The Queen is down to her last £1m and will go into the red in the year of her Diamond Jubilee in 2012, figures released by Buckingham Palace reveal.
Royal accounts suggest that unless ministers agree to a cash bailout, the Queen will either have to cut spending or dip into her private wealth. Her public reserves have been reduced from £37.1m in 2001 to an estimated £1m by the end of next year.
The scale of the financial crisis facing the monarchy has already forced the Palace to postpone vital building projects and scale back on its public expenditure.
But the rising costs of salaries of the Royal Household, a backlog of repairs for the royal palaces and the ravages of inflation have left her public finances in a parlous state.
The Government has said that in the present financial climate it is unable to increase the Civil List funding of £7.9m or to provide extra cash to help with the £40m backlog of palace maintenance, which has risen by £8m in the last year.
Sir Alan Reid, Keeper of the Privy Purse, said: "The Royal Household is acutely aware of the difficult economic climate and took early action to reduce its Civil List expenditure by 2.5 per cent in real terms in 2009. We are implementing a head-count freeze and reviewing every vacancy to see if we can avoid replacement. Property services funding will be reduced by £500,000 this year."
The cost of the Queen's Civil List – which pays for the running of the Royal Household including staff salaries – was £14.2m in 2009, up £300,000 on the year before. However, the overall cost of keeping the monarchy decreased by £3.3m (7.9 per cent) to £38.2m during the 2009-10 financial year. A spokesman said the fall equated to a drop in real terms of 12.2 per cent and was mainly thanks to a reduction in commercial charter flights and a refund of lease rentals from the Queen's helicopter, which was replaced last year.
That is still £10m more than in 2002, when the Palace first published detailed accounts of its finances. Some MPs suspect that members of the Royal Family, principally the Prince of Wales and the Duke of York, have been profligate with taxpayers' money and want the royal accounts publicly audited in the same way as government departments.
But the biggest immediate financial headache for the Palace is the growing cost of the maintenance of the royal palaces which are supported each year by a public grant of £15m.
Sir Alan said: "Work will continue on assessing the condition of the estate, but it is acknowledged that the necessary cuts in public expenditure will have an impact on the backlog of essential maintenance which it is hoped can be addressed in the longer-term. In the meantime, the Household is continuing to pursue opportunities to reduce costs and generate income from the estate's assets, including commercial lettings and management charges."
Key projects in the backlog of essential works for which there are unlikely to be funds available in the next 10 years include: renewal of lead and slate roofs at Buckingham Palace and Windsor Castle; refurbishment of State Rooms at Buckingham Palace and Windsor Castle; replacement of existing heating and electrical services at Buckingham Palace, with associated asbestos removed, and replacement of Victorian cast-iron and lead water mains at Windsor. The Palace also acknowledged that the backlog includes much-needed conservation work at the Victoria and Albert Mausoleum at Windsor, which means it will remain on English Heritage's Buildings at-risk register.
Royal aides are understood to be negotiating with the Treasury to find a new formula to pay for the Royal Household and the upkeep of the palaces. "We are looking at a consolidated funding arrangement that would bring all the elements together", a Palace source told The Independent. Palace accounts show that last year the Queen had to dip into her reserve fund to boost her Civil List by £6.5m in 2009. This is the highest amount ever drawn from the reserve, which comes from surplus Civil List money accumulated in the 1990s. The current deal for the Civil List – which gives the Queen £7.9m a year – was agreed by then prime minister John Major in 1990 and frozen by Tony Blair in 2000.
Republic, a group which is campaigning for a democratic alternative to the monarchy, protested outside Buckingham Palace yesterday. Its campaign manager, Graham Smith, said: "With European elected heads of states costing a fraction of this official figure, it's clear the monarchy continues to waste many millions of pounds of taxpayers' money when front-line services are being threatened."