David Cameron has got the right analysis on public spending but has so far failed to come up with credible answers. His speech yesterday in Birmingham on “living within our means” was frustratingly incomplete: a plan with a hole in the middle.

The Cameron strategy since 2005 has been to put economic stability before tax cuts and to improve public services for everyone, not help a few to opt out. But a deteriorating fiscal position limits the scope for tax cuts and on the spending side.

Mr Cameron summed up the dilemma: “In the decades ahead there will be pressure to spend more on the essentials: care for the older generation, equipment for our Armed Forces, more prisons and police to keep us safe. At the same time, we have reached the limits of acceptable taxation and borrowing.”

The familiar Tory mantra about sharing the proceeds of growth does not get you very far. Over time, spending should decline as a share of national income and taxes should fall, but as a short-term plan it is almost as elusive as Mr Brown's golden rule on borrowing. It all depends where you start. If borrowing is already too high, as it is, and the economy is likely to grow below trend, and could even contract for a period, “sharing the proceeds” is largely a well-meaning aspiration.

The Tory Right would like Mr Cameron to abandon this formula, which involves accepting Labour's plans for 2 per cent real growth in spending for the next couple of years, but a tighter squeeze on spending, let alone a real cut, is impracticable in the short term. It will be very hard to achieve even after 2010 in view of the extra spending demands that Mr Cameron outlined.

Many Tories respond by saying “cut waste” but, in a passage of blunt home truths, Mr Cameron said that people did not believe this approach at the 2005 election when, based on the James Report, a long list of efficiency savings was added up to produce a great big total to be allocated to debt reduction, spending increases and a tax cut: “The Government efficiency drive is one of the oldest tricks in the book.” Simplistic lists of cuts naively overestimate potential savings.

Instead, making government more efficient should be part of a far deeper review of the role of the State. Quite right. Unfortunately, Mr Cameron's solutions do not bridge the gap. Reducing the long-term demands on the State by tackling social and welfare problems is, even if successful, going to take a very long time to produce savings. There is a strong case for reforming public services through choice, competition and local control. This should produce efficiency savings in the long term but in the short term expanding capacity may cost more. Using private sector expertise to save money and improve service delivery is hardly new, nor is it a panacea.

Mr Cameron has good intentions and is rightly trying to lower expectations but there is no alternative to some of the tough decisions that the Thatcher Government took to remove the State from many activities. And it was not until her second term that the tax and spending burdens (as shares of national income) began to fall. Any incoming Cameron government in 2010, or whenever, is going to have to concentrate on sorting out a probably messy inheritance.

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