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Home Publications The outlook for the public finances under the long shadow of COVID-19

The outlook for the public finances under the long shadow of COVID-19

Carl Emmerson, Benjamin Nabarro and Isabel Stockton
Briefing note

It is clear that the COVID-19 outbreak – and the public health response to it – will dramatically reduce economic activity in the second quarter of 2020. This in turn will depress tax receipts and add to government spending, increasing government borrowing and in turn adding to government debt. The package that, appropriately, the government has announced to help support public services, households and employers will also have the direct impact of increasing borrowing. A key issue is how quickly – and how fully – the economy, and with it the public finances, recover over subsequent years.

This report sets out three scenarios for the outlook for growth over the next five years (Section 2) and describes what in turn these might mean for government borrowing (Section 3) and government debt (Section 4). Finally, in Section 5, we provide some guide to the appropriate fiscal policy response in the short-term, where essentially additional borrowing that will boost subsequent growth is likely to be beneficial given very low interest rates, and in the longer term, where a combination of tax rises and accommodating an elevated level of debt for decades is, perhaps, the most likely outcome.

A podcast featuring authors from this report is available here.

Funding from the UKRI under the grant ‘Supporting fiscal policy through the crisis’ (ES/V00381X/1) and from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy (ES/M010147/1) is gratefully acknowledged.

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Press release
As long as the government can continue to borrow very cheaply, what really matters for the public finances is not the size of the temporary spike in borrowing that is inevitable during the current lockdown, but rather the extent to which current weakness in the economy persists in subsequent years.