THE STATE is "sleepwalking into a devastating economic depression", the Labour party has claimed.

The claim came as Minister for Finance Brian Lenihan acknowledged that all forecasts were that the economy would contract by between 3 per cent and 4 per cent next year.

Mr Lenihan said "the fall in the 2008 revenue take alone would push the 2009 general deficit up by approximately €1.5 billion to 7.25 per cent of GNP".

Labour finance spokeswoman Joan Burton claimed the Minister's acknowledgment that the contraction would be more than forecast in the Budget showed that "we are sleepwalking into a devastating economic crisis".

She sharply criticised Department of Finance officials and said that "either the mandarins and number crunchers are not able to do the counting or they want to deny reality until it is too late, thereby preventing an adequate and timely response".

But in a staunch defence of his officials the Minister said they worked very hard and were neither mandarins nor number crunchers. They work on the statistics and their forecasts throughout this year have been in line with the forecasts of reputable organisations such as the ESRI and the Central Bank.

"We are where we are," said Mr Lenihan. "We have gone through a remarkable deterioration this year. The Government has responded with a distinct response at each phase of the deterioration."

Ms Burton said the fact that forecasts had moved from 1 per cent at Budget time to between 3 per cent and 4 per cent showed the Budget day forecasts "were basically hopelessly optimistic and it means that the basis of the figures in his Budget have been rendered shambolic".

"The Minister had forecast a general government deficit of €12 billion or 6.5 per cent of GDP," she said.

Mr Lenihan acknowledged that it is likely to be at least 7.25 per cent of GDP next year, "which would be at least €13.5 billion, which would necessitate a significant range of additional borrowing".

Fine Gael finance spokesman Richard Bruton asked, "How soon will we have a clear fiscal strategy?" He said that policy changes had to be made to get back to the 3 per cent stability pact requirement, "but we have not been told what they are".

He said the Minister should accept it was "a serious mistake to bring forward the Budget which was built on numbers that do not hold water".

Mr Lenihan replied that the situation was already bad by August and that was why the Government brought forward the Budget.