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This briefing was last updated on 31 July. This is a fast-moving crisis, so please be aware that information may have changed since the date of publication. The Library intends to update this briefing.

The coronavirus outbreak has impacted the economy in a number of different ways. From the lockdown restrictions shutting down many businesses to limits on mobility, voluntary and enforced, the economic impact has been severe.

Economic impact

The magnitude of the recession caused by the coronavirus outbreak is unprecedented in modern times. UK GDP was 26% lower during the depth of the crisis in April than it was only two months earlier in February.

While a recovery is underway, there is uncertainty over how fast economic activity will regain lost ground.

Economic prospects depend greatly on how the Covid-19 caseload evolves. The possibility of a resurgence in cases presents the greatest risk to the economic outlook. The reactions of consumers and businesses to the uncertainty will also play an important role in the speed of the recovery.

Consumers may be reluctant to return to ‘normal’ spending patterns. This may be due to health concerns but also perhaps due to concerns over their income. A key factor will be how high unemployment levels rise. Particularly important is how many employees currently furloughed will return to work and how many will become unemployed. Uncertainty may also dampen businesses’ inclination to invest.

OBR estimates of GDP growth

Policy response

Governments and central banks around the world introduced policies designed to mitigate at least some of the negative economic impacts from the coronavirus outbreak.

In the UK, several policies have been announced by the Government and the Bank of England in order to support businesses and workers. The first package of measures was announced on the day of the Budget, 11 March 2020. Since then, more extensive interventions have been made.

The intention of these measures is to keep businesses afloat and, in turn, as many people as possible employed. The measures seek to financially support businesses, workers and the wider public during the outbreak, as well as attempting to reduce the economic uncertainty.

Public finances

The coronavirus outbreak is significantly affecting the public finances. The Government’s budget deficit is increasing as tax revenues fall and government spending increases. Government debt is, therefore, increasing.

The measures the Government has taken to support businesses, workers and household incomes may cost over £190 billion this year. The longer the crisis continues, the more the cost to government will rise. The budget deficit in 2020/21 is likely to reach a level last seen during World War II.

The outlook for the public finances in the coming years depends on the strength of the economic recovery. As the economy recovers the Government’s deficit will decrease. Tax receipts will recover and spending on support to individuals, workers and businesses will fall. The extent to which the economy recovers will depend on how much permanent damage – or scarring – there has been.

OBR estimates of the budget deficit

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