Eddie Barnes: Experts say the Scottish Government must wield axe, but will John Swinney heed the advice?

"WHAT do we want the state to do?" Five months ago, Crawford Beveridge, the former chairman of Scottish Enterprise, had been asked simply to examine ways in which the Scottish Government might find some savings. Last Thursday, however, seated in a poky downstairs room at the Dynamic Earth building in Edinburgh and presenting his conclusions, Beveridge appeared to have widened his remit somewhat.

• Unable to borrow, John Swinney has no choice but to hack back at costs

The question above appeared in the introduction of his ground-breaking report into the state of the country's public finances which warned that, such were the cuts coming Scotland's way, 50,000 public sector jobs will have to go and a plethora of tax cuts and benefits axed.

Those figures got the headlines, but as Beveridge's query suggested, there was much more to his findings that a simple check list of savings. By coincidence, Beveridge shares the surname of the man credited with perhaps the most important policy report of all: Sir William Beveridge's 1942 inquiry into Britain's social security system. That report paved the way for the modern welfare state. Now his name-sake – in Scotland at least – was laying claim for how to reform it.

In his introduction to last week's report, Crawford Beveridge quoted Beveridge. "The first principle is that any proposals for the future… should not be restricted by consideration of sectional interests," declared Sir William in 1942. "This message is one for all of us," added his successor last week. After ten years in which spending on Scotland's public sector has doubled, with public sector employment outstripping private sector employment by two to one, last week's report called for a halt, and never mind who got in the way.

The coming cuts to public services have made that reform a necessity. But Beveridge and his two colleagues on the Independent Budget Review (IBR), Sir Neil MacKintosh and Robert Wilson, declared they wanted to call a fundamental rethink of the whole way the country is run.

Now, however, the report is in the real world. In less than a year's time, Scotland goes to the polls. The two leading parties: the SNP and Labour are deadlocked. So will the Three Wise Men find no-one wants to listen? Or will last week's report go down as a turning point in the country's political history?

BEVERIDGE'S call for a more fundamental look at Scotland's public sector reflects the fact that the problems facing the country's public sector involve far more than a brief recession.

As well as trimming 4 billion from its budget by 2014, whoever ends up running the country over the coming few years faces a "long financial winter" lasting "until the mid 2020s", the IBR concluded.

Budgets will be squeezed at both ends. The IBR give two main reasons.

Firstly, the Climate Change Act, voted through by MSPs last year, which sets the most stringent carbon emission cuts in the world, is likely to cost 8bn over the next ten years to implement. And secondly, the country's ageing population will increase spending on elderly care from 4.5bn a year to 8bn by the mid 2030s.

Local government leaders say these added pressures – and not the immediate cuts – are what really keeps them awake at night. Over the long term, the IBR concludes, the whole system needs to be changed to try to reduce demand on its services. "This is work which needs to start now," was its verdict.

The group's options for immediate action were clear. Most immediately, they concluded the pay bill needs cutting – a reduction of 50,000 would return public employment numbers back to where they were in 1999. And, in the other big target, universal benefits, should be reviewed. While the IBR held back from actually telling ministers what to do, their language was clear. "Immediate action" should be taken to review the extraordinarily expensive concessionary travel scheme (simply increasing the age limit for eligibility from 60 to 65 would save 279m over four years, the IBR found). "Immediate action" should be taken on free eye tests. Ministers should consider "suspending" their plans to cut prescription charges. The eligibility for free personal care and the introduction of tuition fees should be examined.

Along with that, they added, ministers now needed to think seriously about slaying some sacred cows: should Scottish Water continue to remain in public ownership? Longer term still, the house needed tearing down. "Scotland is a small nation which has, arguably, at present a public service infrastructure which is over-complicated, unduly fragmented and in need of fundamental redesign to address the future needs of a rapidly changing society." Over the short, medium and long term, the report had given its prescription.

THE politician most happy with the report's findings at the end of last week was Scottish Conservative finance spokesman Derek Brownlee. It had been at the Tories' behest, back in February, that finance secretary John Swinney had commissioned the report as part of a deal which saw the Tories backing the Scottish budget.

The Conservatives' rationale was clear. Fearing at the time that, once in power at Westminster, the focus of blame for cuts would fall entirely on their shoulders, they wanted to point to something north of the Border which focused attention on what Scottish ministers should do about it. Now Beveridge had provided it in spades. The attention is now all on how the SNP government – less than a year from its first election as a governing party – is going to handle the cuts.

Swinney immediately ruled out several of the report's recommendations. The concessionary travel scheme will stay. Free personal care will not be watered down ("pensioners vote, you see", noted one MSP wryly).

Controversially, Swinney also reiterated a vow to pass on any "Barnett Consequentials" he gets from UK ministers straight to the NHS. The health service gets a bye. Swinney has also already promised to retain the council-tax freeze for next year – although, wth Beveridge calling it "unsustainable", 2011 seems almost certain to be the last. The moves drew condemnation from local government bosses yesterday. They could end up the biggest losers from the report if Swinney, as suspected, simply passes on the bulk of his cuts to them. But now that everyone can see the scale of the crisis heading his way, Swinney is coming under serious pressure to reveal his hand, with Labour leading the charge.

Without themselves offering any indication of what they may also cut (although it is clear there is little enthusiasm on the Labour benches for universal "middle class" benefits), the party is demanding that Swinney publish his full budget plans for 2011 now. The aim is to make the story all about the SNP cuts. One shadow minister says: "There's no percentage in us responding to Beveridge. Swinney has to make the first move. Of course, we can't win next year by just beating the SNP over the head; we need to have our own proposals and argue for them. But Swinney has to make the first move because he's in government."

Swinney, not surprisingly, is now playing for time. He claims he cannot start laying out his budget plans until Chancellor George Osborne reveals this October exactly what departmental budgets will be. This is rubbish, says Labour MSP Wendy Alexander. Figures from the Scottish Parliament's library show that there is already near certainty about Swinney's pot for next year, with doubt only surrounding around 200m or so. She says: "Claiming as SNP do that you cannot set a budget of over 27bn because of uncertainty surrounding 200m – that is 0.7 per cent of the total budget – smacks of sticking your head in the sand, trying to hide where the axe will fall."

Privately, SNP ministers acknowledge that they cannot delay for much longer. One SNP minister said: "Nobody wants to be in this position. But we know we are going to have to deal with it or we run out of money. It's as simple as that. We can't borrow money. We can't raise it in taxation. We don't have any option."

First of those inevitable choices will be to attack the pay bill. The minister acknowledges: "Headcount and wages are the short term measures available to us."

In the first year of cuts, Beveridge concluded that the government should be able to avoid compulsory redundancies, relying instead on natural wastage. This will take some of the sting. On top of this, a pay freeze will be implemented, likely to follow that already announced in England, where low-paid workers have been exempted.

But that won't be enough. Unable to borrow, Swinney has no choice but to hack back at costs. As Beveridge acknowledged last week, capital budgets – those used to build infrastructure – are usually the first to go in these cases. But ministers are committed to spending 2bn over the next few years to build a new Forth road bridge. So the matter of Scottish Water, and the 140m annual loan handed to it by ministers, looms large.

Alex Salmond told fellow ministers at a Cabinet meeting last week that there was no way in the world that the public utility would be privatised. But there is growing talk of the creation of a "public interest" company model which could tap markets for loans, instead of themselves. This would be short of full privatisation, but at arm's length to the government. For the Tories, Brownlee argues: "It's inevitable. If they can't bring themselves to do this, then how can they do stuff that is more painful? Even if Labour wins next year they will do it as well because they can't not. You can't say you are going to deal with the budget problem when you don't even have the guts to deal with Scottish Water."

The SNP will be wary, aware that Labour will be coming at them with accusations of "privatisation". One senior SNP figure in favour of reforming Scottish Water ruefully noted: "The trouble is we have a culture of clientism in this country, built up over decades." Governments aren't supposed to take things away. Perhaps Scottish ministers could take a leaf out of the first Beveridge report. Writing in the middle of the Second World War, he declared: "A revolutionary moment in the world's history is a time for revolutions, not for patching."