Britain's recession has been deeper, lasted longer and may extend further partly as a result of tax increases and spending cuts implemented by coalition Chancellor George Osborne.
That's the verdict from the independent Office for Budget Responsibility (OBR), the fiscal watchdog established by Osborne to keep a bi-partisan eye on economic growth and government spending. The OBR's second bi-annual assessment of the economy suggests growth has missed both its and many other's targets thanks to a combination of weak export markets, faster-than-anticipated inflation and stunted credit growth.
Most controversially, however, the OBR says Osborne's "cuts in government spending on goods and services have directly reduced GDP by less than half the amount that we expected in June 2010," according to its report, released Tuesday in London.
"We significantly overestimated economic growth over the past two years. This likely reflected several factors, including the impact of stubborn inflation on real consumer spending, deteriorating export markets on net trade, and impaired credit conditions, euro area anxiety and demand uncertainty on business investment. Fiscal consolidation may also have done more to slow growth than we assumed."
Having missed the "double dip" of recession which occurred in the second quarter of this year, the OBR said the weakness was in large part due to the "the unexpected weakness of net trade and, to a much smaller degree, investment" while adding that "changes in government spending directly added to GDP rather than subtracting from it as we predicted."
Collectively, the OBR says Britain's economy has regained only around a third of the 6.3 percent it lost during the worst of the global credit crisis.
"Following the Coalition's first Budget in June 2010 we forecast that the recovery would be slower than its predecessors, but nowhere near as slow as it has been. We forecast that GDP would rise by 5.7 per cent from the first quarter of 2010 to the second quarter of 2012, but the latest data suggest it has grown by only 0.9 per cent."
Public borrowing, the OBR says, has fallen from a post-war peak of 11.2 percent of GDP in the 2009/2010 government financial year to the current level of 7.8 percent. It noted, however, that deficit reduction was more down to spending cuts than revenue increases.
"The main contributors to the fall in the deficit were cuts in capital spending and current spending on public services and administration, plus a rise in VAT receipts as the temporary cut in 2009 was reversed and the standard rate was raised again in 2011."