The UK’s independent forecaster says the economy will return to pre-Covid levels faster than expected.
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The UK’s spending watchdog expects the economy will return to its pre-Covid level at the turn of the year, Chancellor Rishi Sunak has said.
The Office for Budget Responsibility (OBR) has lifted its prediction for economic growth in 2021 to 6.5%, up from its previous forecast of 4%.
It has also reduced its estimate of the long-term “scarring” effect of Covid-19 on the economy from 3% to 2%.
But the chancellor acknowledged that the cost of living is rising.
He described the economic picture as “strong” in the short term, with the OBR now expecting the economy to return to pre-pandemic levels six months earlier than it had forecast previously.
In its latest report, the OBR said that the effectiveness of Covid vaccines and the adaptability of consumers and businesses had sped up the recovery.
But it forecast that economic growth would be lower next year than it previously thought, partly down to a better performance in 2021.
In 2022, gross domestic product (GDP), which measures all the activity of companies, governments and people in an economy, will increase by 6%, the OBR said, rather than the 7.3% it predicted in March.
Growth is forecast to be 2.1% in 2023, 1.3% in 2024 and 1.6% in 2025.
Mr Sunak said that the pick-up in inflation, which measures how quickly the cost of living increases over time, was due to increased demand for energy and supply chain issues as economies and factories reopened following coronavirus lockdowns.
The UK’s exit from the European Union has also exacerbated problems such at hold-ups at ports or with deliveries, the OBR says.
The inflation rate was 3.1% in September “and is likely to rise further”, the chancellor said. The OBR expects the CPI measure of inflation to average 4% over the next year.
“The pressures caused by supply chains and energy prices will take months to ease,” Mr Sunak said.
“It would be irresponsible for anyone to pretend that we can solve this overnight.”
The OBR previously said it had ended any updates to its forecast on 24 September, earlier than usual and “in response to a request from the chancellor”.
Had its data been more-up-to-date, numbers would be consistent with inflation peaking at close to 5% next year, it said, marking the highest rate seen in three decades.
Higher inflation is likely to put pressure on how much the chancellor is able to spend in the future.
But Mr Sunak has been offered some room for manoeuvre, as the improving economic picture and higher tax incomes means the government will not have to borrow as much.
Borrowing hit a record £319.9bn during the 2020 financial year as the government poured money into pandemic support schemes such as furlough.
It is now forecast to fall every year between 2021 and 2026.
Jane Mackay, head of tax at audit, tax, advisory and risk firm Crowe, said there was still a “huge” Covid bill to deal with, though.
“The Budget statement hasn’t really given us clarity on who will pay that bill.
“The tax increases that were announced before the Budget, including corporation tax rising to 25%, and the NHS and social care levy additional NICs of 1.25%, might suggest the strategy will spread the burden as widely as possible, rather than to make the structural changes to our tax system that may be what is really needed.”