What a difference a year can make. That applies as much to economic forecasting as anything. It is exactly one year since George Osborne stepped up to the dispatch box in the House of Commons to announce the Government's Comprehensive Spending Review. As we well know, the centrepiece of the Review was the Chancellor's commitment to overhaul the public finances, cutting £81 billion in state expenditure between 2011 and 2015.
That decision was the subject of intense controversy then, and continues to dominate political debate now: the dividing line between Labour and the Coalition on economic policy remains fully rooted to whether the speed and depth of Osborne's cuts was right. But one year on, how is the economy fairing, compared to the plans and projections that were made in October 2010? What was the verdict of the independent forecasters then and what are they saying now?
IPPR' Senior Economist Tony Dolphin has compiled a table of the headline indicators. It compares the latest economic forecasts for 2011, made by the independent analysts - and compiled by the Treasury - with those made at the time of the Spending Review.
Suffice to say, the table paints an incredibly gloomy picture. On every indicator, the latest projections for the economy in 2011 are far worse than analysts had banked on one year ago. GDP growth is now expected to be 0.9pc lower, consumer price inflation 2.1pc higher and the number of people claiming unemployment benefit up by 20,000 in 2011. The public finances don't fair any better: forecasters now expect the current account deficit to widen by £9.8 billion in 2011, and public sector net borrowing to be £10.1bn more than they had predicted a year ago.
Forecasts made in: Oct 2011 Oct 2010 Change
GDP growth rate (%) 1.0 1.9 ↓
Consumer price inflation (Q4, %) 4.6 2.5 ↑
Claimant unemployment (Q4, millions) 1.61 1.59 ↑
Current account (£ billion) -32.4 -22.6 ↓
PSNB (2011/12, £ billion) 128.1 118.0 ↑
Despite the readiness of some on the Left, it would be wrong to attribute this underperformance solely to the Coalition's spending cuts or to government policies more generally. Global factors beyond the Government's control- for instance, higher oil and commodity prices driven by soaring demand in emerging economies and events in the Middle East and Libya - have played their part in the inflation surge and the growth prospects of other major economies, China included, have also recently been downgraded.
But the impact of other external factors is far more tenuous: despite Ministers' best efforts to apportion blame on the on-going dislocations in the Eurozone, IMF forecasts suggest otherwise. Serious as the malaise in the Single currency bloc is, the Fund has only slightly trimmed its latest forecast for Eurozone GDP growth this year, to 1.1 pc compared to the 1.4pc it predicted in October 2010. As Chris Giles notes in the Financial Times, this shortfall will have barely made a dent in the UK's national accounts to date. And besides, it is tall order for the Chancellor to claim one minute that the UK is 'a safe haven in the storm' only to now blame that storm for our problems.
Yet whatever the causes of the economy's underperformance, they are less important than the fact that it has occurred in the first place. Irrespective of whether the slowdown is the result of government policy or factors beyond its control, one thing is clear: a response is needed. This should include short-term measures, starting with a relaxation of the pace of deficit reduction, so that the cyclically-adjusted deficit is eliminated over six years (rather than four and as currently planned). By mandating the OBR to determine the pace of deficit reduction at the start of each financial year, based on whether the economy is growing or shrinking, this approach would not only be responsive to market concerns but also consumer and business confidence.
The response should also include an increase in infrastructure spending, the reintroduction of a jobs guarantee for young people who have been out of work for a year, and a suite of longer-term policies designed to encourage more innovation and investment and lift the economy's long-term growth rate. This would include the introduction of a British Investment Bank to support lending to SMEs with high-growth potential, and a commitment to ensuring investment will not fall below 2 pc of GDP per annum.
Were the Chancellor to announce these measures in his Autumn Statement, we might expect a series of rosier outlooks from the independent forecasters in the months and years ahead.