A paper published by the Centre for Policy Studies has concluded that public spending could be lowered to 35 per cent of GDP.

Director of the centre Ruth Lea argues in the study - "Tax 'n' spend: No way to run an economy" - that if public sector efficiency matched that in the private sector then public spending could be drastically reduced.

Lea warned that her findings showed that "as the public sector expands, diminishing marginal returns set in and increases in spending and taxes crowd out private spending and destroy initiative".

Public spending stood at 39 per cent of GDP, or £320 billion, in 1997.

It fell to 37 per cent of GDP by 2000, but by 2007 it is set to rise to over 42 per cent or £580 billion - the equivalent of £10,000 for every household in the UK.

In contrast, the US government is expected to be spending 36 per cent of GDP by 2007.

The IMF suggests that the optimum level of spending should be around 30 per cent of GDP.

In the report Lea welcomed the Gershon review which identified potential public spending savings, but argues that it is not ambitious enough.

She claims that the £20 billion of waste discovered by Gershon will only be equivalent to 3.5 per cent of public spending by 2007.

Lea also contends that if UK government spending was as efficient as that of Japan, the US or Luxembourg, then public spending could be reduced to 84 per cent of current levels.

This would also be enough to get public spending back to 35 per cent of GDP.