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It’s the eve of the Pre-Budget Report. Last winter, Alistair Darling delivered his shocker.  Just a few months earlier he had been clinging to Gordon Brown’s beloved golden rule, the one which was supposed to limit government borrowing over the course of an economic cycle to fund spending on capital items only; and the sustainable investment rule, which was supposed to put a 40 per cent cap on government net debt. All the time he was chancellor, right up to the moment he took up the mantle of Prime Minister, Gordon Brown repeated these two rules over and over again. He suggested that adherence to these rules was the means by which we should judge him.

Then in the last budget it all changed. Net debt was forecast by the chancellor to peak in 2014 at 80 per cent of GDP.  Since then analysts have pored over these estimates, and it seems there’s a good chance Al will up his estimate of the final size of net debt in the Pre-Budget Report.

And so commentators predict doom. Writing in the Telegraph, Liam Halligan talked about the nonsense of Keynesian economics. He reminded us that next year fiscal borrowing as a percentage of GDP is likely to be double the highs reached in the mid 1970s, when Britain had to call in the IMF for help.

Across the blogoshere commentators are spreading their tales of woe. They are saying that debt will be so high that investors will simply be unwilling to lend the government the money it requires, unless they are offered a much higher return. So interest rates will rise, and it will become nigh on impossible to fund the interest on our debt.  Britain will then join Argentina in the list of once-wealthy countries that went bust.

So that’s the argument. The question we need to ask is are they right? Are things really that bad? Today we attempt to answer that question. The conclusion may surprise. For while it is true that there is a danger things could turn nasty, the more likely scenario is far less dire. But it does all rather depend.

The first thing you need to bear in mind is that the future course of interest rates is crucial. Earlier this year, the Institute of Fiscal Studies concluded that providing interest rates stay at the low levels we have seen of late, then the cost of repaying debt will actually be similar to the cost incurred in the 1990s.

So, if you think the cost of repaying debt is more important than the size of the debt, in a low interest rate environment our projected fiscal debt would appear to be affordable.

The second thing you need to bear in mind is that fiscal debt in the UK has been much higher in the past. It reached 250 per cent of GDP after the Second World War and the Napoleonic War.

The third thing you need to bear in mind is that the UK is not alone. Japan’s fiscal debt is already over 200 per cent of GDP, and is expected to rise further still. A few months ago the National Institute of Economic and Social Research predicted that net debt would peak at an even higher level in Italy, Germany and the US, and would only be marginally lower in France and Canada.  In other words our projected fiscal deficit is actually better than the predicted G7 average.

Rather than ask the question is the UK set to go bust, it may be more pertinent to ask will the G7 go bust?

The Japanese experience is illuminating. Japan has never had any major problem funding government debt at all. The main reason is simply this: savings are high in Japan, meaning spending is low, meaning economic growth has been anaemic. But because savings are so high, the government has had no problem funding debt. In other words the very factor that created poor economic performance leading to high government borrowing, was the same factor that meant the government had no problem raising the money it required, and at a low interest rate too.

The same argument applies, but if anything more so, when you look at the G7 as a whole. One assumes the only occasion in which the G7 governments will find it impossible to raise the money they require would be in circumstances in which savings start to fall, and rising consumption pushes up growth. Under these circumstances the government wouldn’t need to borrow so much anyway.

Finally, you need take into account the retirement of the baby boomers. One assumes that as the horrible truth dawns on this generation that they don’t have enough money saved for their retirement, the savings ratio will shoot up, which should in turn push down on interest rates.

There is a snag with all this, however.

One of the reasons why the massive fiscal debt after the Second World War was affordable was because the economic growth that followed over the next 25 years was without precedent.

If your debt equals your annual income, but then your annual income increases by 3 per cent a year, and all you do is repay the interest, within 25 years the debt will have fallen to just half of you annual income. For a government this argument is even stronger, because if national income is rising, so too are tax receipts, meaning borrowing should automatically fall anyway.

The UK economy enjoyed its best ever run of growth during the 25-year period after the last world war.

By 1973 this growth rate had slowed down. Maybe that is why the UK’s debt suddenly became unmanageable; we had become so used to high growth that we simply hadn’t adjusted our habits to a lower growth regime.

Right now the potential for growth is probably as impressive as was the potential back in the late 1940s. Technology seems to be advancing, if anything, at an accelerating rate. In the US, productivity has been rising at an annualised rate of 4 per cent.

If we let capitalism work, let businesses that are getting it wrong go bust, and provide the opportunity for new businesses to expand, the growth rate over the next decade or two could indeed be impressive; meaning net debt will be reduced quite rapidity.

But the backlash against capitalism threatens this. The banking rescue has set a precedent for saving struggling businesses.

The real danger to the UK’s future performance lies not in the size of government debt, but in the government and public overreacting, creating a backlash against risk, and sending us into a cosy world of corporatism, in which large companies are not allowed to fail.