Tax rises likely as PM holds talks on £40bn black hole

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The Government faces having to find an extra £40 billion a year by 2016 to bring borrowing under control, according to an analysis commissioned by the BBC from the Institute for Fiscal Studies.

The sum equates to raising taxes or cutting public spending by an extra £1,250 per family a year. This would be on top of the tax rises and public spending squeeze already announced by Chancellor Alistair Darling.

The IFS has estimated that the Government will ultimately have to foot a £130 billion bill for bank losses, which have so far not been included in Treasury forecasts.

This morning, Bank of England governor Mervyn King, Financial Services Authority chairman Lord Turner and Mr Darling were set to join the Prime Minister in Downing Street to discuss how to use the deals agreed at last week's G20 London summit to combat the downturn.

The talks come a day after Mr Darling admitted that the recession will be worse than he had forecast and was unlikely to be over before the end of the year.

Experts believe the economy could shrink by three per cent this year, three times more than Mr Darling predicted in November's pre-Budget report.

"I thought we would see growth in the second part of the year," he said. "I think it will be the back end, turn of the year time, before we start seeing growth here."

Mr Darling could increase the take from National Insurance or put VAT back up, possibly to as high as 19.5 per cent, on top of the new top rate of 45 per cent for people on more than £150,000.

Meanwhile, Mike Platt, chief executive of BlueCrest, one of London's biggest hedge funds, says the Government will have to "print money" on a greater scale than it has previously done after the Bank of England started last month to buy up £75billion of outstanding corporate bonds and gilts to support the economy.

After last week's G20 summit in London the Prime Minister appears to be benefiting from a bounce in the polls, with Labour rising three points to 34 per cent, the Tories unchanged on 41 per cent and the Liberal Democrats down one to 16 per cent, according to a YouGov survey.