Britain is facing its worst recession in more than 300 years, and the government isn’t expecting the economy to return to pre-pandemic levels until the end of 2022 - or longer if Brexit goes wrong.
“Our health emergency is not yet over, and our economic emergency has only just begun,” Chancellor of the Exchequer Rishi Sunak told the House of Commons Wednesday as he outlined the bleak assessment.
COVID-19 has hit the U.K. harder than most European countries. Much of the country was put into a second lockdown this month in an effort to slow the spread of the virus, which is infecting almost 40,000 people every day.
The economic toll has been significant, and Mr. Sunak said gross domestic product is expected to drop 11.3 per cent this year. That’s the biggest contraction since 1709, when a fierce winter across much of Europe devastated the economy and caused widespread famine. Among European countries, only Spain is expected to fare worse this year, with a 12.4-per-cent drop in GDP.
The situation is so dire, Mr. Sunak said, that Britain has been forced to cut back on its robust foreign aid spending – a point of pride for successive governments.
While the British economy will return to modest annual growth after 2021, Mr. Sunak said output won’t reach pre-crisis levels until the fourth quarter of 2022. The economy will also be 3-per-cent smaller in 2025 than the government predicted in its budget last March. And none of that includes the impact of Brexit.
The U.K. left the European Union in January but remains inside the EU’s single market until Dec. 31. The two sides have been negotiating a trade pact, but talks have stalled. If no deal is reached by Jan. 1, 2021, trade will be governed by World Trade Organization rules, which will mean high tariffs for many goods.
A report released Wednesday by the Office for Budget Responsibility, a public agency that monitors government spending, concluded that a no-deal Brexit would cut economic growth by a further 2 per cent in 2021 “due to various temporary disruptions to cross-border trade and the knock-on impacts.” The OBR added that GDP could still be 1.5-per-cent lower in five years because of trade disruptions.
Mr. Sunak has introduced a range of measures to cushion the impact of the pandemic, including grants to businesses and a wage-subsidy program. So far the government has spent £250-billion ($434-billion) on various relief programs, and Mr. Sunak announced Wednesday that an additional £55-billion will be spent next year. He also committed to increasing spending on education, health care and an assortment of infrastructure projects. However, there will be a wage freeze for public servants, with the exception of some health care workers and those earning less than £24,000 a year.
The added spending means the government’s annual deficit will jump to £394-billion, the highest level since 1945. The overall debt is expected to climb to more than 97 per cent of GDP by 2025.
In a controversial move, Mr. Sunak announced that Britain will cut its annual spending on foreign aid from 0.7 per cent of GDP to 0.5 per cent, saving about £4-billion annually. “At a time of unprecedented crisis, the government must take tough choices,” he said.
Britain has been one of the few developed countries to meet the 0.7-per-cent target for international assistance set by the United Nations. The commitment has been championed by Conservative governments for years, and Prime Minister Boris Johnson reiterated the pledge during the 2019 election campaign. Mr. Sunak said Britain will still have one of the largest foreign-aid budgets in the world and added that the government would return to the 0.7-per-cent level at some point.
The cut to foreign aid prompted a backlash among some Conservative MPs and led to the resignation of a cabinet minister. Elizabeth Sugg, a member of the House of Lords, stepped down as the minister for overseas territories and sustainable development. In a letter to the Prime Minister, Baroness Sugg said; “Cutting U.K. aid risks undermining your efforts to promote a Global Britain and will diminish our power to influence other nations to do what is right.”
Aid groups and churches also criticized Mr. Sunak. “I join others in urging MPs to reject it for the good of the poorest, and the UK’s own reputation and interest,” Justin Welby, the Archbishop of Canterbury and head of the Church of England said on Twitter. Danny Sriskandarajah, the head of Oxfam Great Britain, said “cutting the UK’s lifeline to the world’s poorest communities in the midst of a global pandemic will lead to tens of thousands of otherwise preventable deaths.”
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