Beating Covid-19? The new chancellor shouldn’t budget on it | UK news

Economic forecasting, at the best of times, is an uncertain task. For the purposes of forecasting the outlook for the British economy, this is not the best of times.

Brexit uncertainty continues in that the negotiations on our future relationship with the EU are only just beginning. It is not obvious that any deal will be reached but, even if it is, the deal will be pretty thin. The economic consequences of such an outcome are disputed, in the sense that the vast majority of economists view this as a bad outcome for the economy and the government apparently doesn’t.

Thankfully for the credibility of our economic forecasts, we have an independent body of experts – the Office for Budget Responsibility – to make these forecasts. It was notable that the former chancellor, Sajid Javid, felt the need to defend the importance of the OBR in his resignation statement last week.

The OBR has known for some time that it would have to address the sensitive issue of Brexit in its March 2020 forecasts. It now faces the further challenge of addressing the economic impact of the coronavirus.

This is particularly difficult to predict because much will depend upon the virus itself. We do not know with great confidence how quickly Covid-19 will spread, what the mortality rates will be in advanced economies, whether there will be advances in treatment and if warmer, spring weather will see it off.

As for the economic consequences, to what extent will supply chains be hit? How many people will be absent from work (because they are ill, self-isolating or caring for others)? How much will a negative story dominating the news for the weeks ahead dent consumer confidence?

The impact is likely to be significant and immediate, albeit followed perhaps by a strong recovery with little lasting harm done to the economy. But a fall in GDP of 3% (which is the estimate made by a 2016 European Commission study of the impact of a pandemic on European growth) would be painful. Such a fall in GDP is more than half the size of the financial crisis contraction.

Given the uncertainties, the OBR is likely to qualify its economic forecasts. This does not make the task of the new chancellor, Rishi Sunak, any easier. He will be delivering his budget just four weeks after being appointed, with a powerful No 10 apparently indifferent to keeping control of the public finances, in a government that is pursuing a growth-damaging Brexit policy and in the midst of a health crisis that makes all short-term economic forecasts a matter of guesswork. It is quite a baptism of fire.

If there is a substantial reduction in consumer confidence, there will be those who argue for a short-term fiscal stimulus. The Treasury will, I suspect, urge caution. The problems may be as much to do with supply as demand; fiscal tools can take a while to implement (a short-term cut in VAT probably being the immediate lever to pull) for an issue that might be relatively short term; and action can give the impression of panic, which would be self-defeating.

In these turbulent circumstances, the chancellor would be entitled to take a cautious approach in his first budget. He will have a chance to get the wheels in motion for the increases in infrastructure spending due over the course of the parliament but, in an uncertain world, it would make sense for the autumn budget to be the big fiscal event of 2020.

David Gauke is a former treasury minister

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