Tighten your seatbelts: the big spending days are over

When something as strong as Halifax Bank of Scotland, with deposits of £250 billion, can be swept away as an independent institution in a morning by the panic gripping the markets, the pain will spread far wider than Hackett account-holders with large houses in Wandsworth.

When the US government's effective nationalisation of the world's biggest insurance company, AIG, fails to stem the tide, simply leaving everyone looking around for the next victim, the ground is starting to shift beneath our feet. And it's only Thursday.

The immediate effects on the economy are obvious enough. The credit crunch, which was easing, has returned, worse than ever. Property prices will fall further. Thousands more people are going to lose their jobs. Millions will be spending less.

But what I want to consider is something that hasn't been talked about much: the effect on London government. What hasn't yet been widely understood — not least by the politicians themselves — is that in this new world, many of the cornerstone assumptions that have governed London politics for years are going to be destroyed. Huge numbers of things London's rulers have been talking about as recently as the May election are either at serious risk, or are effectively already dead.

At that election, one live issue was the best way to get developers to build affordable housing. Ken famously promised all new developments would be 50 per cent affordable. Boris rejected quotas but still promised to deliver 50,000 new affordable homes in his first term.

That argument, and both those policies, are now as quaint and irrelevant as the debate about Irish home rule in 1912. Some new homes, started during the boom, are still in the pipeline — but nobody will be building any more, affordable or otherwise, for quite a while. Several developers are on the verge of bankruptcy.

Tall buildings is another one of those live issues which might be about to die. There is already a glut of office space. Whatever your views for or against, whatever the mayor decides, it seems highly unlikely that many tall towers will ever get off the ground.

Even the election's top issue, violent crime, may become less of a concern. Recessions usually reduce crimes against people and increase crimes against property. Because property crime is common and violent crime is comparatively rare, however, that could also halt or reverse the recent reductions in crime.

Above all, the finances will get much tougher. Nearly all the GLA's income comes not from its own tax-raising powers but from Whitehall. For eight years, City Hall has enjoyed a kind of fantasy existence, awash with other people's money. A beneficient national government has shovelled wildly disproportionate amounts of cash into London.

It's little wonder, for instance, that the buses are better here than anywhere else. London has about 15 per cent of England's population but gets about two-thirds of England's bus subsidy. Its buses get about twice as much from central government as the other six-sevenths of the country put together.

This may help explain why TfL has become such an extravagant organisation (I noticed yet another absurd example in Islington yesterday — it has started putting expensive, burnished bronze-like plates on manhole covers, proclaiming its "London Streets" corporate identity to anyone who doesn't mind getting run over). Billions have also been given us for that other gross government-imposed waste, the Tube PPP. As a recession squeezes government spending, Whitehall's favouritism towards London simply cannot last, even under a Tory chancellor. Big, necessary projects are at risk.

Unfortunately, many London politicians still clearly assume that the next eight years are going to be like the last: that spending is an end in itself, and the only problem is what new item on the bulging wish-list to get next.

Even this week, amid the meltdown, the London Assembly was still, incredibly, whingeing about the likely cancellation of the Cross-River Tram, an obscure project to send trams from Peckham to Camden Town many years in the future. People: the world just changed. Don't give the Cross-River Tram another thought. You need to concentrate all your energies on saving Crossrail.

So what should the new times mean for Boris? Obviously, it adds urgency to his so far unconvincing effort to slim down TfL and the rest of the "GLA family". I've sometimes been accused of favouring cuts for their own sake: actually, I favour cuts in unnecessary vanity projects to ensure that we do not have to cut the things that matter, such as bus and Tube services.

It means entirely new policies in some areas. City Hall has to use its substantial resources more directly to stimulate the London economy, or protect parts of it. The LDA needs to return from being an agency of social engineering to its original purpose, of economic and business support.

London's housing problem has not gone away because there is likely to be a recession. Boris might like to consider using his (quite sizeable) housing budget to build houses directly, rather than bribing private developers to do it.

There is a case for cutting some of the GLA's few taxes, above all the western extension of the congestion charge, which is already doing serious damage to west London retailers and coupled with a recession will almost certainly drive many to the wall. The revenue impacts would be small.

But the other thing Boris should do is just as important as adjusting policy. It is adjusting expectations. He needs to tell people, while he is still on honeymoon, that he will probably not be able to keep his promise of building 50,000 affordable homes; that times will soon become tougher; and that difficult decisions will soon have to be made. All these things will be a great deal easier to say now than later.