A disaster is impending, he says, and sooner or later a hurricane is going to hit. It’s going to be a perfect storm, he says. Just as the housing market is looking peaky, just as the stock market is stuttering, just as VAT goes up to 20 per cent – whoomf – the Coalition’s spending cuts will come in and kick the stuffing out of the recovery. Confidence will fall away. Orders will dry up, he warns. Unemployment will climb so high that the welfare bill will wipe out other savings, and mutant rats (he all but says) will crawl from the neglected sewers and gnaw the faces of the unburied dead.

It must be admitted that his words are finding an audience, even among those who might normally be counted as state-shrinking free-marketeers. There was Martin Wolf in last week’s Financial Times, warning that “Ed Balls’s critique is right”; and blow me down, there was a leading article in the normally pur et dur Thatcherite pages of the Sunday Times. “An awful thought,” ran the panicky headline, “but what if Ed Balls is right?” If the Right-wing commentariat is getting nervous about the depth of the cuts, what about the Left of the Coalition? What about the Lib Dem rank
and file?

The consensus around drastic and immediate deficit reduction is in danger of breaking down. That is because one of the key arguments no longer looks as strong as it did. You may remember that during the election and in the run-up to the June Budget, we were told that it was necessary to avoid a Greek-style sovereign debt crisis. We were told we would have to slash the deficit or else the markets would punish us with cripplingly high interest rates. Well, the deficit is still more or less what it was, and yet interest rates and bond yields are at historic lows. Of course it is a good thing to bear down on wasteful public spending, and the deficit must certainly be reduced. The question is how far and how fast this can be done without provoking a double dip recession – and the risk is that if there is a serious downturn at the end of the year, it is the Coalition that will cop the blame. Balls will be jubilant. Nouriel Roubini will be claiming his Nobel Prize for Gloom. The unions will be doing their best to fan the flames of public anger, and there will be a further toxic element to be introduced to the mix.

What else do we expect to happen around about Christmas, just as large numbers of public sector workers will presumably realise they have to look for a new job, and just as businesses of all kinds start to feel the chilling effects of cuts in public spending? The bankers will be getting their bonuses – that’s what.

I hope and believe that Balls is wrong about the double dip. I hope and believe that the economy will continue to recover, and that the Government can make the necessary deficit reductions without a new recession. But whatever the pain and anger of the public at the cuts – and some pain is inevitable – that anger will be hugely magnified by the spectacle of the banks doling out hundreds of millions of pounds in Christmas bonuses to the very people who, collectively if not individually, were responsible for the financial crisis.

Whether Balls is right or wrong to prophesy a new slump, the banks have got to understand that this year public feeling may be even more inflamed than last and politicians will be facing colossal pressure to appease public indignation – and the risk is that this year they may take steps of a fiscal or regulatory kind that would do long-term damage to London as a financial centre and as a tax generator for the rest of the economy.

We need two things to happen. We need the Government to be vigilant about the risks of a double-dip recession. And we need the bankers to break the habit of a lifetime and anticipate this problem. We still have time. There are months to go before we see this combustible contrast, between public sector lay-offs and vast bankers’ bonuses. The executive jet and the passenger-laden jumbo have entered the same airspace, at the same height; but there is still time to change course.

The banks have three months to get together and work out a way of showing restraint and a real commitment to the poorest and the neediest in our capital city and the country as a whole. Many financial institutions already have excellent corporate social responsibility programmes. But they could do much, much more. If they fail, there will be many who find an unbearable contrast between the fortunes of the bankers and those of the wider public. As John Prescott might put it, we need to nip this train crash in the bud.

This article is in The Daily Telegraph