Its forecasts have been exposed as wildly optimistic, but the Pre-Budget Report of November is still worth a read. I suggest you start with table B21 on page 222. It sets in its proper context the scale of borrowing that the Government has undertaken since that statement, and the additional borrowing it plans over the next two years.

In only one year since the present Government was elected has public sector net borrowing as a percentage of GDP exceeded 3 per cent. Indeed, in three years it was negative, lending some credence to the Prime Minister's assertion that the Government did mend the roof when the sun was shining.

The 3 per cent figure is more than symbolically important. It is the threshold defined by the Maastricht treaty at which the “excessive deficit procedure” kicks in. In other words, it represents an internationally agreed definition of a reckless fiscal policy.

There have been occasions in the past when this threshold has been exceeded. In 1975-76, when the Callaghan Government had to go to the International Monetary Fund to rescue a failing economy and was forced to accept damaging public expenditure cuts in return for IMF support, public sector net borrowing was as high as 7per cent of GDP. And in 1993-94, after the recession of the early 1990s and the Major Government's expulsion from the exchange rate mechanism of the European Monetary System, it reached its highest level yet, of 7.7per cent.

I remember both periods well. I got married in 1976 and we honeymooned for a few days in Amsterdam. I had taken out plenty of spending money from the bank before we left, but I had not had time to change it into guilders. When we arrived I discovered that the pound was falling so fast that no one knew what the correct exchange rate should be, so the Dutch banks refused to change my money.

My pounds were, quite literally, worthless. We might well have starved had not a Yugoslav couple taken pity on us and bought us a meal. It's a miracle I'm still married.

And in September 1992, as a finance director, I unluckily found myself having to refinance a £40million loan on the day that Norman Lamont raised the metaphorical white flag on the steps of No11 Downing Street. I was able to raise an overnight loan, but only at an eye-watering 29 per cent interest rate.

Those who are too young to remember those periods would do well to learn about them fast - because even the dark years of the mid-1970s and the early 1990s may look like days of wine and roses quite soon. This year net public sector borrowing will comfortably exceed 10 per cent of GDP.

Next year, according to credible forecasts published by the CBI, it will be about 12 per cent. Others have suggested that it might be as much as 15per cent, more than double the figure reached in 1976.

It is worth recalling that at the height of that sterling crisis, the Prime Minister, James Callaghan, (who was a former tax inspector), told the Labour Party Conference: “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists and, in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

How times change. What the mid-1970s and the early 1990s had in common was that huge government borrowing was quickly followed by public spending cuts. In the case of the Callaghan Government, the cuts were so huge that the Cabinet was torn apart by them. Ministerial diaries and memoirs of that period describe a level of dissent amounting to subversion.There is little doubt that if Labour wins the next election the scale of spending cuts needed to rebalance the public finances would again test loyalties within the Cabinet to near breaking point.

That is why some have argued that the present Government will simply carry its burden of debt on the public sector balance sheet for decades, in the hope that our children or grandchildren will pay it back, no doubt in even further devalued pounds. After all, it is argued, Japan and Italy have managed their economies with substantially higher debt-to-GDP ratios than Britain.

There is some merit to this argument. There are two definitions of reckless fiscal policy in the Maastricht treaty, and on the second the UK economy looked a lot more healthy at the time of the Pre-Budget Report. The treaty permits public sector net debt to rise to as much as 60 per cent of GDP.

Before the downturn began, it was only 36.3 per cent, having been reduced from 42.5 per cent when Tony Blair first became Prime Minister and Gordon Brown Chancellor. In 1976 when net borrowing was 7 per cent of GDP, net debt was 53.8 per cent of GDP. And in every one of the Thatcher years it was more than 40 per cent.

Most economists and ministers now believe that a prudent fiscal policy means not allowing public sector debt to exceed 40 per cent of GDP. But the Government is under no obligation to manage the public finances with this target in mind. Indeed, Britain is not even bound by the 60 per cent limit in the Maastricht treaty, as Margaret Thatcher managed to win an opt-out from the relevant article.

This is just as well, given what has happened since last year. With the debts of the nationalised and part-nationalised banks now on the public sector balance sheet, the ratio of public sector debt to GDP in the UK exceeds that of Italy and Japan. And it is set to grow much higher. On the basis of the planned levels of borrowing, it could exceed 65 per cent of GDP in 2010-11.

And at that scale of indebtedness, the Armageddon scenario most feared by the Treasury - that there will be insufficient lenders to match the planned level of borrowing - begins to look a distinct possibility.

That is why tax increases and spending cuts are inevitable immediately after the election, assuming that there are signs of economic recovery by then - and why any managers of a public service who are not planning now on the basis that they will have substantially less money to spend in two years time are living in cloud-cuckoo-land.

Steve Bundred is chief executive of the Audit Commission, the independent body that checks whether the public services are giving value for money

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