Economic situation

The coronavirus pandemic has continued to effect spending, incomes and jobs in the UK. The Bank of England’s February 2021 commentary described how economic growth had slowed in the fourth quarter of 2020 as Covid-19 cases and restrictions increased. The Bank expected growth to turn negative in the first quarter of 2021. It attributed this to the third national lockdown, as well as a temporary impact on gross domestic product (GDP) of 1% from the introduction of border arrangements with the EU following the trade and cooperation agreement (TCA).

For more detailed data, see the Library’s briefing on the 2021 budget.


Economic activity

The Bank of England stated that the future path of the economy remained “unusually uncertain”. It said that vaccination programmes were improving the outlook. However, an increase in cases in some countries was affecting global activity. The Bank described the impact of public health measures, and how households, businesses and financial markets react to them, as key factors in determining the pace of recovery. For example, it reported evidence that people would be “cautious” about going out once restrictions were lifted but assumed such concerns would fade over 2021.

Overall, the Bank of England expected economic activity, as measured by GDP to recover “strongly” over 2021, towards pre-Covid-19 levels. It said this would be supported by existing fiscal and monetary policies to support the economy during the pandemic, but that the effect of these would diminish from 2022.

The Office for Budget Responsibility’s (OBR) latest assessments were published alongside the budget in March 2020. It estimated that economic growth would be 4% in 2021. However, more recent forecasts, from a panel of 19 independent forecasters collated by the Government in the first half of April, provided an average estimate for economic growth in 2021 of 5.7%.

The OBR suggested that in the longer-term, the pandemic would lead to a 3% permanent loss of capacity in the economy (known as ‘scarring’).

Globally, the International Monetary Fund (IMF) recently predicted a stronger rebound in advanced economies than it had previously expected. However, it said that emerging markets and developing countries were “expected to suffer more significant medium-term losses”. The IMF also stressed the high level of uncertainty around the global outlook.

Commenting on the initial UK data following the end of the 2021 lockdown, the Financial Times reported signs that “strong, pent-up demand” was leading to better than expected trading. The degree to which savings accumulated during the crisis are spent in the months following its end has been identified as an important factor that will affect the economy over the next year.

Both the Bank of England and the OBR expect a negative long-term effect on the UK economy from the TCA signed with the EU. The Bank estimates that in the long-term UK trade will be 10.5% lower, and GDP and productivity 3.25% lower, than with “frictionless trade”.


The OBR forecast a peak level of unemployment of 6.5% at the end of 2021. This compares to a pre‑pandemic level of 4.0%.

The Financial Times quoted some commentators as suggesting that recent labour market data shows signs that it is “turning a corner”, particularly with an increase in vacancies and hiring. However, the article reported others as arguing there could be a “worrying rise” in unemployment when the coronavirus job retention scheme (the ‘furlough’) ends in September 2021.

Public sector finances

Government borrowing in 2020/21 was £303 billion on provisional figures, equivalent to 14.5% of GDP. This compares with £57 billion, or 2.6% of GDP, in 2019/20. The Office for National Statistics (ONS), which compiles the data, said borrowing in 2020/21 was substantially below the £327 billion forecast by the OBR at the time of the March 2021 budget, on a like-for-like basis.

The Financial Times quoted one economist as saying that the figures suggested borrowing was likely to “fall more quickly than most expect”, in a “strong recovery”. However, another argued that repairing the public finances by the middle of the 2020s would require “a swift recovery, big tax rises and very tight spending”, and that “there is a good chance that at least one of these will not happen”.

These increases in borrowing will affect the accumulated public sector debt, which the OBR said would peak at 110% of GDP in 2023/24. Immediately prior to the pandemic, debt was 84% of GDP.


The Bank of England forecast that inflation would increase towards its target rate of 2% towards the end of 2021, and remain around that level.

The economist Nouriel Roubini has suggested that there will continue to be inflationary pressures over the next few years. This is because of the extensive economic stimulus measures and supply shocks such as deglobalisation. He argued that this could lead to a period of macroeconomic instability and possibly even a return to the high-inflation, low-growth ‘stagflation’ conditions of the 1970s.

Policies for recovery

On 3 March 2021, the Government published its strategy for the recovery from the pandemic: ‘Build Back Better’. The Prime Minister said that he wanted to see “strong and active government investing massively in science and technology, coupled with a dynamic enterprise economy that embraces the instincts and know-how of the private sector”. The strategy’s aims include:

  • Increased infrastructure spending on broadband, roads, rail and cities. A new UK Infrastructure Bank will support these activities and will encourage private sector investment alongside that of the public sector.
  • Enhancing skills and training to support productivity growth. The plan aims to “transform” further education, reform technical education, improve apprenticeships and enable “lifelong learning”.
  • Supporting and incentivising innovation, ideas and new technologies. This included proposals to improve access to finance, better regulation, attracting the “brightest and best” people to the UK and helping to boost productivity in small and medium-sized firms.

The Government said these policies would be targeted to support its three priorities of:

In a House of Lords debate on 20 April 2021, the Government spokesperson, Baroness Penn, said that the approach set out in ‘Build Back Better’ would drive economic growth, which was key to the recovery. She highlighted the corporation tax super-deduction as a key policy to encourage firms to invest. However, she also noted policies designed to improve the government deficit and debt position in later years. These included an increase in corporation tax from 2023 and freezes in the thresholds and allowances in income tax, inheritance tax, capital gains tax and the pensions lifetime allowance.

Responding to the debate on behalf of the Labour Party, Lord Tunnicliffe called for a greater focus on reskilling the younger workforce, which he said had been particularly affected by the pandemic. He also warned that the recovery could be restrained by the high levels of debt taken on by some firms, particularly in sectors such as hospitality, steel, travel and tourism.

The Government has also previously published a ‘plan for jobs’ and a ‘ten point plan for a green industrial revolution’. The plan for jobs included a £2.1 billion ‘kickstart scheme’ to “create hundreds of thousands of high quality six-month work placements aimed at those aged 16 to 24 who are on universal credit and are deemed to be at risk of long-term unemployment”. The plan for a green industrial revolution committed £12 billion of government investment, “and potentially 3 times as much from the private sector”, to create and support up to 250,000 “green jobs”.

Other commentators, such as the consultancy McKinsey, have suggested that the pandemic will change patterns of work and consumption. For example, it argued that jobs with higher levels of physical proximity to co-workers are likely to be the most disrupted. On consumption, McKinsey said that some habits formed in the pandemic would persist; for example, e-grocery shopping, ‘virtual’ healthcare and investing in at-home facilities such as gyms, gardens and home entertainment. However, it predicted that other pandemic effects, such as reduced air travel and visits to live entertainment, would be reversed.


The following bills with particular relevance to the economy and business have previously been introduced to Parliament, published in draft form or otherwise foreshadowed:

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Cover image by Adeolu Eletu from Unsplash.