ANALYSIS:George Osborne has promised that the effort to restore stability to the country's finances will come mostly from spending cuts. Now, he must enforce them, writes MARK HENNESSY

THE UNITED Kingdom state is about to get very much smaller if chancellor George Osborne’s commitments to the House of Commons yesterday are driven through in the face of major opposition.

Under his plans, £120 billion worth of government spending, including £11 billion from welfare, will be cut over the five years the Conservative/Liberal Democrat alliance hopes to be in power, leaving many departments, bar health and overseas aid, struggling to cope with sums one-quarter less than they would otherwise have expected.

By 2014/15, Mr Osborne intends to take the knife to an extra £40 billion worth of public spending on top of the £40 billion of cuts Labour had planned to enact if it had been successfully re-elected.

The exact details of where the savings will be found are not due to emerge until a spending review is completed in the autumn, but the political consequences will undoubtedly test the coalition to its core.

Dubbing it “the unavoidable budget”, Mr Osborne repeatedly laid the blame for the cuts outlined on the previous Labour administration, insisting it had left the cupboard bare, forcing him to bring in the “biggest peace-time correction” in modern British history.

The chancellor intends for 77 per cent of the savings needed to restore the UK’s accounts to come from spending cuts, with the rest from higher taxes – just below the 80/20 mix the Conservatives had favoured during the election campaign.

His Conservative cabinet colleague Ken Clarke required a one-to-one mix during his time at the treasury as he set about recovering from the damage inflicted by the early 1990s financial crisis, while Margaret Thatcher’s chancellor Geoffrey Howe did not even come close to what Mr Osborne now plans.

His hopes for a speedy validation of his actions from the markets have borne modest fruit. The interest charged on British government gilts fell to 3.443 per cent – the lowest figure since last October. This is welcome news indeed for a chancellor needing to find billions to pay borrowing charges.

Though the chancellor sought to emphasise the darker side of life, it is already apparent that his arithmetic is dependent upon forecasts from the office of budget responsibility for economic growth and unemployment that some already view to be overly optimistic.

Growth in the year to next April will run at 1.2 per cent – lower than that predicted by Labour’s Alistair Darling while he occupied No 11, but it would run at 2.3 per cent and higher over the four years following, while unemployment figures, after a rise next year, are expected to fall over the period as a whole.

The growth Mr Osborne needs to make his figures work will be hard-won, if it comes, given the impact of measures such as higher VAT, but also the fact that other EU economies are unlikely to prove to be thriving export markets for the UK since they are following the same path.

The decision to increase VAT to 20 per cent, from January next, means he will be able to avoid the inflationary effects of this until next year.

Higher VAT will impact on high-street spending, even if Mr Osborne insists the £13 billion it will yield annually cannot be raised in any other way that would do less damage, given his determination not to impose higher income tax rates.

However, those paying the higher rate of PAYE – that is, anyone earning over £40,000 approximately – will find their tax bills rising over time from the so-far little-noticed decision to freeze thresholds, assuming that they enjoy wage rises in the first place.

While the UK’s national deficit is lower than that predicted by Mr Darling before he left office, the office for budget responsibility, helpfully for Mr Osborne, argues that the structural share of it – the part that will not disappear on its own from extra growth – is actually £12 billion higher than Labour estimated.

Under the Osborne plan, that structural deficit will disappear by 2014/15, while British public debt will peak at 70 per cent of gross domestic product a year earlier, falling to 67.4 per cent a year later – just outside the margins set by the European Commission.

The detail of the office for budget responsibility’s figures raise other possibly overly-optimistic projections, particularly where it predicts that inflation will stay around the 2 per cent target, but that wages will rise by just under, or just over 5 per cent in 2013, 2014 and 2015.

On banks, which will face a £2 billion levy designed to encourage them to adopt more conservative business practices, the chancellor took care to emphasise that he is not acting alone. Mr Osborne pointed to France and Germany’s decision to sign up to a common declaration.

Despite the deflationary effects of the spending curbs, the chancellor argues that other measures, such as cutting corporation tax steadily over four years, along with other business-friendly measures, will help to recover the ground, rebalancing the UK economy in the process.