UK 'keeps spending taps open' to fight Covid-driven deep slump      

World’s sixth-biggest economy  set to shrink by 11.3% in 2020 before growing by 5.5% in 2021

UK Chancellor of the Exchequer Rishi Sunak will spend a further £55bn (€61.8bn) in fighting the health and economic costs of Covid.  File picture: Yui Mok

UK Chancellor Rishi Sunak is "keeping the spending taps open" during the Covid-19 crisis but the worst mistake he could make is to pull back from the spending spree too soon, a senior economist has said. 

Mr Sunak will spend a further £55bn (€61.8bn) to add to the £280bn (€313.9bn), equivalent to 14.5% of Britain's GDP, already committed in the financial year to fighting the health and economic costs of Covid, said Ruth Gregory, senior UK economist, at Capital Economics. 

The world’s sixth-biggest economy is now set to shrink by 11.3% in 2020, its biggest contraction since the early 1700s, before growing by 5.5% in 2021, Mr Sunak said as he announced a one-year spending plan.

“Our health emergency is not yet over. And our economic emergency has only just begun,” he told the UK parliament. “So our immediate priority is to protect people’s lives and livelihoods.” 

Announcing the latest forecasts from the Office for Budget Responsibility (OBR), Mr Sunak said public borrowing would be £394bn (€441.8bn) in the 2020-21 financial year that began in April.

However, Ms Gregory said that "the chancellor’s spending spree looks set to continue for some time yet" and maybe the best way to counteract the country's deep recession. She said the British economy may be stronger than the OBR numbers suggest.

"First, we think the OBR’s forecasts are underplaying the effect of vaccines on economic activity which would go along way to filling any fiscal hole," Ms Gregory said. 

"Second, it is not necessarily the case that there will be a fiscal hole anyway if the economy eventually gets back to its pre-virus level as we think it will."  

Ms Gregory said UK taxes may have to rise "but the danger is that taxes rise by more than spending... and that a fiscal tightening is announced in the next two years before the economic recovery is entrenched".

• Additional reporting Reuters