Public spending has been the battleground of the last two general elections and it will be the battleground of the next, with one crucial difference. On both the previous two occasions, the election was held against a backdrop of long periods of continuous growth and, hence, a time of plenty for public spending. Next time around, even in the unlikely event that the Chancellor's forecast of a recession lasting for just four quarters turns out to confound all the independent observers, there will be tax rises on the immediate horizon and a very tight squeeze on public spending. In that context, there will be no option other than to set about the serious reform of state structures that so far has been so inadequate.

This is not a partisan point. The privatisation programme was, indeed, a major reform of the State but public services in the Thatcher years suffered a combination of institutional status quo and starvation funding. The maligned Major Government did more, in its short and benighted tenure, to begin the necessary reform. Labour came to power with a clear mandate to spend more on public services but, once that corrective action had been taken, a second unsustainable phase began. This time there was plenty of money but there was not much more reform.

This has been a week in which some of the tensions within the new Labour idea have been laid bare. The appetite for reform, especially when it involved the application of market principles to public services, was always occasional in the Labour Party. Such changes as have happened, such as top-up fees and foundation hospitals, have usually taken place in spite of, rather than because of, the Pariamentary Labour Party. And now, with borrowing set to hit £118 billion next year and with sterling falling a long way, albeit slowly, the echoes of the last days of previous Labour governments are all too evident.

However, it is not too late for this Government to put the economic crisis to good use. To recuperate new Labour is, in fact, the only option left because the dire state of the public finances now makes reform of the public services unavoidable. Indeed, this point applies equally to the Conservative Party, should it form the government in due course. There is a political prize for whoever can sound convincing on the central question of how to get more for the public realm from less money.

This will require more than abandoning a few pet projects. Identity cards are the putative solution to so many problems that even their advocates have forgotten what they were supposed to be for. Though they do have a small recurrent cost, most of the expenditure starts and ends in year one. The Olympics budget has risen fourfold and no doubt the Games could be done more cheaply. But they are one of those events that might as well be done well if it is to be done at all. Regional development agencies are a layer of bureaucracy that would leave no legacy if they were abolished. There are plenty of other bodies whose absence would scarcely be noticed but none spends enough money in any given year to do more than make a small dent in the problem.

It is time for a serious debate about whether a public health system can cover all of what we expect from it. Health service inflation is running at 8 per cent just to maintain the current service. Britain has more children leaving school at 16 than any comparable nation. A tiny fraction of crimes are seen all the way through to prosecution. The incapacity benefit bill is still huge. So are the unfunded pensions liabilities. There has been a decade-long experiment in the social democratic idea that money and a modicum of efficiency saving will lead to drastic improvement. It has failed to do so and there is now no option other than fundamental reform of the State.