Champagne for Charlie. A quiet tipple for Tony. A huge gulp for Iain

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The Independent Online

For Charles Kennedy it could not have been better timed. The Liberal Democrats have been waiting for more than a decade to win a safe Labour seat. Last Thursday in Brent East they leapt from third place to first, toppling Labour. Kennedy has a glittering trophy to parade at his party's conference in Brighton this week. I can almost hear the words he will deliver during his leader's speech: "Fellow Liberal Democrats, after Brent East there are no no-go areas for this party any more!" (Pause for rapturous applause.)

So how should Tony Blair, a political leader unused to electoral setbacks, respond to this traumatic political event, this moment of history? Quietly he can raise a glass this weekend and toast Labour's victory at the next general election. This is hardly a moment for ecstatic celebration in Downing Street, but Brent East sends out a single clear message: the Conservatives cannot win the next election. Under Britain's voting system only Labour or the Conservatives have a chance of forming the next government. Even Charles Kennedy accepts that. In this week's speech he is not going tell his activists to go back to their constituencies and prepare for power. No doubt he will make many claims about the significance of the by-election result, but he is sensible enough not to boast that this will mean he will be Prime Minister in two years' time. Kennedy will predict that his party is getting closer to power, is on the verge of an historic breakthrough and much more besides, but that is as far as he will go, because his party cannot go any further than that.

Which leaves Tony Blair or Iain Duncan Smith as the only possible prime ministers after the next election, assuming they are still leading their parties on polling day. The voters in Brent East confirm that it will not be Duncan Smith. The Conservatives' chairman, Theresa May, attempted to give the impression that last Thursday's result exceeded her wildest expectations. Ms May's contrived triumphalism reminded me of Tony Benn's performance as a TV panellist on the night of the Glasgow Hillhead by-election in 1982, a safe Labour seat which was won by the SDP's Roy Jenkins. Benn turned to the camera and declared with an almost rapturous conviction that "this result means Michael Foot will be Prime Minister after the next general election and any other interpretation can only be the result of bias in the media". Ms May claimed vindication because the Conservative vote held up. But performing as badly as they did at the last election is nowhere near good enough. At a time when New Labour faces crises at home and abroad the only alternative government made no headway in a constituency where they had been in second place.

With good cause Kennedy has focused more on the humiliation of the Conservatives in Brent than the loss for Labour. Of the Liberal Democrats' 50 target seats at the next general election, Labour holds only three. Most of the rest are held by nervy Conservative MPs.

Potentially this places the Liberal Democrats in a strategic dilemma. Disillusioned Tory voters are more useful to them at a general election than New Labour supporters who are seeking a more left-wing alternative. Tomorrow I will be chairing The Independent's fringe meeting at the Liberal Democrats' conference and posing the thorny question: "Are the Liberal Democrats to the left of New Labour?" In theory this should be a very short meeting. The obvious answer is "Yes". The actual answer is more complicated, as the Liberal Democrats never stay in one position for very long. Not so long ago they called for increases in taxes and public spending. Now the current government is spending more than the Liberal Democrats ever called for they are arguing that it is being spent in the wrong way. Charles Kennedy attacks the Government for being too cautious over the euro, but when asked whether he would join now he insists the economics have to be right, which puts him more or less in the same position as Blair and Brown. Kennedy was opposed to the war, but once the Commons voted in favour of military action he suggested that opposition would no longer be appropriate. The Liberal Democrats like to keep their options open, but they tend to do so from a left of centre perspective. What will make tomorrow's fringe meeting even longer and more scintillating is that leading Liberal Democrats never admit to being to the left of New Labour, even though that is clearly where they are. They cannot do so because they want to win at least 40 Conservative-held seats at the next election.

Not that disaffected voters, Conservative or Labour, will spend too much time scrutinising the conveniently flexible Liberal Democrat policies. They regard Kennedy as a decent chap, who tells it as it is. Those words are to become a persistent Liberal Democrat soundbite. Here is a party that "tells it as it is", a piece of spin aimed at proving that the party and the leader are anti-spin. Conveniently they are words that do not place Kennedy or his party anywhere on the political spectrum. The "Charlie is a decent chap" strategy has worked well until now. It will continue to succeed while there is deep disillusionment with the other parties.

This places Blair in a politically contradictory position. The rise of the Liberal Democrats is likely to damage the Conservatives more than Labour. Yet Blair's party lost the by-election with a breathtaking swing against his party. His strategy to recover from the last authority-sapping year appears to be that he will listen more, attempt to explain more effectively and then continue with the same policies. In an interview with me today on GMTV's Sunday programme the former Cabinet minister and close Prime Ministerial ally, Stephen Byers, warns dissenters against "self-indulgence", implying that the rebels are the problem, rather than the policies that have surfaced in a rushed manner over the last 12 months. Blair and Byers are right to warn against the complacency implicit in some of the foaming denunciations from a small group of MPs and union leaders. But it was the last Conservative government that was deservedly mocked when it said that its main problem was communicating its policies. A by-election defeat on this scale suggests something more profound going on than a communications problem.

The risk for Labour is that it wins a third term, but on an even lower turnout than last time, returned to power on a wave of apathy and disillusionment. The Conservatives face being slaughtered for the third time in a row.

The Liberal Democrats can enjoy themselves this week in sunny Brighton. Labour can be fairly relaxed about watching the Liberal Democrats enjoying themselves. The Conservatives should be worried sick as they prepare to head for the darker skies of Blackpool in two weeks' time.