Mystic Mart

I've just been re-reading my predications for 2008. How do you think I did?

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I usually have a rule not to make political predictions but I made an exception for last year's Christmas issue:

The New Statesman does not employ an astrologer and the usual rule of thumb is that political predictions are as useful as a handful of homoeopathic sugar-pills. But this year we have been persuaded to indulge in journalistic crystal-ball gazing, because it looks set to be one heck of a 12 months. By the end of 2008 we will have a good idea whether this government is in any state to win an unprecedented fourth election, or whether the current climate of wintry gloom will prove deadly. Much will depend on whether the Conservatives (or, indeed, the Liberal Democrats) build themselves into a credible force.

Almost exactly a year ago, Tony Blair received a festive visit from Scotland Yard to question him about the "cash for honours" affair, in which campaign payments for the 2005 election were hidden as loans. One near certainty at the time was that Gordon Brown would succeed Blair during 2007, but no one could have predicted that the new Prime Minister would himself be engulfed by a police probe into secret donations. There is nothing more corrosive to trust in politicians than the suggestion of dirty money. The Brown administration is wise to this. Cross-party talks on funding, suspended in October after just five meetings, will have to restart, so look out for a compromise deal within weeks.

Apologies for reheating a prediction from last year's NS Christmas special (just goes to show how tricky soothsaying can be): "It is likely that the first stories about a Lib Dem-Conservative electoral pact will emerge in 2007," we said. There were rumours of talks about talks, but nothing substantial materialised. The trouble for the Tories was that Menzies Campbell was never the man to make the deal, because of a historical loyalty to his old friend Brown. No such scruples need bother the new Lib Dem leader. The Tories will argue that in the event of a hung parliament, the third party will have a moral obligation to opt for a change of government.

During the series of crises that followed the "election that never was", Brown has consoled himself with the plaudits he received for his reaction to early events in his premiership: the failed terror attacks, the floods and foot-and- mouth. Sir Michael Pitt's independent report into ministers' response to the floods will provide the first assessment of the new administration in the face of a crisis. Anything negative in the report will be seized on by Brown's enemies to suggest that the honeymoon was all hype.

One of Brown's first acts as PM, in order to establish his brand, was to set up a series of reviews of Blairite policies about which he had always been less than convinced: supercasinos, 24-hour licensing and the downgrading of cannabis classification. The first of these will be published in January and the last in April. The announcement of the reviews allowed Brown to represent himself as a breath of fresh air sweeping away the excesses of the Blair era. This was the very essence of Brownite new puritanism: designed to be equally attractive to the Daily Mail and core Labour supporters.

But the real test will come when Brown is asked to reveal what he really thinks. Will he actually take on the drinks and gambling in dustries? Will he reverse the downgrading of cannabis and risk boosting the prison population still further? An initial analysis of his decision-making processes suggests that he takes all the available advice he is given, goes into a period of intense self-examination, hesitates and then plumps for the compromise option. This showed itself most clearly over the issue of extending the period that terror suspects can be held without trial from 28 days. Blair and the police had originally wanted 90 days. The outgoing attorney general, the serving Director of Public Prosecutions and the Tories said 28 days was sufficient. So Brown opted for an arbitrary 42 days, guaranteeing his first backbench rebellion of the New Year.

How would that process of consultative compromise work for other policies? Perhaps Brown could announce "midicasinos" (not quite large enough to merit the title "super", but still able to rake in a tidy profit for the gambling industry and provide a modicum of regeneration). With licensing, maybe he could cut the new "Continental" drinking culture to a mere 20 hours, with bars closing between four and eight in the morning. Only on cannabis is compromise more difficult. The increasing strength of new forms of cannabis and new evidence of a connection to psychotic illness suggest a stricter approach is inevitable. But the prisons are already full of drugs offenders and Brown will not wish to add to the problem.

Feel the squeeze

Hovering over everything Brown does in 2008 will be grave worries about the economy. Even if he takes up Vincent Cable's suggestion of nationalising Northern Rock, the fallout from the collapse of the north-east bank will continue to plague the Treasury well into the New Year.

A sustained fall in house prices would eat into the reputation for economic confidence Brown built up while he was chancellor. Every government department will feel the squeeze from the settlement announced in the Comprehensive Spending Review. This will prove particularly difficult for Des Browne at Defence, who has already come under sustained fire from retired generals. But here, perhaps, is one cause for cautious optimism. The year ahead could bring the final removal of British troops from Iraq, coupled with a strengthened presence in Afghani stan, which ministers still believe they can turn into a good news story.

After the spring, the Labour Party will be thrown into a London mayoral election in which Ken Livingstone faces a real challenge for the first time. Boris Johnson is no political heavyweight, but he is as recognisable as Ken is, and equally at ease with the media. The contest will have serious implications nationally if Livingstone loses. The mayor has made it his business to cultivate better links with Brown and his circle. The green light for the Crossrail deal to link east and west London is seen as the early fruit of improved relations.

But Brown must be careful not to hitch himself too closely to Livingstone. The London Evening Standard has already published a series of damaging articles about the mayor's race adviser, Lee Jasper. The intense scrutiny of Livingstone's close circle will continue until the poll on 1 May. Brown has been burned by the row over David Abrahams's donations and rightly criticised for not making it his business to be better informed of the party's funding arrangements. He will do well to interrogate the Livingstone campaign to avoid any hidden surprises.

The civil liberties debate will rage, and we will follow developments closely. Growing public concern over plans to introduce identity cards intensified after the loss of 25 million child benefit records. This still has the capacity to end up as Labour's poll tax, and ministers should use the New Year to come up with an ingenious escape route (the vast expense and the fact that Whitehall civil servants cannot be trusted with our personal information should do the trick).

The treatment of refugees, as Alice O'Keeffe reports on page 58, should already be a national scandal. Developing a policy to allow failed asylum-seekers to fall into destitution as a de terrent to others should not be countenanced by a prime minister who claims to be guided by a moral compass. However, any change of policy in this area seems unlikely.

Meanwhile, we will follow with interest the trial of Derek Pasquill, the Foreign Office civil servant accused of leaking confidential documents to the New Statesman and the Observer concerning policy on radical Islam and "extraordinary rendition" - the de facto kidnapping of terrorism suspects for interrogation. As a result of the disclosures, the government's line on both issues shifted considerably; yet ministers still sanctioned shooting the messenger. It is our contention that this is a political trial, designed to save ministerial embarrassment. One safe prediction for 2008 is that this magazine will lead the campaign to drop the Pasquill prosecution.