Blair and Brown locked in battle on 'two-tier Britain'

Rift over public services between Prime Minister and Chancellor could lead to 'a fork in the road' for New Labour's two main architects

A battle has broken out between Tony Blair and Gordon Brown over the Government's public-sector reforms amid concern in the Chancellor's camp that they could create a "two-tier Britain".

Mr Brown spoke out against the new direction of Mr Blair's modernisation plans when the Cabinet met eight days ago, warning that moves to inject more choice and diversity could undermine the very public services the Labour Party had created and was now trying to safeguard.

According to Blairites, even Mr Brown's natural cabinet allies did not speak up in his support. "He was pretty isolated," one minister close to Mr Blair claimed yesterday.

The Brown camp insists he was far from isolated. "He spoke about the limits of the market in public services; no one disputed what he said," another minister said.

Whatever happened around the cabinet table, Mr Brown's fears are certainly shared by many Labour MPs, who are worried that the new reform drive announced by Mr Blair at last month's Labour conference will take public services down a dangerous road marked "back door privatisation". As one Brown aide put it bluntly: "This is not about modernisation or the status quo. It is about public or private."

The split between the Prime Minister and the Chancellor goes to the heart of the debate about the state's role and of what the New Labour project is. The rift is so serious that some ministers believe it could even prove "a fork in the road" for the partnership between New Labour's two main architects.

HOSPITALS

The dispute surfaced publicly over plans, confirmed in the Queen's Speech, to set up a network of prestige foundation hospitals. Mr Blair had to broker a compromise after a bitter row between Mr Brown and Alan Milburn, the Health Secretary, over how they would raise funds. Only hospitals that have gained the top "three-star" rating will be able to apply initially, raising fears of a two-tier system as they use their new freedom from Whitehall to cream off the best staff by paying them more. Critics say the Government should focus on the worst hospitals, not the best.

SCHOOLS

Labour MPs are worried about the push by Blair "modernistas" to create more specialist schools. But Mr Blair is convinced that this is the way to raise standards in what he calls the "post-comprehensive era". He says the specialist schools in his Sedgefield constituency are better schools, but still teach the same pupils they had before.

UNIVERSITIES

After pressure from some of the premier group of universities, Mr Blair is attracted by the idea of allowing them to charge top-up fees. But 90 Labour MPs have already registered their opposition, warning the move would create a "two-tier Ivy League system". Mr Brown is against the idea and Mr Blair is likely to have to include measures to help students from low-income families go to university when a long- delayed White Paper on higher education is published in the new year.

Critics argue that, by giving more freedom and money to the most successful hospitals and schools, Labour will only widen the gap between "the best and the rest". People living in areas without good hospitals and schools – often those on low incomes – will be left with deteriorating services, while middle-class areas will see services improve.

The Brown camp is furious that the Chancellor is portrayed by some Blairites as an opponent of reform. But his fears over the Blair agenda were spelt out only a few days after the Prime Minister's conference speech by Ed Balls, Mr Brown's closest aide and the Treasury's chief economic adviser. He wrote in a pamphlet: "We are devolving power to those best placed to make decisions to deliver agreed goals and standards. But we have to be careful to strike a balance, particularly in public services such as health and education, between encouraging local flexibility and rewarding success on the one hand and our firm commitment to tackling inequalities in provision and preventing two-tierism in public service delivery."

In a rare newspaper interview, Mr Balls added that there was a "limit" to how far market principles could be applied, warning: "If you go down that marketising route, you run grave risks with that ethic of public service."

His comments infuriated Downing Street. Although Mr Blair claimed publicly they were aimed at the Tories, he knew they were really directed at him. "We were amazed that Gordon allowed Ed Balls to break cover," one cabinet minister said.

A Blair aide quipped: "We're going to ask a Number 10 special adviser to give a newspaper interview saying why the five economic tests [for joining the euro] have been met. Then Gordon would know how it feels."

Frank Dobson, a former health secretary, has emerged as the most prominent critic of foundation hospitals but has widened his attack to accuse Mr Blair of fostering "elitism" in both health and education. The charge is denied by the Blairites. "It is not about two-tierism," one minister said yesterday. "The point is that we don't have hospitals and schools at the same level now. Some are better funded, or better run or provide a better service. It is largely in the less well-off areas, often represented by Labour, where services are under-performing, so they have the most to gain."

The Blair camp argues that monolithic public services will not survive in the long run because consumers will demand more of the diversity and choice they enjoy in the rest of their lives. The "modernistas" see foundation hospitals as only the start of a revolution, and want such "public-interest companies" across the range of services.

The future shape of Britain's public sector is far from clear. Matthew Taylor, director of the Institute for Public Policy Research, which led calls for a greater private- sector role, said: "The account of change that is coming from different parts of the Government is basically incoherent. I have no confidence that we know where we will be in five years' time."