The UK and other countries should steer clear of cutting government spending to ensure a stronger economic recovery from the coronavirus pandemic, the Organisation for Economic Cooperation and Development has said.
In its latest economic outlook report, the leading global thinktank said it expected the UK economy to contract by 11.2% this year, compared with the 10.1% fall in GDP it was forecasting in September. The Paris-based organisation also sharply downgraded its forecasts for UK growth next year, to 4.2% from 7.6% three months ago.
The OECD said governments were at risk of failing to learn the lessons from the 2008 financial crisis when the UK and other wealthy nations cut back spending in response to record levels of national debt, choking off the economic recovery.
In a clear warning to nations contemplating spending cuts or tax rises, including the UK, the OECD said public spending would be vital to support the rebound in growth expected next year as Covid-19 vaccines enable a gradual return to normality.
It comes after the UK chancellor, Rishi Sunak, used his spending review to impose a pay freeze on public sector workers outside the NHS and slashed the overseas aid budget to tackle record levels of government borrowing this year.
“The fact that vaccines are in sight suggests that this is not the time to reduce support, as was done too early in the aftermath of the global financial crisis,” the OECD said in the report.
“The lessons from the past nine months are that such policy action was and remains appropriate. Monetary and fiscal policies will need to continue working vigorously in the same direction, at least as long as the health crisis threatens otherwise viable economic activities and employment.”
Hopes are rising that an earlier coronavirus vaccine than first anticipated could fuel a faster economic recovery next year, as Britain and several other nations fight to limit the damage from the second wave of the pandemic.
Since the OECD’s previous assessment in September, it said there was now hope for a brighter future for the first time since the pandemic began. Interventions by central banks and governments have ensured the worst has been avoided and preserved much of the global economic fabric. However, it warned the situation remains precarious for many vulnerable people, firms and countries.
The OECD said the global economy would shrink by 4.2% this year, slightly below a previous forecast of 4.5% made in September, before rebounding by 4.5% next year as vaccines are deployed around the world.
However, it said the second wave of the pandemic continuing into the start of 2021, before immunisation programmes could get under way, meant its forecast for next year was below its September estimate for 5% growth.
Laurence Boone, the chief economist at the OECD, said: “We made the mistake in 2010; we need to learn from the mistake. We need to keep up the support for the people and those in and out of jobs. We must make sure income is supported.”