OBR Says UK Would Tip into Recession Without Russian Energy  | Rigzone | #government | #hacking | #cyberattack

The UK economy could plunge into recession if the war in Ukraine triggers a cutoff of Russian energy supplies, boosting natural gas and oil prices, the British government’s fiscal watchdog said.

The Office for Budget Responsibility’s biennial report on risks to the UK public finances studied a number of scenarios that could upend the outlook and identified energy as a key concern. Inflation could leap to 11% if Russian oil and gas exports were temporarily halted in 2023, the OBR said.

That scenario underscores the difficulty the UK government faces in steering the public finances through a series of shocks to the world economy, including the pandemic, the Ukraine war, energy shortages and potential cyber attacks. 

“This analysis of the risks and pressures on the public finances is based on a series of ‘What ifs,’” OBR Chair Richard Hughes said at a press conference. “Some are very likely to come to pass — the aging of the population is pretty certain; the need to reduce carbon emissions is widely accepted; and the take-up electric vehicles is accelerating. Some risks are more uncertain.”

The OBR said the UK Treasury’s finances over the long term are on an “unsustainable path” that will require tax increases or spending cuts, a conclusion that jars with the ambitions of the newly appointed Chancellor of the Exchequer Nadhim Zahawi.

“It is hard to escape the conclusion that the world is becoming a riskier place,” the OBR said in a 174-page report released Thursday. Bail-outs during the pandemic, it said, “may have raised expectations regarding the role of government in future crises.”

In the energy scenario, the OBR assumed gas prices briefly hit £7 per therm, above the recent close-of-day peak of £5.40, and oil prices return to their 21st-century high of $147 a barrel.

Such a combination would push consumer price inflation to 11% and cause the economy to shrink by more than 2% in 2023. The squeeze on household disposable incomes would be severe, at 4% the deepest since at least the Second World War.

“While governments have more options for reducing the UK’s economic dependence on fossils fuels over the longer term, each of those options comes with a potential fiscal price tag,” Hughes said. “The scope for meeting those costs through higher revenue is diminishing as fuel prices rises and fuel use falls.”

That scenario underscores the risks posed by the conflict in Ukraine, which is causing huge volatility in energy prices, and the frequency of global economic shocks. In 15 years, there has been a financial crisis, a pandemic and a war. Those have left the UK economy weakening and on the brink of a recession.

A slump would slow tax receipts to the Treasury at the same time ministers come under pressure to support struggling voters, adding to strain on the public finances. 

The UK government has so far spent as much this year to help households to cope with the sharp rise in the cost of living as it did supporting the economy through the financial crisis.

Inflation has surged to 9.1%, the highest in four decades and well above the 8.7% peak that the OBR expected in March. The Bank of England expects it to reach 11% in October.

Higher inflation would automatically add £30 billion to debt servicing costs on index-linked gilts. Were the government to provide a level of support to households proportionate to the measures already taken, it would cost a further £40 billion, the OBR said.

The watchdog also modeled a scenario in which the post Cold War “peace dividend” ends and the UK has to raise defence spending, faces damaging cyber attacks and struggles as the world pares back on global trade links.

An increase in defense spending to levels prevailing in the 1980s around 4% of GDP would cost £49 billion a year, the OBR said. A major cyber attack that successfully brought down the electricity grid may knock 1.6 percentage points off growth and add £29 billion to government debt.

An unraveling of global trade would be most costly due to the openness of the UK economy. The productive capacity of the UK would shrink and market interest rates on UK government debt would rise by one percentage point, the OBR warned. As a result, the national debt would increase by an additional 20% of GDP in 15 years.

The OBR said:

  • Long-term projections show debt rising to over 100% of GDP by 2052-53 and reaching 267% of GDP in 50 years if upward pressures on health, pensions and social care spending, and the loss of motoring taxes, are accommodated.
  • Bringing debt back to 75% of GDP — the level before the pandemic — would need taxes to rise, spending to fall, or a combination of both.
  • The required squeeze may amount to 1.5% of GDP, or £37 billion a year in today’s terms, at the beginning of each decade over the next 50 years.

“Our baseline projection for debt assumes that nothing else goes wrong over the next 50 years,” Hughes said. “But if the past two decades has taught us anything, it’s that things can and will go wrong — and that when they do, they can have significant and lasting effects on the public finances.”

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