National Institute of Economic and Social Research
National Institute of Economic and Social Research
The UK economic outlook
The outlook is precarious and uncertainty massive.
Will discuss:
• A plausible main-case scenario
• Risks to the short-term outlook
• Risks to the long-term outlook
National Institute of Economic and Social Research
Uncertainty mainly about:
• Path of the virus and possible recurrences in UK and other countries
• Effectiveness of social distancing in workplace and possible future lockdowns
• The extent and duration of government support
• Survival of physical, network and (firm-specific) human capital through Covid-19 period
National Institute of Economic and Social Research
NIESR May 2020 main-case forecast scenario
Source: NIESR.
• This is a plausible scenario rather than a confident prediction,
• conditioned on gradual easing of lockdown from mid-May, with no significant recurrence of virus.
• Very large, mainly downside risks.
National Institute of Economic and Social Research
Government deficit matched by household surplus
• Higher government borrowing is matched by higher private saving, so it is financed by borrowing from those unable to spend. National balance sheet largely unscathed.
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10
2014 2016 2017 2018 2019 2020 2021 2022 2023 2024
% o
f GDP
Sectoral balances
Households CompaniesGovernment Current account deficit
National Institute of Economic and Social Research
What has changed in last two months?
• Infection rate fallen, but still present in community
• Lockdown measures have been progressively eased
• GDP 25 per cent lower in April than February
• CJRS extended to end-October. 9.2 million jobs furloughed by 21 June, plus 2.6 million self-employed
• 600k fewer paid employees in May than March
• Around a third of workforce are working only from home
• Financial markets no longer stressed
National Institute of Economic and Social Research
GDP Per head in 2020q2 is at 1999 level
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7000
8000
9000
1955Q1 1961Q3 1968Q1 1974Q3 1981Q1 1987Q3 1994Q1 2000Q3 2007Q1 2013Q3 2020Q1
GDP per head (£ per quarter at constant prices)
National Institute of Economic and Social Research
All industries affected, but to different extents
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20
40
60
80
100
Heal
th
Educ
atio
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Adm
inist
ratio
n
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mod
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od
Arts
and
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t
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rvice
s
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mer
cial
Impu
ted
rent
Cons
truc
tion
Man
ufac
turin
g
Min
ing
and
quar
ryin
g
Tran
spor
tan
d St
orag
e
Info
rmat
ion
and
com
mun
icatio
n
Prof
essio
nal,
scie
ntifi
c…
Adm
inist
rativ
ean
d su
ppor
t
Fina
ncia
lse
rvice
s
Agric
ultu
re
Elec
trici
ty
Wat
ersu
pply
Tota
l
Inactivity in lockdown by industry
% fall in GDP Feb to Apr % of workforce furloughed
National Institute of Economic and Social Research
Risks to short-term outlook
• Is 25% hit to GDP as bad as it gets?
• Maybe: but ONS estimate is uncertain and impact could be bigger in longer lasting lockdown.
• In scenario, GDP 7 per cent lower in 2020H2 v 2019H2
• Spending affected by:
• reduced business investment due to uncertainty
• reduced exports due to measures in other countries
• reduced activity in job-rich hospitality, arts and travel industries.
National Institute of Economic and Social Research
Illustration of spillovers to other sectors
• Industry specific shock (in hospitality, arts and travel) could spill over to othersectors. Unlikely to be much reallocation of jobs across sectors in short term.
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0
1
2
Public Privatenon-traded
Privatetraded
Construction Realestate
Manufacturing Finance Utilities Total
Effect of lower spending on sectoral GDP (per cent change from baseline)
National Institute of Economic and Social Research
Employment in second half of 2020If CJRS is not extended or replaced then unemployment could be over 10 per cent by end of year, largely due to job losses in hospitality, arts, travel and spillovers to other sectors. This would be highest since 1992-93.Sectors most likely to be impacted by social distancing rules are relatively job intensive, especially accommodation and food (3% of GDP, 7% of jobs).
National Institute of Economic and Social Research
Risks to long-term outlook
• Potential output due to:
• Changes to labour supply (+ to make up for lost time, - due to hysteresis)
• Changes to productivity (- due to lost time, + due to creative destruction)
• Demand due to effects of:
• changes in private sector balance sheets through crisis (+/-)
• fiscal response to extra government borrowing through crisis (-)
• spillovers from other countries (+/-)
• Real interest rates could revert to historical levels (note these are ultimately determined in global markets)
• Inflation upside risks should be largely contained by monetary policy remit. More concerning would be falling prices.
National Institute of Economic and Social Research
Illustrative long-term scenarioWhat if productivity lower (by 1%) and NAIRU (1pp) higher as a consequence of withdrawal of fiscal support?
GDP lower than otherwise in long term (by 2.5%) and higher tax rates needed anyway.
400000
450000
500000
550000
60000020
19Q
1
2019
Q4
2020
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2021
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2022
Q1
2022
Q4
2023
Q3
2024
Q2
2025
Q1
2025
Q4
2026
Q3£m
per
qua
rter
GDP
Scenario Baseline
National Institute of Economic and Social Research
• Economic outlook is extremely uncertain and depends critically on path of Covid-19.
• Even without recurrence, recovery could be slow.
• Important for policy to limit transmission of economic shockby continued support for businesses and households.
• Otherwise risk of significantly worse long-term outlook that could be as costly as short-term support.
Summary
Carl Emmerson
Based on joint work with Ben Nabarro and Isabel Stockton
Presentation at joint IFS-NIESR webinar “Covid-19: deficits, debt and fiscal strategy”
https://www.ifs.org.uk/events/1832
1 July 2020
The public finances under the long shadow of Covid-19
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2000
2010
2020
Per c
ent o
f nat
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l inc
ome
Borrowing to reach highest level seen outside of World Wars in 320 years
The public finances under the long shadow of Covid-19
Notes: Calendar year until 1948. IFS/Citi ‘central’ scenario for 2020–21.Sources: Bank of England, Office for Budget Responsibility.
IFS/Citi ‘central’scenario for2020–21
Central government borrowing
Deficit to remain elevated after this year’s spike
£47bn
£307bn
£158bn
£133bn £128bn £130bn
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2
4
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8
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16
18
2019–20 2020–21 2021–22 2022–23 2023–24 2024–25
Per c
ent o
f nat
iona
l inc
ome
IFS/Citi 'central' scenario
March 2020 EFO
The public finances under the long shadow of Covid-19
Notes and sources: See Figure 3 of Emmerson, Nabarro and Stockton (2020).
Deficit to remain elevated after this year’s spike
£47bn
£307bn
£158bn
£133bn £128bn £130bn
0
2
4
6
8
10
12
14
16
18
2019–20 2020–21 2021–22 2022–23 2023–24 2024–25
Per c
ent o
f nat
iona
l inc
ome
Economic environment
Direct cost of new policy measures
March 2020 EFO
The public finances under the long shadow of Covid-19
Notes and sources: See Figure 3 of Emmerson, Nabarro and Stockton (2020).
Uncertainty around this – or indeed any other –forecast particularly high in present climate
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5
10
15
20
25
2019–20 2020–21 2021–22 2022–23 2023–24 2024–25
Per c
ent o
f nat
iona
l inc
ome
The public finances under the long shadow of Covid-19
Notes and sources: See Figure 4 of Emmerson, Nabarro and Stockton (2020).
March 2020 EFO‘Faster recovery’
‘Second wave’‘Central’
Debt reaches its highest level since 1963,but not unchartered territory
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100
150
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300
1700
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1800
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1830
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1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
Per c
ent o
f nat
iona
l inc
ome
The public finances under the long shadow of Covid-19
Notes: Calendar year pre 1920, financial year post 1920. Includes Ireland pre 1920.Sources: Bank of England, Office for Budget Responsibility, Office for National Statistics.
Public sector net debt
Exceeds 100% in 131 of the last 320 years
Debt forecast to continue rising in all scenarios
50
60
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80
90
100
110
120
130
2019–20 2020–21 2021–22 2022–23 2023–24 2024–25
Per c
ent o
f nat
iona
l inc
ome
The public finances under the long shadow of Covid-19
Notes and sources: See Figure 4 of Emmerson, Nabarro and Stockton (2020).
March 2020 EFO
‘Faster recovery’
‘Second wave’
‘Central’
Debt interest as a share of revenues at a 320 year low
0
10
20
30
40
50
60
70
1680
1700
1720
1740
1760
1780
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
2020
Per c
ent o
f rev
enue
The public finances under the long shadow of Covid-19
Notes: Financial year basis (breaks in length of financial year in 1751, 1800 and 1854). Excludes Asset Purchase Facility.Sources: Bank of England, Office for Budget Responsibility, Office for National Statistics.
Debt interest
Conclusions
Lockdown, and emergency support, to push borrowing to highest level ever seen in the UK outside of the two World Warsas these expire borrowing will return towards its pre-crisis path
Debt pushed up levels not seen in almost 60 years, and will remain elevated for many yearsat least for now debt interest costs set to remain below that forecast pre-Covid
Key issues for fiscal policy:1) is there more we can and should do to strengthen the recovery, even if it means more borrowing now?
2) once crisis is over should taxes rise to help return borrowing towards its pre-crisis path and/or to finance any new desired increase in spending?
The public finances under the long shadow of Covid-19
National Institute of Economic and Social Research
Jagjit S. Chadha
Joint NIESR-IFS Seminar
1st July 2020
Fiscal Strategies in Uncertain Times
National Institute of Economic and Social Research
A Framework for Debt
• Public debt shares risk with future generations• Control of debt fosters efficiency in the provision of debt but
also maintains capacity to respond to future shocks• Large expenditure shocks need to be met by tax smoothing• Tools to reduce debt have been sequences of fiscal surpluses
and nominal GDP growth• Call for general social objective for fiscal policy• Reform of instrument setting and timetables of revenue and
expenditure plans, recognising inherent uncertainties
National Institute of Economic and Social Research
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1770 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990
Government revenue to GDP
National Institute of Economic and Social Research
Long Run Costs of Funding
-1
0
1
2
3
4
5
10 Year Government Yields
UK GOVT. BOND SERIES 10 YEAR - RED. YIELD
GERMANY GOVERNMENT BOND 10 YEAR - RED. YIELD
US TREAS.BENCHMARK BOND 10 YR (DS) - RED. YIELD
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0
1
2
3
4
5
Implied Risk Neutral Yields
UK Germany US
National Institute of Economic and Social Research
Term Premia
Source: NIESR
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0
1
2
3
4
09 10 11 12 13 14 15 16 17 18 19 20
United Kingdom United States Germany
Brexit Referendum COVID-19Brexit Referendum COVID-19
National Institute of Economic and Social Research
Holders of UK Public Debt
0
10
20
30
40
50
60
70
80
90
100
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Bank of England Monetary Financial Institutions
Overseas Holdings (Rest of World) Private Sector (non-fin. corporations, hh & charities)
Financial Institutions
National Institute of Economic and Social Research
Bonds Outstanding
Bonds outstanding: total and currency composition1
Table 2
Period ending
Total amount2
Share in % of total
US dollar euro Pound sterling
2000 26.0 61.5 29.8 5.6
2005 44.1 55.0 36.7 5.5
2010 69.1 49.8 41.4 5.4
2015 72.2 58.6 32.3 6.7
2019 84.0 60.3 31.5 6.1 1 Comprise international debt securities in all currencies (dollar, euro and sterling together comprise about 85% to 93% of total outstanding), domestic dollar debt securities in the US , domestic euro debt securities in the euro are and domestic sterling debt securities in the UK. Instruments such as bonds, medium-term notes and money market instruments are included. 2 Amounts outstanding in trillions of US dollars. Sources: BIS Debt Securities Statistics; ECB statistics on euro area debt securities statistics; authors’ calculations.
National Institute of Economic and Social Research
Debt Dynamics
0
50
100
150
200
250
2020 2030 2040 2050 2060 2070
Publ
ic d
ebt/
GDP
Scenario 1 Scenario 2 Scenario 3 Scenario 4
National Institute of Economic and Social Research
A Framework for Debt
• Public debt shares risk with future generations• Control of debt fosters efficiency in the provision of debt but
also maintains capacity to respond to future shocks• Large expenditure shocks need to be met by tax smoothing• Tools to reduce debt have been sequences of fiscal surpluses
and nominal GDP growth• Call for general social objective for fiscal policy• Reform of instrument setting and timetables of revenue and
expenditure plans, recognising inherent uncertainties