IPPR: Economy would need an extraordinary turnaround to generate growth

Tony Dolphin, senior economist at the think tank IPPR, responds to figures showing inflation at a new high.

"Recent developments make it likely that unemployment will also be higher than forecast by the OBR and this too will add to the projected social security bill. Their projections were based on the claimant count measure of unemployment averaging 1.51 million in 2012/13. The latest figure, for September, was 1.60 million and most forecasters expect it to increase further in the next few months. It would take an extraordinary turnaround in the economy to generate the growth needed to get unemployment down to the level forecast by the OBR.

"It is not all bad news for the government. Higher price inflation will also boost some tax receipts. VAT revenues, for example, will be higher than previously forecast. But higher price inflation – when it is not matched by higher wage inflation – also has a more general effect. It squeezes households' disposable incomes and reduces their ability to spend. Higher inflation has been one of the main reasons why retail sales have been flat over the last year. This in turn helps explain why the economy has not grown in the last nine months and why forecasters now think the economy will expand by less than one per cent in 2011 (compared to the 1.7% the OBR was forecasting in March). This downgrade to growth will also necessitate an upward revision to forecast budget deficits.

"The chancellor's self-imposed deficit targets have just become that little bit harder to achieve."