John Rentoul: No wonder the Tories ask, 'Are we there yet?'

The recent immigration debate shows the Conservatives are still doing battle over what sort of party they want to be

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The battle for the soul of the Conservative Party is not over yet. In one corner last week there was Michael Howard, who told Michael Portillo in a documentary that he had become a moderniser because he had, in the 2005 election, "tested to destruction" the alternative approach. In the other corner, Norman Tebbit, who wrote a furious letter to The Spectator denouncing "the poisonous tree of Blairism planted in the Shadow Cabinet".

This was the backdrop to the Second Battle of Dover. The First Battle of Dover was a speech delivered there by Tony Blair on the subject of immigration during the 2005 election. It was memorable for two things. One was that Labour's supposedly formidable spin machine had failed to ensure that there was a single non-white face in the audience. The other was that, by going to a port and explaining patiently how he had brought asylum applications down, Blair managed to incite a media consensus that Howard was a very right-wing Tory whose campaign was devoted almost entirely to the issue of immigration.

We know what happened next. So does Howard. So does David Cameron. So do most members of the shadow Cabinet. But not Lord Tebbit. What happened next, according to Tebbit, is that the Conservatives nearly won the election; and if only they had been more right-wing, Howard would be Prime Minister now. Presumably, the Prime Minister would this week be explaining to Gordon Brown, the Leader of the Opposition, why the Treaty of Lisbon was different from the European Constitution, and why there did not need to be a referendum on it.

Meanwhile, back in the real world, we had the Second Battle of Dover last week. Not that it literally took place in Dover, but Liam Byrne, the immigration minister, brought in a new points system for skilled workers wanting to come to the UK. Legal experts say that the first phase of the points system makes little difference – the main impact will be on less-skilled workers, to be brought into the scheme later in the year. The important change brought in on Friday was the heavier fines on companies that fail to check employees' passports.

What was interesting about what Byrne implausibly called the biggest change to immigration policy for a generation, though, was how moderate the Conservative response seemed. Damian Green, the Tory immigration spokesman, was mildness in human form. He told the Today programme that he wanted to set an annual limit to non-EU immigration, but he couldn't say what that should be. Byrne said he wasn't going to set an arbitrary number: his number was going to be "what the British business community says that it needs".

Yet the policy that Green advocated was precisely that advocated by the right-wing, immigration-obsessed Howard at the 2005 election. So why was the First Battle of Dover a rout for the Tories, while the second battle looks more like a draw? Three reasons: Labour has moved to the right, the Tories have moved to the left, and the world has moved on.

Most important, the debate about immigration has been changed by the expansion of the EU to the east. The influx of Polish workers, which started before the 2005 election (Poland joined the EU in May 2004) but with which most journalists and politicians caught up only afterwards, has separated the issues of immigration and race.

Now that most immigrants are white Roman Catholics, it is safer to call, as the Tories did in their advertising campaign last week, for "proper controls on immigration so our public services can cope". Tebbit sounded out of date and overheated when he denounced shadow cabinet members for trying to copy Blair, "who introduced uncontrolled, unmeasured immigration of people determined not to integrate".

With race put to one side, it is easier to see immigration as an economic phenomenon. And that does not mean simply in the sense that immigration brings economic benefits. As Adair Turner, the former CBI director-general, argued in a lecture at the London School of Economics last November, those benefits have been overstated – except to immigrants themselves. The point is that immigration is a symptom of economic success as much as a contributor to it. The steady growth of the British economy created pent-up demand for labour that was suddenly sucked in when the barrier to Polish workers was lifted.

This raises all sorts of interesting questions that have little to do with race, such as why four million Britons on benefits did not take these jobs. And whether Brown's ambition to build three million more homes by 2020 would reduce house prices or act as a pull factor for further EU immigration.

Not that we would expect much by way of answer to that question from the Conservatives, whose advertising campaign last week showed such a grasp of the laws of supply and demand that it promised "a home of my own" to first-time buyers by abolishing stamp duty for nine out of 10 of them. If the supply of houses is more or less fixed, first-time buyers will simply bid up prices to what they can afford, so the removal of stamp duty would do nothing except provide a windfall for vendors.

The Second Battle of Dover raises other interesting questions. The Government has to try to respond to people's concerns through words that are matched by actions. Brown repeated Blair's error of saying that he would deport all foreigners who commit crimes, which is not possible under EU law. Last year, he made a worse mistake by promising "British jobs for British workers", which was not only contrary to EU law but to good taste. Now, however, the reforms begun by Byrne are practical and could turn out to be popular.

Then the Conservatives will have to decide how to respond. No prizes for guessing what Tebbit would want. Nothing the Government could do would go far enough for him. He is an extreme example, but he is not alone. There are many other Tories for whom modernisation was a one-off deal, achieved largely by electing David Cameron and shutting up about immigration and Europe for a bit. Once Cameron had convinced everyone that he was a modern, compassionate guy who uses phrases such as "a very tough ask" (as in, to Portillo, an election on 4 October last year "would have been a very tough ask"), they thought it was safe to go back in the xenophobic water.

That is why, after he said that NHS spending would rise under the Tories, the second most important question asked of Andrew Lansley, the shadow Health Secretary, last week was: "Has the party modernised enough?" He gave the right answer: "I think there's a way to go." But it is not completely obvious that Cameron – who has mysteriously promised Lansley that he will be health secretary if they win – agrees with him.

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