We will still feel the effects of this in 2030

ALISTAIR Darling prescribed some bitter medicine for high-earning taxpayers and users of public services in last November's pre-Budget report - much of it to be swallowed after the next general election. Come the Budget, our report on the public finances shows, he may need to prescribe a second dose.

Treasury forecasts already suggest that the credit crunch will cost the Exchequer around £50 billion a year in today's terms in lost tax revenue and higher social security costs. Left unadressed, this permanent blow would have sent the Government's debt and debt interest payments climbing to unsustainable levels.

Mr Darling tried to contain the damage by pencilling in a tight squeeze on public spending and modest tax increases, to take effect once his short-term stimulus package had expired and the economy had hopefully stabilised.

We estimate that the spending plans he has pencilled in will require a real freeze on spending by Whitehall departments over the next three-year spending review, which is likely to start in 2011-12.

The spending cuts and tax increases will mount gradually from next year, reaching about £38 billion a year in today's terms by 2015-16. Even if the economy performed no worse than the Treasury expected last November, this tightening would probably have to remain in place until the early 2030s before debt and debt interest return to pre-crisis levels.

On that basis, the Conservatives were correct in their warning last year that the rise in debt might take a generation to pay off. But they were wrong to lay most of the blame on the temporary VAT cut and other stimulus measures.

These account for only one 15th of the rise in public sector debt over the next five years. It is the blows to the economy, housing market and stock market that do most of the damage.

Most City and academic forecasters now think that the recession will be deeper and longer than the Treasury thought at PBR time. This will push borrowing up further, but hopefully only temporarily. In the long-term, there is also the open question of whether the Government will make losses on its bank investments - and, if so, how big.

As if this picture was not gloomy enough, we also suspect that tax revenues will not grow as quickly over the next years as the Treasury hopes.

As a result, the Government - or its successor - would have to implement further tax increases or spending cuts worth around £20 billion a year in today's terms by the end of the next Parliament to expect to reduce borrowing as quickly as Mr Darling had hoped in the PBR.

The Treasury is also assuming that the Government will continue to be able to borrow relatively cheaply. Our Green Budget collaborators at Morgan Stanley see good reason to hope this will be the case. But there is a risk that investors will demand more to lend to us.

That might not push us into the arms of the IMF, but it would make the fiscal arithmetic even more unpleasant and require a bigger tightening.

That makes it all the more important for the Government to convince people now that it is serious about repairing the public finances as soon as the economy is fit enough to stomach the medicine.