John Rentoul: They say Brown lacks courage. Dare he keep John Reid? Will he have Balls?

Reid is portrayed as someone who lets paedophiles roam the streets

Who's up, who's down? Who's in, who's out? John Reid is down, with renewed muttering at Westminster that under Gordon Brown he will soon be out.

Does this tittle-tattle matter? Of course. One of the most important ways in which the incoming prime minister will put his stamp on his administration is by deciding who gets which jobs.

The Home Secretary certainly made mistakes last week, although it is as well to be clear about what they were. What was not his mistake was that 15 drug traffickers had escaped travel bans because of a "systems error". As in the NHS, where the discovery of hidden deficits is evidence that financial discipline is being imposed, the discovery of the unenforced travel bans is more likely to be evidence that the Home Office is beginning to get a grip.

But Reid did make two mistakes last week. One was to propose splitting up the Home Office. Why he did so is a puzzle. It is hardly self-evident that separate justice and security ministries would be better co-ordinated than a single one. It was only last May that Tony Blair said he was against plans to restructure the Home Office. "My own judgement about this is that there is not a structural problem," he said at his Downing Street news conference. But he did preface this with a form of words that suggested abehind-the-scenes row: "It is perfectly possible to take an alternative view, I accept." Perhaps there is a good technical case for separation. In which case, Reid's mistake was to fail to make it.

The Home Secretary's second mistake was to write to judges asking them not to imprison people if they could possibly help it. Again, we should be clear about what was wrong with the letter. Elected leaders are entitled to urge unelected judges to take aspects of the wider public interest into account. What was strange was that the letter allowed judges and the authoritarian press to conspire to portray Reid as responsible for letting paedophiles roam the streets.

Nonsense, of course, but Reid had contradicted the core New Labour message that, if people needlocking up, the Government will provide the prison places. And it is because Reid is so relentlessly New Labour that he had, until last week, seemed to have insured his tenure at the Home Office against civil commotion, riot and Acts of Gord.

The argument for Brown to keep Reid as Home Secretary was twofold: first, he is a more credible reformer than any alternative candidates; second, he offers the public the reassurance that he understands their priorities. Both arguments are weaker than they were a week ago, but remain compelling when measured against the claims of Alistair Darling or Des Browne - or, if the Home Office is split, both of them. Whatever the structure, though, Brown needs someone in his Cabinet who is convincingly tough on crime.

The test for Brown, then, is not whether he keeps Reid in order to be healingly collegiate towards a known Blairite. As one Brownite said recently, "Gordon has said we want a Government of all the talents, not one of all the factions." The question is whether he gives jobs to people who will drive forward public service reform so that Labour can credibly claim to be the party of the future at the next election.

Part of that will also be the matter of promoting young ministers. It looks as if David Miliband, Secretary of State for the Environment, will have to be satisfied with a more powerful green remit for the moment. But at the Treasury, stand by for the most stunning promotion in British politics since Hugh Gaitskell was appointed Chancellor of the Exchequer in 1950. I recently spoke to a cabinet minister who takes it as given that Ed Balls, the most junior of Treasury ministers, will be appointed Chancellor in a few months' time. We were talking before Reid's latest troubles and this cabinet minister thought that Reid's likely survival as Home Secretary was "bad news" for Alistair Darling. The implication was that Brown could not have yet another Scot in yet another great office of state.

Yet there is a powerful case for Ed Balls to be Chancellor, regardless of Reid's fate, and I suspect that Brown's people who tell journalists that Darling is likely to get the job are laying a false trail to maintain the element of surprise. It would be a daring appointment, and a greater promotion than Gaitskell's. Gaitskell, like Balls, went straight into the second most important job in Government from outside the Cabinet. But Gaitskell was a Minister of State, the most senior rank below Cabinet level. Balls is Economic Secretary to the Treasury, at the most junior level of departmental minister. Gaitskell was 44, Balls would be just 40. He has been a minister for less than a year, and an MP for less than two. Gaitskell had been a minister for three years and an MP for five.

Yet the objections to Balls - and many MPs have strong feelings - are not solid. It would reinforce the sense of a Brown "clique" and he "hasn't been tested", one minister told me. The first objection could be overcome by promoting talented Blairites at the same time. James Purnell, the pensions minister, could, for example, be Chief Secretary to the Treasury.

The second objection is currently better known in the US as the Barack Barrier. Barack Obama, it is said, is "not ready" to run for president. He is too young, too untested, too inexperienced after just two years as a junior senator. Yet when the main objection to a candidate is that it is "too early" you know it is time for them to run. It was said of David Cameron, yet everything else about him was right.

The question about Balls is, therefore, is he qualified? And who can say he is not? He is clever enough. As Cameron's exact contemporary at Oxford, he took a higher first in philosophy, politics and economics than the Tory leader. As Brown's right-hand person for the past 15 years, he knows the job of Chancellor as well as the Chancellor himself.

Of course, Gordon Brown's appointments are not the only test. His views on public service reform still make Churchill's description of Russian intentions in 1939, "a riddle wrapped in a mystery inside an enigma", seem crystal clear. But he needs to rebut Charles Clarke's most wounding accusation, that of lacking courage. The bold choices would be Balls as Chancellor, Reid kept as Home Secretary and Miliband given more power as Green Secretary. Has Brown the courage to do it?