UK risks lasting economic scars from Covid and Brexit, OECD warns

The UK will need to invest heavily in digital infrastructure and drive through reforms to raise productivity if it is to repair long-term economic damage left by the Covid-19 crisis and the effects of Brexit, the OECD said on Wednesday.

Britain’s economy is one of the hardest hit by the pandemic among the 37 tracked by the international organisation, which said UK gross domestic product was set to be 10.1 per cent smaller at the end of 2020 than it was a year earlier and to recover only some of the ground in 2021, with growth of 7.6 per cent.

These forecasts are contingent on the course of the virus, and the extent of restrictions needed to contain it, but the UK’s prospects are even more uncertain because of the risk of a disorderly exit from the EU single market, which the OECD said could depress GDP by 5 per cent over two years.

Further public investment would be needed in digital infrastructure, such as high-speed broadband in deprived or rural areas, and the government could do more to push the transition to green technology, for example by making support to businesses in polluting industries conditional on switching to cleaner processes.

“Actions taken to address the pandemic and decisions made on future trading relationships will have a lasting impact on the UK’s economic trajectory for years to come, so they should be in line with long-term objectives,” said Laurence Boone, the OECD’s chief economist. “Productivity growth in service sectors will have to accelerate significantly for the recovery to be long-lasting and sustainable,” she said.

The immediate challenge is to support low-income households and get people back into good jobs, it found. Alvaro Santos Pereira, the OECD’s director of country studies, said higher unemployment would have “a massive impact” if it became entrenched, scarring the economy “for many years to come”.

The OECD urged the UK government to go further in offering companies incentives to hire new workers and in spending to help unemployed adults retrain, with a focus on digital skills. It also said that making welfare payments more generous would be a better way to help low-income households than relying on further increases in the minimum wage, which might put jobs at risk.

Fiscal support for the economy should continue for now, Mr Pereira said, even though the UK would have to confront levels of debt not seen outside wartime once the crisis was over — with the OECD projecting debt would climb to 140 per cent of GDP next year.

Later, it will be necessary to get the public finances under control. The OECD said this should involve spending cuts, as well as measures to boost productivity that would reduce debt as a share of GDP.

It said the government should scrap the costly “triple lock” that guarantees generous increases in state pension, and instead raise pensions in line with average earnings growth.

Talks with the EU had so far focused on avoiding barriers to trade in goods, but the priority for the UK should be maintaining access for trade in services, the OECD noted.

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