By David Milliken and William Schomberg
LONDON (Reuters) -British finance minister Rishi Sunak announced stronger economic growth and lower public borrowing forecasts as the country emerges from the COVID-19 pandemic, and he vowed to protect households from rising inflation.
Announcing forecasts drawn up by the Office for Budgetary Responsibility (OBR), Sunak said in his budget statement that the economy was likely to grow by 6.5% in 2021, faster than a forecast of 4.0% made in March when Britain was still in a coronavirus lockdown.
Since then, the country has moved ahead with its COVID-19 vaccination programme and lifted restrictions on the economy.
“Today’s budget does not draw a line under COVID. We have challenging months ahead.” Sunak said in a speech to parliament. “But today’s budget does begin the work of preparing for a new economy post-COVID.”
The 6.5% forecast was close to the International Monetary Fund’s estimate that British gross domestic product will grow by 6.8% in 2021, the fastest among Group of Seven nations after the country suffered the biggest slump in the G7 in 2020.
The OBR forecast that gross domestic product would grow by 6.0%, 2.1% and 1.3% in 2022, 2023 and 2024, Sunak said.
In March, the OBR had forecast growth of 7.3%, 1.7% and 1.6% over the next three years.
The economy was expected to regain its pre-pandemic size at the turn of the year, compared with March’s forecast of the second quarter of 2022.
The OBR reduced its forecast for long-term “scarring” of the economy to 2% from a previous estimate of 3%.
Sunak acknowledged the risks posed by rising inflation, much of which he blamed on problems in the global economy.
But he announced further measures to ease a shortage of truck drivers which has led to supply chain problems.
“And in terms of our fiscal policy, we are going to meet our commitments on public services and capital investment but we are going to do so, keeping in mind the need to control inflation,” Sunak said.
“I understand people are concerned about global inflation – but they have a government here at home ready and willing to act,” he added.
A big risk for Sunak is that the recent jump in inflation proves to be more stubborn than expected, which could push up the government’s debt costs sharply.
Around a quarter of British gilts are indexed to inflation, a higher share than most other rich economies.
A 1-percentage-point rise in interest rates and inflation would cost taxpayers about 23 billion pounds a year, according to government estimates.
That would be equivalent to double the money that Sunak plans to raise with his increase in social security contributions to fund the health service and social care.
Borrowing costs could start to go up as soon as next week when the Bank of England is due to announce its November policy decision against the backdrop of an inflation rate on course to hit 5%, more than double its target.
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