Ruth Lea: Turning point for Britain as Osborne starts to tackle the mountain of debt

Some 364 university economists famously wrote to complain about the tightness of Chancellor Sir Geoffrey Howe's macro-economic policy. In fact, though it was not clear at the time, the 1981 Budget marked the beginning of Britain's long economic upturn of the 1980s, which lasted until early-1990s.

Far from deepening the depression, the Budget signalled the start of the recovery, though it should be noted that a two per cent cut in interest rates and a weakening of the currency helped the recovery along. The 1981 Budget has gone down in history as a "turning point" Budget.

There have been other vitally important Budgets since – notably Norman Lamont's tax-raising 1993 Budget, which was planned to repair the damaged public sector balance sheet in the wake of the early-1990s recession, and Gordon Brown's 2000 Budget in which he began to turn on the spending taps which have so significantly contributed to today's parlous public sector finances.

As in 1981, today's Budget will also prove to be a "turning point" Budget. It will be the most important for a generation because George Osborne will have to show that he is determined to tackle the mountain of debt left behind by his predecessor.

As the former Chief Secretary to the Treasury Liam Byrne wrote to his immediate successor (David Laws): "Dear Chief Secretary, I'm afraid to tell you there's no money left."

It was certainly honest if a tad unhelpful. In fact, the situation is worse than this. Not only is there "no money left" but a hefty deficit has accumulated. Liam Byrne's letter recalls a similar note left by Conservative Chancellor Reginald Maudling to his Labour successor James Callaghan in 1964: "Good luck, old cock... Sorry to leave it in such a mess."

George Osborne will have to tackle the debt mountain because, quite simply, the British Government is on probation with the financial markets. The markets, which lend the Government one pound for every four it spends, expect no less than this. If the Government does not deliver, then interest rates will rise, borrowing will become more expensive and growth will be undermined.

It is not so much a matter of big deficit cuts derailing the recovery, as some claim, but more a matter of continuing to run big, unsustainable deficits derailing the recovery. The grim situation in countries like Greece, Spain and Portugal surely focus minds on this score.

The 6bn of spending cuts for the current financial year announced in mid-May are relatively modest – less than one per cent of total public spending and less than half a per cent of GDP – and surely won't wreck economic growth. But more, much more, will have to be done if the Government is to eliminate most of the structural budget deficit over the lifetime of this Parliament and keep our creditors happy.

If the coalition is aiming to reduce the deficit from last year's 156bn to about 20bn by

2014-15, then there may have to be a further 50bn of cuts. Last week's announcement of another 2bn of spending cuts shows, I believe, that the coalition Government is serious in tackling the debt.

There is little doubt that deficit reduction will have to be accelerated from next year. In the Budget, the Chancellor will announce the overall shape of the spending plans over the next three to four years. And this autumn he'll announce the departmental details. To date, the Government have said they will ring-fence NHS spending and overseas aid but given the brutal implications for other departments these policies may be relaxed. Indeed they should be – especially the funds going to overseas aid. Deep cuts are not just "right", they are essential. But they should be seen to be "fair".

It is widely expected that most of Osborne's deficit reduction programme will come through spending cuts, but there are likely to be tax rises too. As much as I dislike any tax rises, an increase in the standard rate of VAT from 17 to 20 per cent looks a distinct possibility. The potential increase in the capital gains tax rate for "non-business" assets is an unwelcome tax on what is, for many people, their saving for their retirement.

Last but by no means least, the Chancellor must be seen to encourage business and enterprise. With all the talk about "cuts", there is a tendency to forget about the need to stimulate growth in the economy.

The private sector must be supported and encouraged to drive the recovery forward and

not just replace but exceed the output and employment that will be displaced from the public sector. Lower business taxes and an easier regulatory burned would help. The Chancellor may, for example, seek to cut the standard corporation tax rate and finance the cut by reducing capital allowances.

In the meantime, at the other end of town, the Bank of England has the vitally responsible job of keeping interest rates low, which should help to keep the pound competitive, and monetary policy expansionary. Let us hope no burst in inflation upsets this apple cart.