"The level of public spending is no longer the best measure of the effectiveness of government," said the shadow Chancellor, Michael Portillo, at the beginning of his response to Gordon Brown's statement on the Comprehensive Spending Review. Labour MPs' laughter was stilled when he revealed that the words were taken from the Labour Party's 1997 election manifesto. Actually, there was an even more damning indictment of public expenditure in the paragraph before the sentence quoted by Mr Portillo: "The myth that the solution to every problem is increased spending has been comprehensively dispelled by the Conservatives. Spending has risen. But more spending has brought neither greater fairness nor less poverty."

"The level of public spending is no longer the best measure of the effectiveness of government," said the shadow Chancellor, Michael Portillo, at the beginning of his response to Gordon Brown's statement on the Comprehensive Spending Review. Labour MPs' laughter was stilled when he revealed that the words were taken from the Labour Party's 1997 election manifesto. Actually, there was an even more damning indictment of public expenditure in the paragraph before the sentence quoted by Mr Portillo: "The myth that the solution to every problem is increased spending has been comprehensively dispelled by the Conservatives. Spending has risen. But more spending has brought neither greater fairness nor less poverty."

The Labour manifesto then continued with more guff about "seeing how public money can be better used", asking "can existing resources be used more effectively to meet our priorities?" We will probably see these last phrases used by the Conservatives in their own manifesto next time if Mr Portillo is to persist in his own policy of spending "better" some £16bn less than Mr Brown. The difference between the two parties has narrowed down to an argument, from the Tories' standpoint, that Labour's total of £440bn a year by 2004 will be bad while the Tories implied £423bn by then will be good. Hardly the best basis for the Conservative Party to win the next general election, but a hint that they are making a good tentative start on laying the foundations for a victory in the general election of 2005/6.

Higher public expenditure as the solution to the nation's ills is, effectively, Labour's next election manifesto. There is no point in Tories nit-picking the details, as they will fall into the "what will you cut?" trap. But here is a chance for the seeds of original Conservative principle - against the concept of state spending and in favour of more private provision - to be sown once again. It is not so much the fact that public expenditure is to rise above estimated rates in economic growth that should worry the Tories so much as the percentage of national income which the state will yet again consume. The powerful case, made from first principles, enabled Baroness Thatcher to stand out from her predecessors when she was Leader of the Opposition as she successfully pointed out the dangers posed to a free society and market economy if the state consumed an excessive share of national income. Friedrich von Hayek's The Road to Serfdom eloquently made this point in 1944, and his treatise is just as relevant today.

There are now good political reasons for opposing in principle the concept of relentlessly increasing the volume of public expenditure. By 2004, when the country will look like a building site, the voters will begin to see just how wasteful taxpayers' money, doled out by politicians and bureaucrats, is as a method of delivering effective services. Expect to read countless columns about contract mismanagement as the nation's construction industry takes the taxpayer for a ride.

In the Seventies I was the Conservative parliamentary candidate for the steel town of Scunthorpe, during which time Labour and Tory governments were implementing a "Ten Year Development Strategy" for the recently nationalised steel industry. The plan, a huge binge cooked up by Peter Walker during his stint at the DTI under Edward Heath, consumed massive sums of taxpayers' largesse. Corruption, fraud and backhanders caused monumental local scandals, and the project was abandoned as it became clear that the state's inefficiencies in running the industry were finally killing the nationalised British Steel Corporation. Thatcherism subsequently proved that the state could not run steel, coal, the car industry, telephones, water, gas and electricity better than private industry. Why should the politician be any better at playing doctors and nurses, even with massive increases in taxpayer funding?

In 1983 I attended the opening by the Princess of Wales of the spanking new local hospital in Grimsby, with all the fanfare that goes with such occasions. From the minute the wretched building was opened there was nothing but trouble as wards were then closed because no one had considered how much extra annual current expenditure was required to sustain the new capital investment. The local news was dominated by stories of the lavish new foyer and fitted carpets, large salaries and company cars for the new breed of health service manager.

The World Health Organisation recently concluded that France has the world's best overall health service. France's mixture of public and private provision, with widespread use of supplementary private health insurance is, according to the WHO, superior to Britain's National Health Service in which the state has effectively assumed responsibility for everything. Alan Milburn's Soviet-style "National Plan" is unlikely to address the fundamental reasons for the UK's inferior performance. The Tories themselves, at the end of their period of office, increased spending on the NHS by 75 per cent in real terms. Did they get any thanks for that? Their own record of throwing public money at the problem has merely delayed the day when we will have to consider an alternative approach.

It is a shame that we now have to go through yet another public spending spree, to prove beyond peradventure, that the state is the most inefficient distributor of resources. But the next three years will give the Opposition a magnificent opportunity to watch and re-capture the public mood as it becomes clear that this is the last-chance saloon for the advocates of high public spending. When the public worm turns, as it will, the Tories need to be able to show that they stand for something other than just a bit less (£16bn) public expenditure. By 2004 it will be possible to prove to a fickle public that, whether it is a Conservative government or a Labour government, neither can spend public money "better".

So my advice is for the Tories to set out their alternative stall now, even if they may be accused of handing out rope to hang themselves at the next election. They need to be able to say, with conviction, in the subsequent election: "We told you before that more money was not the answer."

Even the present Government acknowledges that the state cannot provide adequate retirement pensions and that the individual must be required to make their own arrangements for their old age. Why is it such a difficult political problem to persuade voters that they should make the same arrangements for their own health care?

The answer is that, as Nigel Lawson observed, the NHS is the last true religion in British politics. It is time for Tories to secularise the NHS in preparation for the day when Mr Milburn's bogus munificence shakes the public's faith. Private hospitals and a greater reliance on an insurance-based health-care provision will allow Mr Portillo's claim to "tax less and spend better" to be taken seriously. In the meantime, only the construction industry stands to benefit from the Milburn millions.

mrbrown@pimlico.freeserve.co.uk