It is not for Mr Prescott to tell the rest of us where we can live

For all the virtues of social democracy, this Government also displays too many of its vices. In this week's public spending review, we got higher public spending on the kind of services best obtained by collective provision – but we also got centralised state control. The response of the Deputy Prime Minister yesterday to the rise in house prices in South-east England is to intervene, centralise and dictate.

The saving grace is that he lacks the power to lay down in a five- or 10-year plan how many houses, of what kinds, should be built and where. That is just as well, because it was the post-war obsession with targets for house-building that left us with such a mixed legacy today.

John Prescott's powers are mainly those of co-ordinating local forecasts and influencing the planning rules, not least in his role as court of appeal in planning matters. Apart from his ability to define the green belt, however, his power to dictate where and how many houses should be built is weak.

His attempt to stipulate what density is acceptable in planning applications (more than 30 houses per 100m square) is well-intentioned. But it does not take into account what people want. Fortunately, it is unlikely to restrain the buying power of families trying to live in low-density suburbs and dormitory villages. The role of the state should be to protect unspoilt countryside and lay down the powers of local councils – and then let people choose.

For the Deputy Prime Minister to declare that "we are building the wrong kind of houses in the wrong places" is nonsensical. Houses are being built where people want them, within the planning laws. There may be minor relaxations in planning rules that would allow more houses to be built in the South-east, but few people want to see significant parts of the green belt turned over to housing.

In the end it is most efficient to allow market forces to reconcile the competing pressures. If the price of houses in the South-east becomes a sufficient drain on labour costs, companies will locate elsewhere.

But what about the public sector? From some of Mr Prescott's rhetoric it sounds as though he were engaged in the garrisoning of the Red Army – a state-controlled mass to be billeted in state-provided units. Yet even "key workers" such as teachers and nurses, those deserving public servants usually cited in this context, have to be recruited and retained in competition with the private sector. Eventually, public-sector wages have to catch up with private-sector ones, which is what they are doing at the moment and why public-sector trade unions are in a bullish mood. The answer to the problem of high house prices in the South-east is to pay public servants in the South-east more – not to subsidise so-called "affordable housing" for them.

The notion of subsidised housing for "key workers" runs the Government into a terrible muddle. It confuses social housing – housing paid for by the state for people who are unable to earn an income – with housing for those employed in the public sector. Given that the Chancellor has made money available for the latter, it should go into their pay packets rather than to housing associations. Subsidising most things leads to market distortions and undesirable, unintended consequences, and housing is no exception.

Margaret Thatcher's governments rightly began to withdraw the state from providing or subsidising housing for people in work. It would be a damagingly backward step to reverse that process.