These spending cuts go to the heart of what sort of society we want to be

Decisions made now will tie the hands of the next government too. By the middle of the next parliament, half of all spending will go on social welfare and the NHS

George Osborne: 'Confidence is returning to financial markets' (PA)

The cuts go on. It is almost impossible these days to open a newspaper or listen to a news programme without there being some reference to government spending cuts. The reason is simple: during the next four weeks, the Treasury has to get agreement from the various spending departments for their budgets to 2015-16, the first year of the next parliament. So departments have a choice. They either do a deal quickly, in which case they hope to get more favourable treatment. Or they put up a fight, typically by trying to whip up public support for their cause. If they do that, they may end up protecting more of their spending, but they may generate more resentment and end up worse off.

This is now being played out. Ministers have to make a judgement: deal or fight. Seven departments representing about 20 per cent of all spending have done deals but the rest have yet to do so. The ripples that surface in the media are the outward signs of the battles being fought far below. There will, I am afraid, be quite a lot more in the coming weeks.

All spending rounds reflect the tensions inevitable to government but this one is notable in several ways. First, it applies to the next government, not this one. That might seem strange given the political noise but the harsh reality is that the hands of any incoming government, at least in the early years, are pretty much tied by the decisions of the previous one. The case for accepting the previous government’s spending plans, as Tony Blair did in 1997, is that you cannot change them much anyway.

Second, there is not a lot of debate about the need for the cuts. The gap between the three main parties is marginal, a few billion here or there on a budget of half a trillion. As George Osborne keeps saying, the Coalition has eliminated one-third of the deficit. That leaves two-thirds to go. Even if they make more progress in the next two years than they did last year, the next government will have to face another five years of cutting. Alistair Darling said it would take two parliaments to clear the deficit, and he is proving right.

Third, there is not much debate about closing the deficit by increasing taxes yet further. Labour actually proposes cutting taxes, albeit temporally. There are two reasons for this. One is that increasing taxes would be likely to clobber the already fragile recovery. The other is that for the past 30 years no government has been able to collect more than about 38 per cent of GDP in taxation, so that seems the practical limit for the funds any government will have available. There is, I think, a tacit acceptance by all senior politicians that they have to work with what they have got.

Finally, this tussle over the spending round takes place against a background of a huge structural change in public spending that has largely gone unnoticed outside Whitehall. By the middle of the next parliament, public spending will be down to a similar portion of GDP as it was in around 2003. But the money will be spent very differently, with half of all spending going on two areas: social welfare and the NHS. That is a result of a number of things, but particularly the growing numbers of elderly people and the general rise in healthcare costs. Everything else gets squeezed: education, infrastructure, defence, police, housing, the lot. And it goes on getting squeezed.

It may be that this is the choice that we as a society want to make, but I suspect that most people, even most politicians, are unaware of what is happening. Expect the present rumbles about cuts to be nothing as to the battles to come.

Getting over the fiscal cliff

The bulls that believe that the surge in equities is mostly a reaction to positive news about the US economy – rather than a result of the central banks printing loads of money – got a double boost yesterday. One came from house prices, which showed the largest annual increase for seven years, nearly 11 per cent. The other came from consumer confidence, the highest for five years.

What is perhaps the most interesting aspect of current strength is that the big worry in the US earlier this year, that demand would be crushed by an arbitrary squeeze on public spending, the “fiscal cliff”, seems to have proved unwarranted. Congress did fail to agree to the Administration’s plans and the automatic cuts in spending, sequestration, has occurred. Partly as a result of these cuts and partly as a result of higher-than-expected tax receipts, the US budget deficit is closing much faster than expected. As for the cuts in public services, with the exception of flight delays as a result of cuts in air traffic control staffing levels, there has been little dissent. Maybe the fiscal cliff did not matter after all.