Budget 2021: what’s really going on in the UK economy?

By Richard Partington

Britain’s economic recovery from Covid is at growing risk from severe shortages of workers and materials, as well as mounting living costs for households, as Rishi Sunak prepares his budget and spending review.

Here are five key charts that will underpin the chancellor’s statement on Wednesday afternoon.

The UK economy

Real GDP chart

Britain’s economy has recovered close to pre-pandemic levels after a swift rebound from the worst recession in 300 years, helped by vaccines and the easing of Covid restrictions. According to the latest official figures, GDP is just 0.8% below its February 2020 level. However, the severe shortages of workers and materials risk weighing on growth, putting a complete recovery by Christmas at risk.

Attention will focus on today’s Office for Budget Responsibility forecasts for the long-term economic “scarring” caused by Covid, estimated at about 3% at its last update in March. The Bank of England has suggested the impact could be lower than feared, at about 1%.

Combining the impacts of Covid and Brexit, a joint forecast from the Institute for Fiscal Studies and Citi bank predicted GDP will remain 2.5% smaller than would have otherwise been the case by 2024-25.

The public finances

Government borrowing chart

The government’s budget deficit – the gap between spending and income – has improved from a record £355bn shortfall in the year to the end of March 2021, when it stood at the highest recorded in peacetime.

After improvements, the IFS estimates that borrowing could come in about £55bn lower than forecast by the OBR in March, at about £180bn for the current financial year.

Despite these gains, rising inflation is pushing up the cost of servicing the national debt, in a development that is causing concern for Sunak. Government debt has risen from about 80% of GDP before the pandemic close to about 96%, the highest level since the 1960s. Despite these increases, a group of 70 leading economists said servicing costs remain at the lowest levels since the 1950s.

Levelling up spending

Spending chart

Sunak is expected to announce spending limits for Whitehall departments for the coming three years.

After a decade of austerity under the Conservatives, there is pressure on the chancellor to boost the funding available to meet the government’s levelling up promises.

Under details announced at the launch of the spending review process last month, average real-terms growth in spending is expected to rise by 3.2% each year between 2021-22 and 2024-25, according to the IFS. This is below more generous settlements agreed under Labour during the early 2000s, but much higher than in the 2010s when steep cuts were made.

Jobs

Unemployment chart

Unemployment in the UK has fallen steadily in recent months, down from a peak of 5.1% late last year to 4.5% in the three months to August. Although higher than pre-Covid levels, when the jobless rate stood at 4%, the outcome was far better than the 12% that had been feared.

However, the latest figures represent a snapshot in time before the furlough scheme stopped at the end of September, when as many as 1.4 million people were receiving wage support up until its closure. Early figures for redundancies from the Insolvency Service suggest job losses may have been limited, but many economists suggest it is still too early to tell.

Sunak has taken comfort that record job vacancies of more than 1m could help keep a lid on unemployment, while hoping that the end of the furlough scheme could benefit firms struggling with severe staff shortages.

Living costs

Inflation chart

Rising energy bills have pushed up inflation to the second-highest level in a decade over recent months, putting a tight squeeze on household finances before a tough winter. The consumer prices index stood at 3.1% in September, a slight drop from a month earlier, despite prices rising across a wide range of goods and services.

The Bank of England’s chief economist has warned inflation could peak close to 5% in the coming months, with the barometer for the rising cost of living forecast to remain elevated until the middle of next year before gradually falling back towards the Bank’s 2% target rate.

Inflation is being pushed up by a surge in global demand for energy and manufactured goods, as well as severe disruption to international supply chains caused by Covid-19, with added pressures from Brexit.