LONDON (Reuters) – Britain will borrow nearly 400 billion pounds this year to pay for a massive coronavirus attack on its economy, Finance Minister Rishi Sunak said on Wednesday, as he took his first steps to offset the country’s highest non-wartime budget deficit. .
The world’s sixth-largest economy will now shrink by 11.3% in 2020 – the most since 1709’s “The Great Frost” – before recovering less than half by 2021, Sunak told parliament as he announced a one-year spending plan.
“Our health emergency is not over. And our economic emergency has only just begun, ”he said, promising more money for health, infrastructure, defense and to fight unemployment.
The UK budget watchdog forecasts lending to reach 394 billion pounds ($ 526 billion) in the 2020/21 financial year starting in April, slightly more than expected in August.
At 19% of gross domestic product, the deficit will be nearly double its level after the global financial crisis has spent nearly a decade of unpopular spending pressure falling.
Sunak announced cuts to foreign aid spending and a freeze on the salaries of many public sector workers.
However, with many public services still being stretched, Sunak is expected to pay more attention to tax increases to cover the shortfall.
“We have a responsibility, once the economy recovers, to return to a sustainable fiscal position,” he said Wednesday.
Britain has been hit harder by the coronavirus pandemic than most other wealthy nations due to its long lockdown.
Nearly 56,000 Britons have died from COVID-19, the highest death toll in Europe.
Even with recent positive news on vaccines, the Office for Budget Responsibility (OBR) says the economy may only regain pre-crisis size by the end of 2022 – or later if Britain fails to secure a post-Brexit trade deal with the European Union before transitional arrangements end in December 31st.
Sunak did not mention Brexit in his speech.
Since the pandemic hit Britain weeks after he took over as finance minister, a former Goldman Sachs analyst has issued emergency spending – mostly to pay subsidies to fend off a spike in unemployment – and tax cuts.
The shift from the Conservative Party’s traditional economic orthodoxy has worried some lawmakers.
Sunak said the cost of his actions to fight the coronavirus was now 280 billion pounds for this year, up from an earlier estimate of around 200 billion pounds.
Even so, the long-term economic damage of around 3% of GDP is most likely caused by COVID-19, OBR said.
Unemployment tends to peak at 7.5%, from 4.8% now.
With the damage in mind, Sunak seeks to emphasize how spending will increase in the short term as Britain grapples with the effects of the pandemic.
During this year and next year, daily spending will increase by 3.8% in inflation adjustment, the fastest growth rate in 15 years.
To fulfill Prime Minister Boris Johnson’s pledge to “raise the level” of growth across the country, £ 100 billion will be spent next year on long-term investment, £ 27 billion more than last year.
The new national infrastructure bank will be based in the north of England, where many voters broke tradition and supported Johnson in last year’s election.
Johnson later told Conservative lawmakers at a 1922 Committee meeting that he believed the British economy could revive quickly, and that his government would meet the needs of those who voted for him, said a lawmaker who attended the meeting.
The OBR said it would need 1% of GDP from spending cuts or tax increases to match day-to-day government spending with revenue. Debt is likely to increase further, to over 109% of GDP in 2023/24, up from around 101% now.
Paul Johnson, head of the Institute for Fiscal Studies think tank, said the headline figures were “truly shocking” but hid pressure on spending in three or four years that would be difficult to convey.
Sunak hinted at some initial cost-saving measures, including a salary freeze for public sector workers, except for doctors, nurses, other health staff and the lowest paid public sector workers.
And the UK will save 3 billion pounds a year by cutting foreign aid spending to 0.5% of GDP, a level that remains higher than almost any other wealthy country.
Archbishop of Canterbury Justin Welby said the cuts were “shameful and wrong”, former Prime Minister David Cameron said the government had broken promises to the world’s poorest countries, and government ministers for sustainable development were resigning.
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Written by William Schomberg; Edited by Catherine Evans and Jan Harvey