So, how bad is it for Gordon Brown? The polls are obviously terrible, with one showing the biggest drop in a prime minister's approval rating since 1940, when Neville Chamberlain lost the nation's confidence after the German invasion of Norway. Since the March Budget the Conservatives have consistently polled above the 40 per cent mark needed to win power. In YouGov's latest respected snapshot, Labour was trailing 16 points behind the Tories, who scored 43 per cent - their most popular rating since before Black Wednesday. The voters, who gave Gordon Brown the benefit of considerable doubt when he took over, seem to have turned away.

The commentariat, even some of the friendlier columnists, are coming to a similar conclusion. The Commons rebellion over 42-day detention without trial for terror suspects is growing. Anger about the abolition of the 10p tax band is rising. Most worrying of all is the effect on the nerve and discipline of the Parliamentary Labour Party. Graham Stringer MP explained that "it's sorrow, more than anger, with Gordon". Ian Gibson MP described his Prime Minister as being "a bit like a scared rabbit in the headlights". An unnamed former cabinet minister chose to sum up the position thus: "We're f***ed." Some MPs have switched from plotting against Blair to plotting against Brown with barely a pause for breath. The Prime Minister may be the architect of his own misfortune, but the spinelessness of his MPs is still shocking.

The loyal Hazel Blears took to the airwaves to defend the PM as "a pretty serious person who thinks very deeply about decisions and is also a man of conviction". Few would challenge the first claim: but if anything Brown has been hobbled by lack of confidence. The paradox is that he almost certainly does have a vision of a more communitarian, more equal nation. But if this is Brown's real agenda, he seems to have been persuaded that it would alienate voters. Having tucked away his own moral compass, he appears directionless. It is difficult for him to appear as the friend of business, following the capital gains tax reforms which - on the upside - seem poised to push Digby Jones out of government. Yet it has also become harder for Brown to be seen as a staunch ally of the poor after the 10p tax band blunder. He has tacked on public service reform, trimmed on tax and triangulated on China.

It is nonsense, however, to suggest that he will be replaced before the next general election. Things might yet get better. The snazzy new communications team might get a grip. The PLP might find their cojones. Anxious voters might begin to worry about handing power to the sixth-form prefect duo of George Osborne and David Cameron. The downturn might be shallower than feared, and Brown credited as the one who kept his head. There is always a fight to be had.

But the only hope for Brown is to be Brown. He should launch a passionate, outright campaign for a fairer and more democratic Britain; rein in the Blairite marketisation of public services; raise taxes on inheritance and high incomes to fund more aggressive redistribution; and introduce much tougher regulation for the financial markets. He needs to persuade the voters that an unashamedly social-democratic government is the only one that can really be On Your Side. Even if he loses, at least he will do so on his own terms.

Bad news, good news

The hard truth, however, is that everything now has to go right for Brown - and Brown has to get everything right - to save Labour's chances. "We have to be thinking about opposition now," admitted one level-headed senior adviser, indicating that the smart money is not on a fourth term. In this case, the party would also be electing a new leader.

The bad news is that there is no superstar candidate, no Blair or Clinton, waiting in Labour's next generation. The good news is that this means the next leader will have to set out a compelling direction for Labour and its path to reconnection with the British people. The most likely contest would be between David Miliband and Ed Balls. This would present the party with a real choice, not only between two very different personalities, but between two distinct philosophies.

Balls has declared himself, on these pages, to be uncomfortable with the label "social democrat", because it reminds him of the treacherous SDP. He prefers the term "socialist", he said: "Socialism, as represented by the Labour Party, the Fabian Society, the Co-operative movement, is a tradition I can be proud of." Balls is Fabian to his fingertips. He is the guardian of the government's pledge to abolish child poverty. He may not have said "So what?" in response to Conservative claims that Labour had ratcheted up the tax burden, but it is the sort of thing he might say. Balls is a passionate advocate of Sure Start and a national strategy for play. Confronted with evidence that poor children are more likely to suffer death or injury in the home, his Fabian instinct was to put £18m into a fund for domestic safety equipment for low-income families.

Miliband's nascent philosophy has a different starting point. As a backbencher, he told an audience in Berlin that Labour "needed to reach back into the history of progressive thought in Britain to develop a 'liberal socialism'" and he argued for not only "regeneration of local government", but a wider agenda that would "include issues of ownership and control of local public services". By 2005 he was suggesting "liberal social democracy" as an alternative label, but the import was the same: power should go to patients, parents, local citizens.

He has been a consistent, if cautious, advocate of greater devolution to local government and an enthusiast for citizen-focused public service reforms. In an article in the Times a fortnight ago, Miliband insisted that a "successful ideology for the 21st century" would be built on "two rich intellectual traditions": state-focused social democracy and the "radical liberal" tradition, whose "goal was the freedom and flourishing of the individual".

Balls the Fabian socialist wants to use central power for progressive ends; Miliband the radical liberal thinks those ends require the devolution of power. This critical battle, not yet joined, would be for the very soul of the Labour Party.

Martin Bright is away