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Economists release interactive tool showing public debt will probably settle higher than stated by the OBR, but will stabilise and remain manageable

The government can afford continued measures to fight the Covid-19 crisis and to invest in a broad-based recovery stimulus, as debt levels will remain manageable in the medium term, according to economists in a discussion paper for the IPPR think tank.

The economists, Rob Calvert Jump and Dr Jo Michell, have created an interactive tool to model the likely economic scenarios, which launches to the public today (Tuesday).

The tool, designed to enable the public to see inside the “black box” of economic policy-making, is available to use online here.

The modelling reveals that:

Under a three-month lockdown scenario, there is likely to be a peak debt-to-GDP ratio of around 120 per cent of GDP.
This rises to more than 130 per cent in a six-month lockdown scenario, which assumes “scarring” effects on medium-term growth.

The paper, Inside the black box: the public finances after coronavirus, also argues that the high degree of uncertainty around the economic outcomes should be better communicated by institutions such as the Office of Budget Responsibility (OBR).

The new tool uses fan charts to demonstrate this uncertainty and allows users to modify different factors to see how such changes affect the potential economic outcome. It compares user-generated scenarios with that of the OBR, revealing that the OBR’s modelling emerges as a “best-case scenario”, implying a quick recovery and lower debt.

The authors argue that the economy is “not like a spring that will simply recoil once restrictions are lifted”. They say that forecasts from the OBR and Bank of England that show a rapid “V-shaped” recovery are “implausible” due to the phased end to lockdown and long-term “scarring” effects on the economy likely to be caused by job losses and bankruptcies.

A manageable level of public debt

The paper emphasises, however, that even in scenarios with relatively higher levels of debt, public debt would remain manageable, due to the very low interest rates on government debt. Even if these rates were to rise, it would take time to feed through into higher debt servicing costs for interest payments, according to the economists.

Once the most acute phase of the crisis has passed, debt is likely to be higher, but this will still leave room to enact a much-needed, broad-based stimulus to the UK economy.

Carsten Jung, IPPR Senior Economist, said:

“This work shows that public debt levels may well end up higher than the OBR has stated, but that we can afford to sustain a higher debt level. The government should do what it takes to kickstart the economy and not jump to debt-reduction mode. Smart tax reform, alongside investment ininfrastructure, high-quality public services and the green transition, can help the UK grow out of its debt in the medium term.

“Interest rates are currently so low that even a doubling of the UK’s debt would still mean the Treasury pays less to service this debt, as a share of tax receipts, than almost any time since 1950.”

Dr Jo Michell, Associate Professor of Economics, University of the West of England, said:

“Recent fiscal scenarios from the OBR and Bank of England understate the likely economic damage caused by coronavirus. The public should be ready for a weaker economy and higher public debt than these predict.”

Rob Calvert Jump, Research Fellow, Institute of Political Economy, Governance, Finance and Accountability at the University of Greenwich, said:

“Forecasts play an influential role in framing debates about government spending, taxation, and the deficit. But these are often constructed using ‘black box’ models which are difficult for non-economists to engage with. This is unnecessary and damaging to democratic engagement with policymaking.

“Our interactive forecasting tool allows users to gain an intuitive understanding of the dynamics of public debt, and describes the policy options available to the government in a transparent manner.”

ENDS

CONTACT

David Wastell, Head of News and Communications: 07921 403651 d.wastell@ippr.org

Robin Harvey, Digital and Media Officer: 07779 204798 r.harvey@ippr.org

NOTES TO EDITORS

The discussion paper Inside the black box: the public finances after coronavirus by Rob Calvert Jump and Dr Jo Michell is available to download at: https://www.ippr.org/research/publications/inside-the-black-box
The interactive tool is embedded for use at the above IPPR web address. The tool is also available in full screen at http://macroflow.org/forecasts/uk/2020-05-corona/
The forecasting tool allows the user to choose different levels for lockdown length, 2021-22 growth, and medium-term growth rates, and combines these choices with a small set of pre-determined parameterisations and accounting identities to simulate time paths for the public finances. The methodology is described in full in the discussion paper.
The paper is published by IPPR’s Centre for Economic Justice. The Centre was set up in 2019 to broaden and deepen the work of IPPR’s Commission on Economic Justice, which completed its final report in September 2018.

Commissioners included the Archbishop of Canterbury, Justin Welby, and Frances O’Grady, general secretary of the Trades Union Congress. The Commission recommended far-reaching reforms to the UK economy, including establishing a Citizens’ Wealth Fund. Its final report, Prosperity and Justice, is at  https://www.ippr.org/research/publications/prosperity-and-justice 
IPPR is the UK’s pre-eminent progressive think tank. With more than 40 staff in offices in London, Manchester, Newcastle and Edinburgh, IPPR is Britain’s only national think tank with a truly national presence. www.ippr.org