Out of touch, but not out of the woods

As his recent Houdini act demonstrated, Tony Blair has still got the Commons Touch. What neither he nor many political commentators do not seem to realise is that he has lost the Common Touch.

They really do not seem to have got the message. Almost everywhere I go I find that most people have not forgiven Blair for the war, and have no intention of doing so. In that jargon of which New Labour is so enamoured, majority opinion outside Whitehall and Westminster refuses to concede 'closure' on the war.

The results of the recent by-elections were far worse for the future of a Blair-led Labour Party than has been generally acknowledged. The text of the Butler Report was far more damning of this government's treatment of 'intelligence' than even Blair himself appears to realise. And it would have been fatal if the New Labour apparatchik Ann Taylor had not made life extremely difficult for Lord Butler and his colleagues as they drafted the final report.

Inside Whitehall the talk has been of little else this week. Try as they will, those policy makers whose prime concern is the economy find themselves irresistibly drawing the conversation to Butler, Blair, Hutton and the novel legal principle 'If everyone is guilty then no one is'.

As Blair goes off for a Summer Holiday chez Sir Cliff Richard in Barbados, he might well reflect that now would be the perfect time for him to resign. He has had an amazing press from commentators who a few days earlier were writing him off; he could persuade himself that he was going out on a high before he returns for Iraq to haunt him in the late summer, the autumn, the winter, the spring, ad infinitum. Seldom has a Prime Minister had such a good press as this one received after another series of bravura performances in front of the Commons and the media last week.

We are told, however, by him and the loyalist press corps that he will serve on and on and on. I wonder. One test will come with the by-election in Hartlepool caused by the resignation of Peter Mandelson en route to his new job as a European commissioner. Another test will be avoiding the precedent of the poll tax, which was the last time when a prime minister became completely out of touch with the public without acknowledging it even to herself, and the slow-burning fuse eventually did its damage.

On this occasion, of course, we know that, with the silly season in full swing, commentators are now writing off the Conservative Party, just as Labour was written off in the Eighties. But a new factor in this millennium is the international phenomenon of the desire to punish incumbent governments, even if their majorities seem impregnable. Although most analysts assume Labour will walk the next election, there might be a very odd result if my own straw polls are typical, and traditional Labour supporters persist with the claim that they are not prepared to walk into a polling booth on behalf of Tony Blair - reassured in the 'knowledge' that the Conservatives are finished.

One illustration of the thesis that Blair's 'touch' is not quite so common as it used to be was the way he caused a lot of annoyance in Whitehall and Westminster last week by allowing the impression to grow that there was going to be a reshuffle and then drawing back from it. This kind of thing upsets not only those who read that they are vulnerable, but also those who aspire to higher things. It also antagonises civil servants who start preparing for changes that then don't take place.

A prime ministerial resignation would be the ultimate reshuffle. There would also be a certain irony if it were to be Blair, and not Gordon Brown, who became the embodiment of the latter's favourite joke: 'There are two kinds of Chancellor: those whose careers end in failure and those who get out in time.'

At the moment the Prime Minister shares the credit with the Chancellor for the golden scenario, in which the British economy is roaring ahead at a real rate of growth of 3.6 per cent a year, unemployment is low and, for all the concerns expressed here and elsewhere, those 'imbalances' in the economy - the trade gap, the credit boom, the bubble in house prices - do not seem, as yet, to have ended in tears.

The atmosphere at the Treasury is positively complacent about these matters. At the Bank of England, however, there is rather more concern. The consistent theme of the Bank, this year, in its Inflation Report, the minutes of the monetary policy committee's monthly meetings, and the MPC's appearances before the Treasury committee and the House of Lords economic committee, has been concern about pressures on capacity and the implications for interest rates.

Thus, in his speech at the Mansion House on 16 June the governor Mervyn King stated: 'As far as we can tell, there does not appear to be much spare capacity in the UK economy. The labour market has tightened further as employment has risen at well above the rate implied by growth of the labour force. Cost pressures are increasing, and pay growth has picked up.'

King made it clear where his bias lay when he told the Scottish CBI on 14 June: 'Most business cycles over the past 50 years have owed more to the twists and turns of monetary policy, and the failure to control inflation , than to waves of innovations.' This was, by the way, in the context of a very interesting historical speech. King shares with Alan Greenspan a penchant for thoughtful historical speeches, from which only the topical references to interest rates etc tend to be quoted. But how interesting to be reminded that 'One hundred years ago the 10 largest British companies, ranked by market capitalisation, were all railway companies... Now the 10 largest companies include five in financial services and only two in manufacturing'.

The Bank in general, and the governor in particular, have a special concern about public spending. From the point of view of the nation's public services and infrastructure, many of us are only too pleased that the Treasury is at last spending real money. But from King's point of view 'what is relevant to the MPC is the extent to which the resources that are going into the public sector are not available for use in the private sector, hence putting overall pressure on the demand for resources'. King sees inflationary implications here. (Treasury committee 24 June.)

Another MPC concern has been the budgetary position. The Chancellor told the Treasury committee on16 July that the Treasury, via the Inland Revenue and Customs and Excise, had a better idea than anyone else about the course of revenue. King told the Lords economic affairs committee, with I think a certain edge in his voice: 'They are the experts and I do not think it should be for us to second-guess those judgments. I think what is important is that the people making those judgments have the right incentives to make and then publish the correct judgments to state what they really think is going to happen.' (29 June.)

So, the Treasury seems happy with the economy. The people who now actually operate economic policy are not so sure. And the latest minutes from the MPC make it clear that further increases in interest rates are on the way.