Economic and fiscal outlook – March 2021

The latest update of our forecasts was published on the 3 March 2021 in the March 2021 Economic and fiscal outlook. Read the overview or the Executive summary.

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Economic and fiscal outlook - March 2021

March 3, 2021 – 2.00 MB

Chapter 2 sets out our forecasts for the economy over a five year horizon. We cover our assumptions regarding the coronavirus pandemic, set out our latest forecast and the effect of policies in the Budget 2021.

Chapter 3 sets out our forecasts for receipts and public spending over a five year horizon. We also explain our loans and other financial transactions forecasts. All this, together with new policy decisions, builds the outlook for borrowing and debt.

In Chapter 4, we assess the Government against its fiscal targets and present the significant uncertainty around our forecast.

Annex A covers the policy decisions since November and Annex B provides an update on major balance sheet interventions.

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At a glance

Forecast in pictures
Graphic showing GDP growth in 2021
Graphic showing peak unemployment rate
Graphic showing borrowing

Supporting documents

Supplementary documents

Information or data which has been released as a result of external requests, since the original publication of the main document.

Presentations

Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

Uncertainties around key epidemiological assumptions

Chart A: Potential future epidemiological outcomes as restrictions are eased compared to past outcomes
The path of the pandemic and the associated public health restrictions will be the most important near-term determinants of the UK’s economic and fiscal performance. Our March 2021 central forecast was conditioned on the Government’s ‘Roadmap’ for the lifting of restrictions and despite encouraging news regarding vaccines, there remains considerable uncertainty surrounding the future path of the pandemic and the economy. This box considered the uncertainties around key epidemiological assumptions on how the pandemic will unfold.

Impact of the Brexit trade agreement on our economy forecast

Chart B: Number of heavy goods vehicles on roads around Dover
On 24 December, four and a half years after the EU referendum, the UK and the European Union concluded the Trade and Cooperation Agreement (TCA). This box compared the provisions of the TCA against our previous broad-brush assumption that UK-EU trade would take place under the terms of a ‘typical’ free-trade agreement. It also discusses the initial evidence regarding its short-term impact.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2021 Economic and fiscal outlook, we adjusted our economy forecast to take into account plans to loosen fiscal policy in 2021-22, before tightening from 2023-24 onwards, as well as for several specific measures, including the impact on our business investment forecast of temporarily much more generous capital allowances.

International comparisons of the economic impact of the pandemic

Chart C: Shortfall in real GDP with and without government consumption
The coronavirus pandemic has affected economies of all countries around the world as a result of public health measures and voluntary social distancing. In this box we assessed how the UK had fared relative to other major advanced economics by examining the effect of using different measures of government output, the composition of these economies and the severity of the virus.

How the economy has adapted to the virus

Chart F: Firms closing or pausing trading at the start of each lockdown
Output held up better in November 2020 than we had expected at the time of our November 2020 forecast. In light of this, this box considered whether the economy had become increasingly adapted to operating under lockdowns and other public health restrictions since the onset of the pandemic, and the implications that this might have had for the economy during the January 2021 lockdown.

Coronavirus and the flow of funds

Chart I: NMG survey responses on what households plan to do with additional savings built up during the pandemic
This box explored how the pandemic and associated policy response changed the flow of funds between the different sectors of the UK economy. It then considered the implications of how those flows unwind for the pace and sustainability of the recovery.

The rising cost of the coronavirus policy response

In the March 2021 EFO we estimated that policy measures responding to the coronavirus pandemic would add £344 billion to borrowing, with these policies announced across a number of statements beginning alongside the March Budget. This box updated on our estimate of this cost from November and the relative shares of support going to households, businesses and for public spending.

Corporation tax in historical and international context

Chart B: Onshore corporation tax receipts versus the headline rate
The rise in the main rate of corporation tax (CT) announced at Budget 2021, from 19% to 25% – from 2023-24, marks the first rise in the main rate of onshore CT since 1974. This box put this policy change in its historical and international context, by looking at onshore CT receipts as a share of GDP within the UK since its inception in 1965, and by looking at other corporate tax rates across OECD countries.

Departmental spending risks at the next Spending Review and beyond

Chart E: Change in real RDEL spending in 2022-23
This box discussed the risks to our medium-term forecast of day-to-day departmental (RDEL) spending, particularly in relation to the impact of the pandemic.

The evolution of different sectors’ usage of the CJRS

Chart F: Sectoral furlough usage versus GVA shortfalls relative to February 2020
In this box, we discussed how the hospitality, wholesale and retail, arts, manufacturing and construction sectors, as well as the economy as a whole, adapted the usage of the furlough scheme in relation to output, and commented on the increased level of employees on furlough relative to the loss in output in the November 2020 and January 2021 lockdowns when compared with the April 2020 lockdown.

Government response to the McCloud-Sargeant case

On 4 February 2021 the Government published its response to the December 2018 Court of Appeal ruling that the transitional protection arrangements in place across public service pension schemes based on years from retirement constituted a form of unlawful discrimination on the basis of age, commonly known as the ‘McCloud-Sargeant case’. This box explored the potential fiscal impacts of the Government’s remedy, as it was not possible to reflect the costs directly in our March 2021 EFO due to remaining uncertainty around the schemes’ implementation of the response.

UK Infrastructure Bank

Chart G: UKIB lending forecast relative to historical EIB lending
The Government announced the establishment of a new UK Infrastructure Bank (UKIB) at Budget 2021 to tackle climate change and support regional and local economic growth. It does this in part by replacing some of the activity of the European Investment Bank (EIB). This box looked at how UKIB will operate and how this compares to the EIB, as well as briefly exploring potential fiscal and classification risks.

Debt maturity, quantitative easing and interest rate sensitivity

Chart A: Mean maturity and redemption distribution of gilts
The average maturity of UK government bonds is longer than the average maturity of government debt in most other advanced economies. But the average maturity of the net debt of the public sector as a whole (including the Bank of England) has shortened considerably since the global financial crisis. In this box, we explored how the Bank of England's quantitative easing operations have shortened the maturity of public sector net debt, dramatically increasing the sensitivity of debt interest spending to changes in short-term interest rates.