Julian Knight: Politicians in denial, and we'll all pay the price

Greece’s ‘lies’ have led to it being shorted by hedge funds, while Ed Balls, is among those peddling myths in the UK

People in serious debt often live in a state of denial. A close friend of mine who worked for Citizens Advice talks of people turning up hours before repossession with suitcases full of final reminders, which they have hidden from their families. Often my friend's first job was to get them to own up and tell their loved ones they were about to be thrown on to the street. It may seem crazy that people can live in such a state of denial – but, remember, shame and fear are two of the strongest human emotions.

Fear, of course (although not shame, we're talking politicians), is at the core of last week's pre-Budget report. Fear of what voters, unions and opponents would do if the Government 'fessed-up and told the truth about how we can possibly get out of this fiscal mess. Treasury officials have already said they wanted to do more and are pointing the finger at Brown and his mate Children's Secretary Ed Balls, right, for persisting with the myth that borrowing £173bn next year is sustainable.

A potentially lethal game – for government finances and for our whole economy – is being played. Everyone knows a public-finances crunch will follow the election and we are banking on the bond markets to give the Government breathing space. We are entering the most dangerous period for public finances, and therefore your personal finances, in living memory.

The markets are getting a taste for blood. Greece broke all trust by basically lying about its finances and is being shorted by the hedge funds. Ireland is being brave and facing up to its deficit, which may well save its economy, if not the government. But both are in the euro's embrace, which although not a guarantee of survival, certainly adds a layer of protection.

There is no such protection for the UK, we are relying on a good public finances record – until 2002 – and on being too big to have our marker called in. It's going to be a close-run thing when it comes to downgrading government debt, particularly if we have another "denial" Budget in the spring. Ministers are doing the equivalent of locking final reminders in a case.

But as a private individual what can you do? Gold is only a good hedge for global economic moves, not for when the UK alone is going down the tubes. Residential property in the short term (or long term if you're outside the South-east) is vulnerable because a UK double-dip recession could kill the market stone dead. One of the few places where returns could be had, or at least losses minimised, is the FTSE. The UK stock market is a global market – profits from firms listed come mostly from overseas – and could prove a good hedge against a downgrading of UK debt, a run on sterling, or worse.

The only bright spot of the pre-Budget report was the recognition that public-sector pensions need reform. It was a necessary rowing back from Home Secretary Alan Johnson's craven agreement with the unions that pensions will remain untouched. However, if the Government thinks that it can just cap the pensions of its highest-paid public servants and get the majority of staff to pay an extra couple of per cent each month then it is in denial, again.

We cannot afford to write a blank cheque for public final-salary schemes. There was an argument for them when public sector pay was worse than in the private sector, and interest rates were higher, so investment returns used to pay for pension promises were higher. But now not only is the UK issuing tons of new debt, it's also trying to pay next to nothing for it and compelling the pension funds to buy this cruddy paper. What has to happen now – and this would show the markets that we mean business – is to introduce career-average plans.

Pretending the burden can fall on the best-paid civil servants is as ridiculous as suggesting that those in the 40 per cent tax bracket can pay for the nightmarish public-sector deficit.