Is George Osborne cutting for a rainy day of bailouts?

In politics, when somebody tells you that "there is no alternative", it usually means that they are just desperate to stop anybody else noticing that there are several. Where the depth, speed and scale of public spending cuts is concerned, the story told by the coalition government – and dutifully, and largely uncritically, repeated by the BBC – is that we have no choice. Yet in some fundamental ways the chancellor, George Osborne, is very successfully spinning us a yarn and certainly not telling us the whole story.

First, the cuts are likely to be so damaging to the economy that they will do precisely the opposite of his stated intention of restoring the trust and faith of the markets. This is odd, in any case, as it was the markets that failed, not the public sector, and odd also considering that the financial markets don't appear to give a fig about the public's trust or faith in them. Either way, finance is unlikely to be overenthusiastic about an economy that ends up in long-term decline.

Then there's the point that there are real alternatives to the cuts. Rather than cuts on services that disproportionately affect the poor, the government could pursue taxes left unpaid, evaded or avoided, with the potential to raise more than £50bn, and much more likely to affect the comfortably off. A sum like that alone would change the landscape of the cuts debate. But there is much more. The government could also reclaim part of the potentially profitable function of credit creation. This has been left almost entirely to the commercial banks, who create credit when making loans (it is one of the oldest myths in economics that banks merely lend out other people's savings).

The government could also choose to inject money directly into the economy rather than via the banks, preferably in the form of a green new deal to generate employment, improve infrastructure, reduce carbon emissions and raise energy security. Quantitative easing via the banks makes little sense when it is so poorly targeted and when the banks' behaviour continues to be remarkably self-serving, instead of serving the wider public and economic interest. Of course, the pressure on public services could also be greatly reduced if spending was better prioritised; cancelling the Trident replacement alone could save an estimated £97bn over several years.

Second, and critically, the unreformed banking sector looks set to hit the edge of a funding cliff, according to Bank of England data analysed in the New Economics Foundation's (Nef) new report, "Where Did Our Money Go?", published this week. Just to keep functioning, the main banks' monthly borrowing needs look set to more than double next year, rising to around £25bn a month. This raises a number of awkward questions for George Osborne.

Such as: where will the money come from? Reading between the lines of the Bank of England's analysis, it seems highly unlikely that the money will be found in the financial markets. Which leaves, you guessed it, you and me. If the public purse is the most likely last resort, the question that George Osborne must then answer is this: is the severity of public spending cuts being pushed by the fact that the government is also provisioning for another round of bailouts to the still unreformed banks? If it isn't, then what is the plan to deal with the funding cliff? When hit with the question on Sky TV today, Osborne looked decidedly uncomfortable and blind-sided.

There are already admissions that the tax on bonuses failed to change behaviour within the banks, and Simon Johnson, former chief economist at the International Monetary Fund, points out that most banks are largely unaffected by new rules on the amount of assets that banks must hold compared to their liabilities.

If we see a retread of the crisis of two years ago, at the same time that the government sucks money out of the economy with spending cuts, we will have the worst of all worlds.

If the cuts programme is being partly driven by a government saving for a future bailout, it will be much worse than merely making us all suffer in order that the banks, laughing behind their bonuses, carry on with business as usual.

Because, in this case, we will be suffering for a banking system that is now providing a worse service for fewer people. The general public would be taking a triple hit, earning less on its savings and paying more to borrow, while also weathering the spending cuts. In Ireland the new bank bailout was remarkably close in sum to recently announced cuts, €5bn as against €4bn. A direct connection may be hard to prove, but it raises reasonable suspicion.

Whatever is the case now, the agenda for reform of the banks is already long overdue. The minimum necessary is laid out in the new Nef report. Banking should be a utility to serve a productive economy and help us meet incredibly pressing social and environmental objectives. It has been allowed to become a law unto itself. We haven't yet been told where all our money went during the last bailout. Osborne has a duty to tell us where our money is going to go now.