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Quarterly Issue 2

The UK’s financial response to COVID-19

Author: ICAEW Insights

Published: 17 Jul 2020

London skyline

With the IMF projecting average debt-to-GDP ratios exceeding 120% in 2021, we examine the measures taken by five countries to the economic impacts of the coronavirus pandemic. Here, we explore the UK’s response.

Chancellor Rishi Sunak found himself charged with developing an unprecedented package of rescue measures for an economy that came to a screeching halt in a matter of days.

Recognising that payroll formed the largest part of companies’ costs, the Coronavirus Job Retention Scheme, now extended to October, promised to cover 80% of furloughed employees’ salaries.

The Bank of England (BoE) has urged other lenders to stay open for business to stave off big rises in unemployment and widespread bankruptcies that will lead to greater pain further down the line.

There seems little doubt the UK will need to add significant borrowings. Indeed, the UK Office for Budget Responsibility estimates that government borrowing will rise to well over £200bn this year.

As to the future impact, the BoE’s scenario for UK GDP for the full year of 2020 is -14% – the worst year for the economy since 1706.

Looking ahead

The consensus sees a rise in unemployment to 10% in Q2, dropping to 8.5% the following quarter, and bouncing back to 6.2% within 12 months. In the BoE’s “plausible illustrative economic scenario” for UK growth and jobs in its most recent report, it said GDP could fall by 25% in the second quarter and unemployment more than double to around 9%.

What, though, of the impact on the UK’s debt-to-GDP ratio? Having remained steady at 85% it looks set to jump as tax revenues drop and borrowing increases.

The question remains as to how the government will deliver on its “levelling up” agenda – especially against the backdrop of Brexit negotiations.