Central to the government's plans has been its hope that it can moderate the "boom and bust cycle" of the British economy.

Most observers now agree that the economic climate, both in Britain and the world, has deteriorated sharply.

There is uncertainty as to whether we are about to enter a recession - defined as two quarters of economic contraction - or merely a slowdown, where the economy is still increasing in size, but not as fast as this year's growth rate of around 2.5%.

The judgement on how severe the downturn is likely to be, will be central to future decisions on interest rates, taxes and spending.

Predicting a recession

But predicting a recession is tricky. If you announce that the economy is in recession too early, that might hit confidence and make economic conditions worse.

Leaving it too late, however, as the last government did in 1991, means that the adjustments to fiscal and monetary policy - higher taxes, for example to cover a budget deficit - are more painful.

Up until recently, Gordon Brown seemed concerned to play down the risks of an economic slowdown.

As late as September 14, the chancellor told the BBC Radio 4 Today programme that "growth is as predicted and in line with our budget forecast."

It was only when the International Monetary Fund was about to publish its forecast for the world economy in October that he admitted his previous forecast for 1999 - when he assumed a growth rate of 1.75% to 2.25% - was unrealistic.

The IMF now says the UK economy will only grow by 1.2% next year.

And most independent forecasters agree.

According to the Treasury's own compilation of independent forecasts, in October the average prediction was for growth of just 0.9%.

But the range was extraordinarily wide - with investment bank JP Morgan predicting zero growth next year, while Liverpool University was sticking to an optimistic 2.3%.

A severe slowdown will also have consequences for unemployment, which has already stopped falling according to some counting methods.

The most pessimistic forecasts suggest that unemployment could rise by 300,000 to 500,000 next year, pushing the number of unemployed towards the 2 million level once again.

Getting it wrong

During the last recession, the government's forecasts were pretty substantially wrong, with an average mean error of 1.6% between 1985-94.

Professor Roy Batchelor of City University believes the government did about as well as could be expected:

"It's very unusual for the Treasury to be wildly away from what the private sector is forecasting ... more worrying is the fact that it has been very difficult to get a lead in recession years."

One reason for difficulty in forecasting is that official data is only collected slowly and is backward-looking, telling us what has happened some months in the past.

That is why many forecasters do believe that surveys of business confidence are important as forward looking indicators of what businessmen are likely to do.

The gloom shown by manufacturers in the recent quarterly survey by the Confederation of British Industry has in the past foretold the severe downturns in 1980 and 1991.

That contrasts to the government's own figures, which showed manufacturing output still growing in August.

Consequences for public spending

The slowdown in the economy will inevitably put pressure on the government's spending plans.

Each 100,000 more unemployed, for example, add £350m to social security bills.

In July, when the government promised another £40bn for health and education during the next three years, it appeared to have plenty of headroom because of a growing budget surplus.

But the slowdown means that the forecast for government borrowing is likely to increase by at least £20bn over the next five years.

As the Treasury Select Committee pointed out:
"If the economy should slow by more than the Treasury is expecting then inevitably tax receipts will fall and social security spending will increase, putting the Golden Rule at risk."

The Golden Rule is the government's self-imposed limit on borrowing. In the interests of macro-economic stability, it has pledged not to borrow "over the economic cycle" to fund current spending.

If the economic slowdown is short-lived, the House of Commons research library suggests that such a target can be met.

A more severe slowdown, however, could force the government to increase taxes - near the time of the next general election - or break its spending pledges.

As Michael Dicks of Lehman Brothers put it: "You need a system that is robust to surprises. That is the danger that Gordon Brown finds himself in, setting spending plans in stone when the forecast could go wrong."