Question: There has been lots of talk about a possible second term Labour Government, how would you define the first term?

Michael Jacobs: I think the first term had two major priorities. One was to establish Labour as economically competent, a reputation which had largely eluded previous Labour governments. Both in its management of the macro economy - largely through its effective devolution to the Bank of England monetary policy committee - and in its handling of the public finances, the Government has I think succeeded in establishing itself as economically competent. This has had an important effect. Quite apart from providing jobs and healthy public finances (which have in turn funded higher public spending) it has given the Government greater room for manoeuvre in the future. It has earned a reasonable degree of trust in the financial markets, which puts a long term downward pressure on interest rates and gives it a bit of leeway in terms of spending and so on. In this sense it has set a valuable framework for the second term.

The second major priority and achievement of the first term is constitutional reform. Because it has all happened rather easily - I mean devolution to Wales and Scotland and to Northern Ireland, reform of the House of Lords, the incorporation of the Human Rights Act and so on - the significance of all this has been rather underestimated. The recent decision by the Scottish Executive (or as it now quite rightly calls itself, the Scottish Government) to introduce free personal as well as nursing care for the elderly is an indication that devolution is more radical than many people thought it might be - or in some cases hoped it would be. I think historically the first term will be remembered more for constitutional reform than for anything else.

There were two other areas which should have been priorities, were perhaps meant to be, but haven't really come to fruition. One was real improvement in public services. We haven't seen as much progress here as I am sure the Government would have liked - mainly in my view because of the freeze on spending in the first two years, but also because the Government has found it much more difficult and slow to reform public services than they expected. The fourth area was Europe, where I think the Prime Minister certainly has a vision - of Britain at the centre of Europe - but, because he has felt unable to hold the referendum on the Euro, has not managed to achieve this. We are not at the centre of Europe, and won't be so long as we are out of the Euro (for good or ill). And if anything the debate has slipped away from the Government.

Question: Labour has already committed itself to a massive spending programme which will extend into a second term. What isn't clear is how this extends to tax?

Michael Jacobs: Well the Government has in a sense been very lucky with tax, but it is not clear how far its luck will continue. Lucky in the sense that the public finances have been much healthier than even they imagined. Indeed we're not really quite sure why so much money has been coming in.

The Government had to get rid of the budget deficit when they first came in to office, so it was inevitable that taxes would rise. They believed that by promising not to raise income tax rates they would take the electoral sting out of this. For the first two years, by and large, this seemed to work, but it has now become obvious to people that other taxes have risen. The accusation of so-called 'stealth taxation' by the Tories has I think been quite effective - obviously this became most obvious with fuel duty increases. In the long term I don't think higher indirect taxation is politically sustainable. But in the short term the Government has probably got away with it. It is now in the fortunate position of having got its tax rises out of the way in the first three years of the government, without too much public opprobrium (though certainly some disgruntlement) and now has a lot of money to spend. Enough indeed to give some back in tax cuts in the March budget. Whether it would be wise to do so or not on any significant scale I think is an interesting question. But it certainly has lots of money. That's a good position to be in going in to an election.

The key question here however will arise in the second term. This is whether the money that has been allocated will prove enough. At the moment the Government has probably allocated sufficient amounts of money in its 2001-4 spending review - though of course most of it doesn't come on stream until April. At the moment many departments are finding it difficult to spend the money they have already been allocated - there is a limit to the amount of money you can give to public services in any particular time period. They won't necessarily be able to spend it wisely. But whether at the end of the three-year period, in around 2004, public services will have improved enough I think is a moot question.

There are huge demands on public services. We have become so used to having poorly functioning public services that I think most British people are barely aware of what a really good public service looks like. They get a glimpse of it when they go to Germany or Switzerland or France or Scandinavian countries or the Netherlands. The difference between those countries and the UK is largely the amount of money they've spent on them. Of course we can improve the management and the efficiency and so on in most areas of public services, but the sheer quantities of money that are given to them are absolutely vital. The European average tax take as a percentage of GDP is 41.5%; in the UK it is around 37%. That is the equivalent of £45 billion that the average European country is spending that we are not. £45 billion extra in public spending would make a great deal of difference to the quality of services we get.

So I think there will come an interesting moment in the middle of the second term in which the British public will look at public services and say - is this now good enough? and will probably answer no. At this point somebody will have to say to the British public that the reason public services are still not good enough is not because we are incompetent or there are lots of inefficient managers in the public sector; it is because they have not got enough money. And if we want to improve them further we may have to pay more in tax. That I think will become the central question of the second term. It will emerge about half way through when this current spending round is coming to an end.

Question: Isn't that a big danger for the government ?

Michael Jacobs: It's only a danger if the conclusion people draw from it is that the reason public services are still not good enough even after all this money is because the Government is incompetent. The crucial thing for the Government to do in the next three years is therefore to educate the public about what you get for your money. There is no such thing as a free lunch. The British cannot have brilliant public services and not pay the taxes that are required to fund them. Other countries don't do that and we can't expect to be different. What has got to happen is sufficient improvement over the next three years to make it clear that having more money does make a difference, but that there hasn't yet been enough money to make the services good enough. Then I think that argument may be winnable.

Question: In order to avoid the accusation that they are simply throwing money at the problem - what is the Government doing to ensure the money being spent on public services is being spent wisely?

Michael Jacobs: I think the government has thought about that very hard. One of the reasons that not enough progress has been made in the first term on improving public services is that the Government didn't at the beginning realise how difficult it would be: how much reform would be needed. I think they do know that now and I think the second term will see a continuation and stepping up of the pace of reform.

It is much easier to reform the public services when you are also giving them more money because managers and workers have the incentive then to improve. They don't feel they are just being beaten up by the Government saying they are not good enough, which I think has happened rather too much - notably among teachers. They have been told to shape up in all these ways, but there has been no money to actually make the improvements that they can see are needed. Now that the money is starting to flow I think it will be much easier to make reforms.

Question: Some ministers have talked about hypothecated or earmarked taxes for key areas like health and education and transport. The Lib Dems support it and say that in their manifesto there will be more of it. The CBI supports it. Do you expect to see it in Labour's manifesto?

Michael Jacobs: It is an interesting question this. The Fabian Society's Commission on Taxation and Citizenship, which reported at the end of last year, called for more use of earmarked taxes, including a new National Health Service Tax taken out of income tax. Some members of the Cabinet and junior ministers expressed support for it, and others have done so privately, but officially the Treasury remains opposed.

We need to be clear about what earmarking or hypothecation means. There are already a number of earmarked or hypothecated taxes or part taxes. Most of the Government's environmental taxes - for example, the climate change levy, the landfill levy, the aggregates levy which will be coming in next year - contain earmarked components for environmental spending. The Government's proposals that local authorities can levy congestion charges requires the money to be earmarked for transport spending. So the idea of earmarking is already happening. Whether it should be done for the big areas, for income tax or for VAT or other mainstream taxes, is a much more difficult question. On the one hand it would clearly 'connect' voters much better to their taxes, showing them exactly how much they are paying (and how much more they might need to pay) for major public services such as the NHS. This was our Commission on Taxation's primary concern. On the other it could lead simply to reduced spending on other less popular areas. The Commission discussed both sides of the argument in great detail. I think we need much more public debate about it - this was the point of the Commission's recommendation.

There are two different options on the table which I think are also important to distinguish here. One is the wholesale earmarking of a tax or part of a tax to a particular area of spending. This is what our Commission's National Health Service Tax would be. The other one is simply to earmark the increases in a tax. When the Lib Dems last time round said they put a penny on income tax for education, it was only the extra penny on the basic rate of income tax that was going to be earmarked, not the whole of the tax. That would be not as radical, but it would perhaps be a simpler way of starting the earmarking process. I think there is a very strong case for that: for saying that if you are going to increase a tax then you should identify what you are going to spend the extra spending on. I suspect that that proposal, if not the full earmarking one, may well surface in government policy in the second term.

Question: How open are the minds in Downing Street to this idea then?

Michael Jacobs: Well clearly tax is one of the issues that they are least wanting to talk about at the moment. It is a subject about which Labour is very sensitive and in a pre-election period understandably so. But I think quite a lot of innovation in this field is likely to emerge in the second term.

Question: As you mentioned before the first term was marked by radical constitutional reform. Should we expect further constitutional change in a possible second term?

Michael Jacobs: It would be disastrous if there wasn't. The House of Lords reform so far is not a settlement. It is a piece of unfinished business. A second chamber which is now almost entirely appointed has no more legitimacy in my view than the largely hereditary chamber that it has half replaced.

So far the Government's proposals for further reform, which are for a largely appointed chamber, I think fail the simple test of democratic legitimacy. I don't think that such a second chamber will do anything to enhance the democratic process or the legitimacy of government in general amongst the public. There has to be a majority elected element and I think the demand for that will emerge very strongly in the second term.

The perhaps less obvious bit of unfinished business is the government of England. This incidentally is another issue in which the Fabian Society has taken an active interest - we published a book last year called 'The English Question' which identified some of the problems of the governance of England that follow devolution to Scotland, Wales and Northern Ireland. There are two problems. One is that the House of Commons is now unbalanced. There are proportionately too many Scottish MPs, and there is the so-called 'West Lothian question' by which Scots can vote on English matters but not vice-versa. Both of those need to be sorted out. There is a problem of legitimacy. You could easily get a situation where a UK government is propped up by Scottish Labour MPs when England has voted against Labour. I don't think that will happen this time, but it is certainly possible some time in the future. The obvious immediate reform is a system under which English MPs vote on English matters.

Question: As the Conservatives are proposing?

Michael Jacobs: Indeed. I think that the proposal for an English parliament is a complete waste of time. I mean we already have an English Parliament. 85% of MPs represent English constituencies. What we need is a system within the UK Parliament that matches the powers available to Scottish and English MPs .

But more important in terms of governance is the fact that England is terribly overcentralised. We have a central government that controls nearly everything and local authorities who are not nearly powerful enough. I think the second term will see moves towards the decentralision of power in England.

Question: Even after the London Mayor?

Michael Jacobs: Yes. I don't think the London Mayor has proved the 'disaster' that New Labour thought it would be. Indeed Ken Livingstone has been largely invisible while he gets his strategies together - which is what he is doing at the moment, if anybody is wondering. And on the tube privatisation there are plenty of people in Labour (and indeed in the Government) who are delighted that he has won considerable concessions from Prescott.

There are two competing visions for the governance of England. One is a regional model, mainly championed by John Prescott; the other is the 'city mayors' model, championed by Tony Blair. I suspect for that reason that the mayor's model will win out - but one shouldn't underestimate the very strong regional pressures in the North of England. These are not often recognised in London. But whichever way it goes those debates will emerge very strongly I think in the second term.

Question: If those issues aren't addressed, do you detect a problem with rising English nationalist tensions?

Michael Jacobs: No, I don't think English nationalism is any kind of force at all. I get no sense that English people feel aggrieved by their governance; on the contrary I think they feel largely apathetic about it. I think that is a spectre conjured up by people who would like there to be an English national backlash. I don't see any signs of it myself.

Question: The first term Labour government was expected to have a strong appeal to women. In a recent Fabian pamphlet Harriet Harman called for the government to sharpen its appeal to women. There's talk of the women's unit merging into an anti-discrimination unit. Do you feel that the government's focus on women may get lost in a possible second term?

Michael Jacobs: I don't think it has really been there at all in the first term. And whether or not a particular unit of government is structured in one way or another I don't think is the central question. This is a very male dominated government. It's not worse than any previous government, but there were some expectations that it would be better. And Labour does have a problem. As the focus group research that we did with Harriet Harman and Deborah Mattinson in that pamphlet showed, women don't like male politicians in general - they think they are largely playing games, very egotistical. Labour is not perceived as much better than the Tories by many women.

I think that Labour does need to promote more women. There are some very talented women both in the government and on its fringes who ought to come in to government. I think it would be wholly to the good for Labour's position electorally - but more importantly for the development of policy and generally for public life, if more women came to the fore in Labour's ranks.

In terms of policy there is a major agenda here which is bubbling around on the edges of public debate but is not yet being taken up as a central theme - and it would be very interesting if this became part of Labour's manifesto. This is 'work-life balance': how we regulate the growing demands of the economy on people's time. So far it largely seems to be conducted in terms of women juggling work and childcare. But this is a shame, as it is in fact men who need to spend more time with their children at home, doing housework and so on. But the balance between work and family which nearly all women experience - the difficulties of managing those two roles, - is I think one of the things that could really emerge in the second term as a big issue.

Labour has published a green paper just recently setting various options for parental leave, which I think is the beginning of a serious attempt to address this problem. I think if the Government did bring in paid parental leave there would be a lot of women who would regard this as a very progressive move and would be more inclined to support Labour. Again this is something the Fabian Society has worked on.

Question: But the problem is that they don't want to regulate employers do they?

Michael Jacobs: That is precisely the problem. New Labour has been terribly anxious not to antagonise business and for historical reasons you can see exactly why, but at some point many of the things you want to do to make society better do conflict with anarrow view of business priorities.

The narrow view says we need every hour we can get out of our employees. The longer- term more enlightened view is that happy, unstressed employees are better employees, are more likely to stay with you. High stress levels and long hours make people leave businesses, which leads to higher recruitment costs, etc. So you can create a business case for a better work life balance, and the most progressive businesses are doing so. But that does mean facing down those elements of the business community that are only interested in a short term view of profitability and productivity. And in the end it means facing down the CBI which tends to represent those views rather than the views of its progressive members. The Government stood up to the CBI very successfully on the minimum wage and it could do so on working time.

Question: But does a possible second term mean more finger wagging or would it actually mean legislation ?

Michael Jacobs: I think it is very unlikely you could reduce working time entirely through voluntary mechanisms. The big companies can do it: they have got the leeway. But unless everyone is doing it it's very expensive for smaller firms. So it is very unlikely that you will get progressive policies coming in at anything like the speed you want without legislation. I don't think Labour should be frightened of that.

Question: How important will a social agenda be to a possible second term Labour government? At the recent party conferences we saw a debate going on between tolerance and authoritarianism. Should we expect a more radical approach from Labour towards marriage and the family, homosexuality, cannabis?

Michael Jacobs: It depends what radical means here. My own view is that the way to support families is to support the children. I am not bothered, and I don't think the state should be bothered, with the nature of the family around them. I think children need a loving, financially and emotionally secure environment and almost certainly that is better if there are more people in it. I am not particularly bothered what sex they are, but we need to support all families. You can't penalise single parent families because it means you just penalise the children. People's marriages and relationships break up for all kinds of reasons and there are too many divorced politicians to make that any kind of viable policy. So I don't think policy on the family need change from what Labour has largely done, which is supporting children - a big increase in child benefit and tax allowances for children. I think that is excellent.

Question: But conflicting with the churches who were suggesting a minister for marriage just recently?

Michael Jacobs: Yes, if the churches go down that route, which is unsurprising, then yes, conflicting with them. I don't think marriage is in itself the crucial thing, and I think what you will find is that it is very very difficult to see what measures a government could introduce that would encourage people to be married, who wouldn't otherwise be married. This is an area of people's personal life which is very very difficult to affect with government policy. What you then get is simply moral exortation, which sounds hypocritical every time a politician gets divorced. It has no effect and just turns people off. I think this is not an area for government to get into.

Cannabis of course is a much more interesting field. And we desperately need a proper debate about the de-criminalisation of cannabis and the re-classification of other drugs, particularly ecstasy.

Question: A royal commission?

Michael Jacobs: That would be the way to have a debate but not do anything about it for a while. I think that is probably therefore quite likely and probably would be the first step to dealing with the issue. It has got to happen. The present situation is totally ludicrous.

Question: You have said that in the past New Labour hasn't been noted for its green credentials. How do you think a possible second term could remedy that?

Michael Jacobs: It's beginning to change already. The Prime Minister made an important speech in October in which he pinned his colours to the environmental mast. For the first time, for example, he said we shouldn't just be looking at 20% cuts in carbon dioxide, but 60% cuts, which is what the Royal Commission on environmental pollution argued for last year. So I think it is beginning to change.

The crucial issue is climate change. We have to make sure that the Kyoto treaty is properly implemented. The negotiations failed in The Hague, but they are continuing. At the moment we have targets that reach 2008-2012. What we actually need is to start putting in place mechanisms for the period beyond that. I think Labour's attitude to that will be crucial.

The key is support for technological development. The principal way in which we will improve environmental performance is by developing new technologies. Government has to do a lot more to support those. It has been very reluctant to support new technologies - you hear that old phrase about government not trying to 'pick winners'. Yet the Government has been quite happy to pick losers in the past, industries that are in decline or industries it felt it needed to support for electoral reasons. I think the time will come very soon when much more emphasis will be needed on pro-active industrial policy to support the development of new technologies. There are tremendous business opportunities, export markets and so on in this. Most other countries have much bigger research and development and innovation programmes than we do. That is where I think the real efforts need to come on environmental policy in a second term.

Question: Before Tony Blair gets to preside over a second term - he faces a general election where many say a big threat is voter apathy. Do you think compulsory voting could be a reality for the election after next?

Michael Jacobs: No. Compulsory voting is another idea the Fabian Society has put forward and it is certainly a solution to non-participation. But it is not a solution to apathy because people can still be apathetic - they're just forced into voting by compulsion. So if you were asking me if I would like to see it in the election after next I think the answer would be no, though it might be experimented with in local elections or in certain areas.

I think the more important issue is how you make sure people don't become apathetic. What people hate about politicians is their apparent dishonesty. So I think we need to see politicians engaging much more directly and more honestly with people. It is not easy. We live in a world where people have many distractions. Politics doesn't mean as much to people as it used to, for substantive reasons. People aren't as dependent on the state as they used to be. It is a difficult thing but it is very important because the trends are very worrying.

Question: Earlier on you said the two things that characterised Labour's first term was economic competence and constitutional reform - what do you think will be the two things that characterise Labour's second term ?

Michael Jacobs: Well obviously improvements in public services. This is the make or break issue for Labour. If Labour cannot improve public services then there is a question of what Labour is for. Labour believes in public services which are free or largely free at the point of use. This creates a cohesive society because we all use these services, and the burden of paying for them is shared equitably. It is very important that Labour succeeds in its desire to improve them.

It is very important that people understand what is happening with the taxes they are paying. There is an absolute link between tax and public services but it doesn't exist in most people's minds. When we did the research on public attitudes for our Commission on Taxation we discovered that people are highly 'disconnected' or alienated from the taxes they paid. They don't know where they go. They think the Government wastes money. Labour has got to show people that the taxes they pay really are going to improve public services - that it's worth paying them.

We recommended that every citizen should receive a leaflet which sets out exactly what has been paid in tax and where it's gone. Our Commission recommended a new body be set up, merging the Audit Commission and the National Audit Office, to report to the public on what the Government has done with their money. At the moment the Government tells the public it has done this or that and we know nobody believes it. The Government has been seen to be spinning too much. So we feel it is very important to have an independent body that audits Government and is able to tell the public what has been done with the money - this has improved and this hasn't.

The second issue is poverty. Tony Blair quite rightly said before the 1997 election that the Government should be judged on how it deals with poverty. They have made a very dramatic pledge to eliminate child poverty in 20 years and halve it in 10, and to end pensioner poverty. Those things won't be done simply in a second term but major inroads must be made.

This is the mark of a civilised society. Britain has tolerated poverty for far too long and it is unacceptable in the twenty first century for a country as rich as the UK still to have so many people who live at a level which does not allow them to participate in mainstream society. In my view, if a Labour government is to prove that it has genuinely made a difference, we have to see really significant reductions in poverty and social exclusion by the end of the second term. This is ultimately the real test.