As expected, the Treasury has marked down its Budget forecasts for economic growth this year from -3.5% to -4.75%, but has maintained its growth forecast of around 1-1.5% in 2010, which looks plausible. The Treasury then projects that GDP growth will rebound to an average of 3.5% per annum in the following three years, which looks relatively optimistic although not impossible in the upturn phase of the economic cycle.

Public sector net borrowing is now estimated to be around £178 billion in 2009/10 (12.6% of GDP) and £176 billion in 2010/11 (12% of GDP), up slightly from the Budget forecasts but not by much. But with a rapid economic recovery thereafter, the Treasury is expecting buoyant tax revenues to reduce public borrowing in 2014/15 to around £84 billion (4.4% of GDP). This is possible, but if a more cautious view is taken of medium-term economic growth potential in line with the view of PwC and most other independent forecasters, then borrowing may well remain higher than the Treasury expects.

The Treasury forecasts that net public debt will rise to a peak of around 78% of GDP in 2014/15 before stabilising. The current budget deficit will not return to balance until 2017/18, which would be a long time for the bond markets to wait. The risk is that financial market worries about this rise in public debt (to almost £1.5 trillion by March 2015) could eventually lead to significantly higher long-term UK interest rates.

The Treasury has proposed only relatively modest net tax rises in the PBR, amounting to a net increase of around £5 billion by 2012/13. But there must be a significant risk that further tax rises will be needed after the general election next year, whichever party wins.

The Treasury largely confirmed earlier plans for total public spending to be broadly flat over the three years to 2013/14 in real terms although the initial level of spending has been increased somewhat. These projections would imply a significant real cut in departmental spending over this period after allowing for rising debt interest costs and projected social security benefits and tax credits. With some areas like health, schools and police being protected from real cuts, however, other areas are likely to see double digit real spending squeezes in the three years to 2013/14.

The era of fiscal austerity is likely to extend throughout the next Parliament and quite probably beyond given the difficult state of the public finances. This will certainly be a long and painful process: the PBR has not done much to close the fiscal gap so there will be further tough choices to be made on tax and spending after the general election.