Focus: How the wheels came off UK plc

But things have not gone to plan. From education to health, pensions security to economic growth, the wheels are falling off the once well-oiled Labour wagon.

True, Blair has more than his fair share of “worst weeks” in politics only to bounce back again but for the past six months virtually nothing has gone his way.

Last week it emerged that he had recalled Alastair Campbell, who stepped down more than two years ago, to his inner sanctum for advice. Campbell faced some tough tasks in his time as Blair’s spin doctor in chief but helping to steer his master’s legacy onto the statute books looks impossible even for him.

Consider education. On Thursday evening dozens of Labour backbenchers crowded into the Gladstone room in the Commons to hear party rebels attack the Kelly’s proposals for giving greater autonomy to schools. As Campbell squeezed his way into the rebel stronghold observers noted that it was not to spy for No 10 but to cheer on his long-time girlfriend, Fiona Millar, who had helped organise the meeting. So rabid is Millar in her support of the “comprehensive principle” that even friends describe her as “the Taliban”.

Inside the oak-panelled room the star turn was Lord Kinnock, the former Labour leader, who was openly criticising the prime minister for the first time. In a speech full of references to solidarity and socialism, and quotes from Gramsci, said he could not accept the “dreadful shattering of the school system . . .”

If there was ever a signal that the Blair era was coming to a close this was surely it — the return of the “Welsh windbag” looking and sounding almost exactly as he did 20 years ago. The only difference, quipped one observer, was that this time he was rallying the militants rather than purging them.

Yet the story of how the wheels have come off the new Labour wagon can not simply be put down to self-indulgent backbench revolt. Nor can the blame for the breakdown be placed at the door of No 10. Economists say that the real problem for Labour is that the chancellor’s “business model” is not working.

Brown had hoped to steer a middle course through market economics on the one hand and old-style public spending on the other. He would spend more on the public services as Labour governments had always done, but this time it would be married with reform to ensure the new investment would not be wasted.

But after eight years and tens of billions of pounds of taxpayers’ money, Britain’s public services are still beset with problems and certainly they have not been transformed. Worse, the nation’s productivity and competitiveness have faltered and with it our future economic prospects.

“As Britain squanders some of its post-Thatcher advantage . . . the two sides of the Channel are becoming much more similar again,” said an analyst with Bank of America last week. “Gordon Brown’s largesse is showing up.”

SPENDING on schools is a case in point. It has soared from £22.4 billion in 1997-98 to £35.4 billion in 2004-05.

Thanks to David Blunkett, Labour’s first education secretary, teachers are considerably better paid. The average teacher gets £32,000 a year. Maths and science teachers are likely to be on £40,000-plus. Head teachers in secondary schools crashed the £100,000 barrier a few years ago. Even primary school heads in London can now earn £70,000 a year, plus perks.

The government says hundreds of millions are also being spent on improving school buildings and building new schools. Ministers boast there are 40,000 more teachers and 100,000 more support assistants in classes.

The problem, however, is that for all this change, school performance has hardly altered. Last week’s exam league tables showed that almost 60% of 16-year-olds fail to get even a C grade in maths and English at GCSE. In 1997, 45% of 16-year-olds managed five GCSEs at grades A* to C. Last year the proportion was up at nearly 54%, but the figures were boosted by giving vocational qualifications GCSE equivalence.

The government’s own spending watchdog, the National Audit Office, has also produced evidence of ministers’ failure. Its latest report, published two weeks ago, pointed out that there are still about 1m children in schools that do not provide a satisfactory education. “We estimate that around 980,000 pupils (13% of the total in state schools) are, in 2005, receiving an unsatisfactory education,” the report said.

Even Blair’s new city academies programme appears to be faltering. Despite costing an average of £27m each to build, the performance of several of the shiny new schools has been savaged by inspectors. Last week the £31m Bexley business academy in south London was judged “inadequate” by inspectors from the Office for Standards in Education who cited poor teaching standards, ill discipline and low exam results as key problems. They issued the school with a “notice to improve”. Blair meanwhile reiterated his plans to create 200 academies by 2010.

Other expensive educational initiatives have fared little better. Ministers were recently told by the National Audit Office that there was not much to show for £1 billion spent on schemes to tackle truancy and poor behaviour in schools. Despite this vast expenditure, truancy rates in school in England and Wales are still increasing.

WITHIN the NHS things are little better. Six years ago this month, Blair gave a Sunday morning interview to Sir David Frost. The NHS was under pressure as a result of a winter flu crisis and Blair had to be seen to act.

From the comfort of Frost’s sofa he announced that the government would dramatically increase health spending in Britain. It would grow from just over 6% of gross domestic product to the EU average of more than 8%, he said.

Brown, while initially angered by Blair’s leaking of what he saw as his big announcement, duly obliged and taxes were raised so billions of pounds in new investment could be poured into the NHS.

Last week details emerged of a Treasury presentation on the consequences of all this largesse. Just as with schools, much of the extra money had gone into salaries rather than improved services, the report showed. Britain’s GPs, nurses and consultants had become the best paid in Europe.

Research from the King’s Fund, an independent health watchdog, shows that 59% of the extra money pumped into the NHS since 2001 — the point at which the taps where turned on — has gone on staff pay. Consultants and GPs have had salary increases worth up to 50% over three years, with GPs now earning more than £100,000 a year on average. Nurses have also had substantial increases.

The leaked PowerPoint presentation showed that the NHS can no longer expect funding increases on anything like the current scale and must now concentrate on greater efficiency and value for money. That may be easier said than done.Figures compiled by the think tank Reform show that NHS productivity is still falling by at least 1% a year. No fewer than a quarter of NHS trusts are now in financial deficit.

This may sound academic but the impact on patients is all too real. Last November Mike Collins, a former member of the Labour party, was denied the same sort of heart operation that Blair received on the NHS a year before.

The 55-year-old accountancy lecturer from Abingdon, Oxfordshire, was told he was no longer eligible for the treatment. It was cancelled because of a financial crisis at his local hospital. Like dozens of others with irregular heartbeats who were being treated by the Oxford Radcliffe Hospitals NHS Trust, he was told the eligibility criteria for the operation had been changed. That policy was reversed by the hospital only last week.

Collins, who had planned to take out a £10,000 loan to pay for the treatment privately, felt badly let down. “My contract with the NHS, where I pay for it in years of taxes so that it is there for me when I need it, had been broken,” he said.

THROUGH more than eight years in office Blair and Brown have insisted that they were building a strong, enterprise-friendly economy, capable of generating the wealth needed to pay for the huge increase in spending on public services.

Voters have, for the most part, believed them. Some have always been sceptical about the merits of public spending but so long as Labour’s dynamic duo kept the economy ticking along they have not thought it worth rocking the boat.

Brown knows that the economy has been central to new Labour’s electoral success and has claimed that Britain was becoming “an increasingly successful leader of the global economy”.

That, however, is a claim that is becoming harder and harder to justify. Figures last week showed that unemployment, measured by the traditional claimant count, rose in December for the 11th month in a row. The government’s favoured jobless measure, based on the official Labour Force Survey, jumped by 111,000 in the latest three months to more than 1.5m. After falling consistently since Britain emerged from recession in the early 1990s, the spectre of lengthening dole queues has returned.

“Perhaps the most depressing feature of the latest figures is the sharp rise in unemployment to above 1.5m,” said John Philpott, chief economist at the Chartered Institute of Personnel and Development. “When combined with the number of economically inactive jobless people who say that they want a job this raises the total number of people who want to work above 3.5m.”

Growth in the economy slowed sharply last year to just 1.7% and the public sector jobs boom is fading. But the biggest reason for unemployment rising is that Britain’s businesses have become hamstrung by high taxes, red tape and a government-inspired pensions crisis.

“This gradual change in labour market laws that we’ve seen is going to lead to big inflexibilities in the economy,” said Richard Jeffrey, head of research at the City firm Bridgewell Securities. “It is inhibiting our ability to compete.”

The consequences of the government’s extravagance on spending, and the accompanying increase in the tax burden, are coming home to roost. A decade ago, the tax burden in Britain was decisively lower than in Germany. Measured as a share of gross domestic product, it was — at 38% — close to the average of the generally more successful English-speaking “Anglo-Saxon” economies, and within sight of low-tax America.

But this year, says the Paris-based Organisation for Economic Co-operation and Development (OECD), Britain’s tax burden will be 42.4%, higher than Germany’s 42.1% and well above America, which has come down to 32.7%.

Holger Schmieding of Bank of America, who highlighted the figures in a report last week, said Britain was becoming more like the slow-growing economies of Europe. “For 2006, the OECD expects the German government spending share to fall within striking distance of the UK share. For 2007, the OECD even sees German government expenditure, 45% of GDP, below that of the UK’s 45.7%,” he said.

Sir Digby Jones, the CBI director-general, citing a £50 billion increase in the business tax burden, has repeatedly warned Blair and Brown of the dangers of making Britain uncompetitive.

But such warnings have fallen on deaf ears, with damaging consequences. “There is a lot more talk from members that companies will go elsewhere,” said a CBI source. “More and more people are making plans to do that.”

That’s not the only problem. There was near-meltdown in Britain’s market for gilts — government bonds — last week. Company pension schemes, hit hard by the £5 billion annual tax raid that Brown instituted shortly after Labour took office in 1997, are now being forced by the pensions regulator to buy “safe” investments. These include index-linked bonds, protected against inflation. But last week the return on these bonds, after inflation, slumped below 0.4% — a fraction of what pension schemes need to meet their liabilities.

The best measure of a country’s long-term prosperity is the growth in productivity — output per worker, or output per hour. In his first budget more than eight years ago Brown set out a “productivity agenda”, aimed at closing the gap between Britain and competitor countries. But British workers still produce substantially less every hour than their French, German and American counterparts.

Productivity growth has slowed sharply since 2001, when Blair and Brown turned on the spending taps. Public sector productivity has been falling for the past four years, dragging down the overall figures. The latest figures show output per worker in Britain up by a paltry 0.4% on a year earlier. Measured on a per-hour basis, there was no increase at all.

Tomorrow, David Cameron will launch his final policy review. The new Tory leader, alongside George Osborne, the shadow chancellor, will announce a review of policies to improve Britain’s competitiveness, under the chairmanship of Simon Wolfson, who runs Next, the fashion retailer.

The Tories have had a tough time facing Brown since 1997, and successive shadow chancellors have fallen. But with the Blair-Brown experiment on public services failing, Britain’s economy shackled by the same high taxes and red tape that have held back Europe and productivity struggling, it is the chancellor who is now on the defensive.

The Taxpayers’ Alliance, which has been carefully analysing polling on tax and public services, says the tide of popular opinion is turning. “People’s experience with the NHS and schools means that it’s becoming less credible to claim higher taxes mean better public services,” said James Frayne, its campaign director. “Also, people are taking on board all these stories about politicians wasting money.”

When the Tories do eventually come up with an alternative, voters may at last be ready to listen.

Additional reporting: David Cracknell, Geraldine Hackett, Sarah-Kate Templeton and Yuba Bessaoud