Labour politicians will have rubbed their hands in glee when they heard Michael Portillo's ode to the Royal Yacht last week. The Defence Secretary has given them a wonderful gift, all wrapped up in red velvet - pounds 60m.

There is no need to wait for a future Labour chancellor to conduct a spending review this time; the potential savings are clear. Not surprisingly, a Labour government would not throw pounds 60m of taxpayers' cash at a new floating holiday palace for Charles and Camilla. If exporters will benefit so much from a glorious royal show house touring the world, they can pay for it themselves.

Nor would Labour fuss around finding the money to dress the nation's children up as soldiers. Re- allocate that little package and you have a few more schools and hospitals, teachers and nurses.

In the context of a government spending budget of pounds 300bn, pounds 60m may not seem much. But who knows how much more there might be in a similar vein. The commentators who claimed at the beginning of the week that the Conservatives had already cut every foolish, extravagant and pointless spending programme down to the bone, were proved wrong by Michael Portillo in one fell swoop.

Nor were the pessimists right to claim that a new government's freedom to manoeuvre will be scuppered by a crisis in the welfare state. Commentators such as William Rees-Mogg and spending experts at the Institute of Fiscal Studies have lamented that any new government - Labour or Conservative - would face ever escalating demands on the public purse. They have assumed that changing policies or doing anything new within existing budgets is impossible - and that any government will either have to push taxes up and up or chop off entire chunks of the state to make the sums add up.

But this gloomy, conservative view of the British state is ludicrous. Take a closer look at the real demands for public money in future. Yes, there are upward pressures - but nothing so dramatic as the alarmists pretend. It is defeatist in the extreme to imagine that there can never be any freedom to manoeuvre within state budgets.

The demands on taxpayers' cash are not exploding out of control. For a start the demographic burden is a myth. We are not all about to be taken to the cleaners forking out for pensions for an ageing population. According to the Institute for Fiscal Studies, total spending on the state pension will rise from 4.3 per cent of GDP in 1996/7 to only 4.4 per cent by 2000/1. By 2030, the proportion of the national cake going in state pensions will have fallen again - hardly making the elderly the harbinger of fiscal crisis.

Nor will the NHS necessarily need to gobble up more of our resources. Admittedly medical advances have made possible expensive new cancer treatments, pushing up demand for costly procedures. But technological improvements could equally save cash in future. Just think what an Aids vaccine would save on drugs and treatment. Developing pig organs for transplant could cut costs too - kidney dialysis for patients awaiting donors is extremely expensive.

Even the biggest spending budget of all - social security - provides possibilities for long-term savings. True, it has swollen dramatically in the past 20 years, mainly to pay benefits to people of working age. Almost one in three families now receives some kind of means-tested benefit. Social security spending has gone up by more than pounds 40bn in today's prices to meet the bill. Jobless, sick, or stuck at home alone with children - the numbers have soared. Three times as many single parents are claiming benefit today as in 1979, three times as many people are on long-term sickness benefits too, even as the health of the overall population improves. Worryingly, the number of people on Income Support actually went up in the first three years of the recovery, even though official unemployment figures were falling.

So why all the extra giros? The old skilled manual jobs in heavy industry were destroyed in the 1980s, leaving many men unqualified to pick up new work. Those who stay on the dole too long find it harder still. Many of the older workers have ended up on long-term sickness benefit instead. Moreover, the chances are that if one family member is out of work, no one else at home is working to support them. In the past the non-workers - women - conveniently lived with wage earners. Today either both are in work, or both are on benefit.

But we shouldn't accept dependency and poverty on this sort of scale. Most of these people are not unemployable. Frank Owen, the hero of Robert Tressell's The Ragged Trousered Philanthropist, seethed with frustration when his fellow workers argued that unemployment was the result of too many people being born. The idea that there is a tight and limited number of jobs to go round is as much a fallacy now as it was when Tressell wrote at the beginning of the century. The economy is growing, jobs are being created. The challenge is to work out why the jobs always seem to go to people from working households while those in workless families go without.

Other governments have managed as much. In California, the Gain programme saved money just by getting lone mothers to the employment service, and putting them in touch with child care and job opportunities. This, presumably, is the kind of thing Tony Blair and Harriet Harman had in mind when they proposed help for single mothers last week.

But if the savings are feasible, why has the Government been so slow to act? You might suppose Peter Lilley would be desperate to generate savings to bring his budget down.

The trouble is, many of these savings don't materialise straight away. Worse, they often need cash upfront - in other words, investment. The i-word hasn't been popular with the Conservatives in the past 18 years. Public investment has been slashed over the decades. Whether it be investing in people or in capital, if the benefits don't materialise quickly the project is written off.

That's why Labour's plans for a windfall tax on the privatised utilities to spend on employment programmes are so important - far more so, in fact, than anything else the party said on tax and spending last week. The success of Labour's economic strategy depends on whether the new policies it plans succeed in reducing spending on unemployment in the long run.

It is not just Conservative politicians that are to blame for short-termism. Treasury officials are as bad. Ask the Treasury to work out the costs and benefits of some policy designed to get people back into work and officials take a very narrow approach. Their published calculations assume that no one changes their behaviour and goes out to work, and therefore that there are no savings at all. This cautious attitude - that nothing will ever make a difference, and that no savings can ever be counted on - pervades our public culture.

It is easy to see why cynicism and caution should develop. Decades ago, politicians from both left and right signed up to that parody of Keynsianism - the belief that more public spending was always better, and would generate savings in the long term, by encouraging higher-growth tax revenues. Sloppy optimism about savings somewhere down the line has been used too often to justify policies that merely wasted money, and wasted people's time as well.

We are right to be cautious about our cash. Commentators and pundits are right to be sceptical about politicians' promises, and Treasury officials are right to be cynical about grand projects which might, or might not, save public money. But we shouldn't become paralysed by our caution. Nor should we assume that because changes (and savings) have failed in the past, every attempt to reform the purpose and priorities of the state will fail again. Stopping that yacht, and spending the money on getting people back to work instead, is a good way to start.