LONDON (Reuters) - Britain’s economy could shrink by 13% this year due to the government’s coronavirus shutdown, its deepest recession in three centuries, and public borrowing is set to surge to a post-World War Two high, the country’s budget forecasters said.

FILE PHOTO: Canary Wharf is seen with the O2 arena, illuminated blue in support of NHS and other key workers as the number of coronavirus cases increases globally, London, Britain, April 2, 2020. REUTERS/Paul Childs

In the April-June period alone, economic output could plunge by 35%, with the unemployment rate more than doubling to 10%, the Office for Budget Responsibility said on Tuesday. A bounce-back may come later in the year if restrictions on public life to slow the spread of the coronavirus are lifted, it added.

Finance minister Rishi Sunak said he was “deeply troubled” by the prospect that two million people would lose their jobs due to the impact of the virus.

“This is going to be hard. Our economy is going to take a significant hit,” he said at a daily government news conference.

The OBR stressed it was not making an official forecast, given the lack of clarity about how long the government would require businesses to remain closed to the public. The OBR assumes a full shutdown for three months, followed by a gradual lifting over a further three-month period.

Separately, the International Monetary Fund said it expected Britain’s economy to shrink 6.5% in 2020, similar to other economies, before growing by 4.0% in 2021.

But the outlook for Britain’s public finances is stark.

The OBR said the hit to tax revenues and the government’s huge spending plans meant the budget deficit could hit 273 billion pounds ($342 billion) in the 2020/21 tax year -- five times its previous estimate.

That would be equivalent to 14% of gross domestic product, higher than the 10% level hit after the global financial crisis that began in 2007. Britain had gradually lowered the deficit to about 2%, mainly through a decade of spending cuts for many public services.

RISK OF SCARRING

The Resolution Foundation, a think-tank, said it was plausible that the economy could suffer a more sustained hit than outlined by the OBR.

“This scenario also assumes almost no scarring or lasting impact on the economy from this recession, which history shows is unlikely to be the case,” it said.

The OBR said public sector net debt could exceed 100% of GDP during the 2020/21 financial year but end it at around 95%.

Sunak did not want to be drawn on whether he would seek to reduce this debt level through tighter fiscal policy after the crisis, and said he was committed to the government’s ‘levelling up’ agenda which involves heavy infrastructure spending.

“The best way out of this for all of us is to just grow the economy,” he said.

The annual budget deficit - as opposed to the debt accrued - should fall back to normal once the crisis is over, he added.

Before the government shut down the economy from March 20 to slow the spread of the coronavirus, the OBR had forecast debt would be 77% of GDP in 2020/21.

“It should be borne in mind that the short- and medium-term outlook for the economy and the public finances would be very much worse without any fiscal and monetary response,” the OBR said.

The Bank of England last month cut interest rates twice, ramped up its bond-buying programme by a record 200 billion pounds and took other measures to help companies secure credit.

Sunak said on Tuesday banks were issuing more state-backed loans to businesses and that companies would receive cash from a job-guarantee scheme by the end of the month, but warned again that the government could not save every job or business.

He also denied reports of tensions between his department and the health ministry over the duration of the lockdown.

“It’s clear we must defeat this virus as quickly as possible,” Sunak said, adding there was “not a choice between health and economics. That defies common sense”.