UK economy could shrink 14% this year, budget forecasters say

Britain's economy could shrink by more than 14 percent this year if there is lasting damage from the coronavirus, a scenario that would push government borrowing to nearly half a trillion dollars, budget forecasters said on Tuesday.

The Office for Budget Responsibility, whose projections are used by the government, said tax hikes or spending cuts would probably be needed to fix the huge hole in the public finances.

"The UK is on track to record the largest decline in annual GDP for 300 years, with output falling by more than 10 percent in 2020 in all three scenarios," the OBR said in a report.

"This delivers an unprecedented peacetime rise in borrowing this year to between 13 percent and 21 percent of GDP, lifting debt above 100 percent of GDP in all but the upside scenario."

The central scenario, with only moderate long-term damage, showed a 12.4 percent fall in output, with a 14.3 percent decline if the scarring is deeper.

In the downside scenario borrowing in the current financial year could hit 391 billion pounds ($490 billion) and in the upside one 263 billion pounds, with output falling 10.6 percent.

Last month, the International Monetary Fund said Britain's economy looks set to shrink by more than 10 percent this year.

The OBR scenarios do not incorporate gross national product data published on Tuesday, which showed only a modest return to growth in May following the lockdown.

Nor do they include measures announced by finance minister Rishi Sunak last week that could cost up to 30 billion pounds, which the OBR said would have had a material effect on the borrowing outlook.

An increase in Britain's historically low borrowing costs could leave government finances vulnerable, given the sharp rise in debt, the OBR said.

Even under the most optimistic scenario, the unemployment rate looks likely to peak at almost 10 percent in the third quarter of 2020, it added, with its downside scenario showing the peak at 13.2 percent in early 2021.