Where now for the economy?

By Dan Corry | 15 December 2020
  • Dan Corry

Trying to see through the fog of the next few months and years is like searching for a needle in a very messy haystack. Understanding where our economy might be going matters for individuals and families, and in our communities and our work.

While there is always uncertainty about the future, these days it is of mega proportions.

The Office for Budget Responsibility (OBR) gave the formal view of the economy a few weeks ago. Its main forecast was sobering. Using reasonable assumptions on vaccines and lockdowns, it sees a fall in GDP of 11% in 2021 – which would be biggest drop in annual output since the Great Frost of 1709 – and unemployment reaching 7.5% in 2021 Q2. That means no full bounce-back until 2022 Q4 (even if it has a vague ‘V’ shape to it).

Others see a faster bounce-back. For instance, Capital Economics thinks unemployment will peak at 7% with the economy possibly returning to its pre-pandemic level early in 2022.

In fact the OBR, unusually, decided to confront the heightened uncertainty by presenting us with strong variants of its main forecasts. In its more optimistic one – where the vaccine works fast, lockdowns are efficient and so on – it says unemployment peaks at 5% and we are back to pre-crisis level of GDP in 2021 Q4, which sounds much better. But then it also thinks about a less optimistic scenario where we are not back to ‘normal’ until 2024 Q4 and unemployment peaks at 11% in 2022 Q1, which sounds worrying.

Good luck for planning for that. And remember, this assumes a Brexit deal is done.

But it gets even more complex because much depends on how the Government sees things and what steps it takes in response to any of these potential outcomes.

There are clearly many judgements to be made on health and how long and hard to lock us down for. But there are also policy reactions to the economic situation as it unfolds that are hard to predict.

On the public finances for instance, will the Government remain relaxed on the debt levels which are now going to be over 100%, as most economists would advocate, or will it cower to its backbenchers who are alarmed by the size of the debt and want action soon to reduce it.? And if it heeds those calls for action, will it be tax rises or spending cuts that await us?

What about trying to run the economy a lot faster? Will it allow and encourage that to happen or will it fear that this will only lead to rising inflation?

Some say the latter does not matter as the Bank of England would just put up interest rates to counter it. But others, like ex- Monetary Policy Committee member Sushil Wadhwani, think there is at least a chance that in such circumstances the Government would change the 2% inflation target (such as by replacing it with a ‘looser’ nominal GDP target).

All of this matters to the progress of our economy and hence the amounts and kinds of demand for services and support that public services and charities provide. Slower growth and higher unemployment always mean more needs and less revenue one way or another.

And if the Government decides to spend more money, where will it spend it?

The Spending Review showed some of its colours. There had previously been announced multi-year deals on health and education and more was announced – much of it to cover the costs of COVID-related expenditure.

There were some big numbers on future infrastructure as well. But there was not that much else elsewhere and as the Institute for Fiscal Studies spotted, there was a cut of £10bn in other departmental expenditure relative to what was said in March pre-COVID.

Councils did not do well either – a bit of extra money but much of it only through putting up council tax.

Will the major things the Spending Review talked about in terms of getting money out, like the new Levelling Up Fund, and the UK Shared Prosperity Fund, be aimed clearly and only at more deprived communities? If you are not a former Red Wall seat should you bother to apply?

Of course, nobody willed this uncertainty and hopefully some of the murkiness about the future will lift as Brexit is sorted one way or another and vaccines come on stream. But the mystery as to the Government’s instincts on economic and fiscal policy will probably remain.

Dan Corry is chief executive of NPC – a think-tank and consultancy on third sector issues. He is a former Treasury and Downing Street economic adviser

@DanRCorry

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