Public expenditure: shock therapy

The new Treasury team feigned Victorian non-amusement, but in truth Liam Byrne's prank had them tickled pink. The outgoing chief secretary left a one-line note on his desk, reading "I'm afraid there's no more money". This delighted the chancellor, George Osborne, and his newfound Liberal Democrat friends, since here – pithily scribbled by a Labour pen – was precisely the message which they are suddenly scrambling to convey. While Vince Cable talked of skeletons falling out of the exchequer's cupboard , Mr Osborne yesterday fixed an emergency budget for 22 June, and also promised to unveil his first cuts as soon as next week. Make no mistake – with the election out of the way, the political game is hyping up the gravitational collapse in the public finances which brought the black hole into being. The new Office for Budget Responsibility , which Mr Osborne launched yesterday , is being asked to review Labour's fiscal forecasts and to factor in supposedly "hidden liabilities" such as PFI contracts and public-sector pensions. Independent validation of the books is a good idea, as is the inclusion of every form of public debt in the ledgers. There ought, however, to be no assumption that this will make the picture worse. Gordon Brown donned rose-tinted glasses to pen his final few budgets, but Alistair Darling has since injected so much caution that his spring budget outperformed his predictions. PFI and public pensions are mighty burdens, but they are not new and were never truly hidden. If there is an element of fear-mongering in all this, it is because Mr Osborne thinks the way to shake a complacent country into facing up to a very big problem is to suggest that it is even bigger. There ought to be no need: the reality is shocking enough. Combining Mr Darling's own deficit figures with the Conservatives' deep resistance to raising tax implies a need for the deepest expenditure reductions since the second world war. Factor in the shield that David Cameron promises to throw over the NHS, and the Institute for Fiscal Studies calculates that everything else – transport, housing, universities, even schools – would have to be cut by a quarter. The calculus becomes a little less stark if the government launches a direct attack on benefits, but it goes without saying that stinging the poor would raise its own issues, not least for the coalition's self-proclaimed progressive credentials. Post-election analysis by the American pollster Stan Greenberg has revealed a public unready for any of this: for every two voters who fear that the government will not get a grip, three fear deficit overkill. Mr Osborne, and his Lib Dem deputy David Laws, seem inclined to reshape opinion through a quick blast of shock and awe. But pronouncing reasons to be fearful in a quick studio tour will barely move things along – especially if the next move is into the shadows of budget purdah. The world has seen few retrenchments as dramatic as that planned by the coalition, and fewer successful ones. Those which have not run aground on strikes and resentment have rested on a consensus which takes time to build. The Institute for Government points to Canada, where the government first confessed to its problem in 1984 but confronted it in earnest only in the 1990s. Public servants must be consulted thoroughly in the search for the kindest cuts. With both the Lib Dems and the Tories committed to more autonomous schools and hospitals, it would be perverse for them to impose detailed cutting from on high. There is also a need to ensure that the pain is properly spread, not concentrated unduly. The Greenberg polling showed that, by a narrow margin, voters prefer "broad tax rises" to public service cuts. Tightening Britain's belt during the 1990s, chancellor Ken Clarke split the pain equally between expenditure and taxation. The coalition must move in that direction, or its plans will be out of kilter, and out of step with the public.