Are public sector jobs real? Do they add value to the economy, or are they just a burden on private sector taxpayers?

Are public sector jobs real? Do they add value to the economy, or are they just a burden on private sector taxpayers?

It's a question that hasn't really been asked since the 1970s during the last great spending retrenchment. But with the Government borrowing almost £20bn a month, the productivity or otherwise of the public sector is going to be the central question in British politics.

What to cut, and where? Baroness Thatcher and her Friedmanite economic advisers had no doubts: wealth is created exclusively by the private sector and all public sector employment is simply a deduction from profits. Schools and hospitals may be good things but, according to supply side economists, they don't produce value.

For the last 30 years, Conservatives and New Labour have largely subscribed to this dependency theory of public employment and in the present recession are sharpening their knives.

Treasury civil servants are reportedly drawing up "doomsday lists" of 20% departmental cuts and there are calls for an all out assault on public sector pay.

But are they not only cutting their own throats but threatening to destroy the only sector of the economy that is still thriving?

Just look at Edinburgh, regional hub of the greatest financial crash in history. After the collapse of RBS and HBOS, along with large parts of the financial services sector, you might have expected Edinburgh to be a ghost town, with zombie bankers wandering the streets in rags, their children living in the burnt-out shells of black Range Rovers. Not a bit of it. Edinburgh is no longer booming, but nor is there any sign of financial stress, and even house price falls have been modest. This is because the city, while big on financial services, is even bigger on public sector employment.

The top five employers in Edinburgh are in the public sector, led by Edinburgh council with its 20,000 staff who have recently had a 5% pay uplift' (we don't talk of pay rises any more).

Many of the best-paid of Scotland's 50,000 civil servants live here, sending their children to Edinburgh's pricey private schools. And our many Scottish politicians, their retinues and second houses, are pumping public money into the Edinburgh economy.

Power-suited bureaucrats sit in Starbucks drinking skinny lattes next to members of Edinburgh's 50,000 student population. Edinburgh University alone has 8000 members of staff mostly in secure jobs with final salary pensions.

Fear does not stalk the streets of Edinburgh in the recession because so many of its citizens are directly or indirectly living off the public payroll.

Now, I'm as jealous as the next hack at privileged public sector workers with job security, annual pay rises and final salary pension schemes. It really is a different world in there.

But it seems absurd to dismiss all public sector workers as parasites.

In a knowledge economy, where education is the acknowledged route to economic salvation, educational factories such as Edinburgh University are clearly producing a product that is just as valuable as Luton vans.

The people running Edinburgh's excellent council-owned bus service are surely as productive as the people running the dud National Express which has failed so spectacularly to run the east coast mainline.

The questions arise over the tens of thousands of bureaucrats - the pen-pushers of popular mythology - who occupy the shiny new offices springing up all over Edinburgh.

Shipyard workers on the Clyde could be forgiven for thinking that there are better things to do with their taxes than paying six-figure sums to council executives - and there is no shortage of them.

Salaries have risen fast in local government as senior staff compare themselves with private sector. No longer is the public sector the poor relation - average salaries are 13% higher than in the private sector and even bureaucrats get bonuses.

Those Clyde workers facing an insecure future may resent paying the public sector pension bill in Scotland which is now running at £2.3bn. In some councils, more than half of council tax revenue goes in pensions to ex-council employees.

The public sector might reply that the Clyde shipyards are only remaining in existence because of the Government contracts for aircraft carriers that we can't really afford. Indeed, it is not easy to identify exactly where the private sector still happens in Scotland, since so much economic activity, from railway to life sciences, is funded directly or indirectly from the state. Strip out the public sector and all you're left with is alcohol, tourism and financial services.

And now that RBS and HBOS are largely nationalised, and their employees officially classed as public sector workers, financial services is also becoming part of the state. If the public sector stopped tomorrow, we would be left selling each other cups of tea, cutting each other's hair and renting flats.

Maybe that's the answer. Perhaps the Government should take a lead from BT and BA and offer public staff long holidays in lieu of salary. Then we could find out how many of them are really necessary.

Don't think it couldn't happen. In Latvia, which I visited recently, the government has just imposed a 40% cut in public spending, which means that in some constituencies, half of the schools are actually closing.

No one expects that to happen here. But big cuts are certainly on the way, and the great public sector bureaucracies, grown fat in the boom years, would be advised to start thinking thin. With a public spending deficit threatening to rise to 13% of GDP, shrinking the state is unavoidable.

But we need to find some way of assessing which jobs are necessary and which are expendable; which generate wealth and which do not, because the money is not going to be around to pay for them all.

The danger, if we don't conduct this review, is that the public sector bureaucrats at the top end will save their jobs by demonstrating their zeal for cutting useful posts below.

There are two nations nowadays, the public one and the private one and a collision is coming. Subsidy cities such as Edinburgh should enjoy their comfort while it lasts.