Jeremy Warner: A decade of pain looms as full horror story is revealed

Outlook Even on the day, the Budget arithmetic looked bad enough. The day after the night before, it looks even worse. In a characteristically penetrating analysis, the Institute for Fiscal Studies yesterday spelt out the full horror of the period of austerity that now awaits ordinary Britons, well-off, middle income and poor alike, as the Government struggles to bring a decade of let-rip public spending under control.

After Britain's decade of debt, a decade of pain now looms, a lost decade, if you like, to pay for the profligacy of the last 10 years.

Much of this was glossed over by the Chancellor during Wednesday's Budget speech, which in a number of respects now appears downright misleading. He didn't want to admit to the full scale of the challenge facing the country. The IFS spells it out in black and white.

Even assuming the Treasury's heroic assumptions on growth are met, and that higher taxes on the rich deliver the extra revenues predicted – much more likely, according to the IFS, is that they will prove fiscally counter-productive – the Government is still roped in to freezing public spending in real terms for much of the next parliament and possibly for the next two to get to its dim and distant goal of an eventual return to balanced budgets.

What makes this public spending squeeze much more difficult to achieve than it might seem is that whatever the Government does, it has no option but to absorb considerably higher spending on unemployment and other social security benefits. It must also meet the fast-rising costs of servicing its growing debt mountain, projected to swell to nearly 80 per cent of national income by 2013/14.

This necessarily makes the resulting squeeze elsewhere even more severe. To achieve the pencilled-in 0.1 per cent-a-year real cut in spending for much of the next parliament, the Government proposes to take the axe to public investment. No more new schools, no more new hospitals, and severe cuts in other forms of infrastructure spending.

In fact, the scale of the challenge facing the public finances is likely to be even greater than this calamitous prognosis suggests, in that growth may not turn out as strong as the Treasury hopes and the markets may demand a swifter return to fiscal rectitude than the two parliaments the Chancellor is giving himself.

As it is, gilt-edged yields are rising sharply. Much of the good that "quantitative easing" has achieved in driving down borrowing costs has already been undone, as the markets take fright at the sheer size of the debt issuance necessary to fund the enormous size of the structural deficit.

The markets sense that the Government is as insolvent as the banking system. For how much longer will they be prepared to fund the deficit on the relatively benign terms that still reign? Britain has been living beyond its means. Payback time has arrived. The markets may be about to demand their pound of flesh.