Hamish McRae: So what is the state really for?

If it's outcomes that matter not methods, then why should it collect all taxes?

How do we downsize Government – yet actually make sure that people have access to better services? It will be the challenge of this century, not just for us but for the entire developed world. And it is not about politics; it is about arithmetic.

If you don't believe that Government will get smaller, let's start with two numbers, £16bn and £200bn. The first is the amount that Gordon Brown has just announced would be raised in asset sales over the next two years. It is also, unfortunately, the amount the Government is borrowing every month this year. So the entire asset sales programme, assuming you could sell the stuff anyway, covers merely four weeks' borrowing.

The second figure is approaching the size of all the public sector's assets, the schools, hospitals, MoD establishments and so on. Oh yes, the Post Office, too. Unfortunately it is roughly the same as the amount the Government will end up borrowing this financial year: the target was a deficit of £175bn but the running total so far is quite a bit worse. But that is this year; next year the deficit will be of a similar order, and there is the year after that and the year after that. Common sense says it cannot go on.

The story does, I am afraid, get worse. During most previous periods of heavy indebtedness, it was possible to whittle away the real value of the debt by permitting inflation, and to cut it in relation to the total size of the economy by growing the economy. To some modest extent, both will happen this time. But the governments of the developed world are able to borrow now at low cost because they spent 20 years re-establishing credibility in fighting inflation after the catastrophe of the 1970s. Were that credibility to go, then rates would shoot up, as they did 30 years ago.

And growth? Well, there will be some. But there is a crucial difference that distinguishes this period from every other since the Industrial Revolution. The developed world now faces the prospect of a shrinking workforce. That is already happening in Japan and Germany and will hit the UK in a few years' time. So there will be fewer people working to pay the taxes just as the burden of a larger army of retired people requires more public services.

The reaction of many people to this is to blame the downturn or, more specifically, the banks. But while the downturn has exacerbated the problem, it has merely exacerbated pressures that would have hit us anyway. We have a structural deficit, not just a cyclical one. As for the banks, well, it is perfectly possible that the taxpayer will end up square on the deal, maybe even ahead.

So something has to change. There are some precedents. Both Sweden and Canada managed to pare back the state in a radical way when they found they could not pay the bills. We did it in the 1980s when Margaret Thatcher was prime minister, though interestingly the paring back of the state actually was started by the Labour chancellor, Denis Healey. As I said, this is about arithmetic rather than politics.

Now it may well be that the developed world will follow the Canadian/ Swedish pattern of chopping a bit here and there off costs, raising services charges and some taxes, persuading people to pay for some things they had previously received from the state for free and so on. We have started on that course here in the UK with university tuition fees. In the next few years there will be a general upheaval as people come to realise that promises made to them by previous governments cannot be honoured.

There is nothing wrong with this. You have to work from where you are. Indeed the most sensible way to cope with the financial pressure on government is to take what it is doing now and make lots of small changes to improve output and cut costs. You want to look at what seems to work in other countries and figure out whether some of those ideas can be applied elsewhere. We should be suspicious of people who demand radical solutions and even more of people who have an ideological commitment to any particular method.

But I suspect we are in the early stages of something much bigger than a spruce-up of what the state does now. The developed world will, I suggest, feel its way over the next 30 years towards a quite different sort of state: one that does less, but tries to make sure that what it does do, it does much better.

Some of the changes that will take place we can already glimpse in outline. Part of the shift is to split responsibility from action. That is happening. Start with the military. We now regard our armed forces as a core government function, for defence is something that only governments can do. Of course all big military decisions must and will be taken by governments but the actual application need not be carried out by our own armed forces. Fact: in Iraq now, more than half the US personnel are non-military – they are private contractors. Actually that creates problems of control so this may not be an improvement. It is just that it is the objective that matters, not the path by which you reach it.

If you apply the principle that it is the duty of a government to be responsible for outcomes rather than methods, you would start to ask whether it should, for example, collect all taxes. Maybe it would be better to put some specific taxes out to tender and see whether collection rates and customer service improved. There are more obvious areas for experimentation, including education and heathcare, but we are already moving towards change there. In Britain we may have gone the wrong way in pensions, loading more on to the state and less on to individuals to make their own arrangements, but elsewhere in the world the trend is the other way.

But beyond this, there may well be a questioning of where the responsibility of the state really should lie. We live in a world of more and more legislation. Do we as citizens want that? Maybe we will, or rather our children will, want a world of more personal responsibility and less outside intrusion. I cannot see where the frontier will be, but ponder this. Government in general is not popular: people don't say they want more of it. If that is really true, maybe we will vote for less of it.

h.mcrae@independent.co.uk