reset” his government with a renewed focus on spending on green projects and the north of England following the departure from Downing Street of Dominic Cummings and Lee Cain, two former aides.
The forecasts will give some support to the prime minister, showing that infrastructure spending will boost the economy’s growth performance, but they will not deliver a full recovery.
With the exchequer empty, Tory MPs in the wealthy south will soon be asked to support tax increases to help left-behind regions.
An ally of the chancellor said the comparisons with the figures in the March Budget forecasts “are going to be quite scary”. One Downing Street official said next week’s statement would be dominated by the dire state of the public finances, adding: “It’s not looking pretty.”
Concern in government is centred on the official forecasts that show a lasting hangover from the crisis will persist, with the economy recovering to its 2019 peak only in late 2022.
By the time of the next election, the OBR’s forecasts project lasting economic damage will be worth 2 to 3 per cent of national income — a shortfall of economic activity equivalent to £60bn in today’s prices.
These estimates will force Mr Sunak to recognise there will be a need to make tough decisions on taxes and public spending before the next election.
Mr Sunak’s allies said it was not the right time to begin putting up taxes or cutting spending. But they said the chancellor was determined to use next week’s statement to signal he was serious about tackling the fiscal problem. One said: “We’ve got to show that we are making a start.”
David Gauke, former Treasury minister, said there was “not yet an appreciation” of the serious fiscal situation. “Once we are beyond Covid and its immediate after-effects, this will move centre stage.”
With austerity ruled out, he said, Conservative MPs would be forced to vote through tax rises late in the parliament before an expected 2024 election. “It’s not clear the Conservative parliamentary party is willing to face up to that yet,” Mr Gauke added.
The Treasury is not planning to set new fiscal targets in the spending review and will wait until the economic outlook becomes more certain.
Government sources think the scale of tax rises that are likely to be necessary are not far off estimates produced recently by the Institute for Fiscal Studies and the Resolution Foundation. It suggested £40bn a year would be required.
The public finance forecasts are not yet finalised and depend on last-minute decisions on spending plans this year and next, but the deficit is set to be a peacetime record, although not quite reaching £400bn in 2020-21.
Independent estimates and forecasts will show that the deficit will still be above £100bn in 2024-25, equivalent to roughly 5 per cent of national income.
The Treasury declined to comment.
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