Knackered, but for what, exactly?

On the morning of 26 July, an exhausted cabinet will gather in the garden of Downing Street to be addressed by an exhausted Prime Minister on the ups and downs of their last year. As the government's annual report is partly an exercise in public relations, there will be many more ups than downs. Even so, the knackered leader will tell his knackered flock that they could do better. Delivery, delivery, delivery will be his message as he reflects on the past 12 months and prepares for the next with the cabinet reshuffle, which we are likely to see on the following day.

But delivery of what, exactly? Ministers rush around for 18 hours a day, and yet there is a sense that what comes out does not equate with the restless energy that goes in. This frustrating equation is epitomised by John Prescott and transport. No minister works harder, yet still there is a transport crisis. Prescott happens to be in the firing line at the moment, but he is by no means the only example. Frank Dobson has been one of the successes in government, but waiting times to see a doctor, let alone for an operation, remain desperately long. David Blunkett has pursued his "standards" agenda with a courageous relentlessness, and yet the talk among parents is about the appalling state of some schools and the anarchy that arises through the selective "structures", which the government has not addressed. More widely, there is a sense that, with Kosovo and Northern Ireland, Blair has taken his eye off the domestic agenda. The government is tired, with not enough to show for its exhaustion.

This has little to do with a failure of ministers to keep to their promises and much more to do with the nature of the promises that were made. The scale of the victory in 1997 and the novelty of the first Labour government for 18 years created a sense of expectation that was at odds with the programme on which the party was elected.

The drama of the landslide obscured the cautious policies that brought it about. Apart from constitutional reform, the changes promised were important, but pretty small. What is more, public spending was kept within the Tories' proposed limits for the first two years, a barrier that has only just been passed.

The block on spending was presented as an ideological decision at the time. It was no such thing. The move was a pre-election tactic designed to reassure the voters that Labour could be trusted with their money. The shadow Treasury team had no idea whether savings could be found within departmental budgets and, on the whole, ministers have uncovered little spare cash in office.

The additional money for schools, hospitals and transport will start to filter through this year, but more will have to be found to complement the modernising reforms.

I suspect it will be found. Gordon Brown is quite consciously being Denis Healey in reverse. Where Healey gave away money in his early years, only to take it back again when the next election approached, Brown has spare cash to dangle before the voters. Indeed Brown broke his own pledge by increasing spending on hospitals and schools before the two-year moratorium came to an end. The Tories did not complain of a U-turn then. Nor will they when he announces more money, especially for hospitals, in the run-up to the election. Pledges on spending can be broken, as long as income tax, the great British taboo, remains untouched.

The government's attitude to spending has determined its approach to policy- making as a whole. It has not rushed to spend money nor has it rushed to implement policy.

In advance of the election, Labour appeared to know what it was going to do in every area, but in many it did not have a clue. Now that many policy reviews have come to fruition at last, some ministers suggest privately that attempts to initiate policy are blocked by a cautious Downing Street. From Downing Street comes the occasional complaint that too many unworkable policies are coming forward, and it is these that are being blocked. Again, from the perspective both of the department and Downing Street, transport springs to mind. There are the seeds of tension here, but they do not explain a lurking sense of anticlimax as Blair delivers his second annual report.

Part of the early Blairite paradox came from the whiff of danger that accompanied the surface caution. Yet in the three big areas where a sense of fresh excitement was conveyed, albeit vaguely - Europe, welfare and electoral reform - the risk-taking paths have been avoided.

To take the first of the big three. In my view, it will be politically impossible for the government to risk an early referendum on the single currency in a second term. Significantly, the cautious stance on EMU is coming from the Treasury as much as Downing Street. One of the many myths surrounding the single currency debate is that Brown is much keener than Blair to sign up. Both are agreed that the debate in Britain needs to be forced on to the "Britain - in or out of Europe?" terrain. They both hope that this will be an election theme, rather than "Euro - in or out?".

Which brings me to the second myth. It has never been government policy to hold a referendum early in a second term. Ministers have promised to consider the option then, but no more than that. In my view, Blair and Brown both want to join the single currency, but the timing is utterly flexible.

I used to write that such complex issues had become matters for the land of milk and honey called the second term. Now I am not so sure. After all, that land is moving into view, and the terrain looks less benevolent on closer inspection.

Perhaps the third term will do the trick.