Unemployment will hit 3.2 million as the economy shrinks by even more than had been feared, business leaders at the British Chambers of Commerce have predicted.
The BCC report also warns that painful tax rises and spending cuts will soon be required to start paying off the huge debts the Government is running up.
Official unemployment figures are rising and currently stand at 2 million, but in its latest economic report, the BCC says that the peak will be much higher.
Some 3.2 million people will be out of work by the second half of 2010, the BCC says. That is just over one in ten of the workforce.
Overall, the UK economy will contract 3.7 per cent in 2008/09, the BCC says. IN 1992-93, the peak of the last recession, GDP fell by 2.5 per cent.
Though stark, that is not the bleakest forecast the economy. The Bank of England has predicted that over the entire recession, the UK economy could shrink by 4 per cent or even more.
The BCC report also piles added pressure on Alistair Darling to use his Budget in April to set out plans for a severe squeeze on public spending in the years after the recession.
The Chancellor is borrowing huge amounts from the bond markets to finance short-term tax cuts and accelerated public spending during the downturn.
In his pre-Budget report last year, the Chancellor set out plans to borrow an extra £500 billion over five years, taking the national debt above £1 trillion for the first time.
The Treasury’s current forcecasts are for borrowing of £118 billion in 2009/10 and £105 billion the year after.
The BCC says that borrowing will actually be higher, £143 billion — equal to 10 per cent of GDP — in 2009/10, and £158 billion the following year.
Even on the Government’s figures, the national debt is set to go above £1 trillion for the first time.
The BCC says that Labour’s borrowing will mean any future government will have no choice but to rein in spending and increase its tax revenues.
“These figures signal a very serious budgetary position, which will have to be addressed vigorously as soon as the present recession ends,” the BCC report says.
With polls pointing to a Conservative victory at the next general election, senior Tories are increasingly trying to prepare public opinion for unpopular measures on tax and spending.
George Osborne, the shadow chancellor, last week warned that a Tory government will inherit the worst public finances since the Second World War and warned that radical changes in public services will be required.
And Steve Bundred, chief executive of the Audit Commission, which scrutinses public services, has warned of an “Armageddon scenario” where international investors are no longer willing to lend the UK government as much money as the Treasury wants to borrow.
Mr Darling’s pre-Budget report last year signalled much tighter spending and higher taxes from 2011. But the April statement is likely to go much further and could outline deep real-terms cuts in Government spending in the years ahead.
“Government borrowing is unacceptably large. Rising budget deficits are essential in the near future, in order to alleviate and eventually end the recession, but the critical need to significantly reduce borrowing after the recession ends will inevitably dampen UK growth prospects for a considerable period,” said David Kern, chief economist at the BCC.
“Producing a credible plan to reduce Government debt and borrowing over the medium-term is a key condition to maintaining the UK’s international credit rating and the confidence of the markets.