Slow UK recovery risks ballooning borrowing, IFS/Citi research shows

FILE PHOTO: A British pound note is seen in front of a stock graph in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration

LONDON (Reuters) – Britain’s government will still be borrowing vast sums of money five years from now if the economy takes time to recover from the coronavirus fallout, new research published on Friday showed.

The Institute for Fiscal Studies think tank and U.S. investment bank Citi said they thought it would take the economy “several years” to adjust to the pandemic, in contrast to scenarios from official forecasters showing a relatively swift rebound.

That would point to a budget deficit of around 130 billion pounds – or 5% of GDP – in five years’ time, more than double the forecast published by the Office for Budget Responsibility (OBR) in March.

Data due later on Friday are likely to show Britain is on course for a record increase in borrowing this financial year, to reach the highest level as a share of the economy since World War Two.

“Even so, with current low interest rates, additional borrowing now that boosts the economic recovery would still be worthwhile,” IFS economist Isabel Stockton said. “But once we are through the immediate crisis and the economy reaches a new normal, we will be left with elevated debt.”

Stockton added that a mix of tax rises and an acceptance that higher debt will need to be managed carefully seemed to be the most likely outcomes.

Britain’s emergency spending and tax cuts to soften the economic hit from the coronavirus crisis are likely to cost 132.5 billion pounds, the OBR said earlier this month.

It estimated new borrowing in the current financial year could approach 300 billion pounds as normal tax revenues dry up.

Reporting by Andy Bruce, editing by David Milliken

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