Politics - John Kampfner on Downing Street after Campbell

Whitehall is bewildered: the row over the BBC became so all-consuming this summer that Downing Stree

As Lord Hutton concludes the first stage of his investigation into the tragic state of Britain's political process, Tony Blair and his people are taking stock. The inquiry has delved deep. It has exposed malfeasance at many levels. The testimony of Dr David Kelly's widow was harrowing but it was not as devastating politically as it could have been. The Prime Minister got off lightly when he entered the dock, but each day brings new twists. Now, a central figure in the Defence Intelligence Staff says Kelly was expressing the concerns of fellow government scientists that the threat posed by Iraq had been "over-egged".

The final report will prove very difficult for the Ministry of Defence and Geoff Hoon, the man supposed to be leading it. Downing Street is already being shaken up. Blair will be damaged but not done for. Yet his biggest problem may not be a crisis of trust, important though that is. What has most alarmed ministers, civil servants and MPs alike - who have followed the summer's daily dramas with a mixture of fascination and horror - are the related questions of competence and confidence. Does a prime minister not have better things to do than to fixate on that day's headline in the London Evening Standard? We now know that for weeks, perhaps months, No 10 focused on the single issue of Andrew Gilligan to the exclusion of many important policy decisions.

In Whitehall, there is bewilderment. "This row became so all-consuming that the centre wasn't interested, wasn't able to do anything else," says one senior official involved. "And we thought this government was good at managing." So myopic did its collective vision become that all the way up to Blair's chief of staff, Jonathan Powell, it failed to see the elementary danger of communicating sensitive thoughts by e-mail - something you would have thought they had learned from the Jo Moore affair.

The obsessive streak ascribed to Alastair Campbell is also evident in Blair. When the PM told the inquiry that Gilligan's accusations were so serious that they would have merited his resignation, he demonstrated that he, like many around him, had forgotten that the real issue was why Britain went to war with Iraq, rather than a single allegation about a single dossier.

Blair's dependence on Campbell encouraged but did not create his media-centricity. That is why the new structures, announced on 3 September, will be so important. The interim report by the committee reviewing government communications, led by Bob Phillis, correctly spreads the blame for the lamentable state of relations between the government and journalists to both sides. Press officers, many of whom do a difficult job well, are in a state of despair. One recalled how he had been badgered all day by a BBC programme to "put up" a minister to defend the government's position. He was reluctant but, when he finally agreed, the minister was harangued on air for "spinning" on behalf of the government. Many of the criticisms about political journalism ring true. Carping about spin and indulging in cynicism are no substitutes for actually finding out what is going on, though that does not mean having to hang on the every word of the same spin-doctor who is then summarily denounced.

The creation of a powerful civil service arm for government communications - which had been sidelined by Campbell - and the appointment of a permanent secretary to oversee it should go some way to dealing with Blair's problem. The Phillis committee has pointed out, again correctly, that the problem is often not too much information but too little, and an approach that, rather than being too slick, is actually not professional enough.

Downing Street's new director of communications, David Hill, and his civil service counterpart have the Herculean task of restoring trust in the veracity of government information. Hill will be well advised to ring-fence his department from the rest of Downing Street, to persuade the Prime Minister that he should no longer moonlight as a newspaper sub-editor. The tendency is so ingrained that it will not be easy, especially if Blair continues to indulge in telephone counselling from Peter Mandelson and now Campbell himself.

Other significant changes are taking place in Downing Street. The promotion of Geoff Mulgan, the one-time wacky think-tanker, to take charge of both strategy and policy will make more of his skills. Away from the public eye, Mulgan has been managing a large team trying to develop long-term policies, too long term to be of immediate political value to the boss. His influence will now be more immediate. The secondment of Matthew Taylor, head of the Institute for Public Policy Research and a frequent NS contributor, to look after the next manifesto will bolster the operation. Andrew Adonis will be given a more specific brief to concentrate on public service reform, an issue that set him at loggerheads with Gordon Brown and other ministers. Again, communications have often been at the heart of the problem. Whatever the merits of the actual policies on public services, their presentation has been handled badly. A "left" case for tuition fees - that they could be seen as essentially redistributive - has not been made. And a case for foundation hospitals - that they might increase capacity in terms of beds and operations - has also been lost in the dispute about the creeping privatisation of the NHS.

One of the most pivotal players in the new set-up will be Pat McFadden, a Scotsman who is the only member of the current team to have worked for John Smith. A quiet but effective operator, he was underused in Blair's first administration and disappeared after the 2001 election to write. Baroness (Sally) Morgan was given the impossible task of handling relations with ministers, the unions and the party while she also replaced Anji Hunter as Blair's gatekeeper. A year later, McFadden answered an SOS to help Morgan. He has made his presence felt. Much of the government's macho posturing, with the cheap lines about public-sector workers, has been dropped. The deal struck on 2 September to create a public service forum with trade unions - a potentially significant conciliatory step - was largely McFadden's work. That will not prevent a rhetorical mauling at the TUC conference but, for all the talk of confrontation, there is finally some sensible co-operation taking place.

People around Blair accept that the balance of power has changed irreversibly. No longer will his people enjoy hegemony over the civil service, let alone over the party or Labour MPs. This year's party conference will be rough. There will be no Nelson Mandela, no Bill Clinton moment to rally the troops, only an exhortation to remain united against the still invisible danger of a Conservative victory at the next election. Every year, the prospect of conference defeats is talked up. Invariably, the anticipated rumpus fails to materialise, but this year it could.

But the conference also provides the PM with a chance to show some contrition for the first time - on his inability so far to make the case for public service reform but most importantly on Iraq. He could begin by acknowledging the failures of diplomacy that led to war, the exaggeration of the case for war, the absence of weapons of mass destruction, the chaos that has followed the war, and his government's role in Kelly's death.

Will Blair take the opportunity to start afresh, and would any journalist take him at his word? Both require a leap of faith that for a long time neither side has shown itself capable of.