Leading article: Lost in cloud cuckoo land

Few weeks seem to bring any good news about the state of the economy at the moment, but even by recent standards, the last few days have been particularly depressing. We learned from the Office for National Statistics that inflation is now running at twice the Government's target rate. Unemployment is going up too. The number of people out of work rose by 60,000 in the three months to June; the biggest jump since the last recession in 1992. Meanwhile, general growth is falling away. The Bank of England's forecast yesterday is for zero expansion of national output next year.

It is clear that we are in the midst of a sharp slowdown; one that could very easily turn into a full-blown recession. It is hard not to draw a contrast between such dire reports and the optimistic tone adopted by the stewards of our economy this time last year. From the start, the Government underestimated the impact the credit crisis in the international financial markets would have on the broader economy, particularly one as exposed as ours to the financial services and housing sectors.

The comforting message was that the fall-out would be contained; that it would be a short-term inconvenience. Even when it became clear that the effects of the credit crunch would be far more serious, ministers stuck to their optimistic line. And still the Treasury is holding to the growth forecasts of its most recent budgets, which predict that the economy will expand by 2.25 to 2.75 per cent next year.

Obviously, one would expect the Chancellor, Alistair Darling, to talk up the economy to some extent, but he is beginning to give the impression that he resides in cloud cuckoo land. When does an attempt to calm nerves turn into an attempt to mislead the public? After the tremendous mess the Treasury made over stamp duty last week, it is in danger of looking not only clumsy, but dishonest.

It is true that any government would be struggling in the present global economic climate. But the real test of any administration is how it copes when conditions turn nasty. The public expect realism and competence. At the moment, they are getting neither.