A few weeks ago an extraordinary meeting took place that could determine the future of public spending in this country. The venue was a white stuccoed house in Carlton Gardens. The chairman was Sir Gus O’Donnell, the Cabinet Secretary. Under discussion was whether drastic cuts in expenditure — of up to 20 per cent — will be needed to tackle the spiralling deficit. In the room were senior officials from across Whitehall and Conservative frontbenchers — but not a single minister.

The meeting was organised by the Institute for Government, a non-political body funded by Lord Sainsbury of Turville, Labour’s biggest donor during the Blair years. It was considering the lessons to be learnt from the way Canada brought national debt under control. The two figures behind the Canadian cuts package were the speakers.

In 1994 Canada was running a deficit of 9.2 per cent of GDP, about the same as Britain’s today. It had tried “efficiency savings”, public sector wage freezes and departmental budget cuts with little success.

Then the Liberal Government launched a fundamental review of the role of the state. Public expenditure was cut by a fifth across the board, and the number of state employees reduced by 23 per cent. Although health had only a small reduction in funding, defence spending was cut by 15 per cent, the transport budget was halved and industrial, regional and agricultural subsidies slashed. Within three years the deficit had been reduced to zero and the Government re-elected. “There was blood on the floor everywhere, but at least everyone could see that others were hurting too,” said Marcel Massé, the minister responsible. Voters told him: “This is butchery, but at least you seem a good surgeon.”

The Conservatives were impressed. Philip Hammond, the Shadow Chief Secretary to the Treasury, and Francis Maude, the Shadow Cabinet minister responsible for policy implementation, requested a private breakfast briefing with the Canadians. But what was perhaps more interesting was that the civil servants, including Sir Gus, were in broad agreement that there were lessons for Britain from Canada. The consensus was that even a 10 per cent cut in spending — the figure used by Labour to attack the Conservatives — may not be enough.

The battleground for the next general election is now clear: it will be cuts versus cuts rather than investment versus cuts. At last week’s Cabinet, Gordon Brown agreed that the Government’s message had been too simplistic and that Labour could no longer continue to deny that there would be spending constraints whoever won the next election. It was an important climbdown for the Prime Minister and a victory for Alistair Darling and Lord Mandelson over Ed Balls and Shaun Woodward. According to one minister the new dividing line will be “nice Labour cuts versus nasty Tory cuts”. That is much more dangerous for the Tories.

David Cameron has started talking tough on public spending. Yesterday he promised a “bonfire of the quangos”, although Labour’s Liam Byrne pipped him to the post over the weekend (presumably with a nice bonfire as opposed to a nasty one). The Tories are determined to avoid publishing fully costed plans before the election. Mr Cameron and Mr Osborne are both stung by the experience of their 2005 James Review, portrayed by Labour at the time as a slash-and-burn plan. The Shadow Chancellor still recalls ruefully how a little-noticed promise to sell off the British Waterways Board property portfolio provoked a violent backlash among canal users in several key marginal seats.

But the Conservatives are trying to think of four or five eye-catching examples of what strategists describe as “progressive” spending cuts in order to prove that they mean business about reducing national debt but that they are not about to fire all the nurses.

Scrapping or delaying Trident is an obvious example — although Liam Fox and William Hague are fighting hard to retain the nuclear deterrent. According to one insider, the Treasury team believes that only three of the six big defence equipment contracts in the pipeline are likely to be affordable. The Tories have made clear that they will remove tax credits from high earners — and means-testing child benefit and the winter fuel allowance are options too.

An austerity Olympics could be on the cards as well as charging for museum entry. Public sector pay and pensions are under review. The introduction of the promised cut in inheritance tax is likely to be pushed back to later in the Parliament and support for marriage in the tax system reduced to a “tokenistic” payment until economic circumstances improve.

Senior Tories cite Tesco’s slogan “every little helps” in discussing cuts. But the real aim, they say, is to follow the Canadian example and rethink the role of the State. “There will be examples of painful decisions that we will need to take — but that’s more about showing people that we are serious rather than solving the debt crisis,” says one strategist. “You are not going to get anywhere near enough just by cutting even quite big things, the real point is that we have got to make fundamental changes in how we do things.”

That means abolishing large sections of Whitehall and getting rid of centralised databases; it could also mean reconsidering what treatments the NHS provides and drastically reducing the benefits system. “Brown’s argument that cuts are bad is old-fashioned,” says one ally of the Tory leader. “We have to show that cuts are about modernisation.”

It could be tricky. Nice cuts or nasty cuts; old or new cuts, amputation or keyhole surgery — either way it’s not going to be fun. It is telling that the Canadian Liberal Party did not tell the voters before the election precisely what it had in mind.

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