Britain must raise taxes by £26 billion per year or cut public spending by 17 per cent in the three years to 2013-14, over and above the measures proposed in this year’s Budget, a report published today warns.

PricewaterhouseCoopers (PwC), the accountancy firm, says that the damage to the economy inflicted by the recession means that fiscal tightening will need to be more aggressive than anticipated by Alistair Darling in this year’s Budget.

PwC believes that such measures are essential partly because it expects economic growth in coming years to be weaker than the Treasury forecasts underpinning Mr Darling’s Budget.

It also believes that, whichever party is elected next year, the Government needs to prepare for the likely impact that higher interest rates will have on the cost of borrowing and should also seek to create a “buffer” against the cost of future recessions.

For this reason, PwC argues, Britain cannot wait until 2017-18 before restoring the budget to balance, as the Government is proposing, but should seek to do so by 2015-16. It also warns that such tightening was also needed to avoid public debt reaching “unsustainably high” levels due to the long-term costs of an ageing population.

In its report, PwC sets out three possible options. The first of these would stick to the spending plans outlined by Mr Darling in the Budget and would involve £26 billion of higher taxes per year. The second would involve government spending being cut by 17 per cent in the three years to 2013-14 in real terms — in other words, stripping out the impact of inflation. PwC calculates that if healthcare is ring-fenced from spending cuts, as the Conservatives propose, other departments would have to suffer a 23 per cent cut in real-term spending.

The final option, which PwC bel-ieves is the most realistic, would be a mixed approach, with £13 billion worth of extra taxes — including “significant” rises in income tax, national insurance and VAT — and 13 per cent cuts in public spending.

John Hawksworth, head of macro-economics at PwC, said: “Irrespective of who wins the next general election, turning the tide of debt will be critical to steering the economy back to sustainable growth in the longer term. Failing to fix the public finances would risk persistently high interest rates, a more volatile currency and a less certain environment for business.”

Mr Hawksworth said it looked likely that the economy would contract by more than 4 per cent this year, compared with the Treasury’s central forecast of 3.5 per cent. PwC was assuming a “trend rate” of GDP growth averaging 2.25 per cent per year from 2007-8 to 2013-14, compared with the Treasury’s assumption of 2.5 per cent. He added: “We are saying the recession will lead to a permanent loss of output of around 5 per cent — the same as the Treasury forecast. But they are saying the economy will jump back to its old level once the recession is over, which we think is a bit optimistic.”

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive