I AM A BIG FAN of Charles Clarke, but he has got it slightly wrong. The problem with the Government at the moment is not that Tony Blair has lost his sense of purpose and direction, but that the Labour Party has rediscovered its sense of purpose and direction. And it is at odds with Mr Blair’s. The Prime Minister is having to move in ever decreasing circles, like one of those demented wild cats in a small cage, unable to go where he wants.

In each direction that the Prime Minister might travel, there is a cabal of MPs, former ministers and often the Chancellor blocking his way. In an article in The Guardian yesterday, Mr Blair set out a totally clear sense of direction: more competition and greater diversity of provision in the public sector, greater choice for consumers, payment by results, more individualised budgets (where you are given your own budget to control rather than having a public sector institution decide how to spend it for you). All completely clear and utterly unachievable: the party won’t wear it.

As to a sense of purpose, the Prime Minister effectively rolled up his sleeves and invited his critics in The Guardian and the Labour Party, who have been talking passionately about the need for “renewal”, and none more passionately than Gordon Brown, to bring it on. Where, he asked, is their viable alternative programme for government? Let’s debate it openly, to ensure Labour is in the right place to win another election: “The time for coded references and implied critiques is gone . . . If there’s a better idea, let’s hear it.”

Mr Blair knows what he wants to do next. He also knows that he cannot do it. He has come to realise too late what he needed to do to have any hope of transforming public services in the way he envisaged. Among the next moves his advisers in No 10 discuss are a massive extension of individualised budgets, a degree of upfront charges in the health service, and allowing private providers to run schools and make a profit from doing so. But they recognise that Mr Blair has reached the limit of what he can get through the House of Commons. “It would be good if Cameron finished the job for us,” one said to me the other week. The adviser was talking about schools reform, and rueing the shortcomings of the education Bill, but it could as easily apply to other areas as well.

I am not suggesting that the Prime Minister would prefer to see David Cameron in No 10 rather than Mr Brown; just that some of his less Labourite aides could live with it. Assuming as they do that the inexperienced Mr Cameron would be turfed out five years later, some see a potential opportunity to “renew” Labour while out of office and find a more Blairite successor to Mr Brown.

Most of the party in government, however, do want to see Labour renew itself and stay in office, with the Chancellor at the helm if he proves that he can do it. In that sense Mr Clarke’s intervention yesterday is as much a challenge to the Chancellor as it is to the Prime Minister. The former Home Secretary wants Mr Blair to recover his “reforming leadership and style” if he is able, but he makes clear that there is a challenge here for Mr Brown as well: “Gordon also needs that sense of leadership and direction about where the party is going and how it is moving forward.”

Or as one Blairite put it to me last week: “I never want to hear another speech from Tony about public sector reform.” And as a capable, centrist but worried minister said: “I’m sure I can work in a Brown government — whatever that is. None of us has any idea what he will be.” The whole Government has a feeling of being stuck with no clear sense of direction from either of them.

This sense of being rudderless is the fault of both Mr Blair and Mr Brown, and it is bigger than the question of which of them leads the party. The Prime Minister might know where he would like to go, and the Chancellor might know where he would block him — no more competition in the public sector, no individualised budgets, no private firms running our schools — but neither of them is developing the new themes that the younger, abler, next generation of ministers wants to see.

These thoughtful Labourites, not so tainted by the disputes over Mr Brown and Mr Blair and the extent of public sector reform, talk about the emergence of two countries: one in the North where public services are still the main issue (as they might well be in areas where a quarter of the workforce is employed by them), and one in the South where people are afraid of immigration, concerned about racial issues, unable to afford houses to live in and threatened by the insecurities brought by globalisation.

These ministers want to talk about race and equality; about reaching out to the bottom 15 per cent who are always left behind; about reconnecting the two Britains they see emerging. If that sounds vague, it’s because it is: these are debates that barely dare speak their name, as nobody up front is leading them. But set a clear new direction, with new themes and a new script, and not only the ministers but the rest of the grumbling party will follow.

Do not make the mistake, then, of reading Mr Clarke’s intervention as some sort of assault on the Prime Minister’s fiefdom in the interests of the Chancellor, or as a job application to Mr Brown, or as mere sour grapes. It is bigger than that: throwing down the gauntlet to both Mr Blair and Mr Brown to prove that they can be the next generation as well as the last.

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