Expert View: Time for Gordon to be less giving

Belt-tightening dominates this pre-Christmas season. The desire to get the latest wave of redundancies out of the way before hanging the mistletoe has led to frenzied activity in City personnel departments.

Who, if anybody, in the Square Mile can feel safe in their job? This bleak outlook is starting to feed through to the rest of the economy. In central London, house prices are now static and there are signs of a slowdown in consumer spending. The rest of the country will follow. Businesses everywhere are battening down the hatches. The private sector is in retreat, yet in the public sector they have never had it so good. This is the new two-speed economy.

A group of bankers round a gloomy lunch table last week debated whether the current crisis was the worst since '74-76 or since '29-32. Either way, the point is made. Wholesale shedding of jobs in 2002 (an estimated 20,000 highly paid workers) shows no sign of abating. Finance is having a taste of the constant cost-cutting that manufacturing has lived with for years.

And yet over on the public side of the fence, the picture is very different. Job creation in the health and education sectors is at record levels. The Government's massive increases in health spending are unprecedented in history or in any other leading economy. It may be that economic historians will one day record this as a brilliant stroke to reflate the UK economy at a time of world slowdown. Let us hope so. But my fear, first aired in this column in April, is that this may be the point when New Labour throws it all away.

The Government has now grasped the political danger: that dramatically increased spending in the public sector delivers no increase in the depth or quality of service, but is entirely consumed by the public sector workforce. It is a phenomenon similar to that of the old Lloyd's Names, who provided limitless wealth. The public sector hydra can swallow just about any sum the Chancellor can throw at it.

After picking up an overseas newspaper last week, I thought I would return to London to find open anarchy and Tony Blair's head on a spike. Forget the firemen – I read of 50,000 council workers demanding a 50 per cent increase in their London allowances; 20,000 teachers striking for the same; college lecturers, nurses, airport workers, Tube drivers, all in open revolt. The return to the Winter of Discontent seemed unstoppable.

Hopefully, the likely resolution of the firefighters dispute will demonstrate that the structural shift in the UK economy made in the Eighties is irreversible. The FBU strike for a £30,000 salary is hardly a proletarian revolt. With their secondary working, many would sit comfortably in the higher taxpayers' bracket. You could argue that the Government's shoehorning of public sector workers into pay deals linked to modernisation of work practices is, in fact, a tremendous success.

But I fear this may be optimistic. The Chancellor, that greatest of optimists at present, is only just beginning to see the effects of the economic slowdown in his reduced assumptions on tax revenues (he really must improve his forecasting ability). The financial sector crisis is a big part of that, and it's going to get worse.

Old Labour failed to grasp the simple truth that one half of the economy created the wealth the other half spent. You had to increase the former amount if you wanted to increase the latter, in the absence of punitive taxation or high inflation. We got both in the Seventies.

The Chancellor has loosened his belt at precisely the wrong moment. To avoid a repetition of the Seventies, he may have to do something politically uncomfortable. He may have to do what just about everyone else in the business world is doing at present, and cut his expenditure. Happy Christmas, Gordon.