Britain has started the new year with an almighty financial hangover. The cause is years of overconsumption and a reckless debt binge. The result will be months, possibly years, of pain. The Government and the Bank of England will throw the whole medicine cabinet at the problem. But, even if effective, the treatment will take time to work.

The pain will not be shared equally or fairly. Some of the worst affected will be those who behaved responsibly and stayed sober during the boom. Many will lose their businesses. More will lose their jobs and their homes.

Recent weeks have been marked by a slew of companies going under, including household names such as Woolworths and Waterford Wedgwood. In the weeks to come, this flow is expected to turn into a flood, particularly on the high street where many businesses have been kept alive to benefit from Christmas trading. Especially vulnerable will be companies that were bought out with debt during the boom. Many entrepreneurs, such as Sir Tom Hunter, who bought back most of the stores in his USC clothing chain after it was put into administration, will be battling to save their empires.

Some sound businesses will fail because they cannot persuade the banks to lend them the money they need. Much will depend on efforts to get credit flowing again. The Government has already pledged £50 billion to recapitalise the banks and a further £200 billion of liquidity has been pumped into the system. But credit is still extremely tight and the Government is considering a number of other measures that would help banks to raise and lend money. Announcements are expected in the next few weeks. The Government is also under pressure to provide help for specific sectors, notably the car industry. But the Treasury is believed to be nervous about giving support to particular industries and the motor manufacturers are still waiting.

Business failures will stoke unemployment further, with hundreds of thousands of jobs across the economy expected to be lost in the coming months. Royal Bank of Scotland and the merged Lloyds/HBOS, in which the Government has large stakes, are both expected to cut jobs.

Also feeling the pain, though less likely to hit the headlines, are the millions of savers who have seen their income tumble. In an effort to rouse the economy from its sickbed, the Bank has already slashed interest rates and is certain to cut them further. This will put more pressure on savings rates and Gordon Brown has hinted that there will be help in the Budget in March for savers. Lower interest rates have already brought a windfall for the 4.2 million mortgage borrowers who have base-rate tracker loans. And the slump in the oil price, down two thirds since last summer, will bring lower petrol prices and utility bills. Electricity and gas companies are expected to start cutting prices in the next few weeks.

Together with the Government’s controversial cut in VAT, this means that millions of people are seeing a big jump in their disposable income. But with the threat of unemployment hanging over so many, the big question is how quickly this translates into an improvement in consumer confidence, a key early indicator of recovery. Other pointers to watch for will be a bottoming of car sales, after a dramatic slump, and the number of property transactions. But there is little hope of an early end to the slide in house prices, which are expected to drop by at least another 10 per cent this year after last year’s 16 per cent fall. Sterling has also been in free fall, getting close to parity against the euro. But some observers believe it may hit bottom soon as the economic outlook for the eurozone darkens.

There will be new faces at some of Britain’s biggest companies, with BP and Royal Mail set to announce new chairmen and the London Stock Exchange quietly looking for a new chief executive to succeed Dame Clara Furse.

In the next few weeks companies are expected to report sharp falls in profits for the second half of last year, but investors are already expecting the worst, so if the news is less than disastrous shares could bounce. Early reports on Christmas trading from some retailers have been less gloomy than expected, pushing up their shares.

Many observers expect share prices to recover sharply at some stage this year, anticipating an upturn in the economy, though some believe any rally could prove shortlived. One trigger could be any signs of economic recovery in the US, where President-elect Barack Obama is preparing a huge package of spending increases and tax cuts.

Alistair Darling will be under pressure to announce further stimulus measures in the Budget but will be constrained by rapidly deteriorating public finances. A good thing too, say those who argue that encouraging consumers to borrow and spend is no way to cure a financial hangover. Some hair of the dog may take the edge off the pain for the moment but also prolongs the agony.

And for those who really want to drown their sorrows, there will be more bad news in the next three months. At the current rate, it will be last orders for another 400 pubs.

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