Yesterday evening we heard Mervyn King, the Governor of Bank of England, explain that British people will be paying the price for this financial crisis for a generation. He described the £1 trillion cost of the government bank bailout as “breathtaking”.

In addition to the bank bailout, the Bank of England continues to embark on their ‘asset purchase programme’, at a total cost of £175 billion. The amount of money allocated to this quantitative easing was increased by £50 billion in August.

Looking at massive numbers like this is one thing, but what will the real cost of economic recovery look like? What impact will all of this spending and money creation have on our personal financial planning in the years to come? Here are some educated guesses.

Higher taxes

Having to pay more taxes, particularly if you are a higher earner, seems inevitable if the Government is going to be able to reduce massive levels of public borrowing in a reasonable length of time.

A new 50% income tax rate for people earning over £150,000 a year is being introduced on 6th April 2010. This replaced the originally proposed 45% income tax rate for higher earners, which was due to come into force for the 2011/12 tax year. Whilst this is only likely to have an impact on 1% of earners, it will mean around £220 per month in additional income tax for people earning £150,000 a year.

People earning over £100,000 a year will see their income tax personal allowance (the amount of earnings on which you pay no tax) removed in stages from next April. Those earning £113,000 or more will have no personal allowance. It will be removed at a rate of £2 for every £1 of earnings over £100,000.

But will these higher taxes for big earners go far enough? The National Institute of Economic and Social Research (NIESR) suggested today that the basic rate of income tax will also need to be increased from 20% to 27% to pay off national debts.

In January we will all see Value Added Tax (VAT) return from the current level of 15% back to 17.5%. There is every chance that it could go higher than that. Britain has one of the lowest VAT rates in Europe, with the average (according to research from KMPG) standing at 19.8%.

Later retirement

Working longer and retiring later formed a key part of Tory proposals for public finances during party conference season. They suggested raising the State pension age from 65 to 66 (for men and then eventually women) starting from 2016.

We are already on track to see the State pension age increased to 68 for men and women from 2044, but more recently commentators have been calling for these necessary increases to be brought forward and even extended to age 70.

The National Institute of Economic and Social Research (NIESR) said today that the State pension age will need to be 70 if national debts are to fall to acceptable levels by 2015. The Institute of Directors (IOD) has also called for the State pension age to be increased to age 70, ‘as soon as is reasonably practical’.

Increasing the State pension age saves a huge amount of money each year; money that could be used to both reduce national debt and improve pension payments to older people. However, any sudden rise in State pension age is likely to be very unpopular, particularly if it leaves little time for people approaching the current State pension age to plan for the changes.

Price inflation

We are living in a low inflation environment, with the Retail Prices Index (RPI) recording inflation including mortgage interest and housing costs at -1.4% for the year to September.

The Consumer Prices Index (CPI) measure of inflation fell to an annual rate of 1.1% for the twelve months to September, down from 1.6% the previous month. This remains below the Bank of England target of 2% and is significantly lower than the spike of 5.2% recorded just last year.

Analysts are divided on the eventual level of price inflation in the medium to long term, but many expect an moderate (if only temporary) increase later this year. Petrol prices and the cost of clothing are expected to continue to rise, and these items could contribute to an increase back towards the 2% level by the end of this year or early in 2010. The increase in VAT from the start of next year will also feed back into inflation figures.

We might continue to benefit from negative or very low price inflation for another year or so, but eventually various pressures – including the impact of the government printing money – will feed through and result in a return of inflation figures we have been more used to seeing historically.

Low interest rates

Last week we saw a prediction from the Centre for Economics and Business Research (CEBR) that the Bank Rate will remain at 0.5% until at least 2011 and then stay under 2% until 2014.

The historically low Bank Rate has not necessarily resulted in lower borrowing costs. For those fortunate to be on Base Rate Tracker mortgage deals, most of this year has been a very pleasant experience with mortgage payments slashed to tiny amounts as a result. New mortgage (and remortgage) deals remains reasonably expensive and difficult to obtain as the banks continue to repair the damage to their balance sheets.

Savers will also have to cope with this low interest rate environment. The only saving grace for savers is that negative or very low price inflation means the gap between the interest rates they can get and inflation is now at record levels. This results in the preservation of the ‘real’ buying power of their cash, although it is little consolation for those who rely on interest from their savings to supplement other income in retirement.

Public spending cuts

Reducing national debt is likely to mean substantial public spending cuts and then freezes on capital investment over the next few years. The various political parties might argue about where these cuts should fall, but the end result is less money within the public sector. In fact, the CBI has called for an extra £120 billion in public spending cuts to help bring the national budget into balance two years earlier than current government plans.

This might not have a major impact on all of us, although those in public sector employment are likely to experience only moderate pay increases and also job uncertainty.

If you are a user of public services (as the overwhelming majority of us are) then your experience of these in coming years is unlikely to be the same as it has been during the past decade. This could result in greater use of private sector alternatives for those who can afford them, particularly if we start to see key services such as the National Health Service (NHS) suffer.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow BrilliantWithMoney on Twitter @brilliantmoney and Martin @martinbamford.