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Millions of people could be left unemployed as a result of the coronavirus pandemic as the government’s furlough scheme is unwound, the UK’s fiscal watchdog has projected.
The Office for Budget Responsibility (OBR) outlined three scenarios in which unemployment hits levels only seen twice in the last 50 years – in the mid-1980s and early 1990s recessions.
Underpinning all scenarios is the projection that the UK is set to suffer the largest decline in gross domestic product (GDP) for 300 years, leading to a “massive” rise in the government’s budget deficit and an “unprecedented” peacetime rise in borrowing.
Overall, the UK economy may not fully recover from the coronavirus crisis until 2024.
In the worst case scenario, unemployment will rise from its current rate of around 4% to peak at 13% early next year, according to the Office for Budget Responsibility (OBR).
Even in the best case scenario, unemployment will balloon to 10% in autumn this year, while in the “central” scenario it will hit 12% towards the end of 2020.
By contrast, unemployment hit nearly 12% in 1984 and close to 11% in 1992, prompting Labour to say the figures were “very worrying”.
In all three scenarios, the unemployment rate depends on how many people return to work after being furloughed.
In the worst case scenario, one in five workers currently furloughed will be left unemployed when the scheme is fully lifted in October.
All three projections depend on how much long-term economic “scarring” the pandemic causes.
The OBR says it is “highly uncertain” to predict this, as it depends on the course of the pandemic, the development of effective vaccines and treatments, the speed and consistency with which lockdown restrictions can be eased and the effectiveness of policy to protect businesses, foster new opportunities and sustain jobs.
But the outlook would have been “much worse” without the measures taken by the government to provide financial support to individuals and businesses through the lockdown.
These “should also help to limit any long-term economic ‘scarring’, by keeping workers attached to firms and helping otherwise viable firms stay in business”, the OBR notes.
Borrowing - the amount of money the government spends over the amount it takes in, will increase to between 13% and 21% of GDP, with the OBR currently predicting borrowing of £322bn.
The OBR says as a result “it seems likely” that chancellor Rishi Sunak will need to either hike taxes, cut spending, or both, to put the public finances on a sustainable path.
Shadow chancellor Anneliese Dodds said: “This OBR analysis is very worrying. Unless the government takes urgent action, the UK’s unemployment crisis is going to get much worse.
“The chancellor must now listen to calls from Labour, business and trade unions and make the job retention (furlough) scheme live up to its name.
“Instead of withdrawing support across the piece, he must target it to sectors where it’s needed most.
“If he doesn’t act, even more people run the risk of being thrown into the misery of unemployment and our economy will continue to suffer.”