Use the controls below to adjust the forecasts. The blue dashed line shows the median forecast, with the lighter bands summarising the forecast uncertainty. The black dashed line is the OBR reference scenario. The horizontal axes show financial years, which start in April and finish in March. More information is given below the plots.
Nominal GDP is the cash value of the goods and services produced in a year. The growth rate is the percentage change in nominal GDP from one year to the next. Each extra month of lockdown is assumed to reduce growth between 2019-20 and 2020-21 by one percentage point.
As the lockdown gets longer, the initial drop in GDP gets larger. Unless growth in 2021-22 increases to make up for this, the effect is a permanent fall in the level of nominal GDP compared with its pre-crisis trajectory. Lower growth after the crisis could occur if ‘scarring effects’ permanently damage the economy.
Government spending is assumed to stay close to the OBR reference scenario, with each additional month of lockdown assumed to increase spending by £15 billion. Tax receipts are assumed to grow at a similar rate to nominal GDP, so that when GDP falls tax income also falls.
Public sector borrowing (the deficit) is the difference between public sector spending and tax income. As spending is assumed to stay close to its pre-crisis trajectory but taxation is affected by GDP, borrowing increases when GDP falls and decreases when GDP rises.
Public debt is the total amount of debt accumulated as the result of borrowing. So, for example, if the public debt was £1.8 trillion at the end of 2019, and the government borrowed £200 billion over the course of 2020, then the public debt would be £2 trillion at the end of 2020. In addition to the effect of public borrowing, loans made by the Bank of England can also affect the public debt because the Bank of England is a public sector institution.
In a crisis, economic activity falls as firms cut output and employment. Tax receipts fall as a result, and so the government has to borrow if it is to maintain planned expenditure levels. As public debt is the total amount of accumulated borrowing, it also rises.
This is important because the government pays interest on this debt, and this interest is paid from general taxation. At the moment, the interest rates that the government borrows at are very low, so it can maintain a very high debt-to-GDP ratio without interest payments becoming a problem.
If interest rates were to rise, a high debt-to-GDP ratio could mean that interest payments increase as a percentage of tax receipts. Interest payments have been around 6% of tax receipts since the turn of the millennium, around 12% from the end of the Second World War to the 1980s, and were over 20% during the inter-war years.
If interest payments become a problem, the government has a number of options. First, it could increase tax rates. Second, it could undertake measures to increase the rate of GDP growth, like public investment and supply-side policies. Third, it could cut government expenditure.
Finally, when the Bank of England buys government debt, a process known as quantitative easing, it automatically reduces the interest paid on the public debt. Following the March 2020 announcement, the Bank of England will hold £645 billion of government debt. The more of the public debt it buys, the more sustainable high debt-to-GDP ratios become.