The Week in Politics: Brown still looks the Master and Commander

Tony Blair will make a big speech about the economy on Monday. There's nothing particularly unusual about that. The word is that he will say that the economic success story of his Government has not happened by accident. But wagging Whitehall tongues suggest the Prime Minister is anxious to grab his share of the glory that Gordon Brown has enjoyed since his Budget.

The events of the past week have reinforced the impression that the Chancellor is Master and Commander of the domestic political landscape after delivering a Budget designed to reshape the way every government department is run. Other ministers believe the Treasury's tentacles will now stretch even further into their domains as Mr Brown tries to accumulate the £20bn of efficiency savings he announced.

Mr Blair is stuck on the international agenda. He has become a hate figure for the thousands of people who will march in London today to mark the anniversary of the Iraq war. The bombings in Madrid have thwarted Mr Blair's latest attempt to get back to the domestic agenda. After Monday's speech on the economy, Madrid will again dominate his week.

Mr Brown's performance on Wednesday reminded any doubting Thomases on the Labour benches about what a consummate party politician he is. He cut the legs from under the Tories, who had built their tax and spending strategy on ending Whitehall waste.

Still, some Labour MPs are worried that Mr Brown has conceded too much ground to Mr Blair on the issue he dared not mention in his Budget - tax. No one expected the Chancellor to announce tax increases 14 months before a general election. But some MPs believe it would be better to be upfront and say that taxes might have to go up afterwards. They fear Labour is trapped in a vice of its own making: having promised not to increase tax rates at the 1997 and 2001 elections, Mr Blair and Mr Brown will judge that the party's manifesto must do so again next year.

These MPs recall that Labour won the argument for higher national insurance specifically for the National Health Service, transforming the "tax and spending" debate. They believe New Labour's two architects are unnecessarily haunted by the old demons on tax, and that ruling out a rise in tax rates will limit the Government's ability to transform public services and close the gap between rich and poor.

Their fear is that denying the Tory claims about "third-term tax rises" and then breaking the promise could be Labour's equivalent of "Black Wednesday", the moment when the Tories lost their economic credibility and trust. "We are still scarred by John Smith's shadow Budget of 1992," one Labour adviser told me. "Even after seven years in power, we are frightened of our own shadows on tax. Even though the voters have moved on, we are still behaving like an opposition."

Twelve years ago this month, when Mr Smith was shadow Chancellor, he issued a detailed alternative Budget, promising to raise the top rate of tax from 40 per cent to 50 per cent and to abolish the ceiling on national insurance payments. Eight out of 10 taxpayers would be better off and the package was initially well received. But the Tories exploited it, running a ruthless scare campaign about higher taxes in the general election two months later.

Many in the Labour Party, including Mr Blair and Mr Brown, were convinced that the shadow Budget lost them an election they should have won (although Neil Kinnock's leadership was just as a big a factor). They vowed never again to give such a hostage to fortune on tax again.

If the Labour high command has not forgotten events of 1992, plenty of Labour folk believe that the Tories have done so. Last month Oliver Letwin, the current shadow Chancellor, made a similar keynote speech about spending, promising to outspend Labour on schools and hospitals but to freeze other budgets and cut waste. Like Mr Smith's package, it was well received at the time. But by revealing the Tories' proposals, he allowed Mr Brown to use his Budget to outflank them. "It was a gamble," one senior Tory admitted ruefully.

Many Tory MPs now believe Mr Letwin should have held his fire until after the Budget. The Tory leadership is apprehensive but unrepentant - so far. One insider said: "Michael Howard judged that we would not win people's trust by doing nothing. It is not like 1997 when Labour was certain to win. We have got to show people what we would do and grab their attention." Some gloomy Tories now believe they need the economy to go off course to have a chance of winning next year. Mr Brown has ensured that Labour can outspend the Tories in key areas such as defence and law and order, traditionally strong areas for the Tories, even while he squeezes both budgets in his government-wide spending review. The Chancellor has also out-thought the Opposition by ensuring that Labour has a simple and credible message: We will spend more than the other lot and we will put our savings from waste into frontline services while the Tories offer tax cuts.

Mr Letwin's message is more complicated, and less believable: We will spend more than Labour on schools and hospitals but also cut your taxes. For many voters, that will not add up.

Despite the wobbles in the Conservative ranks, both main parties are now on the territory from which they want to fight the election. A long war of attrition is ahead of us. But I suspect that Labour is on firmer ground.

a.grice@independent.co.uk