Britain’s vaccination efforts will help the economy recover faster than first feared but government borrowing will balloon to record peacetime levels this year and next, according to the fiscal watchdog.
The Office for Budget Responsibility (OBR) is now predicting the economy to recover to its pre-crisis level by the middle of next year – six months earlier than previously expected.
Unemployment caused by the pandemic will also be lower than expected, with the unemployment rate peaking at 6.5% down from 11.9% predicted last July.
This will mean 1.8 million fewer people expected to be out of work than previously thought.
The OBR hiked its outlook for gross domestic product (GDP) – a measure of the size of the economy – for 2022 to 7.3% from 6.6% previously thanks to a “swifter and more sustained recovery”.
But Chancellor Rishi Sunak warned the crisis will still do “profound damage” to the economy, with the OBR still forecasting that the economy will be 3% smaller in five years’ time due to the crisis than it would have been.
While upping the outlook for next year, the OBR also slashed its GDP forecast for every other year until 2025, including a cut for this year to 4% from the 5.5% growth previously pencilled in.
The independent forecaster also laid bare the toll taken on the public finances from more than £400 billion of Covid-19 support.
It is predicting government borrowing to soar to £355 billion in 2020/21 – lower than the £394 billion first forecasted, but still 17% of national income and the highest level since the Second World War.
Borrowing will remain at eye-watering levels in 2021/22 at £234 billion, up from the £164.2 billion pencilled in before and 10.3% of GDP.
Mr Sunak said: “The amount we’ve borrowed is only comparable with the amount we borrowed during the two world wars.
“It is going to be the work of many governments, over many decades, to pay it back.”