George Osborne has given us our first taste of things to come (although strictly speaking, the prize goes to Alistair Darling in his PBR last year). Savings include £836mn at Business, Innovation and Skills (BIS); £683mn at Transport; £325mn in cuts at Justice; £362mn in lower grants to town halls; £320mn from axing child trust funds; £85mn of cuts at Energy and Climate Change and so on - a total of £6.2bn.

Now this may seem a lot of money, but it works out at less than ½ of a percent of GDP. Moreover, as argued in our pamphlet In Place of Cuts, merely changing the UK's illogical definition of tax residence and cracking down on personal tax avoidance would raise twice this amount in extra revenue. So why cut?

In February of this year, a number of economists led by Lord Skidelsky signed a letter urging the Government not to cut public spending too early after the recession for fear of setting off a second dip in output and employment. A few days ago, addicts of the Today programme (of which I am one) will have heard David Blanchflower repeat the same warning. Even the FT's Martin Wolf, hardly noted for holding left-wing views, has patiently explained why it is that when the private sector saves more (as it is now doing), the public sector must increase spending by an equivalent amount lest National Income should fall. It does seem perverse that in the face of fierce criticism from many of the grandest names in the economics profession, George Osborne should introduce these cuts. Last March, even Vince Cable was slamming Osborne's ‘schoolboy economics'.

In truth, last night (24 May) Vince Cable gave the game away when being interviewed by Jeremy Paxman on Newsnight. Cable, having had a long hard look at the mauling the financial markets gave Greek Eurobonds, announced he had ‘changed his mind' about cuts. These cuts may be a drop in the ocean compared to Britain's budget deficit - now running at just over 12% of GDP - but Cable believes them necessary in order to reassure international financial markets. Although Cable looked tired and visibly wounded by Paxman's relentless rottweiler-style attacks, there can be little doubt that he meant what he said. The Lib-Dem coalition, just as Labour before them, are deeply frightened that the international financial markets could attack sterling, sending the City into a tailspin.

At the end of the day, containing this crisis is not in essence about how long we should apply a Keynesian stimulus. Quite the contrary, it is about recognising the wisdom of Keynes's dictum on judging beauty contests. As Keynes famously remarked, what's important is not your judgement or mine about beauty -it is rather your judgement or mine about what the judges think. The judges are of course the financial markets, whose total annual turnover currently approaches $1qd per annum (qd = quadrillion = 1000 trillion), or 20 times the size of global GDP. However orthodox you may think bankers' economic, financial markets have huge clout and cannot be ignored.

Take sovereign debt spreads: in the coming months, we are likely to see an inflationary surge fuelled by rising energy and food prices (not QE as some suggest). Future contracts in these commodities, in 1995 only twice the size of the underlying market, are today 12 times the size of the market. There is good evidence that energy price rises are greatly amplified by speculation. Rising energy prices could force central banks to put up interest rates, thus providing a golden opportunity for traders to make a killing by shorting bond prices. The very sector that governments spent billions bailing out - precipitating an economic crisis and a fiscal black hole - is now dictating that ordinary citizens should pay for the crisis through cuts, job losses and stagnating GDP.

The inescapable political conclusion is quite dramatic. Bringing international financial markets under control is no longer a simple question of regulation, admirable though current EU thinking may be. Nor is it even about a special levy, a Tobin tax or whatever grit is needed both to slow the machine and to make it pay (principles I favour). Sooner or later, the banking system will need to be brought under public control; capital must be subordinated to labour. That involves two things. First, the main banks must be fully nationalised. Secondly, casino banking must not merely be regulated, but parts of it - starting with hedge funds - must be banned.

This is a tall order. The parties - least of all the Labour Party - have not begun to admit to such thoughts. It is time to debate the essence of the problem.

George Irvin