The Chancellor of the Exchequer, Alastair Darling, will announce his budget on Wednesday, 12 March. The level of speculation about its contents seems higher than normal but this may simply be a reflection of the level of anxiety about the prospects for the economy.

The newspapers are filled with rumour and counter-rumour (the day will confirm or deny) of targeted taxes on the wealthier members of the community’s more ostentatious expenditures (cars and houses) and of alleged cover-ups of the scale of the poor state of the national finances.

The Conservatives react by appealing to the entrepreneurial class with firm offers of business tax cuts but they will not offer tax cuts to the general public because, they say, the Government's finances are in too much of a mess. The Liberal Democrats are busy reversing position by promoting tax cuts instead of increased expenditures.

The British are not yet as alarmed as perhaps they should be at the course of events. The UK is linked into the global economy more than most and much of the rest of the world appears to have decoupled to some extent from problems in the US.

However, much large-scale British business is Atlantic in orientation and the US is widely reported to be in economic crisis. The real difference between the two economies is that the US has the resources to pump prime. There is the possibility of a short sharp down turn, perhaps, by a whisker, the US may even avoid a technical recession.

The Federal Reserve has allocated as much as $200bn to one month bank lending and another major US interest rate cut is now expected. Talk of recession (not technically the case yet) is growing and the Europeans are planning their own liquidity support but at least Washington has the funds to play with.

The UK is in a very different position. It has wasted its boom years (or so many analysts suggest) and has little to fall back on. The current crisis was well predicted on fundamentals by many economic journalists, yet it seems to have arrived like a bolt from the blue to a Government that has long been in denial about the credit risks hidden within its aggressive drive for growth and international competitiveness.

Even senior Labour Party figures (based on private conversations) consider Brown to be at sea. Reports, although not necessarily reliable, from within Government suggest an Administration that is unsure what to do strategically and is riddled with internal mis-communication.

An aspect of this economic crisis, not present in earlier major global crises, is that British and European (more than American) governments are in an increasingly difficult position in regard to their welfare commitments.

In the UK, the enormous drain on public finances of wasteful welfare benefits (as opposed to healthcare and education spending) has not been dealt with. Reforms proposed by radicals within New Labour early in the Blair Administration were never implemented. 

Waves of migrants have since entered the system without adequate controls but the real problem is that large numbers of the so-called 'underclass' have not acquired gainful employment but have created a black economy in which benefit fraud is simply an underwriting mechanism.

The Right might want to 'slash and burn' welfare payments (although Cameron shows no sign of sharing this vicious atavism) but what was required was reform that might have required much more initial expenditure in order to restructure payments to build family and community so that the long term drain on the public finances would eventually cease. 

And this is where New Labour's nerve failed - in the early investment of funds in the eradication of poverty. Really serious poverty in the country has not been dealt with at all. We have had ineffective tinkering. Labour back benchers are getting seriously restive about this. 

A blanket 1930s-style crack-down on the benefit system to 'balance the books' would hurt the very people that New Labour is claiming, with ever-weakening credibility, to represent, the disadvantaged. And it would revive long-buried memories of the 'means test' and other folkloric causes behind the political dynamic that led to the welfare state being introduced in the first place.

Last year's figures on child poverty seriously shook confidence in the New Labour project amongst some of its own supporters. Action is being sought a decade too late as public finances weaken.

But instead of re-thinking the welfare system from the root, the UK systematically weakened welfare support for the middle classes and for the respectable working class, invested some funds released in making what remained more effective (with some successes in healthcare and education) and then planned to transfer any remaining resources to the poorest. 

The deal was for a less 'cradle to grave' system in return for the promise of sustained economic growth that would pay for both private provision in the middle classes and targeted poverty alleviation. It was to be redistribution by stealth.

The timing of the credit crisis has been very bad indeed for the technocrats of the ‘third way’. The whole project depended on ever-increasing surpluses. A decade of opportunity for reform and reinvestment was squandered and now the economic motor in the government car is stalling.

Now, the British Government is rummaging around looking for ways to fill the growing holes in its revenue just as the economy and relatively low taxes, for a social democracy, begin to bite into public finances. Raising taxes in a slow-down is just dumb but this is the direction that the Government is heading.

If sustained economic growth does comes to an end (and the danger may be over-blown since lower but real growth is still expected in the year ahead) and taxes start to rise, and if what welfare benefits exist are inadequate (in terms of costs of basics like fuel or of deterring repossessions), then this is a recipe for popular discontent.

If benefits are provided to the low cost labour pool of migrants who may now sit with nothing to do, then the political problem moves into another dimension altogether. It is already estimated that the majority of recent new jobs in the UK have gone to migrants and, of course, these jobs may not be the first to go in a slowdown. On the contrary, the low labour costs of migrants may make them more useful to employers at such a time all things being equal.

Whether migrants will be beached, requiring assistance within EU rules, or taking what jobs are available while 'indigenes' are unemployed or are worried sick about repossession is irrelevant, migrants may become a problem in political terms  under either scenario. Perceived high taxes in order to support what will be cruelly called ‘layabouts’ and ever poorer services is a recipe for Middle English rage at the machine.

The British Government, which has gone further down the road to integration with the globalised economy than most Europeans, is in political panic behind the scenes because its room for manouevre is so limited. It has received blow after political blow since the Party Conference in September - and not just Northern Rock. It cannot afford a 'bad budget'.

New Labour's social and economic management technique has been not to act directly on the market unless it is forced to. Its ideology has been based, since John Smith's 'prawn cocktail' tour of the City in the mid-1990s, on the use of regulation in order to pressure business into costly social engineering that is still better (for larger-scale business) than increased taxation.

This technique has favoured businesses with the critical mass to make use of regulatory compliance against smaller businesses. A fissure has opened up over the last fifteen years (the process that started under the Major Government) between big business and the professional services sector on the one hand and the rest of business on the other over the burden of regulation. 

Big business and the City could generally negotiate sufficient regulation to allow the Government to keep its trades union backers sweet but the losers were always the non-unionised poor and the petit-bourgeoisie. Now, circumstances are forcing New Labour to overplay its hand to keep its back-bench in order.

The Treasury has been pressuring energy suppliers to accept a levy to help those who are 'energy poor' (where households are spending 10% or more of their disposable income on rising energy costs). It threatens a ‘windfall tax’ (an old Whitehall trick used by Labour and Tories alike) to ensure compliance.

The Treasury has been calling the levy ‘voluntary’ but business has been reluctant to follow through this time. Although there is little honour amongst thieves, there is no doubt that other sectors will be nervous of this sort of intervention - the next in line would be a very popular intervention against repossessions in the banking sector with all that this would mean in terms of 'moral hazard'.

New Labour is in trouble because its whole ideological raison d'etre in now in question. It has to do something to shore up its discontented base as the economic crisis gets ready to bite, so it is now threatening to move in the direction of market intervention by announcing controls on gas and electricity tariffs.

The negotiations on the energy initiative may go up to the wire on Wednesday but it would be rational for business to call New Labour's bluff. The politically dangerous territory of returning to market intervention techniques is a slippery slope that opens up the possibility of 'market socialism' and New Labour exists solely to obviate that option.

Nevertheless, with its back to the political wall, do not assume that New Labour will not bite this particular political bullet.

Is this the end of the love affair between business and New Labour? If so, it is not intended by New Labour and may be seen by Party strategists as a temporary phenomenon. the reason for the new preparedness to challenge the market lies in internal problems within the party as much as the poor state of Government finances. 

The Party is in deep financial trouble and today its ruling NEC is selecting its next General Secretary. There are only two strategies for going forward that are acceptable to the leadership. There are others but they are not going to happen because they risk too much loss of control for the leadership.

One strategy comprises re-enagement with the trades union political leadership ,which really only means battening down the hatches for the storm ahead. It also means no deal on party funding that does not secure trades union rights in this respect and this means no bi-partisan settlement over the heads of the voters.

The other is to reinstall the central control of the machinery that has drifted with the transition from Blair to Brown. This might allow a technocratic solution to the problem of party financing that can be negotiated with the other two parties regardless of deep suspicions outside the political class of state funding. The Prime Minister quite obviously prefers this latter approach.

The main candidacies for General Secretary, at least of those likely to be appointed today, reflect this dichotomy and the Party's NEC has a tough decision between two equally weak 'fixes' for a broken machine - sticking plaster or chewing gum.

What is not being considered, it would seem, is either one of two other alternatives – the decentralization and democratization of a moribund party so that it becomes a movement (what we might call the Dean/Obama option) or the installation of tough modern management from outside unconnected to any existing party faction.

The leadership is just too frightened to let go but it can count itself as lucky that no bank is likely to pull the plug on any political party that might have the power of revenge in decades to come. 

At the end of the day, the Labour Movement is still a major political force and, even in eventual defeat, it would make a formidable enemy to anyone thinking about their institutional future.

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