Dan Lewis: It's not if, but when we make the cuts we need

The Tories, and particularly George Osborne, have come in for some

stick over the last couple of weeks and have been accused of losing their nerve. Unfairly.

For reasons that will be explained, there are real limits to what can be done in the first year and the situation is constantly changing, with some commentators now forecasting a slide back into recession.

It's what happens in years two, three and four of a Cameron government that will make all the difference.

So why are we in this mess and how bad is it?

The collapse in government finances is due to the near evaporation of tax revenues – which always happens in a recession. This has been

made more severe by the financial crisis limiting the availability and price of credit, combined with an implosion in world trade.

That's all bad enough but the scale of the deficit a Conservative administration would have to get to grips with is even more sobering.

In 2010, the Government deficit will amount to 13 per cent of gross domestic product (GDP). Meanwhile, the ratio of the Government debt to GDP ratio was 52 per cent in 2008 and this could rise to about 80 per cent in 2015, meaning much greater interest rate payments for the Government, already running at 30bn a year.

Public expenditure this financial year will run to 676bn and is forecast to rise to 752bn by 2013-14.

Nearly three-quarters of spending today is led by four big sectors; social protection (190bn), health (119bn), education (88bn) and defence (38bn). The Tories have pledged to "protect" education and health spending, so no cuts there. That really doesn't leave much scope for reduction through cuts.

So let's make the assumption that the Tories win and have a fairly pliant majority, growth is anaemic and tax revenues remain depressed. What could they do?

Apart from on the editorial board of the Daily Mirror, there's already a consensus emerging that there really isn't much alternative to large cuts. But there's still precious little consensus on where to make them and how to plug the hole.

Siren voices have been calling George Osborne on to the rocks of higher taxes, cutting transport infrastructure investment and the defence budget. He must be strong and ignore all of them. The reality is going to be much plainer.

In my view, Year 1AD (Arrival of Dave) is, by necessity, going to seem much the same as it is now. The financial year and its commitments will already have been entered into by the outgoing Government and little can be done about it.

So Cameron is quite right to say there won't be big cuts in the first year.

But there are measures that can be taken to put the country back on the right track. Osborne could start with a three-year public-sector wage freeze. While Britons in the private sector have been losing their jobs or working longer hours and having their salaries cut, it seems perfectly fair to mirror this retrenchment in the public sector and save us all some money.

On top of this, all public-sector websites – Government departments and public bodies – must set up Google advertising on their websites. This is very cheap to implement. One day I hope to get the credit for this idea, which will surely be implemented.

In Year 2AB (After Brown), the pace of cuts will then start to pick up quite substantially. The Tories will have to review their commitment to holding existing expenditure on health and education.

I don't disparage at all the daily efforts of our doctors and teachers, but I just don't believe that all our money is spent wisely in the NHS or in the schools and universities and that we can't achieve more with less. The Conservatives should look again at health and education vouchers and go figure.

In year three, a range of privatisations beckons. New Labour preferred to call them disposals – maybe the Tories should do the same. The BBC, Channel 4, the Met Office, the British Library, Network Rail, the Royal Mail, Crown Estate (including the seabed, as extensive as the whole land surface of Britain) and the recapitalised banks could all be at least partially prepared for sale and sold back into the private sector at a tremendous profit of tens of billions.

This could even be further leveraged through the use of derivatives.

The important outcome is to make sure that all taxpaying UK citizens make a visible gain and the funds should be returned in the form of a cheque or bank transfer in year four, just in time for a general election.

The Tories have not given themselves much room for manoeuvre. Despite all the media hype, cuts will not be quick or deep. There really is no magic bullet – it's going to take time.

The way forward for Osborne will be to reduce the existing functions of government; privatising, outsourcing and aiming generally for deflation in the cost of public services. And over time, this will yield the highest dividend of all – a cost-effective, taxpayer-trusted and smaller government.

Dan Lewis is chief executive of the Economic Policy Centre