office for budget responsibility

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Office for Budget Responsibility

March 2021 Economic and fiscal outlook

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March 2021 Economic and fiscal outlook

Richard Hughes Chairman

London 3 March 2021

Background

• Thanks to BRC colleagues, OBR staff, government analysts, andpublic health experts

• All assumptions, analysis, and conclusions are our own

• Forecast closed on 26 February and takes account of:• Government’s 22 February ‘Roadmap’ for lifting of public health restrictions

• Latest epidemiological data and modelling produced for SAGE

• UK-EU Trade and Cooperation Agreement concluded on 24 December

• All tax and spending policies announced up to and including 2021 Budget

• Yield curve on 5 February, since then 10-year gilt yields have risen 30 bps3

November 2020 coronavirus scenarios

Upside Central Downside

Public health assumptions

Lockdown ends 2 December 2 December 2 December

Test, trace and isolate Effective Partly effective Ineffective

Public health restrictions: lockdown to vaccine1 Medium-low High-medium Very high2

Vaccines widely available From Spring 2021 From mid-2021 Ineffective

Economic effects (per cent, unless otherwise stated)

Real GDP growth in 2020 -10.6 -11.3 -12.0

Return to pre-virus peak (2019Q4) 2021Q4 2022Q4 2024Q4

Peak unemployment rate 5.1 7.5 11.0

Long-term GDP scarring 0.0 3.0 6.0

November virus scenarios

1 Low, medium and high are broadly equivalent to October 2020 tiers 1, 2, and 3 in England. Very high is between October 2020

tier 3 and November 2020 lockdown in England.2 Restrictions to ease to low by end of 2021.

4

Course of the pandemic since November

0

10

20

30

40

50

60

70

80

90

100

Jan20

Feb20

Mar20

Apr20

May20

Jun20

Jul20

Aug20

Sep20

Oct20

Nov20

Dec20

Jan21

Feb21

Index

poin

ts

Lockdown stringency index

5

0

5

10

15

20

25

30

35

40

Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Daily

tota

l (th

ousa

nd,

7 d

ay

rollin

g a

vera

ge)

Number of people in hospital

Note: Shaded areas reflect periods of lockdown in England.

♦

Vaccine rollout

0 20 40 60 80 100

Moderna

Janssen

Pfizer

CureVac

Novavax

GSK

Oxford

Valneva

Millions

UK vaccines purchased

0

20

40

60

80

0

10

20

30

40

50

60

Jan Feb Mar Apr May Jun Jul Aug

Cum

ula

tive

vacc

inations (m

illion)

1st vaccine doses

2nd vaccine doses

Cum

ula

tive va

ccinatio

ns (p

er ce

nt o

f popula

tion)

1st doses for all priority groups by 15 April

1st doses for all adults by 31 July

UK vaccine rollout

6

Adaptation to public health restrictions

0 20 40 60 80 100

Health + social work

Professional + technical

Information + comms.

Transport + storage

Water + waste

Admin + support

Education

Manufacturing

Wholesale + retail trade

Construction

Accom. + food

Arts + recreation

All industries

Per cent of firms

First lockdown

November lockdown

January lockdown

Firms closing or pausing trading at the start of each lockdown

7

0

5

10

15

20

25

30

35

40

2007 2009 2011 2013 2015 2017 2019 2021

Per ce

nt o

f to

tal re

tail sale

s

Internet sales

0

1

2

3

4

5

6

7

8

9

10

1 Dec 15 Dec 29 Dec 12 Jan 26 Jan 9 Feb 23 Feb

Thousa

nd

2017-18

2018-19

2019-20

2020-21

Number of heavy goods vehicles on roads around Dover

EU Exit

8

TCA vs. typical FTA

Tariff barriers

(goods)Tariffs Better

Rules of origin Some extra flexibilities

Customs administration Some extra commitments

SPS checking Broadly similar

Technical barriers Broadly similar

Recognition of qualifications Broadly similar

Worker mobility Broadly similar

Market access Some extra commitments

Financial services Not yet clear

Key trade barriers

Non-tariff

barriers

(goods)

Non-tariff

barriers

(services)

Evaluation of UK-EU Trade Deal

--_j

---

Near-term economic outlook

9

65

70

75

80

85

90

95

100

105

Jan2020

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan2021

Feb Mar

January

2020 =

100

Range of November 2020 scenarios

November 2020 upside scenario

November 2020 central forecast

November 2020 downside scenario

March 2021 forecast

Adjusted outturn

Real GDP level

-----

Medium-term economic outlook: Real GDP

10

75

80

85

90

95

100

105

110

Q12018

Q3 Q12019

Q3 Q12020

Q3 Q12021

Q3 Q12022

Q3 Q12023

Q3 Q12024

Q3 Q12025

Q3 Q12026

2019 Q

4 =

100


March 2020 forecast




March 2021 forecast

Outturn

Real GDP level

---------- - - ------ --------

-- --- -- -- - --- -

- --- -- - - - -- - -- ---- -- -------------- ----

- -- ----

1-11a11-1•• - --- -- - - - - --- -- -- - - - -- -----------+------------ -- --------~-----------------------------------

Changes in Real GDP since November

11

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

Q12019

Q3 Q12020

Q3 Q12021

Q3 Q12022

Q3 Q12023

Q3 Q12024

Q3 Q12025

Perc

enta

ge p

oin

t contr

ibutions to

change in

leve

l of G

DP

rela

tive

to N

ove

mber

Other Net trade

Government Private investment

Consumption GDP

Forecast

Scarring effects of the pandemic

OBR 3 Italy 3

IMF Article IV 3 to 6 Germany 3

NIESR2 4 Netherlands 4

Bank of England 1.75 USA 3.4

Pujol 3.11 Relative to a pre-pandemic baseline, unless otherwise stated.

Scarring estimates (per cent)1

Estimates for the UK International estimates3

2 NIESR's central estimate is 6 per cent, of which around 2 percentage points is the impact of the TCA, therefore

their implied estimate for virus related scarring is 4 percentage points.3 Source: Ufficio Parlamentare Di Bilancio, Stabilitätsrat, CPB Netherlands and Congressional Budget Office.

12

-----

Unemployment

13 0

2

4

6

8

10

12

14

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Per ce

nt


March 2020 forecast




March 2021 forecast

Outturn

Source: ONS, OBR

--Murch 2020 fure1.usl 18

--November 2020 forecast 16

--March 2021 forecast 14

--Outturn CL 12 Cl ~ o 10 c Q) u - 0 Q)

CL

6

4

2

0 2009-l 0 2025-26 2013-14 2015-16 2017-18 20 19-20 2021-22 2023-24 20 11- 12

20

Government borrowing

14

20 H igher borrowing (higher spending/lower receipts)

100

80

60

40 C

.Q

:.0 20 C,l

0

-20

-40

-60 Lower borrowing (lower :.pending / higher receipts)

-80 2020-2 1 202 i -22 2022-23 2023-24

■ Effect of Government decisions

■ Underlying forecast changes

• Net impact on borrowing

2024-25 2025-26

Changes in borrowing since November

15

g

:.0 C,l

100

8 lJ

60

40

2D

Higher borrowing (higher spending/lower receipts)

Rescue (in addition to pre-Budget 2021 support measures) ■ Househo ld support ■ B11sinP.SS s11rrort

Recovery ■ Investment a llowances ■ Other

Repair ■ Corporation tax ■ Income lux ur 1J N IC s ■ Other ♦ Net impact on borrowing

0 -t-_._ ___ ....._--,-....._ ___ ....._---,---.----------r-------,------,-------

-20

--1 0

Lower borrowing (lo we r s pending/ h igher rece ipts)

?0?0-? l ?O? 1-?? ?O??-?:l ?O?:l-?4 ?0?4-?.'i ?O?.'i-?6

Budget Policy: Rescue, Recovery & Repair

S'.)

6'.>

C

-~ 4'.) .D (J.l

20

Higher b orrowing (higher spending / lower receipts)

Lower borrowing (low er spending/ h igher receipts)

2020-21 20'21-'22

Rescue (in addition to pre-Budget 2021 support measures) ■ Housenold support ■ Bus· ness support

Recovery ■ Investment allowances ■Other

Repair ■ Co rporation tax ■ lncorne tnx nncl N ICs ■ Other ♦ Net imped on borrowing

2022-23 2C23-2 4 2024-25 2025-26

lO'.)

Budget Policy: Rescue, Recovery & Repair

■ Support for businesses 350

■ Support for households 300

■ Public services 250

l .'iO

100

50

0 11 17 20 26 13 17 27 12 29 Pre- SEU WEP 5 SR20 17 4 Budget

Mar Mor Mor Mor Apr Apr Apr Matt Matt SEU Nov Dec Jon 2021 (B11rlgP.t)

Date of announcement

Rescue: Covid policy costs

19

110

lCO 0 0 ~

II c- 90 ~

0

"' ,,: 0 eo

70

Real business investment

Forecast

--Morch 2020 forecast

NovP.mbP.r ?0?0 forP.cosl

--March 202 l forecast Q l Q1 Ql Q1 Ql Q~ Ql Q1 Q l Q ~ Q l Q1 Ql Q1 Q. Q.1 Ql

2018 2Cl9 2020 2021 2022 2023 202A 2025 2026

120

Recovery: Investment tax allowances

20

35

30

25

c ~20 ... "' a..

i 5

i O

5

0

Corporate tax rates in 2020

UK 2009

UK 2017

UK 2023

l l l

Corporation tax rate vs. receipts/GDP

a.. 0 <.'.)

4.0

3 .5

3.0

o 2 .5 c Q) u

i 2.0

1.5

1.0

0 .5

--Receipts (left axis)

--Headline tax rate (right axis)

0 .0 -'-------------------------'-1967-68 1979-80 199 1-92 2003-04 2015-1 6

64

56

48

24

16

8

0

-40

Repair: Corporation tax increase

21

37

35

t ('.) 33 -0 c Q)

::'. 31 Q)

Q..

29

27

25 19-18--19 1958-5~ 1968-69

Nole : Nalional accounls taxes/ GDP

--Morch 2020 forecast --November 2020 forecast --Morch '10'1 l to recast --O utturn

1978-79 1988-89 1998-99 2008-09 2C18-19

39

Tax burden

22

March 2020 forecast llO

November 2020 forecast 105

March 2021 forecast 100

Q.. Outturn 0 <.'.) 95 -0

c ., 90 u ... ..,

a..

85

80

75

70 2015- 16 20 16- 17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-2C

115

Public sector net debt

23

targets

Fiscal mandate: structural deficit below 2% of GDP in 2020-21

Supplementary target: debt falls as o % of GDP in 2020-21

Fiscal obiective: balanced budget by 2025-26

March 2020

X

X

November 2020

X

X

X

March 2021

X

X

X

Legislated

Legislated fiscal rules

24

1.5

I .C Q.. D t') -:, -:= 0.5 » ., »

Q..

o.c

.o.5

.1.c Current tudget defi:il 2025-26

In deficit / debt rising

In surplus / debt falling

■ March 2020 forecast ■ November 2020 forecast March 2021 pre -measures foreca st ■ March 2021 foreca st

Change in debt lo GDP (ex. BoE) 2025-26

2.c

New fiscal principles

25

c:;; 0

60

50

40

~ 30 0 .c ,-

20

10

0

Peak hospital occupancy from 12 February 2021

160

Cumulative deaths from 12 February 2021

140

120

100 -0 c:;; 0 V, 80 ::, 0 .c ,-

60

40

20

0 Low Lower lndud ng Jan 2021 Central Low Lower

assumptions adherence vamne seasonality peak assumptions a ~herence vaccine t, ffi<:U<:'l t, fr.<:ucy

Including Deaths up lo seasonalitv 11 Feb 202 1

Note : Potentia l futu re e pid e mio logica l outcomes a s restrictions a re e ased compared to past outcomes based on Scerario Sa in Impe ria l Colleg e London's Februa ry 202 1 publication

-0

Risks to the outlook: The pandemic

26

Risk to the outlook: Public services

• Health service

• Education

• Transport

27

16

14

12

.,. l 0 ~

0 41 >- 8

6

2

Mean and median maturity of government debt (gilts)

Mean a ll gills Mean including irnp:,d of Bank of England (APF!

Mecian all gilts Median ircluding impact o' Bank o' England !APF)

18

Risks to the outlook: Interest rates

28

Conclusion

• Winter resurgence of infections & third lockdown have delayed the economic recovery

• But rapid vaccine rollout & Roadmap offer hope for a more rapid recovery in GDP to pre-pandemic levels by mid-2022

• Budget 2021 extends the covid rescue, stokes the economic recovery, and begins the repair of the public finances

• Enough to almost balance current budget & get debt falling

• But risks to those objectives from failure to keep virus in check, legacy costs of covid for public services, and future interest rate rises

29


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