How long can we avoid a day of reckoning on national debt?

The shock in the House of Commons earlier this year as Alistair Darling laid out how much the government would borrow was palpable.

Tough and cynical politicians who had barracked the chancellor through the rest of the Budget speech were momentarily rendered speechless as they took in the immensity of what was being proposed.

The national balance sheet will go £175 billion into the red this year, £173 billion in 2010, £118 billion thereafter and fall to £97 billion by 2012 – if, that is, Darling manages to bring the debt down as he believes.

Darling’s rationale was that desperate times call for desperate measures and most economists, appalled at the global collapse in GDP at the end of 2008, agreed that governments had to take up the slack to avert an inflationary spiral.

Six months into the massive fiscal expansion and with plenty of green shoots but little sign of concrete recovery, many are asking how long the strategy can remain sustainable. Just how long can Britain avoid a reckoning on its national debt?

The IMF last week said the government had effectively masked the paucity of its accounting via quantitative easing, which had shaved around 1% off the cost of its lending.

If correct, the risk of a major shock to both bond markets and the national finances once QE comes to an end is significant for investors who have ploughed into debt.

Independent economist Andrew Hunt said: ‘Ultimately, the UK government simply cannot afford to continue with its huge budget deficits ad infinitum.

‘Indeed, the political debate is slowly shifting as to “how to tighten?” policy and to close the deficit. At the very least sales taxes will rise once again next year and we suspect there will be many more tax hikes and spending reductions that will reduce household disposable income growth.’

He added that following the awful contraction of UK GDP in the second quarter, significantly worse than expectations, that time has clearly not yet come.