The Week in Politics: A terrifying prospect for the depressed Tories

"And they said the opinion polls were bad under me," Iain Duncan Smith has been telling friends lately with a cheeky smile. I suppose we can hardly blame him: the Great Tory Recovery under Michael Howard appears to have hit the buffers and his MPs left Westminster for their summer break in a familiar state of depression.

"And they said the opinion polls were bad under me," Iain Duncan Smith has been telling friends lately with a cheeky smile. I suppose we can hardly blame him: the Great Tory Recovery under Michael Howard appears to have hit the buffers and his MPs left Westminster for their summer break in a familiar state of depression.

The rise of the UK Independence Party, third place in two by-elections, policy launches eclipsed by the Government's five-year plans, a disastrous flip-flop over Iraq and an unexpectedly strong recovery by Tony Blair all contributed to Tory gloom.

The real significance of this week's story about the "Notting Hill set" of rising Tory stars supposedly trying to hijack the party is the fragility it exposed within the Tory ranks. Much more serious is the YouGov poll in yesterday's Daily Telegraph suggesting the party is doing worse under Mr Howard than poor old IDS. "Anybody but the Tories" was how the paper summarised it.

It all looked so different when Mr Howard was crowned party leader last November. Morale was revived, unity restored. For the first time since Thatcher, Tory troops had a strong leader they respected and behind whom they would gladly march.

Mr Blair, twice pitted against Mr Howard when he was a cabinet minister, recognised that he would be a "good attack machine". He knew the spotlight at Prime Minister's Questions each Wednesday would now be on him rather than whether Freddy the Frog popped up in IDS's throat. Since last November, Downing Street has begun serious preparations for PMQs on Tuesday instead of leaving it until Wednesday morning.

Mr Howard landed some early punches on Mr Blair, but the Prime Minister believes he has now got the measure of his opponent. The Blair analysis is that Mr Howard has missed a chance to modernise his party because he has stuck with the policies he inherited from IDS. Although the ineptly-named "passports" for health and education have been tweaked, Labour can still portray them as giving a state subsidy to patients and pupils who go private.

At least one senior Tory warned the incoming leader that the policies would not impress voters because of the "privatisation" charge. But Mr Howard kept them. This gives the impression the Tories have not "moved on" from the party so roundly rejected in 1997.

The Tories are also in a mess on spending. To try to neutralise the issue of public services, they have pledged to match Labour on health and education. But that means a freeze on other budgets, allowing the Government to cut defence spending but to guarantee it will outspend the Tories. Gordon Brown knows an open goal when he sees one and his Budget and spending review were shaped by Tory policy.

Surely, the lesson from New Labour is that to show the voters it has changed, a party must make a decisive break with the past. Mr Blair did it by abandoning Clause 4. "We need some seismic shocks," admits one shadow minister. But the Tories have not shocked the voters yet. Perhaps their equivalent of Clause 4 will be a pre-election pledge of big tax cuts, financed by cutting government "waste". The shock element might be to target them at poor rather than the rich.

Would it work? I am not so sure. The voters may have "moved on" since 1997; they backed Mr Brown's hike in national insurance to boost health spending.

Mr Brown believes Tory tax cuts would not convince the voters, as Labour would shine the spotlight on the spending cuts needed to finance them. He recalls that, in 1992, Labour thought it could woo people by raising pensions and child benefit. But the voters - and the media - focused on the taxes needed to pay for it.

Mr Howard is a big enough man not to be blown off course by "mutterings" against him. Tory MPs know he is the best man to lead them into the election, whatever happens next. Some suspect the party needs radical surgery and a younger leader, not another middle-aged man in a dark suit such as Sir Malcolm Rifkind. Unlike William Hague and IDS, Mr Howard will not desert the public services battlefield by tacking to the right. He will certainly speak out on crime, immigration and Europe but he will continue to fight Labour on the centre ground.

The talk this summer amongst Team Howard is about holding nerves. The party's private polling suggests that, while the Tories have not wooed the public, they are not as hated as the recent election results suggest. The unpopularity of Mr Blair and his government means there is still an opening.

Their problem is another party trying to grab it. The Liberal Democrats are becoming a serious threat to Labour and the Tories. In the autumn, they will portray themselves as the "real challengers" to Labour on the grounds the Tories cannot win the election.

If a resurgent Charles Kennedy succeeds, the Tories might suffer from the same "can't win" syndrome that has long afflicted the third party in British politics. After all, it happened in Leicester South and Birmingham Hodge Hill. Writ large, it is a chilling prospect for the Tories. At the general election, the voters will probably decide not to change the Government. But they could start the process of changing the opposition.