Our politicians have created an economic time bomb. Profligate public spending at a time of deep recession has led to a severe fiscal crisis.
This year about one in every four pounds spent by the British government will be borrowed. In the United States, the ratio is even worse.
The dangers are huge. The last time the UK ran such large deficits was during World War II. And this was only possible through special loans from the US now the worlds biggest debtor.
Today nearly all major Western governments are trying to borrow vast sums at the same time. Meanwhile, China is engaging in a stimulus package that is depleting its vast reserves, and resource-rich countries such as Russia have seen their surpluses disappear as the price of commodities has fallen.
In the medium term, it is difficult to see who will lend such unprecedented sums to already heavily indebted governments. Indeed, if there is no clear action plan to tackle the deficits, investors in bonds will at the very least demand a substantial risk premium.
This would mean a rise in interest rates. Governments would then have to spend more on loan repayments, threatening a debt spiral in which borrowing is increased to pay off existing liabilities.
In the worst-case scenario, politicians may be tempted to monetise the debt by printing money. In the twentieth century, large and persistent budget deficits were often followed by periods of high inflation.
But even if inflation is avoided, government borrowing on such a scale is likely to crowd-out private investment. Resources will be diverted from wealth creation into unproductive bureaucracy and wasteful, politically-driven spending.
Unfortunately, demographic trends will make it even harder to balance the books. Western governments face enormous unfunded pension liabilities. (Public sector pension liabilities amount to around £1,200 billion in the UK alone.) Rapidly ageing populations are also increasing the burden on state-funded health and welfare systems.
It is therefore essential that borrowing levels are brought down as quickly as possible. And this has important implications for taxation. Taxes must rise or government spending must fall or there will have to be some combination of the two options.
Increasing taxes will do significant economic harm by discouraging hard work, entrepreneurship and innovation. Investment levels are also likely to be reduced, with the government taking a larger share of economic resources that could have been put to productive use in the private sector.