'To most, Brown is a triumphant success. But in his own terms, he has failed '

The election issue of the week - Has Labour really done as well on the economy as its leaders boast?

The day MG Rover finally imploded could have been even worse for Labour. The Bank of England's Monetary Policy Committee was meeting and, if it had raised interest rates, we would have had a rise in mortgages, too. Fortunately, the committee kept interest rates unchanged.

That's not all Labour has to thank it for. It is responsible for the government's most durable success: macroeconomic stability. Gordon Brown's claims to have abolished "boom and bust" are not just hype. The economy still cycles, but the ride has been much smoother over the past eight years. This is partly because Brown handed over to the Bank the power, previously held by the Treasury, to set interest rates, while also setting it a clear inflation target. It is partly because, at the same time, he committed to fairly demanding fiscal rules, including the "golden rule" that, over the economic cycle, the state can borrow only for investment.

The strategy has worked. Since Labour came to power, economic growth has averaged 2.4 per cent a year - with much less volatility than in the past. Even as unemployment has dropped to a 29-year low, prices have been so subdued that Brown lowered the target from 2.5 to 2 per cent during Labour's second term.

These achievements, when contrasted with the shambles of Black Wednesday, have brought about one of the most important transformations of the modern political age: Labour is now perceived as the party of competent economic management. The Tories appear to have given up the fight, using their manifesto to push "wedge" social issues, such as immigration and crime, rather than try to outscore Labour on the economic charts. The Liberal Democrats' spending plans unravelled under questioning from a single Labour MP, Liam Byrne, who pointed out that a 50 per cent top rate of tax would raise less than they thought.

Before the 1997 election, Labour committed to Tory spending plans (described by the then chancellor, Kenneth Clarke, as "eye-wateringly tight") for two years. But Labour met its pledge. Now, the Conservatives have committed to Labour's spending plans until 2008, and they include hefty increases for health and education. This is a true Labour victory. Just as the postwar Tories had to live with Hugh Gaitskell's Keynesianism - the so-called Butskellite consensus - so today's have to live with Brown's commitment to public service investment. Under Labour's plans, the tax take will be 40.4 per cent of GDP by 2007-2008; under the Tories, it will be dramatically lower at, er, 40.1 per cent. If Oliver Letwin were to enter No 11, he would be pursuing "Brownwinism".

The restraint of the first term gave Labour permission to spend in the second. And spend it did: up by 1.6 per cent a year in the first term, spending increases have averaged 4.4 per cent since 2001. From a macroeconomic point of view, the timing has been perfect. The state spending tap was turned on just as private sector activity was softening. Not, perish the thought, demand management - a cuss phrase in new Labour circles - but still effective.

Now, however, the nation's coffers are emptying rapidly. Tax revenues are down, and the un-British surpluses of Labour's first term have been replaced by a more typical pattern of deficits. The chancellor (whoever that is) will have to raise taxes after the election. And by "locking in" spending increases on education and health, Labour has given itself little room for manoeuvre in other areas. No 11 might be a less interesting and less agreeable place over the next few years.

The politics of Labour's econo-mic policies are straightforward. Brown has instituted Tory-ish mechanisms in monetary and fiscal policy, to provide a platform for Labour-style investment in the public services and for some redistribution. Some think this is as far as it goes: Polly Toynbee and David Walker, in their book Did Things Get Better?, write that "having purged itself of socialism, Labour was left with no overarching economic philosophy".

This is not true. Labour has a clear economic philosophy that is summed up by Brown's much-mocked 1994 phrase "post-neoclassical endogenous growth theory". (Even Brown said that, if he hadn't had a heavy cold, he probably would have edited the phrase out of the speech, written by his aide Ed Balls.) The theory is that nations - contrary to right-wing economists - have it in their power to raise their productive potential. By improving human capital (skills), infrastructure and innovation, they can boost productivity, and thus growth.

This is why Brown has obsessively emphasised the need to create a better climate for entrepreneurs, to increase the amount of innovation - especially in science and technology - and to tackle the long-standing skills deficit. But here, the verdict is harsher. The productivity needle has not shifted. The gap between us and our competitors in output per hour has not narrowed. For all the tax breaks for small firms, skills initiatives and research and development incentives, the underlying productivity of the economy has grown at the same pace as during the Tory years. Once again, Labour's business manifesto will promise to "remove barriers to enterprise; incentivise business investment; and make Britain a world leader in science". These unchanged goals are an admission of failure. Although the Chancellor has succeeded triumphantly in most people's terms, he has not succeeded in his own.

The lesson is not that the new economic philosophy is wrong, but that it has not yet been properly tried out. What needs most urgent attention is the skills deficit in the existing workforce - but this has been a low priority, perhaps partly because it does nothing for Middle England. The theory that economic stability would allow investments in economic potential may be right - but so far Labour has tried only the first half of the proposition.

The upside is that the Tories have been made to sign up to Labour's spending plans. The Brown strategy of painfully restoring both the party's credentials and public finances to put real money into the public services has been a stunning strategic success. But, though Labour has proved itself to be a safe pair of hands for the economy, it has yet to show that it can mould it into a better shape.