Budgets the Tories must choose from

For that, they need to adopt one of two models. The first is Geoffrey Howe's Budget of 1981, the second the 1993 Budgets (there were two) of Norman Lamont and his successor Ken Clarke. The first was brutal in its cuts and disastrous for the economy at the time. The second was more subtle and laid the foundation for the growth which the Labour Government was lucky enough to inherit.

Until quite recently Osborne and his advisers looked to model themselves on the 1981 Howe - first because there is something deeply ingrained in the Tory psyche which wants to take a scythe to those ranks of social workers, equality advisers and health and safety professionals but also because they believed that it was Howe's cutting public spending and put up taxes in the teeth of recession which laid the foundation for later growth. To recap - and thanks here to PricewaterhouseCoopers' Book of Modern Budgets for the details - in the 12 months before Howe's Budget, unemployment had risen by more than one million, GDP had dropped by 2.5%, manufacturing output plunged by 9% and the public sector deficit, which had been forecast at £8.5 billion, came in at £13.5 billion. Howe froze personal allowances, created a new tax on North Sea Oil, imposed a £400 million windfall tax on banks and sought to offset the massive fiscal squeeze with a 2% cut in interest rates to 12%. Those were the days.

This is what Osborne is thought to have in mind when he talks about tough decisions. What he needs to remember though is that the economy dropped off a cliff after the Budget and it set off a summer of riots in London, Liverpool, Bristol and several other cities. The Tories also fell massively behind in the polls and would have been thrown out at the next election had not their popularity been transformed by the Falklands War the following year.

Ten years later and after the collapse of the Lawson boom, the public sector deficit ballooned to levels no one had seen before, and the economy once again plunged into recession. That was the background for the April and autumn budgets of 1993. Fiscal policy needed to be tightened but what first Norman Lamont and particularly Ken Clarke did was announce their intention to increase taxes - but not yet. That demonstrated to buyers of government debt that there was a plan to bring things under control but did not further kick the economy when it was already down. So for example mortgage tax relief was cut with effect from two years out; VAT on fuel bills was to be phased in, air passenger duty and insurance premium taxes were introduced with effect from late 1994. Public spending was capped, but there was no overblown rhetoric about cuts - largely because the experience of all governments every time is that they fail miserably in their efforts to do so.

The 1993 Budget was a huge success. The pound had fallen, exports soared, growth resumed and within five years the economy was in its best shape for years - just in time for the Labour victory in 1997.

Given that Ken Clarke remains one of the most impressive figures in the Shadow Cabinet it is hard to believe that the Tories, if elected, will do other than repeat what they did in 1993. Indeed there is very little need to do otherwise - in spite of all the talk of a new age of austerity - and very little need for tax increases as City economist Roger Bootle demonstrated recently.

He pointed out that one reason projections for government spending look so alarming is that they have a built-in adjustment for inflation. This means that simply capping money expenditure at current levels, would in effect amount to a real money cut of about 2% and if absolutely nothing else were done this alone would save £20 billion a year. Thus over four years spending would be reduced by £80 billion which would eliminate by 2015 the structural deficit everyone is so worried about.

So the real debate is not how much the government should spend but what it should spend the money on. It needs to quit all areas where the private sector could do better and focus on those areas where it is the best provider. The Tories and Lib-Dems need to tell us their ideas about what those areas are.