Outlook: The Chancellor gambles on the economy staying robust

Tony Blair says that giving in to the firemen would be to throw away all Britain's hard won economic stability. He's probably right, but the problem the Prime Minister has is that economic growth seems fast to be disappearing down the plug-hole anyway.

The Chancellor will struggle to sustain the illusion of financial prudence in tomorrow's pre-Budget report statement. He's not for cutting back on planned spending increases, he told business leaders at the CBI conference in Manchester yesterday, and he'd be mad to raise taxes any more than he already has.

That leaves borrowing to plug the gap. Given how far tax revenues are already falling short of forecast, that gap seems to grow wider by the day. Just how big it eventually gets depends crucially on how bad the economic slowdown becomes. Mr Brown has so far had a strong following wind for his chancellorship, which he has used wisely to restore the health of the public finances, but his luck may be running out.

One of the most remarkable things about the present economic malaise is the divergence between what the Treasury and most economic forecasters think will happen – slow but continued growth – and the dire state of confidence among business leaders, who are as gloomy as I've ever known them. Economists point to economic recovery next year and the year after, but there's little sign of business responding by raising investment and recruitment. All you hear from industry is the noise of hatches being battened down in preparation for an expected storm to come.

The difference is explained by the contrast between debt-fuelled consumer demand on the one hand and exceptionally poor external demand on the other. The boom created too much capacity, not just in the bubble industries of telecoms and technology, but across the board from autos to plastic carrier bags. How long it takes for worldwide supply and demand to come back into balance is anyone's guess.

The difference is accentuated by the fact that the consumer finds it easy and cheap to borrow while business still finds it difficult and expensive.

If consumer confidence goes the same way as business sentiment, then the economy really will be in trouble. Though you wouldn't believe it from the recently published figures for retail sales in October, there are some signs of that happening. The housing market is already off the boil and cooling fast, while surveys point to growing job insecurity, which would ultimately be reflected in lower spending. There seems to be a significant risk of outright recession, whatever the forecasters say.

If that happens, then Mr Brown's forecasts for the public finances, which already leave very little to chance, are in cloud-cuckoo-land. Mr Brown is right to say that cutting public spending is just what you don't do in an economic slowdown. But a growing public sector and shrinking private sector are not the way back to dynamic economic growth, still less are they the way back to rising tax revenues. Don't forget, it is the private sector that creates the wealth and pays all the tax. The public sector only spends it.

Goldman Sachs

Goldman Sachs is brilliant at what it does, and is rightly admired for the success it has achieved. Unfortunately, it is also an investment bank, and I exaggerate not in saying that investment banks have become some of the most hated institutions in the land, a byword for the greed-inspired frenzy of the last boom. That so many investment bankers are now getting their comeuppance will give many the sort of pleasure we all experience on seeing a Rolls-Royce being wheel clamped.

Goldman Sachs, once the pin-up boy of investment banking, hoped to avoid the allegations of Wall Street and City sleaze. No such luck. The desire to see Goldman toppled is made all the greater by the firm's holier than thou self-held belief in its moral superiority.

Today it stands accused of tainted research, laddering and spinning along with all the others. Out of all the allegations I've read and heard about Goldman Sachs so far, none of them comes close to striking a potentially mortal blow.

That it was responsible for some exceptionally poor investment advice as the bubble reached its zenith is undeniable. Likewise, that it encouraged clients to buy in the after market for its IPOs so as to boost the stock price. On spinning, it is true that preferential treatment in IPO subscriptions was given to private clients who were also providing the firm with corporate finance fees, certainly in New York and very probably in London too. But if Goldman is to believed, this was done on an arms-length basis which breached no law, rule or internal compliance arrangement.

The latest allegations, reported in last weekend's Sunday Times, are less interesting for their substance than the media story that lies behind them. The newspaper's business editor is working out his notice before joining Goldman Sachs as its head of European public relations. His colleagues attribute the timing of the story to "cock-up". That's not how he sees it.

Goldman Sachs is considering its options over what it describes as "Sunday journalism at its worst". But it is surely not going to sue the business interests of one of its best corporate clients, one Rupert Murdoch. John Thornton, joint chief operating officer of Goldman Sachs, is a director of BSkyB, and helped build his career on jetting around the world in Mr Murdoch's slip stream, lest he miss the opportunity of another fee. No, Goldman Sachs won't be suing.

Besides, the press is just doing what it is supposed to in keeping the wider scandal of investment banking in the headlines. A lot of what counted as investment banking in the boom was little more than legalised theft.

Most of the fee-earning deals and IPOs foisted on an unsuspecting public in the second half of the 1990s have been enormously destructive of wealth and employment. This doesn't much bother the investment bankers and corporate lawyers who made it all possible. They will have taken their commission and will, in all likelihood, now be taking it all over again cleaning up the mess they created. Astonishing but true, more than a third of the mergers done in the US bull market have now been undone. Scarcely any have created value.

I don't aspire to great wealth. I wouldn't be in this profession if I did. But I do aspire to a middle class standard of living and what really gets my goat about the bubble and its aftermath is that, thanks to the robber barons of investment banking, I'm now going to have to work into my dotage to afford a decent pension. It is the bubble which is largely responsible for the present bear market.

What makes me angrier still is that I failed adequately to see and challenge the feeding frenzy when there was still time to do something about it, as regrettably did the financial press as a whole. We were not as sceptical as we should have been. I won't be making that mistake again, and nor will anyone else, which is why I believe the present deep recession in many aspects of investment banking is much more serious than the periodic cyclical downturns this industry has suffered in the past.

There is a new aversion to the deal, a suspicion of the IPO, and a general intolerance of the gun-slinging ways of the 1990s among the owners of capital that will take a generation to disperse. Not since the 1930s has the greed of the money men been held so widely responsible for our economic woes. They created and inflated the bubble, and it is the rest of us who are paying the price.

Goldman Sachs is actually one of the few investment banks whose profits have continued to rise, despite the downturn. That's because Goldman Sachs is at root just a giant hedge fund, trading for its own advantage. A clever trader can make as much money out of a bear market as a bull one. But there is a vicious backlash going on, which even Goldman's anonymous traders might find hard to avoid. I suspect we have not yet seen the worst of the investment banking recession.

jeremy.warner@independent.co.uk