The dangerous schism at the heart of New Labour

War would be bad enough, but there is a dangerous side-effect that may endure beyond any conflict with Iraq. The opposition to war has undermined trust between the government and its supporters, and it was this trust that allowed the true believers in the New Labour project to plough on with their domestic reforms. When there was doubt, the government was often given the benefit of it. The loss of that trust could severely weaken this administration.

This is partly because it has been in power for six years and to many of these people the big issues of the day – Europe, gun crime, drugs, asylum, transport – seem as intractable as ever. There is concern, too, that despite massively increased investment funded by higher taxes and progress at the grass roots, visible improvements are not being delivered in the public services.

All this is compounded by divisions within New Labour itself over the future direction of policy. There are those who believe the first set of public service reforms have simply laid the foundations for much more radical measures. The prime minister is the leading exponent of this view and in a speech last week he put his cards firmly on the table: "We can either be well-intentioned, and make incremental change – cautious but comfortable … or, just as the 1945 government pioneered a new settlement, so today we can reinvent collective provision."

His analysis is clear-cut – the changes up to now have been essential but are not sufficient. Across the public services ministers have created national standards, set countless performance targets, supported rigorous inspection and devised ways of taking over failing institutions. Now Tony Blair wants to use this framework to create what he calls diversity and choice. Diversity means bringing in fresh players, some from the private sector, some by establishing new types of autonomous mutual organisations. Choice means abandoning the idea of a single set of local services and encouraging parents, patients and anyone else using public services to consider the public sector like a marketplace with competing providers.

Whatever else it may be, this is radical. Blair really does want to dismantle the monolithic welfare state, he really does want to give choice and he really does not care who provides public services.

Blair really does want to dismantle the monolithic welfare state, and he really does want to give choice and he really does not care who provides public services

Yet even within the Labour leadership there are those who feel uncomfortable with this prospectus. The chancellor, in particular, is not enamoured with the idea of new types of institution such as foundation hospitals, nor apparently is he convinced that choice is what should now be driving the system. Here again we have a clear-cut analysis, but with a very different conclusion. The Brownite perspective suggests that the government has pumped in a lot more money, has set up mechanisms to ensure accountability and improve productivity and that now it should be demanding delivery rather than being distracted by further structural changes.

Judging by last week's performance, the prime minister's aim is to win the sceptics over by arguing that choice and diversity are vital to social justice. "If the affluent don't get choice they find it another way: through their wealth," he said. "A system in which there is choice and quality only for the middle class is intolerable. People should not forget the current system is a two-tier system where those who can afford it go private, or those who move house get better schools."

It is a neat argument but it will take more than that to convince many Labour-inclined individuals to embrace the dismantling of a more-or-less uniform set of state-run institutions and its replacement by a quasi-market of different providers.