The economy looks in fine shape. Shame about the people running the show...

The civil service feels bullied and resentful at all these edicts and initiatives coming from on high

It is a week to the budget, presumably the last significant one before the election. Assuming that comes in the summer of next year, we will be so close next March that there will only be room then for a bit of pre-election sweetening. The budget will be significant, too, because at last there is some credible opposition and the emergence of a bit of product differentiation between the parties.

It is a week to the budget, presumably the last significant one before the election. Assuming that comes in the summer of next year, we will be so close next March that there will only be room then for a bit of pre-election sweetening. The budget will be significant, too, because at last there is some credible opposition and the emergence of a bit of product differentiation between the parties.

So what should we look for next week? We always have to aim off to allow for Gordon Brown's penchant for glossing over bad news, such as failed forecasts, and stressing good news, in particular what is by European standards a decent growth performance. But that is politics.

There will, I suggest, be three main areas of good news - good in the sense that the concerns of recent months will appear to be muted. There will be three bits of bad news. And there will be an implicit wider message for all of us.

The first and most obvious chunk of good news will be growth. Those of us who doubted that the economy would grow by as much as 2 per cent last year have been wrong. Thanks to a spurt towards the end of last year growth looks like well over 2 per cent. Since the spurt seems to have carried on into this year and general world growth will be better than last year I suppose a 3 per cent figure for 2004 is perfectly plausible.

The second bit of good news is that public borrowing may not have become any worse than it was last December. It certainly ought not to have done, given the decent growth and given the huge increase in borrowing revealed then in the pre-budget report. But there have been real fears that the Chancellor was still being over-optimistic. I suspect that he may be OK.

The third bit of good news is that the Treasury has at last been getting a grip on public spending. There has been an enormous increase - spending is running up nearly 10 per cent year on year - but according to the official figures nearly all of it, 8.5 per cent, has been absorbed in higher costs. No one believes that the state can be doing quite as badly as that but there clearly is a need for great order and discipline on the spending side. The good news is that this is at last about to happen.

Now the bad news: tax. Revenues have been falling short of projections, particularly on income and capital taxes. This is particularly worrying given the good growth. Part of the reason for the shortfall is that many of the richest people have seen their incomes squeezed. Since 1 per cent of the population pays nearly a quarter of all income tax, if their incomes fall the tax take plunges.

The Chancellor will want to recoup this somehow so expect a series of measures, clothed in cutting tax-avoidance language, to try to boost revenues. The prime target seems to be the family enterprise companies the Chancellor encouraged people to create a couple of years back when he was in his "budget for enterprise" mode. However this will not be enough and I suspect that there will be further attempts to crank more money out of the tax system, attempts that may well fail now that people are wise to the way the Chancellor operates.

That leads to the second concern: the squeeze on consumption. We are all borrowing too much. We are borrowing too much as individuals and the country is borrowing too much by way of its current account deficit. We don't need to be terrified by this, for our personal situation is not nearly as precarious as it was in the late 1980s. The government's deficit is not as bad as it was in the middle 1990s. And the country's external deficit is not as bad as it has been at many times in the past.

Still, we cannot go on increasing consumption at 4 per cent or more each year when the economy grows at an average of only 2.5 per cent. At some stage we will have to wean ourselves off this excessive spending and this year seems to be seeing the start of this squeeze. The bad news is that consumption is likely to grow more slowly, news that will be pretty unwelcome for most of us.

And the final piece of bad news will be about the performance of the public sector. The deal offered to public sector agencies by the Chancellor was in essence that they would get the money they said they needed but their performance would be carefully audited to see they delivered higher output. Given those dreadful figures noted above it will be very hard to claim that all is well. You can defend the public sector by saying that the figures underestimate the improved quality of output and that there was a backlog of under-investment in a host of different areas from transport to central and local government. But, however you stack the excuses, the fact remains that the British record of public sector efficiency is not good by international standards. It is no good the Chancellor moaning about poor productivity of the private sector when the public sector is at least as bad.

But what has gone wrong? Why did Labour seem to perform well in its first term of office only to disappoint in its second? This is the wider issue that should be in the back of our minds when the Chancellor lavishes praise on himself today week.

I have been talking to people who are either in the public sector at a senior level or who have recently left and they all say much the same thing. The civil service is pretty demoralised. This has something to do with the interaction of the Prime Minister and the Chancellor and in particular their determination to micro-manage everything. All important decisions have to go up to the top two, who then have to agree. Some top civil servants have been run ragged by this. Some ministers, most notably Alan Milburn and Estelle Morris, have given up.

I am told that when the Prime Minister demands some particular action everyone jumps and makes sure it happens, even if it means twisting the figures. The Chancellor micro-manages to an even greater extent than the PM, as anyone listening to his budget speech will understand. But as always happens in these circumstances, wise civil servants do precisely what they are told and no more. And they cover their rear and wait for a change at the top.

As a result the PM and the Chancellor (even when they agree between themselves) feel frustrated with the civil service because it won't do anything on its own initiative and simply waits for orders. And the civil service feels bullied and resentful at all these edicts and initiatives coming from on high. Ministers in other departments feel they are caught in the middle. The fact the government has to operate under very close press and public scrutiny adds to the stress.

Indeed I was told recently by someone very senior in the system that the strain on the relationship between the ministers and the civil service was more serious than at any time since the 1970s. So maybe the underlying message from the Chancellor next week is that the private sector has been doing pretty well in keeping growth going, but he has a lot of problems in managing things closer to home. Funny thing, though - I don't think he will put it quite like that.