Whether you like it or not, the era of much smaller government is fast approaching in Britain

Our Chief Economics Commentator on why austerity will dominate the Autumn Statement; and, below, on the race to succeed Meryn King at the Bank of England

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It is three weeks to the autumn statement, what Gordon Brown used to call the pre-Budget report, which in a way is more accurate because it sets the framework within which the budget will be constructed. And the message, already evident, is that the present path of austerity will, if anything, become steeper.

The reasons for this dispiriting thought are twofold. First, it is pretty clear that the Chancellor will be scrambling to meet even the modest deficit reduction target for this year. We are six months into the financial year and the deficit numbers are slightly worse than they were last year, not – as intended – a bit better. It is possible that they can get back on track by shuffling back some spending, but tricky. Cosmetically, the numbers can be made to look better by taking the interest paid to the Bank of England for all the gilts it holds back to the Treasury. If you are paying interest to yourself, as the Government is doing under QE, you can stick that money in whatever pot you like, but the underlying fiscal position does not change. The national debt is the national debt.

So the outlook for the budget next year will be sombre; we will learn more on 5 December. But there is another, deeper reason for concern, which is the long-term trend of public finances not just here but throughout the developed world. I cannot find a single large advanced country that is not trying to cut its budget deficit. There is the fiscal cliff in the US, austerity in varying degrees across Europe and a fiscal catastrophe brewing in Japan.

The situation varies a bit from country to country but broadly speaking the reasons are threefold. One is that the boom years before the last recession enabled governments to follow unsustainable spending patterns because they assumed that the strong tax revenues would continue, if not forever, at least beyond their period of office. The second, widely noted, is demography, which though less adverse in the UK than in much of continental Europe and Japan, means that a slowly growing or even shrinking workforce will reduce the taxes available to fund public services. The third is the growing demand for services principally funded by taxation, in particular education and healthcare.

Put these together and you have a narrative utterly different from the story that politicians are telling. One example: a lot has been made of the ending of aid to India and the fact that the funds will be allocated elsewhere. Some have criticised this reallocation on the grounds that the money, if not needed by India, should be saved. But the total foreign aid budget is equivalent to one month’s borrowing. So were the entire aid budget eliminated, that would cut only about 10 per cent of our fiscal deficit.

We are not, thank heavens, in the situation of much of southern Europe, where cuts in public spending are quite devastating. But reports this week that government departments – other than health, education and aid – are being asked to consider another 20 per cent of savings for 2015 and beyond, over and above the present squeeze, gives a feeling for what might be to come.

In institutional structure, we are probably better placed than most to cope with a different scale of government. Our Office for Budget Responsibility is able to take a longer view than equivalent organisations, insofar as they exist, in most other countries. But politics lags behind economics. The present argument about the timing of the next increase in fuel duties shows a political system that obsesses with detail and blithely ignores the big picture. That government will become much smaller is not the end of the world. But it is the end of a set of ideas that have prevailed for the best part of a century – and we will get a taste of that in three weeks.

The Bank’s dark horse

Amid all the speculation about the next Governor of the Bank of England, replacing Mervyn King (above) two points have been largely ignored. First, this is a political appointment made by the Chancellor and the Prime Minister, both of whom are realists. So who would most annoy Ed Balls, the shadow Chancellor? The second is that though this is a British appointment, the world outside the UK matters enormously and financial services are our largest single export industry – a thought evident in David Cameron’s speech on Monday. So it is in our interest to have someone who would be in tune with the industry.

By any standards, the front-runner in the betting, Paul Tucker, the deputy governor, would be an admirable choice. He has spent most of his career in the Bank, handled the extraordinary conditions of the near breakdown in financial markets deftly and effectively, and while no patsy to the banking industry is understood and trusted by it. It is comforting that, in contrast to the BBC, there is an insider who could do the job well.

The political element, though, will determine the outcome. What the City thinks, what business thinks, certainly what journalists think will not determine things. A colleague made a telling point to me. Which candidate, he asked, would make it most difficult for the Opposition? His answer was another name being cited, Lord Burns. Terry Burns, now chairman of Santander UK, was brought in to the chief economist job at Treasury in 1980 by Margaret Thatcher.

In the early 1980s, the Treasury, not the Bank, ran UK monetary policy and more than anyone else it was Burns who re-established monetary discipline after the disaster of Labour in the 1970s. Look at our inflation performance now, and look at his record as a liberal economist (small “l”) and you can see the argument.

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