The real pain is still to come. Yesterday’s bank rescue plan is only the start. The recession, rising unemployment and soaring borrowing will force not only the Government but also the Tories to rethink their public spending and tax plans. We are entering an era of tight constraints and lowered ambitions.

The banking package is spectacular and unprecedented. But Alistair Darling claimed yesterday that the impact on the public finances could be “exceptional, and mostly temporary”. That depends on whether the package works.

There are three elements: first, a government guarantee of up to £250 billion for interbank loans that is being treated as a contingent liability and would only be a cost to taxpayers if the loans failed; secondly, raising the Bank of England’s special liquidity scheme to £200 billion, which counts as part of its short-term funding operations.

Thirdly, there is the £50 billion Bank Recapitalisation Fund to allow a strengthening of banks’ capital positions, mainly via preference shares. Leaving aside both when, and for how much, they will be resold, the immediate cost will not be charged against public borrowing, but will raise overall debt totals. This is apart from the costs of nationalising Northern Rock and Bradford & Bingley. The additional debt interest costs will be partly offset by dividend receipts and fees.

But more important is the deterioration caused by the economic slowdown, underlined by the latest, gloomy IMF forecasts. This is likely to push borrowing in 2008-09 up from the £43 billion forecast in the March Budget to possibly £60 billion, and much, much more next year. That would take borrowing back to mid-1990s levels, and, together with the bank rescues, raise debt to well above the current 40 per cent ceiling of national income.

The key is how much of these increases are cyclical and how much structural, caused by a lasting shortfall in tax revenue from the financial and property sectors. The more the problem is structural, the more there will have to be corrective action via higher taxes or expenditure savings, not now but over the next few years.

That means the postponement of Labour ambitions for more public spending and Tory hopes for tax cuts. The next few years, and most of the next Parliament, will be dominated by a painful adjustment as any new government seeks to return the public finances to health. Yesterday’s package makes the required tax and spending measures even more necessary.

But it is not just the size of government. It is also about the role of the State. Comparisons with past Labour commitments to nationalisation are alluring but misleading since ministers will not run the banks. The rescue is about saving capitalism, not replacing it with socialism. More relevant are demands, from the Tories as much as Labour, for government guarantees and tighter regulation — for instance, of bonuses. This muddies the ideological divide and, as yesterday showed, makes it easier for Gordon Brown, at his most commanding, to handle than for David Cameron. But a recession will be much harder for Mr Brown.

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