Depending on which version of the new Labour tragicomedy you sign up to, the government is either ripping itself apart, with various younger members of the cabinet feverishly jostling to replace Gordon Brown as leader after his ultimate demise, or, in a separate but no less gruesome scenario, ministers are calmly allowing the Prime Minister to slide to defeat before embarking on the slow road to recovery.

Elements of both are true. With the outlook so bleak, ambitious ministers, with a long career in politics to contemplate, can be forgiven for preparing for a future without Brown. On the other hand, there are no immediate plans for a leadership challenge and, as a result, a certain degree of drift has inevitably set in.

So here we have it. A circle of increasingly isolated Brown allies and cheerleaders continues to believe the Prime Minister can pull it off in time for the next election. The cabinet and most of the Parliamentary Labour Party remain remarkably loyal, considering the scale of the slide in the polls. A handful of restive former ministers, nostalgic for the high days of Blairism, continue to cause trouble, while backbenchers on slim majorities have begun surveying for prospects in the political wilderness.

A sense of the state of government nerves can be found in the reaction to an article in the June issue of Prospect magazine, written by the former No 10 speechwriter Phil Collins and Richard Reeves, a biographer of the liberal philosopher John Stuart Mill and contributor to the New Statesman.

Collins and Reeves argue that the Labour Party must reject its statist instincts and embrace liberalism, or face oblivion. The dividing line is no longer between left and right, but between liberal and authoritarian, something that the Liberal Democrats and the Conservatives have begun to grasp, but Labour has not.

The thoughtful essay was dismissed by Downing Street as an act of gross treachery. The Work and Pensions Secretary, James Purnell, for whom Collins was doing some contract work, was told to sack the speechwriter. His refusal fuelled further stories about cabinet-level splits and Purnell's leadership ambitions. Make no mistake, Collins is hated by some people around Brown, but the reaction was out of all proportion to the offence. (Indeed, I understand that once the Prime Minister's fury had subsided, and he found time to read the article, he decided to hold out the olive branch to Collins and has invited him to No 10 to discuss his ideas.)

Conventional wisdom now traces the decline in Labour fortunes to the aftermath of "the election that never was" in October 2007. But some in the party saw the warning signs long before. The following words, for instance, come from a pamphlet called New Labour: Rebuilding the Coalition, published for Labour's 2006 conference. "At a time when we are in danger of talking only to ourselves, we need to show that we are motivated by the problems that people face in their own lives.

"We need to describe those problems clearly and to provide an explanation that makes sense. We need to show that we can tackle those problems because we share, with voters, a set of values and beliefs of how Britain could and should be. We need to regain our belief that individual aspiration and opportunity can best be met in a society that also promotes . . . fairness and the common good." The pamphlet, which amoun ted to a mini-manifesto, was co-authored by a group of 12 MPs led by John Denham, and included Joan Ruddock, Angela Eagle and Martin Salter. It provided a sound and sobering analysis of the situation facing Labour long before the present crisis. It argued that Labour should forget tailoring messages to individual niche groups in society based on focus-group evidence. It should also avoid the temptation of chasing the tiny number of centre-ground voters in marginal constituencies. Both strategies have been adopted under Brown, with disastrous consequences.

Denham's appointment as Secretary of State at the newly created Department for Innovation, Universities and Skills in Brown's first cabinet was an important symbolic statement. Denham famously resigned from the Blair government in 2003 over his opposition to the war in Iraq, just at the time when he was being tipped for promotion to a cabinet post. Until that point he had been a loyal new Labour crusader, both at the Department of Health and the Home Office. He was a committed moderniser who backed NHS reform and the "Respect" agenda. In his post-Iraq role as chair of the Commons home affairs select committee he remained largely supportive of the government. The committee's June 2005 report on the much-maligned antisocial behaviour orders, for example, gave Asbos a cautious thumbs-up.

Real New Labour

But around the same time, Denham and a few like-minded individuals were already developing a dissident vision for the future of the party, which the New Statesman dubbed "Real New Labour". While attention was focused on the future of Tony Blair and the question of the succession, many on the left of the party hoped that Gordon Brown would show his true progressive colours once inside No 10 Downing Street. Denham was far more sanguine, believing on the evidence of detailed research with his constituents in Southampton that many still believed life had dealt them an unfair hand despite the improvements in health and education made possible by the Labour government's investment in public services. This led him to the view that Labour was at risk of once again losing constituencies such as his in the south of England, a theme to which he returned in a Fabian Society lecture just last month.

To my knowledge, John Denham has no leadership ambitions and has certainly not been plotting to depose Brown. In his year at Innovation, Universities and Skills, he has annoyed some higher education institutions by shifting funding from people taking second degrees to provide more money for first-time students. At the same time, he has increased the number of students eligible for maintenance grants. In short, he got on with his job.

Denham's analysis of the Labour Party's predicament has been consistently correct, but the party leadership is running out of time to take note. If it waits much longer, Denham himself will be swept from his Southampton constituency, along with dozens of other Labour MPs in the south of England.