Economy: no panic yet but the growth isn’t coming

When he told his cabinet colleagues that growth had flatlined over the winter, George Osborne reportedly reassured them that the economy was still "roughly in the right place". Perhaps he had his fingers crossed, but since then the news has failed to improve and disquiet is growing.
 
The danger for the chancellor is not just that the lack of growth will hit employment and pay packets, already under pressure from rising energy and food prices.

The deficit reduction programme he laid out when the coalition was formed is central to his political future. It was predicated on a series of growth projections which, to make doubly sure, he had validated by the newly formed Office of Budget Responsibility.

If growth fails to materialise as expected, his programme is in trouble.

This is what now seems to be happening. Last June the OBR projected that the British economy would grow by 2.3 per this year. In November it downgraded that to 2.1 per cent, and again in March to 1.7 per cent.

Last week the OECD reduced its forecast for UK growth in 2011 to just 1.4 per cent. Yesterday the British Chambers of Commerce said it would scrape in at 1.3 per cent.
 
We also got a taste of what this could mean for the public finances with the release of April's borrowing figure ­ the first of the new financial year. Tax receipts were down and public spending up, particularly on welfare and debt interest, making it the worst April result on record.

Even more worrying, separate figures confirmed that if public expenditure had not continued to rise in the first quarter of the year the economy would be back in recession.

With other sources of growth subdued, the dilemma for Osborne is that when his spending cuts do finally kick in, far from improving matters, they could depress the economy still further, at least initially.
 
The chancellor has always insisted that deficit reduction is non-negotiable; should the economy fail to perform as hoped, he has, apparently, no plan B. It is anyway unclear what a plan B might amount to.

If Ed Balls had his way, the government would slow the pace of spending cuts and relax its targets on the deficit. But some Conservatives are beginning to mutter that the real problem is that spending is not coming down fast enough.

For the moment, things are still expected to get better. Public spending will eventually fall, and when it does the deficit should decline with it. Energy and food prices must stop rising at some point, and when they do growth should finally pick up.

The chancellor continues to keep his fingers crossed, and no one is panicking yet. But if the economic weather does not improve by the autumn, expect trouble. ·