The Pounds 39bn Black Hole in the Chancellor's Budget

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Institute for Fiscal Studies report reveals scale of the crisis in the public finances Little room to provide much-needed boost to economy, analysis concludes

The Chancellor, Alistair Darling, will be unable to deliver any meaningful boost to the economy in his Budget in a fortnight's time, and an almost unprecedented squeeze on public spending will be required over the next few years - whichever party wins the next general election - according to a pre-Budget analysis by the respected Institute for Fiscal Studies (IFS).

An annual "black hole" approaching 39bn will need to be plugged if the nation's finances are to be brought back into balance as the Government plans, warns the IFS, a looming problem that leaves the Chancellor with even less room for manoeuvre in his Budget, due on 22 April. The IFS said: "Because debt is going to be so much higher than had been previously expected, it has become more dangerous to add to it - even relatively modestly."

As public borrowing for this tax year, 2008-09, climbs to 95bn - some 17bn more than anticipated in the pre-Budget report last November - the IFS forecasts that it will hit around 150bn in each of the succeeding three years, again way beyond government estimates. Even without the additional cost of the various bank bailouts, that will take the national debt to more than 1 trillion (1,000,000,000,000), or 73.5 per cent of GDP by 2015.

As a proportion of the size of the economy it has not been at those sorts of levels since the 1960s. Even so, in aggregate terms it is still likely to be lower than that of Germany and Japan, and about the same as the US.

Such sums, however alarming, exclude an additional 130bn, or almost 10 per cent of UK national income, that will eventually be required to pay for the banking bailout - the IMF's latest estimate. In other words, the credit boom and consequent banking crisis will cost each UK taxpayer approximately 4,000 - even before they address the current increase in levels of debt.

The IFS says that, having climbed to 82.4 per cent of GDP including the cost of bank bailouts, public debt is unlikely to return to pre-crisis levels until the 2030s. Without corrective action national debt will go on to reach more than 90 per cent of GDP by the 2050s - by that point a century-long high.

Only by radical cuts to public spending, tax rises or some combination of the two can the "structural" deficit be resolved, says the IFS. …