We've had the boom; here comes the bust - and it is time for us all to panic

Mr Brown's arithmetic, if growth fails to match his expectations, has horrendous implications for public borrowing

"An end to boom and bust" has been Gordon Brown's war cry for the past five years of his stewardship of the British economy. During the Government's first term, hardly a Question Time went by without the Chancellor bellowing out these words, which became a catchphrase in parliamentary exchanges.

The question this week is whether we are now witnessing the beginning of Mr Brown's bust. Only one thing in economics is inevitable. Like the seasons, every upturn is followed by a downturn; every group of interest-rate falls is followed by a series of rises. Every succession of tax decreases is followed by a series of tax increases. Every few years, unemployment falls before it begins to rise. In short, every boom is always followed by a bust and one day – sooner or later – a bust will follow Mr Brown's boom. The Chancellor may well be entitled to his reputation for rectitude, but he cannot abolish economic cycles or stop stock market or property crashes. And the real test of his prudence will be the size of the deficit by the next election.

It seems an age since Mr Brown's spring Budget was received with a hail of compliments. As he prepares for his comprehensive spending review decisions, to be announced in a few weeks' time, he must be wondering just where the funds are coming from. He has predicated extra sums for health on growth rates of between 3 and 3.5 per cent next year. In the subsequent year he still estimates a figure of 2.75 per cent. But it is clear after two quarters that our economy has stagnated. The chances, therefore, that this year's target for growth of between 2 and 2.5 per cent will be met must be severely reduced.

Mr Brown's arithmetic, if growth fails to match his expectations, has horrendous implications for public borrowing. Already, even if his optimistic forecasts are met, the public finances will plunge into the red to the tune of £11bn. Any failure to meet the growth targets that the Chancellor has set means a dramatic and sudden worsening of this deficit within the next two years. We have been here before with the Tory Chancellor Nigel Lawson. The famous "Lawson boom" came to a spectacular end when house prices crashed at the end of the 1980s. Then, as now, the Treasury and the country were awash with cash, rising stock markets and house prices. Mr Lawson spent his winnings from the world economy on tax cuts – mostly for the Tory rich – whereas Mr Brown has put most of his windfalls into the public services.

But the moment the world economy runs dry, so, too, does the Treasury. Tax receipts took a nosedive when the Tories' recklessness was exposed. That exposure was then paid for by higher interest rates and a collapse in house prices, leaving millions of homeowners trapped in negative equity. Everyone says we have learnt our lesson this time. I fear not. The inevitability of a housing market collapse every bit as sour as before is there for all but experts and forecasters to see.

The same is true of the stock markets. "Don't panic," say the experts. For two years now I have been receiving quarterly bulletins from HSBC Investment Management, who look after my shrivelling nest egg. Like millions of others, I trusted the experts to make better decisions than me. At the beginning of 2001 I noticed the first dramatic fall in my savings. The FTSE index had just fallen to 6,000. Suggesting to HSBC that the index would end 12 months later at 5,000, I was met with the "don't-be-so-silly, we-know-best-for-you" attitude. In January this year I had the temerity to tell my money minders that pessimism should be the order of the day.

But with that reassuring air of superiority which experts have when dealing with fools who are easily parted with their money for others to invest, I was persuaded that the index would increase to around 5,700 later this year. We should have ignored the experts two years ago who told stock market investors: "don't panic". There are times when it is necessary to panic and avoid the advice of experts.

Now should be the time for voters to panic as well. The trouble is they will not do so – until it is too late. But we should panic at the prospect of the Chancellor's decision to raise taxes in order to binge on the public services. Extraordinarily, after the events surrounding Stephen Byers, spin doctors' e-mails and Mr Blair's brouhaha with the press over the Queen Mother's funeral, the polls have not reduced Labour's lead. Public trust in Mr Blair has fallen, but concerns about the economy barely register.

So far only those exposed directly to stock market losses have lost out. These are predominantly pensioners who have been taking income from their investments, previously secure in the knowledge that their capital was safe. But as those in their forties and fifties start to calculate their pension losses, the impact of this stock-market reverse will cause middle England to re-evaluate the overall state of the long-term economy. And that clever wheeze to take an annual £5bn from pension funds will come back to haunt Mr Brown.

It is only a matter of time, probably just a few months, before a housing crash follows the stock market crash. Shrinking savings and interest-rate rises are a lethal cocktail in transforming a booming economy into a recession. Most attention focused on Mr Brown's comments, during his Mansion House speech, on their implications for the euro. Frankly, he said nothing new. What was new in the pre-briefing, however, was the clear hint that Mr Brown wants to widen the scope of the Bank of England's use of interest rates beyond merely controlling inflation.

Mr Brown's flagship policy has always been Bank of England independence – so far as interest rates are concerned. Thus far the policy has been an undoubted success on the narrow judgement that they have mechanistically created a consistently low rate of inflation. But other economic objectives, for which a chancellor might also once have used interest rates as a tool of economics, are now out of his hands. Tory chancellors used interest rates to influence exchange rates and, by implication, balance of payments deficits, as well as to cool credit and housing booms. For the first time since the Chancellor granted the Bank of England independence, there is the hint that he might be preparing to factor in additional policy objectives, beyond just the inflation rate, to be achieved by monetary policy.

Even with current monetary policy unaltered, however, interest rates are clearly poised to rise. Consumers will be forced to redirect a higher proportion of their income to pay for higher mortgages, at the very moment the value of their properties ceases its current relentless rise. The high-street spending boom will consequently come to an end, leading to corporate profits – and, therefore, tax receipts – to fall dramatically. As tax receipts melt, then Mr Brown' deficits will burgeon and become unsustainable. Then surely it will be time to cry "No more boom – only Brown's bust".

mrbrown@pimlico.freeserve.co.uk