When Jim Callaghan arrived at the Treasury in 1964, the outgoing Tory chancellor Reggie Maudling was apologetic about the lousy inheritance he was handing over. Said Reggie to Jim: "Sorry to leave things in such a mess, old cock." Whichever poor cock becomes chancellor after the next election, he is going to face the grandmother of all messes. £165bn is a big number. That is the IMF forecast of government borrowing next year, the highest level in Britain since Spitfires were dog-fighting with Messerschmitts. Here's an even bigger number: £1,000,000,000,000. The national debt is soaring over £1 trillion.

These figures are so bogglingly vast that they scare the wits out of the politicians. Such an epic mountain of debt confronts both the government and the Conservatives with a nightmare that neither really wants to look in the face for fear that it will drive them mad with despair. The entire New Labour project depended on a benign environment in which growth and tax revenues were buoyant. For a decade, that allowed them to spend on the nice things - schools, hospitals, help for the poor - without having to do too many of the nasty things - hiking taxes. Most previous governments struggled to reconcile the public's desire for better services with the public's reluctance to pay increased taxes. Continuous growth allowed New Labour to smooth the hard edges of that dilemma. Those happy days are gone. Future choices will be very jagged indeed.

They don't want to admit that to the voters, nor perhaps even to themselves. Ministers daren't 'fess up to just how skint the next government is going to be. Gordon Brown has ever loved presenting Labour as the investors in public goods and the Tories as the mad slashers and crazy burners. The prime minister will smudge his favourite "dividing line" if he concedes that public spending faces a severe squeeze whoever finds themselves in Number 10. A comprehensive spending review was due this summer. Gordon Brown has quietly told Alistair Darling to scrap it. To publish forward-spending figures now would be to advertise the terrible state of the public finances in neon lights and stick a "Kick Me Here" sign to the backsides of both the chancellor and the prime minister. It would also unleash the bloodiest Whitehall spending negotiations in a generation. Below the radar, the Treasury is already trying to do some mild slashing and burning, seeking "efficiency savings" of £5bn from departmental budgets. Some of the spending ministers are squealing about that even though it is peanuts in the context of the awesome size of the problem.

Over in the Conservative part of this thicket, David Cameron has been desperately trying to recalibrate his position since the economic crisis wrecked his original political project. The New Tories, like New Labour, relied on the assumption that the good times would roll on forever. It was on this sunny basis that Cameron Mark I promised he could both match Labour spending and draw on growth to produce some tax cuts. That project lies in ruins. There is no growth to share between spending rises and tax cuts. There is only the horrible question of how much spending will have to go down and taxes will have to rise in the next parliament. The Tory leader acknowledges that this will not be "pain free" while remaining opaque about which public services will suffer when the Conservatives take out their machetes.

That there will be sharp pain cannot be in doubt. George Osborne, the shadow chancellor, recently issued a secret instruction to his senior colleagues calling in all the Conservatives' previous spending commitments. As for the tax cuts once dangled by the Tories, David Cameron has just given a sensible and significant indication that no one should vote Conservative expecting him to be able to deliver any of those in a hurry. He is now saying clearly that a Tory government would not have the scope to cut taxes until it had drained some of the red ink from the public finances.

In recession, it may make Keynesian sense to keep pumping money into the public sector for now. That helps to sustain the economy when the private sector is shrinking with such painful rapidity. But the public sector be warned: the party is over for you too. Whether the next government is Labour or Tory, there is going to be one hell of a hangover. This week, David Cameron will make another speech on the "post-bureaucratic age" (ugly phrase). He will advance his case that the state will have to deliver less. The smarter people in government - the cabinet office minister, Liam Byrne, is one of them - grasp that Labour can only counter this by proving the worth of the state. The message to all those who work for the state is that intense pressure is coming from across the political spectrum to deliver more with less.

The public sector of the future must be much more impressive at demonstrating that it is spending cleverly and effectively. Apart from being a virtue in itself, there will be heightened voter intolerance for the squandering of public money when so many of those providing it are experiencing the squeeze of their lives. Ministers and civil servants should be spending taxpayers' money as carefully as if every pound came out of their own pockets. This they are not doing. When the Tory leader condemns the wasteful ways of Whitehall he has some ministers privately nodding along in agreement.

The quangocracy is one swollen sector over-ripe for rigorous investigation by some narrow-eyed accountants. Some of the quangos are efficient operations, but too many have grown into bloated, pretentious organisations, interested above all else in justifying their own existence. They spend absurd sums of taxpayers' money on lobbying government for more taxpayers' money. It is time for a robust audit of how they use our cash. Visitors to the plush citadel which houses Ofcom, the broadcasting regulator, are surprised to be offered bottled mineral water emblazoned with the organisation's logo. Why does a broadcasting regulator need to have its own branded water? Let them drink from the tap. That product is, after all, regulated by their brothers at Ofwat.

The post-bubble era is going to be impatient of extravagance. It will be flintier, value-conscious and much less forgiving of waste. It will demand that the public sector justifies its existence to those who pay its bills. More than two million people are now registered as unemployed. Many of those still in work in the private sector are seeing their wages frozen or cut. Their livelihoods are at the mercy of the recession and their pensions have been eaten by the great crunch. These taxpayers will look with increasing interest and swelling envy at those employed at their expense in the public sector who still enjoy secure jobs, rising salaries and protected pensions. Simmering jealousy will boil up into hot anger if the public sector isn't delivering value for money.

Nurses and teachers don't need to write to remind me that there are many dedicated public servants doing tough, complex and essential jobs for society on modest salaries. But in the more senior ranks of the public sector, there has been a great inflation in rewards which has not always been matched by commensurate improvements in results. Salaries have raced upwards while pensions have been gold-plated and mink-lined.

This is another legacy of the bubble years. As rewards in the City ballooned to astronomical levels, there was a ripple effect into the higher levels of the public realm. University vice-chancellors, council chief executives, hospital administrators, quango chiefs, agency bosses and BBC managers grabbed a thick slice of the high-rolling action. The argument was made that you wouldn't get talented people to work in the public sector if it couldn't compete with the juicy rewards on offer from the private. From council executives to the over-padded ranks of BBC managers, you now find amazing numbers of administrators who earn multiples of the salary of the prime minister.

Transparency is one answer and more of that is coming. Legislation going through parliament will force councils to reveal exactly what they pay to their upper tiers of administrators. The council tax payers of Rotherham may be cross to discover that their council pays 61 of its bureaucrats a salary which is larger than that of the town's MP. Some of these public sector executives are worth the money. Scrutiny is likely to reveal that others really do not deserve to be trousering the taxpayers' top dollar. The Healthcare Commission's investigation into the squalid conditions provided by Stafford hospital finds that "appalling" standards of emergency care may have led to the loss of hundreds of lives. The report condemns a "complete lack of effective governance" which led to untended patients in filthy beds desperately slaking their thirst by drinking water from flower vases. No branded mineral water for them. The salary of Martin Yeates, the chief executive of that killer hospital, had risen by a third in just two years taking him to £180,000 a year.

Whether it be the private sector or the public, whether the culprits be bankers or hospital administrators, massive rewards for colossal failures have got to stop. Those who earn a living which doesn't depend on the state are already in the post-bubble era. They know that this is a tougher world in which survival will require being efficient, smart, cost-conscious, customer-satisfying and good at your job. The public sector, too, will have to wake up and smell the bitter coffee.