The course of this economic crisis has been full of unexpected twists. But yesterday's revelation of falling Treasury tax receipts and rising government borrowing was not one of them. Tax revenues always decline in a recession as economic activity declines. And the Chancellor, Alistair Darling, made it clear in his pre-Budget report last October that the Government would respond to the shortfall by increasing public borrowing. The important question is whether Britain's public finances will be able to absorb these twin shocks. The answer is ambiguous.
Britain's national debt is now approaching 50 per cent of our annual economic output. The good news is that, while this breaks Gordon Brown's golden rule on public debt levels, it is nothing special compared with the liabilities of other G7 nations. The United States' public debt is more than 60 per cent of GDP. In France it is 64 per cent. Germany's debt is 63 per cent of its output. We have some room for manoeuvre.
Yet Britain plans to borrow more annually (8 per cent of GDP in the tax year 2009-10) than most of its peers. Throw in the Treasury's longstanding reliance on the now diminishing tax receipts of our financial services, and the potential need to take on the vast liabilities of our failed banks, and you have an ominous picture.
Some have conjured up a nightmare scenario of overseas investors refusing to buy UK government debt at present prices and pushing up borrowing costs for the Government. This would put Britain into a spiral of debt and perhaps even force the Government to seek cash from the International Monetary Fund to pay its creditors.
But there is another nightmare scenario in which the Government does not borrow too much, but too little. If ministers fail to take up enough of the slack in the economy by increasing public spending to pay for a fiscal stimulus, output could shrink still more dramatically. This could potentially create an unprecedented surge in unemployment. History teaches us that political crisis and a self-defeating retreat into protectionism become more likely in such circumstances.
So will the world end in the fire of national bankruptcy, or the ice of collapsing output and massive joblessness? The Government and the Bank of England have the responsibility of weighing up the risk and likelihood of each scenario. But the scary truth is that they are flying blind because we have never been in a synchronised global downturn on this scale before. In the end, our leaders will pay (or save) our money and take their choice. Pleasant dreams.