OBR blames Government cuts for the double-dip recession it failed to predict

Public spending cuts may have had a bigger impact on the economy than previously thought, the Government's fiscal watchdog said yesterday.

The admission came in the Office for Budget Responsibility's assessment of its forecasting performance during the past two years, in which its growth predictions have consistently disappointed. The UK grew by just 0.9 per cent from 2010 to mid-2012, after 5.7 per cent was originally pencilled in.

The OBR said it was "clearly possible" that the Chancellor's belt-tightening "exerted more of a drag on growth than we assumed", although high inflation and a weak trade performance were also culprits as household spending suffered last year and exports fell in the eurozone crisis.

It said: "Along with many other forecasters, 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."

Its comments come after the IMF said the impact of fiscal tightening on growth may have been far more severe than it originally thought. It said estimates of a "fiscal multiplier" of 0.5 (£1 of cuts taking 50p out of the economy) could have been "significantly too low", meaning austerity is doing more damage than first thought.

Since last autumn the UK has wallowed in a double-dip recession that the OBR failed to spot.

The Office for National Statistics defended its GDP estimates in an article examining the puzzle of a buoyant jobs market compared with weak output. It noted the rise in part-time and self-employment, despite total employment regaining its pre-recession peak level of 29.5 million, saying: "The number of full-time employees is still 700,000 (3.7 per cent) lower, similar in scale to the shortfall in GDP."