The Conservatives are riding high at the moment and Labour are laid flat on the floor. Seldom has a serving chancellor of the exchequer appeared as triumphalist as George Osborne – although memories are evoked of the high points in my old friend Nigel Lawson’s chancellorship during the boom of 1988.

However: history demonstrates that Labour is capable of coming back from the dead – eventually. And to my mind, with his naked experiment in social engineering and drastically reducing the size of the state, George Osborne could well be riding for a fall. I for one would not risk too much money backing him to become prime minister.

David Cameron and George Osborne present themselves as “one nation Tories” who have captured “the middle ground”. Ed Miliband has been condemned for being too leftwing, although the prime minister and chancellor have shamelessly stolen his leftwing minimum- and living-wage clothes; and, with its changes in taxation of dividends and treatment of non-doms, the recent budget has upset the top 10% of society just as much as Miliband and Ed Balls would have done.

Let’s face it. All this stuff about “one nation” and “compassionate Conservatism” is so much guff

Both their election campaign and latest, unfettered-by-the-Liberals budget demonstrated that yet another idea the Conservatives stole from Miliband was the concept of “the squeezed middle”. The budget measures are, to put it mildly, hardly aimed at alleviating the plight of the poor and vulnerable, but the government is quite happy to go along with the tabloid myth that most of the unemployed or benefit claimants are merely “scroungers”.

As the old cockney saying goes: “It’s the same the whole world over: it’s the poor what gets the blame, it’s the rich what gets the pleasure. Isn’t it a blooming shame?”

It is not just leftwing extremists who remain up in arms about the way that the banks continue to live in a world where they expect to be bailed out by the taxpayer if – or perhaps when – things go wrong again.

Why, Lord Lawson was making the point in a fascinating conversation with Peter Hennessy on Radio 4 last week. Lawson is annoyed that retail banking is still not properly separated from investment banking.

He is not alone in arguing that one of the fundamental problems behind the financial crisis was the way that the risk-taking culture of investment banks infected good old-fashioned retail banks like RBS. Indeed, I have heard many a rightwing acquaintance complain that the real scroungers were those financial operators who nearly brought the world economy to its knees and then had to be bailed out.

Lawson speaks with some authority on the subject, but seems to have forgotten that the seeds were sown by the Big Bang deregulation in 1986 of which he was so proud. It was that which led to the fusion of retail and investment banking, and all that followed!

And what do we find now? The banking lobby is as shameless and influential as ever, and the chancellor favours easing up on regulation.

But it is not merely the poor and the defenceless who are going to suffer even more from an austerity policy whose origins lay in the consequences of the banking crisis. When the wider public wakes up to the impact of the formidable cuts in public services now being planned by local authorities throughout the land, Osborne may find there is quite a backlash.

Even the Financial Times, which has been a cheerleader for him, is beginning to express concerns about his headlong rush to shrink the size of the state.

Let’s face it. All this stuff about “one nation” and “compassionate Conservatism” is so much guff. When people say how pragmatic and centrist this chancellor really is, I, for one, start counting the spoons. As Tony Travers, professor in the British government department at the London School of Economics, writes in the coming August issue of the National Institute Economic Review, Osborne’s desire for “a 36% state” (as a proportion of GDP) “is well below the longer-term average for UK state spending, and will require very large further cuts to ‘unprotected’ services such as local government, the police, fire, transport and housing.”

Travers is a leading authority on local authority finance. He points out that, despite all their spending responsibilities, in the UK local authorities’ taxing powers amount to a mere 5% of total taxation, compared with 35.7% in Sweden. It is a cliche that the British want Scandinavian levels of public service but with American levels of taxation. Osborne appears to be planning a massacre of public services.

Oh, and by the way: a little-noticed item in the budget indicates that this chancellor, with boundless ambition, is creating a “joint security fund”, access to which will be contested by the Ministry of Defence and the intelligence services. At a stroke Osborne has put himself in charge of the strategic defence and security review, and will decide the priorities.

I am beginning to wonder whether we may yet see the kind of tensions between this prime minister and chancellor that we saw so much of under Tony Blair and Gordon Brown.