Like so many things in this crisis, the story of the public finances is one that makes everything that went before seem trivial. The long debate between the Treasury and independent experts came down to whether there was a "black hole" in the government's projections that would have to be filled by a few billion of tax rises.

The context was Gordon Brown's fiscal rules which, as he put it in his final budget last year, were "the foundation of the strength of Britain's finances".

In that same speech he scoffed at "a deficit equivalent of over £100 billion in a single year in the early 1990s" and looked forward to public borrowing trending down from £35 billion, its level then, to £24 billion, comfortably meeting his golden rule.

I apologise if you wondered what the fuss was about. If Stephen Hawking has the definitive take on "black hole", I regret suggesting that what we were talking about was worthy of the name.

For what Alistair Darling unveiled last week was the biggest, scariest black hole
in modern times. As I understand them, black holes are something you can never escape from. The chancellor's numbers suggest that description fits pretty well.

Public borrowing, £37 billion last year, will be £78 billion this year, a huge £118 billion in 2009-10 and £105 billion the following year. It will rise to a modern record of 8% of gross domestic product and not drop below 3% of GDP — which should be the upper limit for borrowing — until 2013-14.

For government debt, 60% is the new 40%. The old rule of keeping public sector net debt below 40% of GDP has turned into a hope it will stay under 60%. For debt to fall, we have to wait until the Olympics, not 2012 in London but 2016 in Chicago, Madrid, Tokyo or Rio. That is when, according to the Treasury, debt will edge down from a peak of over 57% of GDP. It is also when the current budget, which in normal circumstances is supposed to be in balance, gets back there after years deep in the red.

These were X-certificate projections, the more so since they are dependent on a short and shallow recession but one which, nevertheless, results in some 4% of economic output being permanently lost.

Next year's borrowing alone has been revised up by £80 billion since the budget. Borrowing over five years is up by £295 billion, brought about almost entirely by a collapse in tax revenues, from the City, from the corporate sector and just about everywhere else. Government debt will indeed double, from £527 billion at the end of March to £1,084 billion in 2013-14.

What should be done? Public spending is part of Darling's solution, with its growth rate to slow to 1.2% a year and capital spending, previously sacrosanct, to drop as a share of GDP from 2010 onwards.

The Institute for Fiscal Studies said these adjustments mean spending will take a bigger share of the burden of getting borrowing back down than tax rises, which include, from 2011, a 0.5% rise in employer and employee National Insurance contributions and the new 45% top rate of income tax on high earners.

That may be so. But is it enough? Next year the government will have expenditure of £654 billion but receipts of only £536 billion. The recession has bitten hard into the tax base. The economy that emerges from it will have fewer revenue cash cows of the kind provided by the City and the wider corporate sector in the past.

What should you do when the tax base has been permanently damaged? We have to cut our coat according to our cloth, by reducing spending. This should not happen immediately, but it should happen. The public spending splurge of recent years was based on a false premise, which was that the revenues would always be there to pay for it. They will not be.

In past episodes of economic difficulty, it often required external voices to exert the discipline that politicians, left to their own devices, found difficult. The most famous was the International Monetary Fund bailout of Britain in 1976.

The IMF insisted on a sharp reduction in public spending, more than 4% in real terms in 1977-78. At other times, even without the IMF, public spending has been cut to rein back borrowing; between 1985 and 1990 it was reduced by 3% in real terms and between 1996 and 1999 by over 2%.

Of course this is never easy. But the new era we have entered demands that it has to happen. The question is whether the politicians are brave enough to say so.

What about the short term? The pre-budget report's centrepiece was a temporary cut in Vat from 17.5% to 15%, from tomorrow, and rarely have I heard such whingeing from retailers in response.

I hope the Treasury remembers this next time. Perhaps the chancellor should have gone straight for a 2.5 point rise in Vat, as happened in 1991.

The tax cut will not suddenly make people buy flat-screen TVs but means we will pay £12.4 billion less Vat over the next 13 months. It gives some real income growth for households. It adds to the deficit in the short term, though not much; without it next year's borrowing would have been 6.9% of GDP; with it the figure rises to 8%.

At the margin it will increase consumer spending, which has not grown as rapidly as people think. Before the downturn, spending over the latest five years had grown at only two-thirds the rate of the previous five, and slower than the five-year period before that.

The effects of the Vat cut should be compounded by further speedy interest-rate reductions. The "shadow" monetary policy committee, which meets under the auspices of the Institute of Economic Affairs, wants a full-point cut on Thursday, which would take us to 2%, equalling the lowest Bank rate since 1694.

Monetary policy is being dramatically eased. So is fiscal policy, both by accident and design. The big requirement, though, is a credible plan for getting us out of that budgetary black hole in the medium term. That has to mean lower public spending.

PS: Who was the best chancellor of the past three decades? Thanks to all who responded, and two chancellors are head and shoulders above the rest. Shading it in first place is Kenneth Clarke (1993-97), and behind him, Geoffrey Howe (1979-83). Four years in the job appears to be optimum.

Signed copies of Free Lunch, with a new introduction on the credit crunch, go to Richard Carton and Nico Ladenis. Carton gave nice pen portraits and likened Geoffrey Howe to Geoffrey Boycott. Ladenis, the former restaurateur, needs no lessons about lunch.

From The Sunday Times, November 30 2008