Deborah Orr: Shrinking the state is the best way to redistribute wealth

Progressives must lead the debate on how to restructure the funding of social support

Broad consensus around the "shape" of the recession has arrived. It will be, say many economists, a W, with the zig-zag representing a period of fiscally stimulated weak growth, followed by another period of recession, before we all get back to normal. They are all quite deluded. That wild, excessive, mad, counter-intuitive period that is presently described as "normal" will never return. The boom imploded so spectacularly because it was a fool's boom, economically, culturally, socially, politically, environmentally and even morally unsustainable.

The British economy can and will stabilise again, after much pain. But it will be smaller when it does. My own prediction for the shape of things to come? We'll get the first three strokes of the W, though the central peak will be more of a hillock than a mountain. The fourth stroke, however, will resemble a fairly shallow tick.

Even that projection is cautiously optimistic, because there are no healthy green shoots. That supposedly comforting rise in property prices is a sign of continuing illness, an indication that the chronic housing shortage is still forcing people to borrow to invest in over-priced property, even though that situation greatly contributed to the present mess. Bringing down the price of property, by increasing its supply, is an employment-positive move that should have been undertaken by the Government long ago. Even now, its plans to create more social housing are welcome but inadequate.

Gordon Brown is fond of saying that the recession is due to worldwide economic conditions. Basically, that's true. The developed world's consumer boom, which drove the manufacturing growth of the emerging industrial nations, was fuelled by debt. But the banks broke down under the strain of finding new and supposedly innovative ways of doing the impossible, and performing the modern alchemy of turning debts into assets. You don't have to be an economist to see that this trick cannot be performed again, or not for long anyway. In fact, it appears to be helpful if you are not one.

John Lanchester, for example, is not an economist but a novelist. His long essays in The London Review of Books, however, have brought a beautiful clarity of understanding to the economic plight that Britain, specifically, is in. In his most recent offering, appositely entitled "It's Finished", he writes the following passage: "There are four things you don't want to have, going into the current crisis. 1. You don't want to have had a boom based on a property bubble. 2. You don't want to have a consumer credit bubble. 3. You don't want to have an economy based on financial services. 4. You don't want your government to have just gone on a massive spending spree. We have all four of those things that you don't want." Yes we do, because Brown, as chancellor, made it a matter of unbending and intractable policy to foster and encourage all of those four things.

The British economic collapse has already wrought political havoc, and fast, especially on the left. Why oh why, ask dozens of thinkers, isn't the collapse of market dogma good for us? Why are we unable to claim the intellectual high-ground at this particular time? There is a simple reason. A smaller economy means a smaller state. The right has always championed a smaller state, so its rhetoric need not change. But the left, including the New Labour centre-left in its own loony way, has always looked to the expansion of the state as a means of obtaining social progress. Now, instead, it has to get down to the hard task of examining how many of its hitherto sacrosanct shibboleths must be sacrificed. The unpalatable answer, unfortunately, is: "A lot of them."

Demographically, none of this could have come at a worse time. Everybody understands that recessions place a lot of strain on the state. Tax receipts go down because people lose their jobs. State support goes up for the same reason. That's a squeeze already, especially in a population in which one in five people is even now beyond retirement age. That figure is not likely to improve, as the baby boomers grow older, with their supremely inadequate pensions, and their fading dreams that the investments they have made in their property will see them right in their old age.

In 2007, back in the boom, this was already a concern. Then, the Office for National Statistics projected that by 2031 there would be at least two million more pensioners than children, with the number of people over 75 increasing by 76 per cent to 8.2 million. This would pose, said Guy Goodwin, the ONS director of population, health and regional analysis, "a challenge to British society, with huge implications for hospitals, care homes, the housing stock, pensions and benefit systems". That challenge is a great deal more daunting now. Yet the long period of manic growth created a mini baby-boom too, with the ONS, again in 2007, recording a 26-year high in the average number of babies born to every woman, following five consecutive annual rises. In the long term, considering the vast elderly population that will have to be supported, that is not such a bad thing. In the short term, it means that numbers alone will drive the need for an increase in education and child welfare spending. That's happening already, of course, as young people look at the state of the jobs market, which is already punishing the young particularly brutally, and try to stay in education for as long as they can.

So, more young people to educate, and more old people to care for, in a shrinking economy that is already carrying a phenomenal debt. Nightmare. But that's not the only big worry. A report this week from the Joseph Rowntree Foundation found that the minimum cost of living was rising at twice the rate of inflation. The poor are getting poorer every day. As more and more people who want to work find themselves living on benefits, that £60 jobseeker's allowance is going to look more and more like the guarantee of an impossibly frugal and dehumanising existence that it is.

Thankfully, there is something of a silver lining, in a rather grotesque kind of way. Labour has spent so profligately, so messily and so inefficiently that there is now plenty of room to reform services so they can be both cheaper and better. The problem? There is going to have to be a lot more targeting, much of it based on what the left until now has considered to be unfair or discriminatory assumptions that lead anyway to "two-tier services". But we have multi-tier services already, serving the neediest tiers, often, very badly indeed.

Concentrating state resources on the most vulnerable and expecting the financially healthy to pay their own way a good deal more is, I'm afraid, a much more efficient way of redistributing wealth than straightforwardly "taxing the rich". Progressives cannot drag their feet on this, but must instead lead the debate on how to restructure the funding and the delivery of social support.

The third sector, significantly larger under Labour, but less remarked on than the sprawling expansion of the public sector, has a huge part to play in leading this project. It can start by accepting that the huge resources it expends on lobbying the Government to spend more, need to be channelled into thinking of innovative ways in which the Government could spend less. Because, objectionable as it may seem to many social progressives, the task ahead now is to shrink the state wisely and well, in order to save it.