Lost tax revenues and higher social security costs will leave a 90 billion hole in the state finances, according to the Institute for Fiscal Studies (IFS).
The independent research organisation says the Treasury forecasts imply that the crisis has dealt a permanent hit to Alistair Darling of about 6.5% of national income.
Gemma Tetlow, a senior research economist at the IFS, says the tax burden would reach its lowest level since 1961 this year, at 35.1% of national income. Next years public spending as a share of national income would be 48.1%, equivalent to the peak between 1982 and 1983.
Tetlow says borrowing was forecast to be 12.4% (175 billion) of national income this year and 11.9% (173 billion) next year. Both levels that have not been seen since the end of the second world war, she says. In the medium-term, the chancellor is looking to bring the current budget back into balance by 2017 to 2018 through a combination of spending cuts and tax increases.
Robert Chote, the director of the IFS, says: This [budget] reflects a number of factors, most importantly the treasurys assumption that the long-term productive potential of the economy will be 5% lower in the future than it thought at the time of last years budget. He says a lower price level, falling house and share prices and a weaker outlook for the financial sector all had an impact.
Chote says the Pre-Budget Report contained a 25 billion short-term fiscal stimulus package, followed by a six-year plan for spending cuts and tax increases. This was intended to help repair the public finances that would eventually raise almost 40 billion a year. However, the budget plan added just 5 billion to that short-term stimulus and more than doubled the size of the prospective fiscal tightening.
Notwithstanding the intensity of the looming squeeze, the Treasury predicts that government debts will more than double from their pre-crisis levels before peaking around the end of the next parliament, Chote says.
He says the Treasurys assessment of the fiscal damage from the economic and financial crisis is breathtaking. It is important to look beyond debates about whether the economy will recover quite as quickly and quite as strongly as the chancellor claimed yesterday to the scale of the underlying problem that the Treasurys detailed forecasts identify.