We shall need an answer soon

George Osborne, in an interview this morning on the Toady prograame on Radio 4, was asked how he would deal with the huge and growing Budget deficits if/when he becomes Chancellor.

The newly frank nominal chancellor, Alastair Darling, recently admitted that the future UK government would have to borrow much more than he had forecast because his forecasts about the recession were too optimistic. He too, in the coming budget, will have to square a circle.

How can you fund extra government interest payments on a rapidly growing national debt? The highly respected and independent Institute of Fiscal Studies, today released a briefing paper on how the £39 billion needed annually to bring the Budget back into balance by 2015-16 could be financed. (Their assumptions about length and depth of recession and the speed of recovery are probably accepted by many experts, but if a major industry, say the City of London Financial Industry, does not recover very well, then the need could be much greater.)

As always, there are two broad approaches to finding massive increases in government expenditure.

The first, mainly supported by the left, would favour increased taxation. This will involve an increase per family on the average of £1,250 in their taxes paid. Given that many are already feeling a burden, especially but not entirely at lower incomes, this will be difficult. The whipping boys will be those earning high incomes, especially the bankers who are universal scape goats. One problem here is that with their good qualifications of various sorts, they could easily emigrate, and leave behind an even greater problem. The other problem is that there are relatively few of the highly paid, certainly not enough to avoid fairly modest incomes having much higher tax bills.

(Some taxes are not on incomes, but on spending of various sorts, and to increase these would be to cause prices to rise, and we do not want inflation in a period of recovery!)

The second broad approach is to make cuts in public expenditure, and this is generally supported by the political right. The IFS calculates that there would be a need to reduce public spending by 1.1 percentage points a year, meaning a five-year freeze in public spending in real terms.

Some areas are"sacrosanct" and protected, - health, education, law and order, environment, while others are in poor shape because they have been denied funding, e.g. defence. So where will it be possible to make cuts in real terms? Proposed victims will either not yield enough, e.g. quangos, databases, ID cards, while others offer some prospect but only over a longer time frame, such as social security, bureaucracy.

In the end, there is likely to be a mixture of the two kinds, but I would not like to be the next chancellor. A mixture of Brownian profligacy and recession has left a massive problem.