LEADING ARTICLE : Labour leaves the land of dreams

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The nightmare will not become reality, Tony Blair reassured us yesterday. Forget forebodings of higher taxes, inflation, fiscal imprudence and monetary slackness. The message of his Mais lecture was that Labour has changed its ways. Grown-up, chastened, it now worships at the altar of economic orthodoxy.

But if the nightmare has gone, what of the dream Labour once offered? Is that also now no more than a mirage? For 16 years Labour has told us that the Tories are destroying state education, the National Health Service and the social security system. So many people have waited in hope of a Labour victory. Anyone who has waited months for an operation agrees that the NHS fails to meet our requirements. Those on state pensions will have a jaundiced view of the welfare state. In the past, more cash was always Labour's answer. No more. We don't have it and we won't increase taxes or borrowing to raise it - that was the clear implication of Mr Blair's speech.

In short, the price of accepting the great truth about inflation is that Mr Blair has surrendered the great weapon - increased spending - that the party once promised would secure better services. Come the general election, he may fool voters into thinking that Labour will somehow extract more from the same tax pot. But if he reaches Downing Street consumers will want to see solid results, fast.

The party cannot escape an urgent need for radical new ways to deliver old objectives, now that it is no longer prepared to spend more and more on the welfare state. This may mean that Labour will have to abandon some state welfare activities, privatising them, forcing individuals to take responsibility for their own provision. The party should learn from Peter Lilley, who, for all his right- wing rhetoric, has demonstrated that small- scale reform does not release large amounts of state spending for allocation elsewhere.

Labour is well-placed to engineer radical reform. Where the Tories face suspicion every time they tamper with public services, Labour, at least for now, enjoys a general confidence that its heart is in the right place.

Frank Field, the independent-minded Labour MP, pointed out a possible direction of change last week with his plans to make private pension provision compulsory. He also called for a system of earnings-related benefits, based on earnings-related contributions. Here was a glimpse of how a practical, unsentimental new Labour world might be built.

His recommendations are just a few of the thousand flowers that Tony Blair must let bloom. The Social Justice Commission's report, arguing for more means-testing and in-work benefits, was a start. But the commission was conceived during the era of John Smith, at a time when Labour was still ready to spend more. Its prescriptions already look unambitious, dated and costly. The challenge for Labour now is to move from defending the status quo to setting out its vision of a completely new type of welfare state.