My heart rose at breakfast this morning. I heard George Osborne, the chancellor of the exchequer, admit that “knowing what we know now, we regret the decision”. Sadly, the thrill was short-lived – Mr Osborne wasn’t talking about his tax and spending plans but instead the prime minister’s decision to appoint former News of the World editor Andy Coulson as Downing Street’s press chief. The disappointment was soon to be compounded by the official preliminary estimate of second quarter 2011 gross domestic product (GDP), published by the Office for National Statistics (ONS), which highlighted precisely why the chancellor should be regretting his economic policy stance.

According to the ONS, the economy grew by only 0.2 per cent in the second quarter of the year. Amazingly, this was spun as "encouraging news" by government ministers because some forecasters had suggested things might have been even worse. But quarterly economic growth of anything less than 0.5 per cent would have been poor at this stage of the recovery from recession – the CIPD expected 0.3 per cent – so, far from being encouraging, 0.2 per cent is actually desperately poor.

Don’t pay undue heed to excuses about preliminary statistical measurement or the special "one off factors" highlighted by the ONS which may have depressed economic growth in the spring, such as the after-effects of the Japanese tsunami and the royal wedding (an event we were originally told would boost the economy). The emerging underlying path of GDP growth and forward looking indicators show that the UK economy is being starved of the demand needed to raise output substantially, create enough jobs to cut unemployment and prevent a further deterioration in the fiscal deficit. With the effectiveness of a further bout of quantitative easing far from clear, and even the most growth-friendly supply-side measures unlikely to work properly in a demand vacuum, it’s imperative that the coalition government alters a fiscal policy stance the economy simply can’t bear at present.

It’s becoming increasingly clear that, as the CIPD warned, the coalition government was far too optimistic last year when it set course on a very rapid path to fiscal deficit reduction. Sticking to that course as demand weakens risks crippling the economy for years to come and will make the task of deficit reduction even harder. Ministers should reset the fiscal policy sat nav before it’s too late, in the first instance by reversing last January’s misguided hike in VAT. The argument that a fiscal policy reset would diminish the UK’s credibility in financial markets and itself damage growth prospects has some merit but is overdone. By far the greater threat to credibility is to carry on with a policy that is obviously hurting but shows little sign of working.

John Philpott, chief economic adviser, CIPD