The government has been warned by a free-market thinktank that a delay in coming up with a plan to end Britain’s lockdown will cause deep and permanent damage to the economy.

On the day when the UK’s Covid-19 quarantine was extended for a further three weeks, the Adam Smith Institute said that without a blueprint for reopening the economy, there would not be one to reopen.

The thinktank stressed that it was not calling for an end to the lockdown, but said the UK was behind other European countries – including Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic – in developing an exit strategy.

The ASI said the government’s independent forecasting body – the Office for Budget Responsibility – was wrong to assume that there would be no lasting hit to the economy after a 35% fall in output during the second quarter of 2020.

Eamonn Butler, director of the Adam Smith Institute and co-author of the report, said: “The dislocation that is ripping through the economy because of lockdown is like the virus ripping through the population.

“Each business failure produces many more, just as each infected person infects many more. Unless you get to grips with it fast, things soon escalate out of control. Business failures, bankruptcies and unemployment rocket. So we have to lay plans for how we are going to unwind the lockdown, and do it now.”

The ASI said the OBR’s scenario – under which the UK returns to pre-Covid-19 levels of output by the end of the year – had underestimated the network effect of the economy and the risk of systemic economic decline if the lockdown is sustained.

Criticism of the government’s failure to publish proposals for how the lockdown might be gradually lifted has been mounting in recent weeks, amid concerns that the prime minister’s poor health has resulted in confusion and delay.

The thinktank said it supported the calls by the new Labour leader, Keir Starmer, for a step-by-step exit plan. “A phased plan would allow companies to assess the feasibility of their operations and calculate the worth of borrowing; the longer lockdown continues, the less feasible an option this is”, the ASI report said.

“The greater the systemic loss of industry and mass unemployment, the deeper the risk of depression and the harder any economic recovery will be.”

It said the strategy should focus on growth and jobs through tax cuts, the removal of red tape and reducing state involvement in the economy.