Get leaner and fitter to climb out of this hole

The Government now finds itself deep in just the kind of hole he had in mind as the economy judders to a halt and the popularity of the Government drops off a cliff.

The latest bad news on the housing front is that £30,000 has been lopped off the price of an average London home, confirming this as the worst downturn since the early Nineties and the first period of falling house prices most people under 40 can remember.

Personal spending has been slashed, too. It is hard to find a pub these days where the landlord does not complain that takings are 20 to 30 per cent down on last year and in the high street as a whole, the fall-off in sales is the most acute in 25 years. That is some hole we are falling into.

It is also uncomfortably close to home. If the success of the England cricket team was ever the barometer of the public mood in days gone by, that mantle today has been taken on by house prices.

When they are rising, people feel prosperous, confident and believe things are going well - even when the economic facts suggest otherwise.

When house prices are falling, as they are now, confidence evaporates and people feel poorer and scared as they wonder where it is all going to end.

The fear of the unknown means they grossly over-do the doom and gloom. That is where we are now, and hence the reaction to the news of any further fall in house prices, which at times is little short of hysterical, and they ask the question that if government cannot protect them at times like these then what is it really for?

However, there are good reasons why few can agree on what government should do. The brutal fact is that so much of what is glibly suggested in the form of tax cuts, special reliefs and windfall taxes by self-interested bankers, mortgage providers and housebuilders would in fact be the equivalent of continuing to dig - making the hole bigger and our problems worse.

The issues at the core of our economic problems are the result of excess - particularly the excess born of easy money - and can be corrected only by a period

of moderation. We borrowed far too much for far too long and that allowed us to consume more than we earned for most of Labour's first 10 years.

Now we have to redress the balance and begin the long, slow process of getting our finances back on an even keel.

That means paying off debt and consuming less, paying more for essentials such as fuel and power and having less for holidays, not just for a week or two, but for months and possibly even two or three years. And of course that comes as a shock.

But trying to ease that discomfort with some palliative such as tax cuts would be like giving doughnuts to people who complain when they have to lose weight. The sugar rush might briefly make them feel better but it does them no long-term favours. They still have to shed the pounds.

Just as there is no easy way to lose weight, there is no pain-free way to make an economy leaner and fitter either. Even in America where they don't do discomfort (or dieting for that matter), it is seen that George Bush's tax cuts have failed.

The money has been spent and the malaise is as bad as ever. Now there is real apprehension there that the deep-seated problems in the housing market could cause a major recession.

Trouble is, because it is an election year, the politicians there are even less inclined than normal to tell the people the uncomfortable truth.

Tax cuts here would have the same minimal effect as in America because confidence is so low. The money could be spent and give a short-term fillip to retailers but more likely it would be saved, and when people woke up the morning after nothing would have changed - except that government finances would be in an even worse mess, which would probably indirectly lead to a further slide in the value of the pound and more imported inflation.

Tax cuts won't make firms decide to invest, or foreigners decide to buy our exports nor even encourage banks to lend to each other again. The necessary adjustment to the economy can't be rushed.

It took a decade to get into this mess so getting out of it can reasonably be expected to take a year or more. Hence the absurdity even of closely targeted measures such as the mooted holiday from stamp duty, which some think might tempt first-time housebuyers back into the market.

It simply makes no sense to encourage banks to lend money they do not have to people who can barely afford to repay to buy property which is going to fall in value.

It does, however, highlight a lack of basic understanding that falling house prices are a symptom of our problems, not the cause of them. If people recognised this, they might also see that treating symptoms does not treat the disease.

Governor of the Bank of England Mervyn King gets this, as does his deputy Charlie Bean. Both have been as clear as could be in their recent speeches that living standards have to fall - we all have to slim down a bit - if the economy is to be restored to health. And that is not just the living standards of normal people, it is corporate living standards, too.

Profits will come down, sales will drop, marginal businesses will close, shops will board up, unemployment will rise, empty factories will be demolished and at the end of it all we should be leaner, fitter and better able to pay our way in a world which, with the rise of China, is more competitive than ever. That is what adjustment means and why it is needed. No one diets for fun.

But neither is recession the end of the world. People adjust very quickly once they know they have to adjust, and at the end of the day even if we have a full-blown recession it will only knock prosperity levels back to where they were a couple of years ago - and with most of that pain concentrated in the already hard-hit sectors of finance, property and construction.

Indeed, in those sectors the transformation is well under way, and that coupled with the returning home of many migrant workers means that the economy is already being re-shaped.

The best thing government could do, therefore, is join Mervyn King in telling voters the truth and helping them to face up to it - rather than pretending that it has some easy answers which will miraculously make the pain go away.