Coronavirus Effect On The Economy A

BRIEFING PAPER
Number 8866, 19 June 2020
Coronavirus: Effect on By Daniel Harari

the economy and public Matthew Keep
Philip Brien
finances
Contents:
1. Background
2. How coronavirus is affecting
the economy
3. Policy response
4. Public finances
5. When will official economic
data reflect the full impact?
www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary

2 Coronavirus: Effect on the economy and public finances
Contents
Summary 4
1. Background 6
1.1 GDP growth 6
1.2 Labour market 6
1.3 Public finances 7
Government borrowing: the budget deficit and current budget deficit 7
Government debt 7
Government’s spending on debt interest 8
Preparing for shocks to the public finances 9
2. How coronavirus is affecting the economy 11
2.1 Supply shocks 11
2.2 Demand shocks 12
2.3 Uncertainty: how long will it last? 12
2.4 Assessments and forecasts of overall impact 13
Further information on economic data 15
3. Policy response 17
3.1 Broad goals 17
3.2 Monetary policy and the financial system 17
Background 18
Crisis measures 18
3.3 Government measures 19
Direct support for workers and businesses 20
Public services and welfare 20
Guarantees for business loans 21
Further information on policy measures 21
4. Public finances 22
4.1 The budget deficit 22
Government measures 22
Wider impact on the budget deficit 25
4.2 Government debt 27
Bank of England measures: debt and debt interest 27
5. When will official economic data reflect the full impact? 29
5.1 Economic activity 29
5.2 Public finances 30
3 Commons Library Briefing, 19 June 2020
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Summary
This briefing was last updated on 19 June. 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.
Supply and demand shocks
The initial disruption was to supply chains (particularly from China, the origin of the
outbreak). As the outbreak spread around the world and into the UK, public health
measures to slow its progress have meant fewer people working and businesses in some
sectors shutting down entirely.
In addition to these supply shocks, there are also shocks to demand in the economy.
Consumers are being advised not to leave their homes and with many businesses
struggling to survive, unemployment will likely rise. Consumer spending will likely fall.
There is also a great deal of uncertainty associated with the crisis and how long it will last.
Consumers may be more cautious in their spending decisions and businesses may hold off
on investing.
Economic impact
The UK economy is in recession, with indications that the decline in GDP in 2020 will be
the largest in the post-War era (when current data records began). The Office for Budget
Responsibility and Bank of England have published scenarios where GDP falls by 13-14%
in 2020, although estimates are highly uncertain. For context, the current largest single-
year fall in GDP in the post-War era was 4.2% during the financial crisis in 2009.
The key question for the economy’s longer-term outlook is how much damage, or
‘scarring’, the recession will leave. The Chancellor has said that this question is one which
“occupies my mind”. In particular, once the virus is suppressed and restrictions lifted, “the
question is: what do we return to?”
Policy response
Governments and central banks around the world have introduced policies that will
mitigate at some of the negative economic impacts from the coronavirus outbreak.
In the UK, a number of 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 public finances will be significantly affected by the economic shock of the coronavirus
outbreak. The Government’s budget deficit will increase as tax revenues fall and
government spending increases. Government debt will, therefore, increase. At this stage
no one can say by how much.
The Government has announced measures to support businesses, workers and household
incomes that may cost over £130 billion this year. The longer the crisis continues, the
more the cost to government will rise.
1. Background
The UK economy prior to the coronavirus outbreak was characterised by
modest GDP growth of around 1% per year and high rates of
employment.
1.1 GDP growth

Heading into 2020, the UK economy was growing modestly, with GDP
growth of 1.4% in 2019. 1 The decisive General Election outcome in
December 2019 and subsequent reduction in political uncertainty led to
improvements in business confidence in early 2020. 2
The improvement in sentiment, however, was not reflected in GDP data
for January and February 2020 (the last period before the coronavirus
really began to impact the UK economy). 3
GDP growth was 0.1% in the three months to February compared with
the previous three-month period. Compared with a year ago, GDP was
0.7% higher in the three months to February 2020.
Before the spread of coronavirus took hold in the UK, forecasts for UK
GDP growth in the whole of 2020 were generally around 1%. 4
1.2 Labour market

The labour market began 2020 with the highest employment rate
(76.6%) since comparable records began in 1971. The total number of
employed people in the UK was 33.1 million. Both figures are for the
three months to February 2020, before coronavirus social distancing
measures began. 5
The number of people in employment and the employment rate – the
proportion of those aged 16-64 in work – had been rising since 2012. 6
Similarly, the unemployment rate fell from a cyclical peak of 8.5% at
the end of 2011 to around 4% by 2018, where it remained. The
unemployment rate was 4.0% in the three months to February 2020,
with 1.4 million people unemployed.
The annual growth rate of average earnings was 2.8% in Great Britain
in the three months to February 2020. 7
1
ONS, series IHYP [accessed 22 May 2020]
2
See, for example: Library Insight, Economic update: Optimism on the up, 26 February
2020
3
ONS, GDP monthly estimate, UK: February 2020, 9 April 2020
4
HM Treasury, Forecasts for the UK economy: a comparison of independent forecasts,
19 February 2020
5
ONS, Labour market overview, UK: April 2020, 21 April 2020
6
Data available at Commons Library, The UK economy: a dashboard
7
More information on the labour market can be found in the Commons Library briefing
paper, People claiming unemployment benefits by constituency
1.3 Public finances

Government borrowing: the budget deficit and
current budget deficit
In 2019, the Government’s budget deficit (the amount it borrowed to
make up the difference between its spending and revenues from taxes
and other sources) was equivalent to 1.9% of GDP. This is a fairly typical
level and is below the average for the 20 years leading up to the 2007-
2008 financial crisis.
Government borrowing has fallen since 2010

Budget and current budget deficit, rolling four quarters, % GDP
15%
10%
Budget deficit
5%
0%
Current budget
deficit
-5%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4
source: ONS series JW2T and J5II
The Government was planing on increasing borrowing in the coming

years to pay for more investment spending. 8
Government debt
Government debt 9 is the overall level of government indebtedness, built
up over many years. Broadly speaking, it is the stock of borrowing
arising from past budget deficits.
Before the 2007-2009 financial crisis, public sector net debt was around
34% of GDP. Following the crisis, debt increased sharply. The debt-to-
GDP ratio was a little over 80% of GDP at the end of 2019. Debt was
last consistently higher than 80% of GDP in the mid-to-late 1960s,
when it was still recovering from reaching over 200% of GDP during
World War II. 10,11
8
See Spring Budget 2020: a summary for more
9
Formally – public sector net debt
10
OBR. Public finances databank, February 2020
11
The OBR has produced a summary of post-World War II debt reduction
Government debt remains higher than the 45 year average

Public sector net debt, % GDP
100%
80%
60%
Average since 1974/75
40%
20%
0%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4
source: ONS series HF6X
Government debt of over 80% of GDP isn’t uncommon in the UK’s

history. War has commonly been the main cause of large increases in
debt. For instance, debt rose to over 100% of GDP during the War of
American Independence and grew further during the Napoleonic
wars. 12
Government’s spending on debt interest
In 2019, the Government spent around £36 billion servicing the interest
on its debt. The Government’s debt interest costs have remained low in
recent years, relative to its level of debt.
Despite significant increases in its debt, government debt

interest has been low. Government debt interest, % GDP
4%
3%
2%
1%
0%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4
source: ONS series NMFX and MU74
The Government has been able to borrow at historically low interest

rates and has benefited from the Bank of England owning more than
one fifth of its debt. The effective interest rate paid on the debt held by
the Bank of England is lower than would be paid if the debt were
owned by the private sector (see Box 1).
12
See House of Commons Library. The public finances: a historical overview, March
2018
Box 1: Effect of the Bank of England holding government debt

Government’s debt interest cost are lower than they otherwise would have been because the Bank of
England has purchased government debt, through its Asset Purchase Facility.
The Asset Purchase Facility (APF) was set up for the Bank of England (BoE) to carry out quantitative
easing, which aimed to stimulate the economy. The BoE buys government bonds through the APF from
private investors such as pension funds and insurance companies to get money into the economy.
While the bonds remain in the APF it means that government net debt interest is lower than it
otherwise would have been. This is because the BoE is in the public sector, so when the government
makes debt interest payments for the bonds held in the APF it is making them directly to another public
sector body – this is a transfer within the public sector and the net effect is £0. This means that the
actual cost to the public sector of holding the debt in the APF is the cost to the BoE of raising the funds
used to buy the debt, which is the Bank rate and it is lower than the debt interest.
The BoE has carried out further quantitative easing in response to the coronavirus pandemic (see
section 2.2).
The rate at which government can borrow is at historic lows

Ten-year government bond yields, %
20%
15%
10%
5%
0%
1960 1970 1980 1990 2000 2010 2020
source: OECD. Long-term interest rates
Preparing for shocks to the public finances

Economies cannot avoid economic shocks and recessions. The Office for
Budget Responsibility says that the chance of a recession in any five-year
period is around one in two.
The underlying risk of recession cannot be avoided, but the Treasury has
taken steps since the 2007-2009 financial crisis to mitigate some of the
potential risks arising from an economic shock.
The Treasury’s focus has largely been on reducing the level of
government borrowing, returning government debt to sustainable levels
and managing the stock of debt to minimise risks from inflation and
interest rate increases. 13
While the debt-to-GDP ratio has started to fall, the Treasury was – in
2018 – concerned, based on international evidence, that the level still
13
The Treasury’s approach is comprehensively explained in Managing fiscal risks. The
document is the government’s response to the 57 risks outlined by the OBR in their
2017 fiscal risks report. Broadly speaking, the mitigating steps are covered in the
Executive Summary and Chapter 2.
risked “constraining government’s ability to stabilise the economy in the

event of a shock”. 14
Stepping away from the public finances, other steps taken by
government, since the financial crisis, to help the economy deal with
shocks include the following:
• The Bank of England (BoE) has been given more flexibility around
its inflation target to respond to shocks;
• The BoE has more tools to enable it to support the economy when
interest rates are close to zero, including purchasing assets such as
gilts, corporate bonds, loans and mortgages.
• The BoE’s Financial Policy Committee is using new macro-
prudential tools to limit bank lending to highly-indebted
borrowers; 15
• The Financial Conduct Authority has been given regulatory
powers to protect borrowers.
14
HM Treasury. Managing fiscal risks: government response to the 2017 Fiscal risks
report, July 2018, para 2.39
15
The macro-prudential tools are discussed in Box 3.5 of the OBR’s Economic and
fiscal outlook - December 2012
2. How coronavirus is affecting

the economy
The coronavirus outbreak has impacted the UK economy in several
ways. The initial disruption was to supply chains (particularly from
China, the origin of the outbreak). As the outbreak spread around the
world and into the UK, public health measures to slow its progress have
meant fewer people working and businesses in some sectors shutting
down entirely.
In addition to these supply shocks, there are also shocks to demand in
the economy. Consumers were advised not to leave their homes and
with many businesses struggling to survive, unemployment is rising.
Consumer spending is falling.
There is also a great deal of uncertainty associated with the crisis and
how long it will last. This will likely lead to consumers being more
cautious in their spending decisions and businesses holding off on
investing.
2.1 Supply shocks

The initial focus on the economic impact of coronavirus was on China,
the source of the outbreak. China plays a big role in the global
economy, being a large source of demand for goods and services of
other countries and being heavily integrated into global supply chains. 16
As the outbreak spread across the globe, the scope for economic
damage widened considerably.
Public health measures were introduced in many countries in order to
limit the spread of the virus. The economic impact of these measures is
potentially very large, at least in the short term.
Some of the key ways the coronavirus outbreak and the public health
measures are affecting the capacity of the UK economy include:
• Supply chain disruption – the globalised and complex nature of
some businesses’ supply chains means that it may be difficult for
them to source the parts (car makers for example), or inventories
(retailers for example) they need. For instance, all major UK and
European car plants were closed at the height of the crisis. 17
• Workers being off sick – a number of workers may need to take
time off work, or are advised to, if they or their family members
show symptoms of Covid-19. This will limit the amount of work
businesses are able to conduct.
• Closing schools – the enforced closure of schools for most pupils
means that many parents will have additional childcare
16
OECD Interim Economic Assessment, Coronavirus: The world economy at risk,
2 March 2020
17
“Every major UK and European carmaker to stop or cut production”, Guardian,
20 March 2020
responsibilities. As a result, many will not be able to work as much

as normal. 18
• Shutting down businesses – unprecedented measures to close
businesses entirely – either by government direction or by their own
initiative – is having a severe economic impact, particularly on
sectors in hospitality and travel, but also others.
In summary, the combination of supply chain disruption, workers not
being able to work and the closure of businesses in some sectors, will
restrict what and how much the economy can produce and sell.
2.2 Demand shocks

The coronavirus outbreak is also affecting the demand for goods and
services in the economy. This was first felt in the travel and tourism
sectors.
Since then, there were additional public health measures designed to
slow the spread of the virus. For example, limiting the reasons why the
general public are allowed to leave their homes clearly has a serious
impact on many businesses.
Many businesses are seeing a big decline in revenues, but still
have fixed costs such as rents and staff wages. Even if the disruption is
temporary and demand will rapidly return once the outbreak is over,
firms still face cash flow issues in the meantime; bills still have to be
paid.
Some businesses may have a sufficiently large amount of cash reserves
to make these payments, or the ability to borrow what is necessary.
Some may not. This means some companies risk going out of business
and others will lay off staff. To combat this the Government and Bank
of England have introduced a range of measures (see section 3).
A rise in unemployment and the associated fall in incomes will further
reduce consumer demand in the economy.
2.3 Uncertainty: how long will it last?

There is a huge amount of uncertainty over how long this crisis lasts.
How long will there be public health measures that limit, for example,
which businesses can open and how many children can go to school?
From an economic perspective, will the damage already done be
temporary, leading to a full recovery maybe later in 2020 or 2021? Or
will there be permanent damage to the economy?
There are many questions.
The uncertainty in and of itself will affect consumer and business
confidence and behaviour. Consumers will likely be more cautious in
their spending, perhaps holding off on making larger discretionary
purchases. Businesses will likely cut back on, or at least postpone, their
plans for investment.
18
Simon Wren-Lewis, mainly macro blog, “The economic effects of a pandemic”,
2 March 2020
While these are typical responses to a recession, this is not a typical

recession and therefore it is difficult to say how much behaviour will
change.
Early in the crisis, the Secretary-General of the Organisation for
Economic Co-operation and Development (OECD) warned that the
pandemic has caused “a major economic crisis that will burden our
societies for years to come.” 19
The IMF Managing Director, Kristalina Georgieva, in March highlighted
the severe economic cost: “the outlook for global growth: for 2020 it is
negative—a recession at least as bad as during the global financial crisis
or worse.” 20 On 15 May, she said it could take until 2023 for the global
economy to return to its pre-coronavirus levels. 21 She went on to say
that the world GDP in 2020 was likely to shrink beyond the IMF’s April
estimate of -3%. 22
2.4 Assessments and forecasts of overall

impact
The combined impact of supply and demand shocks, the large degree of
uncertainty and the acute public health considerations make this an
unprecedented economic shock in modern times. 23 Indeed, the
Chancellor Rishi Sunak said on 19 May that the UK economy was facing
a “severe recession, the likes of which we have not seen”. 24
In addition, this is a shock common to the entire world economy,
exacerbating its impact. All this makes it very difficult to assess what the
economic damage to the UK economy will be.
The scale of the economic cost will be affected by how long the
strict social distancing measures are in place for. This, in turn, will
be largely determined by public health considerations and whether
there are any additional waves of Covid-19 cases later in 2020 or 2021
requiring new periods of lockdown.
Analysis of the impact of the lockdown on the UK economy by each
sector suggest that economic output is approximately one-quarter to
one-third lower during the lockdown compared to normal. 25
19
Angel Gurria, OECD Secretary-General, “COVID-19: Joint actions to win the war”,
OECD, 23 March 2020
20
IMF press release, “IMF Managing Director Kristalina Georgieva’s Statement Following
a G20 Ministerial Call on the Coronavirus Emergency”, 23 March 2020
21
Interview with Politico website, Global Translations Interview with Kristalina Georgieva
of the International Monetary Fund May 15, 2020
22
IMF, World Economic Outlook, April 2020, April 2020
23
For analysis of the economic impact of past viral outbreaks see Resolution Foundation,
Safeguarding governments’ financial health during coronavirus, 25 March 2020
24
Oral evidence from the Chancellor to the Lords Economic Affairs Committee, 19 May
2020; Summarised in “Chancellor plays down hopes of quick economic recovery”,
Guardian, 19 May 2020
25
The OECD estimates output is around 26% lower in the UK during a shutdown, the
Centre for Economic and Business Research estimates a 31% reduction and the OBR
suggests a 35% decline during a three-month lockdown.
The largest impacts are in some customer-focused services sectors but

also in construction and manufacturing. 26
Available economic indicators reinforce the above analysis that there has
already been a large negative shock to the economy. GDP during
the first quarter of 2020 fell by 2.0% - similar to the decline during the
financial crisis in late 2008. 27 In March, GDP fell by 5.8% compared
with February. 28 Surveys of business activity since then have fallen
steeply, with some businesses reporting cashflow problems and some
stopping trading. There has been a surge of new claims for
unemployment-related benefits. 29 In short, the UK economy is in
recession and most likely a severe one. 30
Forecasts for GDP growth, while clearly and understandably subject to
major uncertainty, also point toward a large decline in 2020.
In May, HM Treasury surveyed investment banks, economic research
organisations and other institutions for their GDP forecasts. This showed
the average forecast for GDP was a decline of 8% in 2020. 31 To
provide some context, GDP fell by -0.3% in 2008 and -4.2% in 2009
during the recession caused by the financial crisis (the largest post-War
recession). 32
The average forecast for quarterly GDP growth in Q2 (April-June)
was -16% and for Q3 (July-September) was +11%. In other words,
GDP would be 16% lower in Q2 than in Q1 2020, and then recover by
11% in Q3 compared with Q2. For context, the largest quarterly decline
recorded before now is -2.7% in Q1 1974 (comparable quarterly data
began in 1955). 33
The average forecast for GDP growth in 2021 was 6%, suggesting a
relatively strong recovery is expected, though not enough to recover the
lost ground of 2020.
On 14 April, the Office for Budget Responsibility (OBR), the
independent fiscal watchdog, published a report looking at the impact
of a three-month lockdown on the economy and public finances. 34 In
this ‘reference scenario’ GDP would be 35% lower during the period of
lockdown it assumed to be wholly in Q2 (April-June) 2020 compared
with the quarter before.
In this scenario the OBR assumed that by Q4 2020 the economy would
be back to its previous ‘normal’ level, with Q3 2020 being half-way
26
See table 1.2 of the OBR report, Coronavirus reference scenario, 14 April 2020, p7
27
ONS, GDP first quarterly estimate, UK: January to March 2020, 13 May 2020
28
ONS, GDP monthly estimate, UK: March 2020, 13 May 2020
29
Commons Library briefing paper, Coronavirus: Impact on the labour market [accessed
22 May 2020]
30
For more see Library briefing paper, Coronavirus: Latest economic data [accessed
22 May 2020]
31
HM Treasury, Survey of independent forecasts for the UK economy: May 2020,
20 May 2020; Figures shown here, for both the annual and quarterly periods, have
been rounded to the nearest full percentage point
32
ONS, series IHYP [accessed 17 April 2020]
33
ONS, series IHYQ [accessed 17 April 2020]
34
OBR ,Coronavirus reference scenario, 14 April 2020
between lockdown and normal. In addition, this scenario assumed that

there would be no long-term damage to the economy from the crisis.
In 2020 overall, UK GDP would decline by 12.8%, followed by a 17.9%
increase in 2021 (as the economy returned to its pre-crisis predicted
path).
The Bank of England, in its Monetary Policy Report published in early
May, forecast GDP to fall by 25% in Q2 2020 compared with the
previous quarter. 35 For 2020 overall, GDP was projected to decline by
14%. 36 The unemployment rate is projected to rise from 4% to 9% in
Q2. Noting the extreme uncertainty, the Bank said this was a ‘plausible
illustrative economic scenario’ rather than a forecast per se.
A report by the Resolution Foundation think tank looked at three
scenarios: lockdowns of three, six and 12 months were considered. 37 A
three-month lockdown was associated with a 10% decline in GDP in
2020. 38 A six-month lockdown led to a 20% fall in GDP in 2020, while
a 12-month lockdown sees a 24% decline (some the impact would be
in early 2021 as well).
There is a wide range of forecasts from the different sources
summarised here. This partly reflects different ways of calculating the
economic impact but also the different assumptions that have been
made about the duration and stringency of the public health measures.
There is, of course, huge uncertainty involved in an area that strays far
from traditional macroeconomic analysis and forecasting techniques.
Even when the short-term economic shock does eventually dissipate,
there is a great deal of uncertainty as to whether this crisis will have
caused lasting damage to the economy. 39 The Chancellor, Rishi Sunak,
has noted the importance of how much ‘scarring’ the coronavirus-
related recession will have on the economy’s longer-term prospects:
…the question that occupies my mind and in the long term is
probably more relevant is: what is the degree of long-term
scarring of the economy as a result of this recession? What is the
loss of productive capacity?
Ultimately, once we recover from this crisis—by the nature of it, I
believe it will be temporary, and we will suppress the virus and
progressively lift the restrictions—the question is: what do we
return to? 40
Further information on economic data

• Library briefing paper, Coronavirus: Latest economic data
• Library briefing paper, Coronavirus: Impact on the labour market
35
Bank of England, Monetary Policy Report, 7 May 2020
36
Bank of England, Monetary Policy Report, 7 May 2020, table 1.A, p7
37
Resolution Foundation, Doing more of what it takes, 16 April 2020
38
There was a 21% fall in GDP for Q2 2020 in the three-month scenario.
39
For a discussion on possible longer-term damage of the crisis on economic growth,
see the discussion in Box 1 (pp27-30) of the aforementioned Resolution Foundation
report.
40
Oral evidence from the Chancellor to the Lords Economic Affairs Committee, 19 May
2020
• Bank of England, Monetary Policy Report, 7 May 2020

• OBR ,Coronavirus reference scenario, 14 April 2020
• Resolution Foundation, Doing more of what it takes, 16 April 2020
• HM Treasury, Monthly survey of independent forecasts for the UK
economy
3. Policy response
Governments and central banks around the world scrambled to
introduce policies that will 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.
3.1 Broad goals

The nature of the economic crisis means that for many firms, revenues
have fallen sharply. This might make it difficult for many to be able to
pay some or all of their costs, such as rents or wages.
Addressing these cashflow issues is one of the main things new policy
measures are seeking to do; offering a bridge over this temporary
shortfall. If businesses can be kept afloat, they either will not have to
reduce their workforce by as much or be in a better position to get
going again following the crisis. If successful, such policies will minimise
the amount of long-term damage that this crisis will have on the
economy.
Financially supporting workers who face unemployment, or the loss of
income following a reduction in working hours, may also help to reduce
the impact of lower consumer spending on the economy. This may also
help with public health. If people are faced with a large reduction in
income if they adhere to public health advice, some may choose to
ignore it and continue to work.
Intervention by the authorities may also help to reduce the economic
uncertainty associated with the outbreak.
Nevertheless, these interventions will have an impact on the public
finances (as is discussed in the next section) and will not be able to
completely alleviate the economic downturn.
It also worth remembering that many of the public health policies
attempting to contain the outbreak will, by design, worsen the
economic downturn, at least in the short term. 41 For example, shutting
down restaurants and advising people to avoid going out where
possible.
3.2 Monetary policy and the financial system

In response to the coronavirus outbreak and its impact on the economy,
the Bank of England and its Monetary Policy Committee (MPC) has
announced a series of emergency measures.
41
CEPR policy portal (VoxEU.org) ebook, Mitigating the COVID Economic Crisis: Act Fast
and Do Whatever It Takes, 18 March 2020, p6
Background
Heading into the coronavirus outbreak, interest rates were at 0.75%.
The MPC’s quantitative easing (QE) programme – where the Bank of
England creates additional money and uses it to buy financial assets –
stood at £445 billion. Of this, the Bank owned £435 billion in UK
government bonds (these are essentially loans to government), with a
further £10 billion in corporate bonds. The QE programme had been
unchanged since the aftermath of the EU referendum in summer 2016.
Crisis measures
The MPC held emergency, unscheduled meetings on 11 March and
19 March 2020, with additional measures announced at different times.
Interest rates were cut in two stages to 0.1% - the lowest they have
ever been. On 11 March they were cut from 0.75% to 0.25% and then
again to 0.1% on 19 March.
On 19 March, the MPC also expanded its quantitative easing
programme by £200 billion, taking the total value of assets it can
own to £645 billion. This additional money was to be electronic created
(as central bank reserves). The Bank won’t buy these additional assets –
which are to be mostly government bonds – in a single move. Instead it
said it would complete the purchasing by early July. 42
The MPC said this measure was to support the economy and the
functioning of the bond market, which had shown some signs of
stress. 43
This additional capacity to buy government debt will make it easier for
the government to borrow.
On 18 June, the MPC expanded its quantitative easing programme
by a further £100 billion, taking the total value of assets it can own to
£745 billion. 44 The Bank will slow the pace of its purchases, expecting to
complete them around the turn of the year. 45
(The Bank of England does not buy these bonds directly from
government when they are issued. Rather, the Bank purchases them
from others, such as asset managers, in the so-called secondary market.)
The MPC also announced the introduction of a number of schemes
designed to provide cheap loans to banks, so they have additional
capacity to lend to businesses. 46 This includes a new Term Funding
Scheme designed to ensure banks pass on the interest rate cuts to
businesses and consumers by giving them access to cheap loans from
the Bank of England. 47 The amount they can borrow is linked to the
42
Bank of England, Bank Rate maintained at 0.1% - May 2020, 7 May 2020
43
Bank of England, Monetary Policy Summary for the special Monetary Policy
Committee meeting on 19 March 2020, 19 March 2020
44
Bank of England, Bank Rate maintained at 0.1% - June 2020, 18 June 2020
45
Bank of England, Asset Purchase Facility: Gilt Purchases - Market Notice 18 June 2020,
18 June 2020
46
Bank of England, Bank of England measures to respond to the economic shock from
Covid-19, 11 March 2020
47
The scheme is formally called the Term Funding Scheme with additional incentives for
lending to SMEs (TFSME)
amount they lend to households and firms (especially small- and

medium-sized ones).
The Bank of England’s Financial Policy Committee (FPC) lowered the
amount of reserves banks are required to hold, in order to free up
this money for lending to businesses. On 11 March, the FPC reduced
the UK countercyclical capital buffer rate to 0% of banks’ exposures to
UK borrowers. The rate had been 1% and had been due to reach 2%
by December 2020. The FPC said it expects the rate the remain at 0%
for at least 12 months. 48
On 17 March the Government announced the creation of a lending
facility run by the Bank of England called the Covid-19 Corporate
Financing Facility (CCFF) that will provide loans to larger businesses to
help with cashflow problems. 49 The Chancellor said the government
would provide loans and guarantees to the scheme. For more on this
see the section below.
Policy was left unchanged at the MPC’s regularly scheduled meetings on
26 March and 7 May. 50
In addition, there has been coordinated action from world’s leading
central banks to ensure the smooth functioning of the global financial
system. This was undertaken to increase the amount of US dollars –
which have been in high demand – in circulation across the world. 51
Further information is contained in the Bank of England’s Monetary
Policy Report of May 2020 [PDF], Box 2 on pages 14-18. 52 Also see the
Library economic indicator page, Interest Rates and Monetary Policy.
3.3 Government measures

Government measures are designed to support businesses, workers and
individuals during the coronavirus outbreak and economic lockdown.
Rishi Sunak, the Chancellor, has committed to do “whatever it takes” to
get through the crisis. 53
Over £100 billion of direct tax, welfare and spending measures have
been announced. Government is also providing support to businesses
through guaranteed loans. Below we summarise the most significant
schemes. More detail is available in the Library briefings collated at the
end of this section.
48
Bank of England, Bank of England measures to respond to the economic shock from
Covid-19, 11 March 2020
49
Bank of England, HM Treasury and the Bank of England launch a Covid Corporate
Financing Facility (CCFF), 17 March 2020 and Bank of England, Covid Corporate
Financing Facility (CCFF): information for those seeking to participate in the scheme,
20 March 2020
50
Bank of England, Bank Rate maintained at 0.1% - March 2020, 26 March 2020 and
Bank of England, Bank Rate maintained at 0.1% - May 2020, 7 May 2020
51
Bank of England, Coordinated central bank action to further enhance the provision
of global US dollar liquidity, 20 March 2020
52
Bank of England, Monetary Policy Report and Interim Financial Stability Report - May
2020, 7 May 2020
53
HM Treasury, Speech, “Chancellor of the Exchequer, Rishi Sunak on COVID19
response”, 17 March 2020
Direct support for workers and businesses

The most significant policy, in terms of cost, is the Coronavirus Job
Retention Scheme (CJRS). The scheme – often described as the
furlough scheme – aims to keep workers attached to their employers.
Workers of any employer placed on the scheme can keep their job, with
the Government paying 80% of their wage up to £2,500 per month.
The Government also pays employer National insurance and minimum
auto-enrolment pension contributions. From 1 July, employers will be
able to bring furloughed workers back on reduced hours and the
Government will cover the costs of furloughed hours. From 1 August,
employers will be required to meet the cost of employer National
Insurance and pension costs. They will need to cover 10% of gross pay
from 1 September and 20% of gross pay from 1 October. The CJRS will
close on 31 October 2020.
The Self-Employed Income Support Scheme (SEIS) aims to provide
similar support to the CJRS but for the self-employed. Those eligible
receive a taxable grant worth 80% of their average monthly profits over
the last three years. The grant is paid out in a single instalment covering
three months, up to a maximum of £7,500. The scheme is open to
those with average profits of £50,000 or less, who make most of their
income from self-employment. 54 The SEIS has been extended to include
a second grant worth 70% of average monthly profits during the same
three-year period. The grant covers 3 months and is capped at £6,570.
Businesses in the retail, hospitality or leisure sector will have a
business rates holiday in 2020/21. Those operating in smaller
properties 55 will also receive grants of £25,000. Small businesses are
receiving cash grants of £10,000. 56
The Government is also allowing payments for taxes including VAT and
self-assessment income tax to be deferred. The HMRC Time To Pay
service will be scaled up, allowing businesses and the self-employed to
defer tax payments over an agreed period.
Public services and welfare
The Government is providing additional funding for health services to
cover the cost of treating patients and for local authorities to support
social care services and deal with wider issues arising from the
lockdown. Other public services, such as rail, and the devolved
administrations are receiving more funding.
The Government has increased the availability and generosity of
some parts of the welfare system. For example:
• the standard rate in Universal credit and Tax Credits has been
increased;
• the self-employed can access Universal Credit at the same rate as
Statutory Sick Pay for employees;
54
HM Treasury. Chancellor gives support to millions of self-employed individuals, 26
March 2020
55
With a rateable value over £15,000 and below £51,000
56
Those in receipt of either small business rates relief or rural rates relief
• it is quicker and easier for individuals who can’t claim statutory sick
pay – such as the self-employed – to access other benefits.
Guarantees for business loans
Small businesses can access loans through the Coronavirus Business
Interruption Loan Scheme. Loans, overdrafts, invoice finance and asset
finance of up to £5 million can be sought. Smaller loans of £2,000 to
£50,000 for small and medium-sized businesses through the Bounce
Back Loan scheme. 57 These loans are provided by commercial lenders
with at least 80% of the loan guaranteed by the Government. The
Coronavirus large business interruption loan scheme is available for mid-
sized and larger businesses with financing of up to £50 million
depending on their turnover.
Further information on policy measures
All of the Library’s coronavirus (Covid-19) research and analysis is
available from our coronavirus hub. The following give further details
about the policies discussed above:
• Library briefing paper, Coronavirus: Support for businesses
• Library briefing paper, Coronavirus business support schemes:
statistics
• Library briefing paper, FAQs: Coronavirus Job Retention Scheme
• Library briefing paper, Coronavirus: Support for household finances
• Library briefing paper, Coronavirus: Self-Employment Income
Support Scheme
• Library briefing paper, Coronavirus Bill: Overview
• Library Insight, Coronavirus: Employment rights and sick pay
(update)
• Library Insight, Coronavirus Bill: Statutory Sick Pay & National
Insurance Contributions
• Library briefing paper, Coronavirus: Support for economies by
European and other states
57
BEIS. Guidance: Apply for a coronavirus Bounce Back Loan [accessed on 28 April
2020]
4. Public finances
The public finances will be significantly affected by the economic shock
of the coronavirus outbreak. The Government’s budget deficit will
increase as tax revenues fall and government spending increases.
Government debt will, therefore, increase. At this stage no one can say
with any certainty how much it will grow.
Government support to the economy is largely aimed at ensuring that
the effect on the economy – and the Government’s budget deficit – is
temporary, rather than permanent.
4.1 The budget deficit

The Government’s budget deficit may exceed £300 billion in 2020/21.
This is higher than during any year of, or following, the 2007-2009
financial crisis. Only weeks before lockdown measures were introduced
the OBR forecast a deficit of around £55 billion in 2020/21.
Two factors are increasing the deficit. First, the measures the
Government has introduced (discussed in the previous section) come at
a significant cost. Second, while these measures aim to prevent long
term economic damage, they won’t stop an immediate significant
slowdown in the UK economy. As the economy slows, less will be
collected in taxes and government spending – on areas such as
unemployment benefits – will increase.
Government measures
It’s hard to put a definitive cost to the package of tax and spending
measures announced by the Government. The cost will depend on
duration and take-up. This is particularly the case for the Coronavirus
Job Retention Scheme.
The OBR estimates that the current package of Government measures
could add around £130 billion to the government’s deficit in 2020/21. 58
Their estimate is based on a “reference scenario” which they published
on 14 April, some of which has since been updated. The reference
scenario was positioned as not being a central forecast, but rather an
illustration of what could happen if the economy were to be largely shut
down for three months and then progressively returned to normal over
the following three months, with no lasting economic hit (see section
3.4).
58
OBR. Coronavirus policy monitoring database – 19 June 2020
Source: OBR, Coronavirus policy monitoring database, 19 June 2020
Schemes to support employment and self-employment contribute nearly

half of the total cost of Government measures. The OBR estimates that
the Coronavirus Job Retention Scheme (CJRS) alone has a net cost of
over £50 billion. The self-employed income support scheme (SEIS) is
forecast to cost around £15 billion. The final cost for both the CJRS and
SEIS will depend on take up and their duration.
Speaking about the CJRS, the Resolution Foundation – a think tank –
say that “the long-term economic, fiscal, and social benefits of keeping
workers attached to their employers and the labour market, and
avoiding unprecedented levels of unemployment, almost certainly
exceed the temporary costs of the scheme”. 59
The Institute for Fiscal Studies (IFS) say that the SEIS is “very generous
support for the self-employed”. 60
The Government is also providing roughly £30 billion to businesses
through business rates holidays (around £12 billion) and grants (around
£15 billion). These figures include funding going to the devolved
administrations in Scotland, Wales and Northern Ireland from the
Barnett formula. 61
59
Resolution Foundation. Doing more of what it takes, 16 April 2020, Box 2
60
IFS. Help is coming for (most of) the self-employed, 26 March 2020
61
The Library briefing, The Barnett formula, discusses how the formula operates
Away from businesses and workers, an additional £16 billion is going to

health services, local authorities and on measures to support vulnerable
individuals, rail services and funding for the devolved administrations.
Increasing the availability and generosity of some parts of the welfare
system is set to cost around £8 billion.
As the chart below indicates, the OBR expects that most of
government’s extra spending will take place in the early months of
2020/21, with only the cost of loan guarantee write-offs continuing
past October. The OBR’s monthly profile doesn’t yet include the cost of
extending the Coronavirus Job Retention Scheme until October nor the
additional grants from extending the Self-Employed Income Support
scheme (see section 3.3). Once included, these costs will increase
spending in July to October.
Most extra Covid-19 spending will be in April and May

£ billions, main items of additional spending, OBR estimates
35 Loan guarantee write-offs
Public services
30
Self-employed income support scheme
25 Job retention scheme
Small business grants
20
Welfare measures
15
Job Retention Scheme will run until the
10 end of October - the cost of this is not
currently included in these estimates.
5
0
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Notes: Tax measures and some smaller policy interventions aren’t included.
Source: OBR, Coronavirus reference scenario monthly profiles, 14 May 2020
On 4 May, the Government published the Main Supply Estimates for

2020-21. 62 These list the amount of money that each Government
department is requesting from Parliament for the current financial year.
Many departments’ Estimates specified extra money that they were
requesting to deal with coronavirus; the total came to £122.5 billion,
with the largest contributors to the total being the CJRS (£42.0 billion),
changes to Universal Credit (£15.2 billion) and business support in the
form of Coronavirus Business Interruption Loans (£12.9 billion) and
business support grants (£12.4 billion). Many of these figures are rough
estimates and are likely to be amended in the Supplementary Estimates
early in 2021.
Box 2: Funding government spending during the crisis

When the Government spends more than it receives in taxes and other revenues it borrows. The
Government mainly borrows by selling gilts and bills to financial markets. The Library Insight
Coronavirus: Government debt, an explainer explains this further.
Before the coronavirus outbreak, the UK Government planned to borrow around £160 billion through
gilts this year: £60 billion to finance the cash difference between its annual spending and tax receipts
62
See also the Library’s briefing paper on the Estimates.
and nearly £100 billion to roll over previous debt (ie payback old debt that is maturing). The
Government may need to borrow over £200 billion more in response to the coronavirus pandemic.
With more borrowing required, the Debt Management Office (DMO) – the Government’s debt
management agency – tripled its planned gilts sales in April 2020, with the aim of raising £45 billion
from the auctions. £45 billion is more than was raised during any month of the 2007-2009 financial
crisis. 63 The DMO plans to raise a further £180 billion in the three months from May 2020 and a
further £50 billion in August. This will mean raising £275 billion across the first five months of
2020/21, which is more than the £160 billion planned for the financial year at Spring Budget 2020
on 11 March 2020.
As discussed in section 3.2, the Bank of England is purchasing gilts on secondary markets as part of
its expanded quantitative easing programme. The purchases make it easier for the Government to
borrow, as has been recognised by the Bank of England Governor, Andrew Bailey. 64
The Government can also access money directly from the Bank of England, through the ‘Ways and
Means Facility’, which is its overdraft at the Bank. The overdraft has been temporarily extended from
£370 million to an unlimited amount. The facility allows the Government to meet short-term
spending commitments without needing to immediately sell gilts. Any use of the facility will be
“temporary and short-term” and borrowing from it will be repaid before the end of the year. 65 This
means that eventually all additional funding will be met by additional borrowing, even if in the short-
term some comes directly from the Bank of England. As of 30 June 2020, the Treasury has not made
use of the Way and Means facility. 66
Government guarantees on loans

The Government has introduced the Coronavirus business interruption
loan scheme (CBILS), the Coronavirus large business interruption loan
scheme (CLBILS), and the Bounce Back Loan Scheme (BBLS). They are
being provided by commercial lenders, with at least 80% of the loan
being guaranteed by the Government. The Government will cover the
first 12 months of interest payment for CBILS and BBLS.
Where borrowers default on the loans, the write-off costs will add to
the deficit. The cost of covering interest payments also add to the
government’s deficit.
The costs of write-off depends on several factors – “the volume of
lending; the proportion of loans that default; amounts recovered by
lenders in those cases; and the proportion of the remaining loss that is
guaranteed by government.” 67 A simple analysis from the OBR suggests
that write-off costs might add £5 billion to the deficit in 2020/21. 68
Wider impact on the budget deficit
The steps taken by the Government won’t prevent a slow-down in the
economy. Nor are they designed to do so. The measures aim to help
ensure that the inevitable negative effects on the economy are
temporary, rather than permanent. For instance, they aim to stop
businesses failing and people falling out of the labour market.
As the economy slows, the automatic stabilisers (see Box 3) will take
effect. Less will be collected in taxes and government spending – in
63
IFS. For sale: £45 billion of gilts, 8 April 2020
64
"BoE is financing UK’s coronavirus measures, Bailey acknowledges", FT, 14 May
2020
65
Bank of England. HM Treasury and Bank of England announce temporary extension
to Ways and Means facility, 9 April 2020
66
Bank of England. Data series RPWB72A
67
OBR. Coronavirus policy monitoring database – 14 May 2020
68
Based on £50 billion of lending across the three schemes, of which 10 per cent is
assumed to result in write-offs that affect the public finances this year.
areas such as unemployment benefits – will increase. The Government

will have to borrow more to fund its deficit and this will add to its stock
of debt.
At this stage it isn’t clear how much the deficit will increase, but it’s
likely that the increase will be large. It’s fair to say that the longer that
parts of the economy are closed, and consumers are told to ‘socially
distance’ the more the government’s deficit will increase.
On 11 March, only weeks before the introduction of lockdown
measures, the OBR forecast that the deficit would be £55 billion in
2020/21. The OBR now estimate, based on their coronavirus reference
scenario (see section 2.4), that the deficit might be over £250 billion
higher at over £300 billion. £120 billion of the additional borrowing is a
result of tax receipts falling as the economy shrinks. The remaining
£130 billion is the cost of government measures discussed above. The
Resolution Foundation has estimated how different periods of lockdown
might affect borrowing. Estimates from both organisations are shown
below.
Estimated additional borrowing from lockdown, 2020/21

OBR and RF estimates from different lengths of lockdown, £ bn
600
Cost of policy measures OBR
500
Wider economic impact
400
300
200
100
0
3 month 3 month 6 month 12 month
OBR
(June update) Resolution Foundation (April)
notes: in all cases above the borrowing shown is in addition to the £55 billion forecast by
the OBR for 2020/21 at Budget 2020.
sources: OBR. Coronavirus analysis; Resolution Foundation. Doing more of what it takes, 16
April 2020
It’s hard to quantify how government deficits in the coming years will
be affected. Much depends on the extent to which there is permanent
economic damage, such as businesses permanently closing or
individuals losing their jobs. If the Government’s policy response is
successful in limiting long-term economic harm, then there will be little
impact on future government deficits.
However, if there is long-term economic harm there will be less scope
for economic activity to recover. Consequently, there will be less scope
for tax receipts to recover and for welfare spending to subside. This
means that the Government will be left with a bigger structural deficit.
The structural deficit is the part of the deficit that remains when the
economy is running at its full potential.
Box 3: Automatic stabilisers

‘Automatic stabilisers’ are built into the public finances. These are elements of the tax and public
spending system that fluctuate over the ups and downs of the economy (the economic cycle) in a
manner which, without active policy decisions, dampen fluctuations in the economy. For example, in an
economic downturn, unemployment benefit payments will rise, mitigating the decline in household
incomes, and moderating the slowdown. Conversely, during an upswing, tax receipts will rise as
incomes increase, and this will act to mitigate the increase in disposable incomes and hence act to
dampen the cycle.
The automatic stabilisers are “automatic” as they do not require any policy change, such as alterations
to tax rates or planned public spending.
4.2 Government debt

Government debt is the overall level of government indebtedness, built
up over many years. Broadly speaking, it is the stock of borrowing
arising from past budget deficits. Government debt will increase as the
Government borrows more during the pandemic.
The Government will borrow to fund its deficit, and this will add to its
debt. More than £300 billion may be added to government debt this
way (see estimates of the deficit above).
In addition, some of the Bank of England’s policy measures add to
government debt. Most significantly the Term Funding Scheme adds
around £140 billion to government debt in 2020/21 in the scenario
modelled by the OBR. 69 Repayments from these loans will lower
government debt in the future.
The OBR’s analysis of a 3-month economic lockdown estimated that
government debt would increase to around 96% of GDP by the end of
2020/21. 70 Debt was around 80% of GDP at the end of 2019/20. A
longer lockdown would likely result in more debt. The Resolution
Foundation estimated that at the end of 2020/21 the debt-to-GDP ratio
would be roughly 130% following a six-month lockdown and 170%
following a twelve-month lockdown. 71
Bank of England measures: debt and debt interest
Some of the Bank of England’s measures affect government debt but
not the deficit. This is due to how the two measures are accounted
for. 72 Some BoE measures affect the government’s debt interest costs,
spending that impacts on the deficit.
Loans
As the Bank of England is in the public sector, the loans it provides to
banks through the new Term Funding Scheme – to ensure they pass on
interest rate cuts to businesses and consumers – will increase
69
OBR. Coronavirus reference scenario, April 2020
70
OBR. Coronavirus reference scenario, April 2020 and OBR. Coronavirus policy
monitoring database – 14 May 2020
71
Resolution Foundation. Doing more of what it takes, 16 April 2020
72
Debt is measured on a cash basis, so debt changes when any cash payments take
place. The deficit is an accrual measure that records when the activity takes place
rather than when the payment is made (see Box 4).
government debt when they are made. When the loans are repaid, they
will lower the debt.
The OBR estimate that the new Term Funding Scheme will add
around £140 billion to debt in 2020/21. The OBR expect the loans to
have been repaid by 2024/25.
Government bond purchases
The Bank of England (BoE) is purchasing government bonds to get
money into the economy in what is widely known as quantitative easing
(see section 3.2). The bonds aren’t bought directly from the
Government, but from investors on secondary markets. The BoE
Governor, Andrew Bailey, recognises that as well as getting money into
the economy the purchases also support government spending “in
terms of smoothing the profile of government borrowing and the
impact that might have on financial markets”. 73
The purchases result in the government’s debt interest costs being lower
than they would otherwise be. Firstly, as is explained in Box 1,
Government bonds held by the BoE are effectively refinanced at a lower
rate of interest, which is the Bank Rate. Secondly, the BoE’s purchases
support the demand for government bonds, which in turn helps to
maintain the low rates that investors are prepared to lend to the
Government at. The Government is issuing significant amounts of bonds
to fund its deficit and without the BoE’s intervention demand for these
might fall.
Government debt is also affected by the purchases to the extent to that
the BoE pays more, or less, for the bonds (the market price) than the
nominal value at which they are recorded in the public finances.
Presently, this ‘valuation effect’ means that the official measure of
government debt is increased by the bond purchases. The OBR explain
the ‘valuation effect’ in their explainer on the consequences of
unconventional monetary policies on the public finances.
Lowering interest rates
The Bank of England’s decision to lower its main interest rate (Bank
rate) lowers the effective interest rate the government pays on the
government bonds held by the Bank.
73
"BoE is financing UK’s coronavirus measures, Bailey acknowledges", FT, 14 May
2020
5. When will official economic

data reflect the full impact?
The rapid spread of the crisis – and the associated economic impact –
means that official data such as for GDP, unemployment and the public
finances will not reflect the full economic disruption until late May and
June at the earliest. Information of when to expect official statistics
releases, as well as other sources of information, is provided in this
section.
5.1 Economic activity

The economic impact of coronavirus began having a noticeable effect
on the UK in March. 74 Over the course of the month, the scale of the
disruption escalated quickly as the number of cases of Covid-19 spread
rapidly.
By mid-March, it was clear there would be a sizable impact on economic
activity. On 23 March, the Prime Minister announced more stringent
social distancing measures and the enforced closure of many businesses:
the so-called lockdown. 75
Official statistics usually – though not always – lag the time period they
cover by around six weeks to two months. So, for example, GDP data
for April will be published in mid-June. The specifics will vary by
statistical release and dependent on when the source data was collected
from businesses, households and government and then processed by
the Office for National Statistics (and others).
Some release dates of major official statistics from the Office for
National Statistics (ONS) include (dates are subject to change): 76
• 14 July – GDP data for May.
• 16 July – Labour market data
• 21 July – Public sector finances data for June
• 10 August – GDP data for Q2 (April-June)
As well as official data, a range of other sources such as business
surveys and anecdotal information can be used to gauge some of the
economic disruption. This includes some special surveys conducted by
the ONS, which can be found at their dedicated page, Coronavirus
(COVID-19) roundup.
Pieced together this can provide a guide to how the economy is
performing and the scale of the economic impact of coronavirus. The
Library briefing Coronavirus: Latest economic data collates this
information into a single source. 77
74
There was already a relatively small impact on the economy prior to this, via the
impact on global supply chains, international trade and weaker growth in China.
75
HM Government, PM address to the nation on coronavirus: 23 March 2020
76
ONS, Release calendar
77
Commons Library briefing paper, Coronavirus: Latest economic data
5.2 Public finances

The Office for National Statistics (ONS) publishes monthly data on the
public finances. The data are released with a relatively short lag. For
instance, data for March 2020 were released by the Office for National
Statistics (ONS) on 23 April. However, each new month of data is
provisional and will remain so for several months. The provisional data
should be treated with caution (more on this below).
The ONS measures the government’s deficit – and the tax and spending
which determine it – on an accrued basis. As is explained in Box 4
(below), this means that income and spending are recorded when the
underlying economic activity takes place rather than when any cash
payments take place. As a result, the provisional data are largely based
on forecasts that the ONS revises over time as more data come in. 78
Some measures, such as the government’s debt, are recorded by the
ONS on a cash basis. Such measures change when any cash payments
take place. The effect of coronavirus will, therefore, shows up in these
more quickly.
The OBR publish a commentary on the ONS’s public finance data
release, each month. The OBR is using their monthly commentary to
provide as clear a picture as they can about how the coronavirus impact
and policy response is feeding through to the data. 79
On the same day as the ONS publishes data on the public finances,
HMRC publishes data on the tax receipts that they collect. HMRC’s
release measures the tax receipts on a cash basis when they are paid.
This may provide an early indication of the effect on some taxes (such as
fuel duty and stamp duties, which are paid almost immediately) but
others aren’t paid so soon after the activity has taken place. For
example, VAT is generally paid one-to-three months after the activity
took place. The Government is allowing deferral of some taxes (see
section 4.3) which will make interpreting these cash figures more
difficult.
Public sector finance data, and HMRC tax data, are scheduled for
release on the following dates during 2020:
• 21 July
• 21 August
• 22 September
• 21 October
• 20 November
• 22 December
78
For more information see the OBR. Public Sector Finances: February 2020, 20 March
2020, paras 3-9
79
ibid
The Library briefing Public Finances: Key Economic Indicators is updated

after each release with the key headlines. The OBR’s (previously
mentioned) monthly commentary will provide further useful detail.
Box 4: Cash and accruals accounting

Much of the public finances are calculated on an accruals basis. Accruals accounting recognises when
costs occur rather than when the payment is made. For example, having the heating on is a cost that
accrues each day whereas the bill might be paid quarterly. In accruals accounting taxes are recorded at
the point where the liability arose, rather than when the tax is actually paid. The Government’s budget
deficit is measured on an accruals basis.
The Government’s debt is measured on a cash basis. Government debt changes when any cash
payments take place.
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Every effort is made to ensure that the information contained in these publicly
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Number 8866, 19 June 2020

Coronavirus: Effect on By Daniel Harari

www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary

Cover images copyright:

1.1 GDP growth

1.2 Labour market

1.3 Public finances

Government borrowing has fallen since 2010

source: ONS series JW2T and J5II

The Government was planing on increasing borrowing in the coming

Government debt remains higher than the 45 year average

source: ONS series HF6X

Government debt of over 80% of GDP isn’t uncommon in the UK’s

Despite significant increases in its debt, government debt

source: ONS series NMFX and MU74

The Government has been able to borrow at historically low interest

Box 1: Effect of the Bank of England holding government debt

The rate at which government can borrow is at historic lows

source: OECD. Long-term interest rates

Preparing for shocks to the public finances

risked “constraining government’s ability to stabilise the economy in the

2. How coronavirus is affecting

2.1 Supply shocks

responsibilities. As a result, many will not be able to work as much

2.2 Demand shocks

2.3 Uncertainty: how long will it last?

While these are typical responses to a recession, this is not a typical

2.4 Assessments and forecasts of overall

The largest impacts are in some customer-focused services sectors but

between lockdown and normal. In addition, this scenario assumed that

Further information on economic data

• Bank of England, Monetary Policy Report, 7 May 2020

3.1 Broad goals

3.2 Monetary policy and the financial system

amount they lend to households and firms (especially small- and

3.3 Government measures

Direct support for workers and businesses

4.1 The budget deficit

Source: OBR, Coronavirus policy monitoring database, 19 June 2020

Schemes to support employment and self-employment contribute nearly

Away from businesses and workers, an additional £16 billion is going to

Most extra Covid-19 spending will be in April and May

On 4 May, the Government published the Main Supply Estimates for

Box 2: Funding government spending during the crisis

Government guarantees on loans

areas such as unemployment benefits – will increase. The Government

Estimated additional borrowing from lockdown, 2020/21

Box 3: Automatic stabilisers

4.2 Government debt

5. When will official economic

5.1 Economic activity

5.2 Public finances

The Library briefing Public Finances: Key Economic Indicators is updated

Box 4: Cash and accruals accounting

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