Stephen Byers: We must follow the example of Mrs Thatcher

New Labour is entering its third and potentially most difficult phase: renewal in office

Delegates to Labour's annual conference are setting of for Bournemouth this weekend against the backdrop of the by-election defeat at Brent East - the first in 15 years - and to the sound of the closing speeches at the Hutton inquiry.

This coincidence is unhelpful, to say the least. On top of the normal mid-term difficulties that governments face, the decision to send troops to Iraq alongside the US meant that this was always going to be a challenging conference for Tony Blair and his government. The Hutton inquiry has compounded these difficulties.

The Prime Minister now faces some of those tough choices that politicians like to talk about. Under pressure there will be a temptation to seek shelter. To turn and consolidate. To slow down the pace of change. This would be a mistake. Now more than ever, people want to see major advances in the quality and range of public services. To witness concerted action to tackle crime and antisocial behaviour.

The danger for the Government is that by the time of the next election the criticism won't be that it's been too radical, that there's been too much modernisation and reform but that there's been too little, that it has been timid and as a result the major improvements that people expect have simply not taken place.

So Tony Blair has to regain momentum and push forward in the run-up to his third general election as party leader. As he does so, the problems and dilemmas he faces are remarkably similar to those faced by Margaret Thatcher as she approached her third election in 1987. She was also under pressure. The Westland affair had destabilised her government and led to the resignations of Michael Heseltine and Leon Britton. Behind in the opinion polls, she faced a difficult party conference in 1986.

Margaret Thatcher held her nerve and came out fighting. The conference theme was "the next move forward". It was founded on her model of popular capitalism. Extending home ownership to create a property-owning democracy; further privatisation of nationalised industries and a hard-edged attack on Labour in general and its defence policy in particular

While it is unlikely that there will be an election in 2004, Labour must adopt the same approach. We have been on the defensive; now is the time to begin setting the political agenda once again.

I have a feeling that New Labour is entering its third and potentially most difficult phase. The first phase saw changes being made to the Labour Party itself in order to make it electable. The second phase was to demonstrate that as a government we were responsible and would take no risks with the economy or on defence.

The third phase is renewal in office. This is difficult for any incumbent government. But for New Labour it raises particular problems because there are some who have never accepted New Labour and the political direction it has taken. With Tony Blair under attack they feel strengthened, and talk of reclaiming the Labour Party.

The reality is that we cannot allow the process of renewal to be halted by those who substitute the certainty of the old political slogans for the more complex and challenging task of engaging with the public and developing policies which reflect their priorities.

We simply cannot prepare our country for the future if we as a party move backwards. Discipline and unity must not be used as an excuse to stifle debate. I have no doubt that the leadership of the Labour Party can have confidence in its members. There needs to be more open debate, and it should start from the top. I welcome the fact that cabinet ministers are now beginning to talk at an early stage about the policies they are considering. David Blunkett's recent comments concerning ID cards are a good example of this.

Within the Labour Party itself, we need to change the policy forum process to make it a genuine part of policy formation and development. We also need to find new ways of engaging with the public, and to rebuild a mature and responsible relationship with the media. But renewal is not just about process, style and party organisation - it must be grounded in substance and policy.

This is where the relationship between New Labour and the values and principles that led to the creation of the Labour Party in the first place becomes so important. The party was founded to fight for social justice and fairness; to provide opportunity for all; and out of a belief that we achieve far more working together than we can on our own. These are as relevant today as they were then. So New Labour is not about changing or ignoring these basic ideals, but about looking afresh at how in practical terms they can be fulfilled.

None of this is easy. But the public knows that government is about providing answers to difficult questions. Politics engages people when they can see its relevance and when people talk about it with passion and conviction.

Tony Blair has the ability to do just that. He can shape rather than just follow public opinion. He must now do so across the domestic agenda in order to ensure that the third phase of New Labour - the renewal of government in office - is carried out as successfully as the first two phases.

The writer was a cabinet minister 1998-2002