Ministers warn Blair that Labour lacks core values

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Tony Blair moved to calm Cabinet jitters over Iraq and spin rows yesterday as ministers warned him that the Government was in serious danger if it was seen by the public as a "values-free zone".

During a special "away-day" gathering at Chequers, the Prime Minister agreed with colleagues that New Labour had to rediscover its political vision instead of being portrayed as a collection of technocrats.

Mr Blair called the three-hour meeting to discuss the next Budget, the summer's comprehensive spending review and public service reform.

It emerged afterwards that the big winner in the three-year spending plans put forward by the Chancellor, Gordon Brown, to be announced in July, will be health. Education will be the next priority. However, the Home Office and Ministry of Defence could face budget cuts in the wake of claims that they have overspent and submitted unrealistic spending bids.

The meeting took place under the shadow of recent damaging controversies regarding the Indian billionaire Lakshmi Mittal, Enron and the Transport Department's civil war over the spin doctor Jo Moore, which almost cost the Transport Secretary, Stephen Byers, his job.

As the Cabinet gathered, Labour MPs also underlined their strong opposition to British support for a US attack on Iraq, warning that the party would be "split down the middle" by such a move.

Mr Blair and Mr Brown told their colleagues that substantial new funds would only be given to departments if they could produce convincing evidence of improving services.

David Blunkett, the Home Secretary, and Geoff Hoon, the Defence Secretary, were given a clear indication that both of their departments would lose out in the next spending round.

Bids for extra cash by the Home Office have been undermined by claims that it has overspends of £800m on asylum and £200m on police pay. The Treasury is particularly worried about the potential £1bn cost of identity cards, a plan that is being backed by Mr Blunkett.

The Ministry of Defence is keen to boost its spending in the wake of 11 September, but again the Treasury has been reluctant to award an above- inflation rise because the MoD has already had large rises.

Mr Brown made clear that he would rather cut corporation tax and capital gains tax for business than award unjustified spending rises.

Mr Blair told the meeting that the Budget and the spending review would be "the next defining steps in building a Britain of opportunity for all".

The Government would remain focused on the "big issues that matter to voters" such as jobs, schools, hospitals, crime and transport, he said. "That is why the right-wing is in such a rage, because a Labour government is changing the country for good."

His message was backed by Alan Milburn, the Health Secretary, who said the Government needed to present a clear picture to voters of the kind of society that it wanted from its reforms. Mr Milburn said New Labour had to stop itself being seen as "a value-free zone". "We have to be a Government, rather than an administration," he said.

Another Cabinet Minister has told The Independent that the feuding in the Department of Transport and rows over party funding were hanging like a "black cloud" over the Government. He admitted fears were growing of further falls in turnout among voters, disillusioned with all politicians, threatening the "democratic legitimacy" of elections.

Amid growing speculation over a Cabinet split on Iraq, Labour's Bury North MP David Chaytor told BBC Radio 4's World at One: "Certainly there is a serious threat that the Labour Party would be split down the middle if the Government pushed ahead with its support for the US."

The Labour chairman of the Commons Foreign Affairs Select Committee, Donald Anderson, also warned: "The leadership has to consult the party and show it is not reckless."