Britain's long-term public finances problem is simple: there will be no let up in the underlying pressures for rapid public expenditure increases, but government cannot borrow more and the electorate is unwilling to vote for a party likely to put up taxes.

The correct response to the challenge is to prioritise areas where tax-financed expenditure is efficient and in most demand - defence, public security, treatment of acute and chronic illnesses, compulsory education and redistribution to the elderly and those genuinely unable to work. At the same time, government should seek to cut unnecessary programmes, increase user charges elsewhere and reduce transfers to non-pensioners able to work.