So, George Osborne has sounded the trumpet blast of the Tories' war on public spending, finally acknowledging that the cuts he intends to make will approximate 20% across departments, and will take aim at welfare, tax credits, and pensions. This was always in the pipeline. Nick Clegg has tried to soften the blow by insisting that there will be no return to the mad, belligerent era of Thatcherism, and that the cuts will spare the vulnerable - but pensioners, the poor and welfare recipients (as well as the consumers of public services more generally) are in fact "the vulnerable". They're among the most vulnerable people in society. As Stumbling and Mumbling points out, moreover, Clegg is being extremely disingenuous, to the extent that Thatcher never acheived anything like the level of cuts that ConDemNation intends to deliver.

There is a potential element of shock-and-awe strategy going on here, as the Tories talk up their intended cuts, only to watch the relief set in as they introduce cuts of "only" 15% or 10%. When Cameron warns that the reduction of the public sector will fundamentally alter the British "way of life", it certainly looks like an attempt at rhetorical escalation. But the trouble is that in order to reduce Britain's long-term structural deficit, as the coalition is committed to in its founding pact, meet its new spending commitments, keep to its tax cuts, and ring-fence spending in defence etc., it has to cut spending by even more than it is presently advertising.

The key justification for this policy is the need to restore 'confidence' in the markets. Investors, bonds traders, currency dealers, etc., must have 'confidence' in the UK before they will resume speculation and lending, and thus trigger a renewed period of growth. After all, the financial sector has been the engine of the British economy for a generation, so how is it possible that it won't do so now? Between 1992, following Britain's withdrawal from the ERM, and 2008, Britain experienced an unprecedented period of continuous growth. It was slow growth, at times very weak, but the fact that it was uninterrupted for so long gave the neoliberal consensus a degree of credibility among policymakers, treasury technocrats and Bank of England governors, which was difficult to reverse. This was why the moves to nationalise Northern Rock and involve the government in buying shares in the banks were so reluctant, and so staggered.

To the extent that neoliberal doctrines were taken seriously, government intervention could only be seen as creating economic inefficiency (since a crisis was required to flush out toxic debts, bad investments, failed enterprises, etc.) and "moral hazard" (since irresponsible behaviour would not be punished, but protected and rewarded). But the ruling class is nothing if not pragmatic, and the crisis did produce a demand from businesses for heavy government intervention. Henceforth, the prevailing doctrine among capitalist elites has been the sort of regulatory liberalism proposed by Stiglitz, Sachs et al, which retains the basic structures of liberal capitalism but with increased powers for regulators, and the return of old restrictions on financial activity. However, financial capitalists are fighting hard to limit this, and the signs are that Osborne is prepared to fight their corner. To that extent, the cuts policy points to the continued ability of the financial fraction of capital to assert its hegemony. Especially since manufacturing and services capital is heavily financialised and depends for a considerable portion of its profitability on the City, which redistributes global surplus values to the benefit of UK capital.

The second justification for the cuts policy is that, according to Cameron, reducing the state sector will free up funds for capital investment, and open up new business opportunities. The Tories, and not just the Redwoodite nutters, are insistent that their policy will stimulate private sector growth and job creation of a far more sustainable kind than any growth produced by some bloated bureaucracy. But interest rates are effectively zero, and businesses still aren't borrowing, and therefore still aren't investing. This despite billions in bank bail-outs, emergency tax cuts, and quantitative easing. This clearly is a far deeper crisis of capitalism than the Tories' cleaving to orthodoxy would appear to admit. Martin Wolf, once a doctrinaire monetarist, is the most consistent critic of governments and policymakers demanding a tightening of fiscal policy. Today, like a good born again Keynesian, he highlights the risk of deflation if governments allow fear of 'the markets' to coerce them into imposing fiscal austerity:

[W]hat would a big tightening of fiscal policy deliver? In the absence of effective monetary policy offsets, one would expect aggregate demand to weaken, possibly sharply. Some economists do believe in "Ricardian equivalence" - the notion that private spending would automatically offset fiscal tightening. But, as Mr Posen argues of Japan, "there is no good evidence . . . of strong Ricardian offsets to fiscal policy." In developed countries today, fiscal deficits are surely a consequence of post-crisis private retrenchment, not the other way round.

In short, the deficit is not the cause of weak private sector demand and investment, but the result of it. An attack on the public sector is an attack on one of the few sources of economic growth, and thus on the basis for future taxable income and profits. It may make the deficit larger. It may tip the UK into another recession, or depression. Moreover, there is no great urgency in the UK paying off the deficit, despite the sabre-rattling of the financiers. As Wolf goes on:

As borrowers, the US and UK have advantages: first, their private sector surpluses cover some three-quarters and 90 per cent, respectively, of their fiscal deficits; second, many private-sector investors need assets that match liabilities in their domestic currency; third, because these countries have active central banks, bondholders suffer no significant liquidity risk; fourth, they have floating exchange rates, which take some of the strain of changes in confidence; fifth, they have policy autonomy, which gives a reasonable prospect of near-term economic growth; and, finally, the US offers the world's most credible reserve asset.

So, if the case for cuts as a recipe for growth is so poor, what does that leave us with? Essentially, it gives the government a rare political opportunity to raid the public sector, whatever the consequences for growth, for the benefit of capital, largely financial capital. Don't suppose for a second that the Liberals constitute a moderating input on this trend. Vince Cable is a dedicated privatizer, free trader, and free marketeer. He and George Osborne are as one in seeking to reduce the size of the state, particularly in its capacity as a provider of services, pensions and welfare.

Osborne has declared, not merely portentously, that he intends to revise the relationship between the citizen and the state. He might go further than this. We can consider the institutional arrangements that enable capital accumulation as a mixture of relations between state and capital; between labour and capital; between capital and capital; and between labour and the state. The social struggles of the next few years will be about defining those relationships, and thus the context of any future settlement. It will be in aggregate a class struggle over how much freedom is given to capital, and how much its activities are restricted in the wider social interest; over what rights labour will have with respect to capital (fewer and fewer, if recent court decisions are any guide); and over how much the state will protect labour from the workings of the market with a social safety net comprising health, benefits and free education. Talk of revising the relationship between state and society may be in some measure PR, but the Tories have made their agenda very clear now: they intend that any future settlement will be far more advantageous to private capital, that there will be fewer protections for workers, that public services and welfare will be severely depleted, and that any regulations on capital will be sharply limited and matched by a reduction in "red tape" elsewhere.

Those tailing the Labour leadership in treating this as principally a technocratic issue, an issue merely of when to introduce cuts the better to restore the old order, are thus at the very least politically naive. The old order cannot be restored, and the issues of public sector cuts, privatization and regulatory reform are fundamentally about whose interests future economic growth will serve.