Where we must invest our talents in future

He now warns of the dire impact on the British economy of the decline in financial services that is the likely result of the current debacle. For almost two decades financial services have disguised considerable underperformance elsewhere but it is the underperfoming sectors of the economy that will have to carry the load now.

Smithers' figures spell out the problem. From 1992 up to last year, financial services grew at 13% per annum and throughout the period the UK as a whole grew at an average rate of 2.7%. But if financial services had merely increased at the rate of the rest of the economy (which in the long term they tend to do), annual growth would have been a much more pedestrian 1.7%.

We have to believe the financial services sector's growth will be a lot slower in the next few years, if it expands at all, and we therefore face a prolonged period of lower growth because the rest of the economy cannot take up the slack in the short term. To improve the UK's trend growth rate requires considerably more investment at least up to the levels of the rest of the G5 economies and as of now the savings are not there to pay for it, so it cannot happen.

Though it was there to be seen by those who cared to look, this underlying national weakness of savings and investment was in effect concealed by the financial services boom because it is one of the few sectors that is not capital-intensive where you can grow without serious investment in the capital stock. The vigour of the City disguised this underlying fundamental weakness in the economy for almost two decades and led everyone to overestimate its true growth potential.

It all looks pretty grim because there is not even any scope for assistance in the public accounts. A genuinely prudent Chancellor would have run a fiscal surplus to offset the lack of private saving, but we all know that did not happen. Far from being the solution, the weakness of Government finances has become part of the problem.

The fact that the underlying growth potential of the economy has been overstated also means its ability to support the tax burden has been overstated. So putting Government finances back on an even keel will require an even more wrenching adjustment in terms of increased taxes and spending cuts than the bald figures suggest.

That is not all the bad news. Smithers warns that the medium-term outlook is poor as well. To accelerate its growth rate the economy needs to rebalance, with a shift away from financial services and consumption to savings and fixed investment in plant and exports. That takes time and sacrifice and may well be further complicated by a decline in sterling as foreign investors see Britain as unexciting.

However, if all this is going to happen we ought to make some effort to turn it to our advantage.

Rolls-Royce chief executive Sir John Rose has long campaigned against our neglect of the manufacturing sector and the mistaken belief that we could get by on financial services alone. He wants a much more structured and serious effort made to develop a coherent industrial policy, not in the clichéd way of picking winners, but in providing structures and support that are taken for granted in other modern economies and indeed in the way the City has been benchmarked against other financial centres to ensure its competitiveness.

The coming investments in renewable energy and atomic power generation provide an opportunity to recreate industries where the UK did once have world leadership and which can be used as a vehicle to develop advanced science technology and engineering skills.

So if the political wind has shifted and we are turning away from the Chicago monetarist ideals of laissez-faire and leaving everything to the market, then let us at least make it work to our advantage and put some muscle behind our science and technology-based industries.