Britain's budget deficit could hit the stratospheric levels seen in the wake of the Lehman Brothers collapse if the eurozone crisis deepens and UK growth is wiped out, economists have warned.
On Wednesday, the public sector borrowing figures for November are expected to show borrowing of £20bn over the month. This would leave the Treasury on course to bring the deficit for 2011-12 down to the £127bn forecast by the Office for Budget Responsibility (OBR). However, analysts also warn that if next year's growth undershoots the 0.7 per cent predicted by the OBR, the borrowing figures will rapidly deteriorate.
"If growth is zero for 2012 you could see the deficit back at £140bn-£145bn," said Investec economist Philip Shaw. "If you had a fully blown recession triggered by Europe and another credit crunch it's not impossible to see borrowing a couple of years down the track exceeding the £156bn which we had in 2009-10."
The Government borrowed £137.1bn in 2010-11, equivalent to 9.3 per cent of GDP. The OBR projects that the deficit will fall to £127bn this financial year before dropping to £120bn in 2012-13 and £79bn in 2014-15.
Mr Shaw also warned that if the deficit shoots up due to a return to recession in the UK, the Government's borrowing costs could also rise, opening the door to a sovereign debt crisis. "If you're talking about the worst-case scenario, it's quite feasible that you should be looking at higher yields."
Andrew Goodwin, a senior economic adviser to the Ernst & Young ITEM club, also warned that the public finances risk being thrown into chaos by low growth. "If growth falls short there is a major problem and it does have big implications for the targets further out," he said.