Hamish McRae: A monumental debt that takes us back to the 70s

This is not going to work, is it? Having got us into a jam by borrowing too much, the way out is to borrow yet more. This is a gamble of monumental scale, a bet on the world economy growing again by the second half of next year. If it does recover, then the Chancellor may have succeeded in puffing up our own economy a bit during the downturn but the borrowing levels to achieve that are terrifying. If the world economy does not recover, the consequences don't bear thinking about.

This is the fastest increase in British public debt to have occurred in peace time. Yet even on the Treasury's own figures it merely cranks up an anaemic recovery starting in the middle of next year. If things keep heading downhill, then maybe it does not even do that.

The Chancellor talks about borrowing £118bn next year in terms of 8 per cent of GDP. George Osborne spoke of doubling the national debt. The other way of looking at that is to say that the Government is only raising about £7.50 in tax for every £10 it proposes to spend. That is back to the levels of the 1970s that led to us seeking a bailout from the International Monetary Fund (IMF). It is worse than the early 1990s fiscal deficit.

Gordon Brown introduced his fiscal rules precisely to stop this sort of catastrophe happening again and he has now blown them to pieces. And the tragedy for him – and for us since we will have to pay for this for half a generation – is that had he stuck to his original rules, we would have been in a strong position now to pull through this downturn in better shape than other countries.

So even if the plan works as forecast, the result will be a bit more growth next year at the cost of clobbering economic growth for a decade or more. But what if it doesn't? The Treasury forecast for this year's deficit has been catastrophically overoptimistic. Suppose it is again?

The big question is simply that if a fiscal deficit of £80bn this year does not boost the economy, why should one of £118bn do so next year? Or whatever crazy number will turn up the year beyond? People will look through the stimulus and realise that they have to prepare for the tax increases to come. So, wisely, they will not rush to the shops because VAT has come down

The experience of Japan was that the more the government borrowed, the more frightened people became and the more they felt they had to save. Britons are more insouciant towards their debts than the Japanese but in previous periods when our government deficits got out of control, such as in the 1970s, ordinary people saved more. That was why the Labour Government realised that fiscal boosts simply did not work well. What happened then was savage public spending cuts; if the downturn is prolonged, that is what will have to happen again.

There is a further reason for alarm. It is the impact of this programme on psychology. The Government has talked up this downturn as an unprecedented occurrence; the Prime Minister has to say that to justify these huge borrowing numbers. But while it is true that the banking crisis is exceptionally grave, the general economic outlook is not particularly bad when compared to previous cycles. If you believe the Government's figures – or indeed those of the IMF – this recession will be a bit less serious than the one in the 1990s and a lot less serious than the recession of the early 1980s.

So we have unprecedented borrowing to counter a normal, post-war cycle. The danger of talking up perils is that people will believe them. It is the reverse of Franklin D Roosevelt's phrase that the only thing we have to fear is fear itself – between them, Messrs Brown and Darling are trying to make us more fearful, not less.

If the key to promoting sustainable growth is not a temporary fiscal boost, what is it? Well obviously the deficit should be allowed to rise as the economy dips. That is the automatic natural stabiliser. Beyond that, the case for using tax cuts or give-backs to puff up demand is pretty thin. George Bush did that this year and the US economy is still heading into recession. What needs to be done is to get the financial system going again.

That means pressing on as governments have done in recapitalising the banks. It means making sure they disclose all their bad debts because only by clearing out the rubbishy loans can they start to make good ones again. It may mean lending directly to companies that are in temporary difficulties. It certainly means listening to companies about tax and regulation rather than trying to kick them around.

There are plenty of sensible things for business, particularly small business, in this package. But its credibility is undermined by the big numbers for borrowing.

And those increases in personal tax and national insurance contributions? Well, that 45 per cent rate (actually 50 per cent for bits of the band between £100,000 and £150,000 if you allow for the NI changes) breaks the covenant given by Tony Blair and Gordon Brown all those years ago that basic tax rates would not be changed. It will probably result in less money coming into the Exchequer, not more, or at least that was what Tony Blair always argued. You don't need many people retiring early or moving to another jurisdiction to offset the modest gain you might get from those who don't reorganise their affairs. So it is silly.

But this whole package is about politics as much as economics. It is trying to crank things up for a few months at the cost of pain in the future. The next government will have the huge task of rebuilding fiscal discipline, creating order and efficiency in public services, simplifying the tax system and trying to regain some of the lost ground in terms of the UK's competitive advantage. It will not be a bundle of fun for the next government – or for us.