Jeremy Warner: Now it's public debt we must worry about

Outlook The public finances are continuing to deteriorate at an alarming rate, with growing unemployment, falling corporate tax receipts but still-rising Government spending, further enhanced by repeated bank bailouts.

Fifteen years of meticulous Treasury work in getting the public finances back on the straight and narrow is fast going down the pan. The "golden economic legacy" left for Labour by the Tories has been turned into credit-crunched dust. Forecasts of public borrowing for this year made as recently as last autumn's pre-Budget report already look like fantasy, with some economists now forecasting a borrowing requirement of as much as £90bn.

If the situation looks bad for this year, it's a great deal worse the year after, when the PBR could soar as high as £200bn. Remember that these numbers deal only with the underlying deficit. Add in the fact that the taxpayer has now assumed responsibility for the liabilities of both Royal Bank of Scotland and Lloyds Banking Group on top of Northern Rock and Bradford & Bingley, and the numbers reach truly frightening proportions.

Can Britain afford this recession, or are we, as forecast by the investment guru Jim Rogers, destined to become an Icelandic-style basket case? The one thing we can draw some comfort from is that Britain starts from a relatively low level of overall public debt compared with other G7 economies. Over the next few years, we'll be catching up fast, but ignoring the banking liabilities, which are in any case largely matched by assets, public debt as a proportion of Gross Domestic Product should just about remain containable.

Even the International Monetary Fund, which is particularly gloomy about prospects for the UK economy, thinks British debt as a proportion of GDP will remain below that of Germany, Italy, France and the US, and get nowhere near that of Japan. Thanks in part to quantitative easing, there is no sign yet of any problems in financing these deficits. Investment appetite for government debt seems undiminished. What's more, the inc-rease in public debt is, in a sense, only compensating for the contraction of private credit. Even so, it's a terrible mess we are creating for ourselves which will take years to clean up.

There is also a growing risk of any possible growth in private investment being crowded out by government borrowing. All this policy action is no doubt necessary to save the world from Depression but there is going to be no easy way back to our free-spending ways. A prolonged period of relative austerity may await.