Politics - Robert Peston locates Labour's cancer

Unless Blair averts the looming public services spending crisis at home, his achievements on the wor

The formula that has determined British politics since 1994, that Tony Blair in the ascendant equals Labour in the ascendant, no longer holds.

The Prime Minister may look out of sorts, such that his friends tell me they are anxious about him. But he has had a wonderful time since the general election, manifesting his brilliant talent for spotting and milking the main chance: he is the future of the European Union, the third member of the Bono/Geldof supergroup that is doing it all for Africa, and the crusader against CO2.

None of this is, of itself, bad for the governing party. On the margin, the plausible conceit that the UK once again counts for something internationally might actually be good for Labour - although I suspect most of us are prouder of the good kicking that the old gits from The Who and Pink Floyd gave on Saturday to the young pretenders of all nations.

Yet global breakthroughs will count for nothing come the next election, if Blair and Gordon Brown fail to get to grips with a looming crisis over spending on schools, hospitals, rail and the rest of the UK's still-not-quite-gleaming infrastructure.

To elucidate, the rate of public sector investment will have to be cut back sharply within the next few years if the government is to avoid breaching its self-imposed rule that national debt should not exceed 40 per cent of gross domestic product. There's no space here to rehearse whether it is a sensible limit. There are arguments for and against. However, breaching the threshold or cheating to avoid a breach by raising the threshold are no-nos. Labour's economic credibility would be shot to pieces in either case - and it's that credibility that has kept it in office for so long.

So what the Treasury ought to do, and what it is thinking of doing, is conduct a fundamental review of all public spending, especially investment plans, before reallocating scarce resources from lesser priorities to more important ones.

Such an evaluation would make sense in any event, as there has been no root-and-branch probe of spending since 1997-98. There have been reviews every couple of years since then, but the last one to be styled as "comprehensive" - in which all departments were instructed to assess each and every line of spending - took place eight years ago. In the explosion of public spending that came later, lots of gratuitous projects were funded. That is what happens to any institution with bulging pockets.

All organisations need to take stock periodically. The optimal moment for a government to do that is shortly after an election victory: a thoroughgoing assessment would lead to ministerial rows and back-bench revolts, which are less damaging if they happen early in the life of a parliament. There is no better time than now - although there would not necessarily be time to carry out the investigation by July next year, which is when the conventional two-yearly expenditure review should be completed (so, if it happens, it may run to July 2007).

Why hasn't a new "comprehensive" spending review been announced? Well, the inertia stems, in part, from Blair's decision to pre-announce his resignation without putting a precise date on his departure. In so doing, Blair has severed the link between his own prospects and Labour's: his reputation is no longer inextricably linked to the party's. Blair's future earning power and reputation are dependent on his performances on international platforms such as the G8 and the EU. It is of little consequence to him whether or not Labour wins in 2009 - so why on earth would he put himself through the hell of ministerial wrangles over public spending?

In any other circumstances, the Chancellor would simply drive through the spending review irrespective of complacency in 10 Downing Street. But there is unpropitious history here. Back in the early 1990s, when he was shadow chancellor, it was his determination to end Labour's profligate spending ambitions that cost Brown his standing as Labour's leader-in-waiting - and handed the leadership to Blair. At a moment when, second time around, he is almost a shoo-in as Labour's next leader, he won't be keen to alienate the party's electoral college of members, MPs and trade unionists by torching public projects.

So Brown is once again being forced to choose, between personal ambition and his convictions about what is in the fundamental interest of his party. And I'm surprised, given that dilemma, that the stress is not showing on him.

By saying that he has fought his last election campaign, Blair has engineered a situation in which neither his interests nor those of his Chancellor are directly aligned with the interests of their party. He has created a cancer that will destroy Labour unless it is cut out - and soon.

Robert Peston is City editor of the Sunday Telegraph and author of Brown's Britain. This is the latest in a series of political columns by guest writers