Something has changed at the top of the Government: Mr Blair now believes in himself

Mr Bush believes that he has been tested by great events, and that he has passed the test. So does Tony Blair

It was one of the smallest-ever government reshuffles; it was also one of the most important. Until the reshuffle, it was widely believed that the Blair era was in its last phase. Some commentators even predicted that the PM would stand down this autumn. Others, including me, formed the impression that he would do so within about a year of the election. It was also assumed that Gordon Brown would succeed him.

It was one of the smallest-ever government reshuffles; it was also one of the most important. Until the reshuffle, it was widely believed that the Blair era was in its last phase. Some commentators even predicted that the PM would stand down this autumn. Others, including me, formed the impression that he would do so within about a year of the election. It was also assumed that Gordon Brown would succeed him.

Now, these assumptions have all been confounded. Tony Blair has reignited his political fire and concluded that he is indispensable. He has also decided that Gordon Brown is not the right man to take over. Mr Blair used to say that he had been elected as New Labour and would govern as New Labour. He has now added a third clause: "So will my successor."

There are parallels with Harold Macmillan in the early 1960s. Having concluded that the obvious and long-standing heir apparent, Rab Butler, was not suited to be Prime Minister, Macmillan tried to advance the fortunes of a number of candidates - Hailsham, Macleod, Maudling - before settling on Alec Home. Mr Blair has now given Alan Milburn his chance to prove himself.

In 1962, Macmillan sacked seven Cabinet ministers: the Night of the Long Knives. Last Wednesday was the night of the long stiletto. Mr Brown is not dead yet, but Mr Blair has tried to stab him through the heart of his ambition.

Anyone who reads Derek Scott's forthcoming memoirs, Off Whitehall, will wonder why it took the PM so long. Mr Scott, who had been a political advisor to Denis Healey during his Chancellorship, spent several years as Tony Blair's economic advisor. He tells a fascinating tale.

According to Derek Scott, Gordon Brown carried obstructiveness to the point of insolence. Not content with excluding the PM from economic decision-making, he would even refuse to divulge his plans for forthcoming Budgets. "Give me a hint, Gordon," Mr Blair once asked. Few hints were forthcoming. Number 10 was reduced to reading the newspapers in the hope of picking up clues as to how the Chancellor's mind was working. Treasury officials were instructed not to pass on information to Number 10 advisors.

No previous Prime Minister would have put up with such treatment. As a result of the Granita restaurant dinner in 1994, when Mr Brown agreed not to challenge Mr Blair for the leadership, the Chancellor thought that he had made a deal, under which he would be in charge of every aspect of economic policy.

Back in 1994, Tony Blair did not know much about running a government. He may not have been aware how unworkable such an arrangement would be - but he would never renounced all control of the economic departments. As Mr Scott puts it, the whole business "reflected Tony's instincts to smooth over differences and avoid confrontation''. Mr Blair never expected the embarrassed promises he made in order to soothe Mr Brown's vanity to be taken literally. Gordon Brown did precisely that.

The problem was exacerbated by Mr Brown's belief in his intellectual superiority. That was a further reason for his reluctance to discuss economic matters with his next-door neighbour. He did not think that the PM would have much to contribute. Curiously enough, Tony Blair does not agree.

At one stage, Mr Blair may have been in awe of his Chancellor's mastery of the Treasury brief, but since then, there have been two developments. Tony Blair has grown in intellectual self-confidence. There is a comparison with George Bush, who is much more assured than he was at the beginning of his presidency. Mr Bush believes that he has been tested by great events, and that he has passed the test. So does Tony Blair.

It should be remembered that Mr Blair is certain that he was right to go to war against Saddam. It must have occurred to him that few if any of his Cabinet colleagues - including Mr Brown - would have been so steadfast. That may have helped to persuade him of his own superiority. Nor is it inconceivable that he would have discussed all this with George Bush. The two men are friends as well as allies. Who would have thought that the day would come when Tony Blair found it easier to open his heart to George Bush than to Gordon Brown?

Apart from the canker of thwarted ambition, there is a further obstacle to harmony between PM and Chancellor. Mr Blair is no longer convinced that Mr Brown's economic judgement is reliable. Over the years, much has been made of Mr Brown's grimaces when the PM is speaking. Lowering, bilious, brooding, he radiates grievance. But during the last two or three Budgets, it has also been worth observing Mr Blair when his Chancellor is talking. There was often a quizzical, even sceptical, expression, as if he were thinking: "Gordon, are you sure you're right?''

Derek Scott makes an interesting point: "There are limits to the length of time public spending can increase at a faster rate than growth in GDP without causing problems ... it is easier for governments to mess up an economy than it is to improve it.'' The same thought has occurred to Tony Blair. Mr Brown has spent a vast amount on the public services, yet the public is not persuaded that it is better served. Nor is the Prime Minister.

Holidaying in princely palaces has not only invigorated Mr Blair. It has also made him more imperious, hence his increasing discontent with many of his colleagues, even including Jack Straw. Until recently, the PM had excellent relations with the Foreign Secretary, partly because Mr Straw never expressed any resentment at the extent to which foreign policy was run from Number 10. Earlier this year, however, Jack Straw did assert himself. He decided that it would be impossible for the UK to commit itself to the EU Constitution without a referendum. Newspapers were briefed accordingly.

At the time, the Foreign Secretary had little difficulty in winning the PM's agreement. It seemed as if Mr Straw had merely given Mr Blair a gentle shove in the direction he had been about to take. The PM is no longer so happy. Over the summer, he appears to have convinced himself that he should not have listened to Mr Straw. There are similarities with Margaret Thatcher. She would allow herself to be talked into compromises by members of her Cabinet. She would then blame them for the outcome. Margaret Thatcher never felt that her ministers were doing enough to put her visions into practice. Tony Blair is now in that same mood. This means trouble.

Alan Milburn has been appointed as minister for public sector radicalism and overlord for the implementation of Blairism. As such, he is bound to be in conflict with Gordon Brown. If the Milburn appointment is to be more than froth, the PM will have to back him. But that will not force Gordon Brown to back down. As a result of last week's reshuffle, two powerful locomotives are moving towards each other on the same single-track railway. It is inconceivable that there will not be an almighty crash, and it is not clear who will survive it.