The election of Michael Howard has re-energised the Conservative Party, and galvanised the Labour leadership. Any notion that Tony Blair could seek a third term on a safety first manifesto because the Tories posed no threat has been banished. One Blair adviser told me yesterday: "Safety first might have been all right against a very weak Opposition. But now we need to develop a more compelling vision that is distinct and different from the Tories."
Although no one pretends Labour would have preferred a wounded Iain Duncan Smith to limp on to the election, there could none the less be some pluses for Mr Blair in Mr Howard's elevation. Under such a strong leader, the Tories will not lack definition, so the dividing lines between the two main parties will be clearer. The election will offer a real choice, not just a referendum on Labour's performance - which, given the Government's patchy record on delivery, might have been tricky. A renewed threat from the Opposition might also revive Labour's lost tribal instincts, motivating listless party members and possibly even limiting the scale of rebellions by Labour MPs.
So what is on Labour's new agenda? The Blairites believe the Government needs a new, forward-looking story on the economy, which goes beyond the "stability" delivered by Gordon Brown and addresses issues such as the new globalism, symbolised by call centres being moved abroad, and the critical one of work-life balance. At the heart of the Labour manifesto will lie a big (and expensive) push towards comprehensive child care, possibly with a pledge of universal provision after five years, through a network of new children's centres. (Anyone looking for clues about the new agenda should scan Rethinking Social Democracy, a book of essays published by the Policy Network think tank).
The childcare scheme is still being thrashed out and a key issue will be whether to target the poor or provide a service for the better-off too (who would pay, at a lower cost than they would in the private sector, while the poorest received it free). This dilemma goes to the heart of the debate over Labour's public-sector reforms.
Mr Blair is a universalist who believes the Government must "lock in" the middle classes to the welfare state so that they will be prepared to fund it. As he writes in the current edition of the Labour magazine Progress: "We cannot afford for middle-income families to abandon public services in favour of private provision any more than we can ignore the needs of the poorest in how they are provided." Mr Brown, however, believes targeting the Government's resources on those at the bottom is more important than subsidising the middle classes. He is sceptical about Mr Blair's belief that extending "choice" in public services will drive up standards, fearing that it will help the middle classes rather than the poor. To which Mr Blair counters that the current universal system in health and education does not provide the "equity" Mr Brown desires because services are often worst in "poor" areas. The "choice versus equity" battle was one of the underlying causes of the unprecedented outbreak of public division between Mr Blair and Mr Brown 10 days ago. The Prime Minister wants another raft of public service reforms to maintain the crusade to raise standards; the Chancellor believes the billions pumped in should be given time to work, and that further change will give the voters the impression that Labour has failed.
Mr Brown is furious that he is depicted by some Blair aides as a "road block" to reform. Although the Chancellor was on paternity leave at the time, there was an eruption from the Brown camp when Alan Milburn, the Blairite former cabinet minister, made a coded criticism of him in The Independent, by writing that every school and hospital should enjoy the same independence as the Bank of England. As one Brown ally retorted: "Gordon has probably devoted more thinking time to public-sector reform than anything else since 1997. To portray him as some kind of Old Labour opponent of reform is just a lie." While the Blair-Brown rift has been kept largely out of the headlines in the past week, one insider who knows both men well said: "The atmosphere is still febrile." I am told that Mr Brown was so upset at being denied a seat on Labour's national executive committee (NEC) because he thought the issue was going to be resolved at the long-arranged, much-publicised dinner hosted by John Prescott. Mr Blair had apparently told Mr Brown he would "think about it" when they last discussed the NEC, but by the time the dinner took place his decision had been announced on the Labour Party website. So it wasn't just the decision, but also the manner of it, which so irked the Chancellor.
In the long term, the different approaches of Mr Blair and Mr Brown to reform will matter more than who sits on the NEC. Public services look certain to be the crucial battleground at the next election. It is Labour's natural territory, not the Tories', and so it is a fight Labour should win. But the Blair-Brown differences will need to be resolved before Labour can properly rejoin battle with a revived Conservative Party.