The Conservatives have got themselves in an unnecessary mess over tax cuts. Unnecessary not because the issue does not matter. It does. The mess is avoidable because there is now a false dichotomy between tax cutters and fiscal conservatives.

The tax cutters tend to play down both the short-term fiscal/borrowing constraints and the need to have robust plans for reining back and restructuring the State before tax promises are credible.

The fiscal conservatives are so keen to lower expectations that they blur the distinction between cutting individual taxes and reducing the tax burden but I have little doubt that a Cameron government would cut direct taxes in its first term, even though the overall tax burden, the share of national income, might not fall much as green taxes are raised.

There is a close parallel with the Thatcher Government's first term. The Tories inherited a high, and rising, level of public borrowing, but pressed ahead with a big shift from direct to indirect taxes, via cuts in the top and basic rates of income tax offset by a sharp rise in VAT. The priority of cutting borrowing led to the tax-raising 1981 Budget, so the overall tax share of burden rose by five points over the first term to 38.6 per cent. It took nearly another decade for the share to be back to 1979 levels but, by 1990, the basic rate of income tax was a quarter lower than before. This is the key to incentives.

David Cameron could face the same dilemma. He said on the BBC Politics Show on Sunday: “If we win the next election, there will not be some large kitty of money to spend.” Cutting borrowing may be the priority. Over time, lower marginal rates should generate more tax receipts but this should not be counted upon before it happens.

So the debate comes back to public spending. Growth is already slowing sharply, to 2 per cent annually in real terms for the next three years, and, as Alistair Darling announced in the Budget, the assumption rate thereafter is 1.9 per cent a year.

This is less than the underlying growth of the economy and this therefore, in theory, implies “a sharing of the proceeds of growth” with lower taxes over the long term (the Tory policy).

Cutting spending growth below this rate will be hard, given all the upward pressures on health, defence, law and order etc. Getting rid of waste is always easier to dicuss than to achieve. It is down to functions and structures.

First, where can charging be extended beyond tuition fees, residential care for the elderly, much dental and eye treatment and the congestion charge (where the Government has been timid over road pricing)?

Secondly, where taxpayer financing continues, can productivity be improved and savings be achieved by involving the private sector, as the Reform think-tank urges, and as the Tories have proposed for schools, prisons and welfare? Choice and competition should improve standards but this is not cheap in the short term. Any gains will take time to work through.

George Osborne is pursuing the right strategy, given all the economic uncertainties, but he should be more explicit that caution over the tax burden does not rule out cuts in marginal rates, and that he has a plan for longer-term expenditure savings. The differences are really over tactics, not direction.

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