John Rentoul: Mr Brown must deliver on the 'people's business'

Ousting Sir Menzies shows Cameron's strength, and piles more pressure on a beleaguered PM

Within minutes of Sir Menzies Campbell's resignation on Monday, the question had moved on to the choice of Nick Clegg or Chris Huhne as his replacement, and how either would affect the balance of advantage between Labour and the Conservatives. It was the wrong question. The significance of Sir Menzies's sudden departure is that it tells us this: David Cameron already has the edge.

Sir Menzies is the second Liberal Democrat leader who has been brought down by the boy David. One of the guiding aims of the Cameron inner circle is to make the Liberal Democrats irrelevant. They intend to make the Tory party so liberal, green and centrist that there is no point to a third party – except possibly as a fringe faction to the left of Labour. It was Charles Kennedy's inability to respond to the first Cameron surge nearly two years ago that finally tipped the worries about his drinking into a putsch. And it was the deflating of Lib Dem poll ratings when squeezed by the second Cameron surge in the past few weeks that did for Sir Menzies.

A new leader might help the Lib Dems "cut through the media clutter" in the old American phrase, but the strategic squeeze will go on. I was struck by the slogan with which Huhne launched his leadership campaign on Wednesday: "A fairer and greener society with people in charge." Leaving aside the curious loss of the definite article before "people", which made it sound as if he thought we should be ruled by humans rather than by Daleks, what was striking was how similar the sentiments were to Cameron's positioning. Yet Huhne is supposed to be the "left-wing" candidate who would be more likely to take votes from Labour than the Tories.

The fact is that the struggle for the upper hand between the Government and the main Opposition over the next one-and-a-half to two-and-a-half years depends on what Gordon Brown and David Cameron do, not on the Liberal Democrats. And, because for the moment Cameron has the wheatfield of politics bending in his direction, all eyes are now on the Prime Minister. Brown faces two futures. One possible course is for things to go on getting worse. The mood among Labour MPs is fragile – only this time there is no leader-in-waiting offering the prospect of a fresh start. Anthony Seldon's book, Blair Unbound, due out at the end of this month, threatens to reveal the hidden wounds of the "stable and orderly" transition. I am told that Seldon interviewed several of Blair's allies at the time of Brown's attempted coup in September last year, when feelings were running high.

The ground ahead is littered with other traps for Brown. The capital gains tax changes announced 12 days ago look worse with each passing day. It is hard to explain to Labour backbenchers why a higher tax on private equity partners should be offset by lower taxes on the owners of second homes. Yet a U-turn before the changes take effect in April would further damage Brown's reputation for competence. Meanwhile, the "work of change" does not appear to have generated enough business to keep the Houses of Parliament occupied and MPs get an extra week off at the end of this month.

After that, there is the European Reform Treaty to get through. And all the time, the media are waiting. One of the reasons Rupert Murdoch was thought to be against an early election is because he wants time to weigh up Brown versus Cameron. The Times is already moving away from Brown, and The Sun is giving him a beating over Europe. It is all too easy to see how Brown might stumble into a decline, in which negatives reinforce negatives.

However, there is an alternative future in which Brown pulls it back. Although his election wobble and copycat tax plans damaged him, he still has a story he can tell. It is that he is a leader of sheer dogged persistence. He can turn the setbacks of recent weeks, if not to his advantage, into a tale of endurance in adversity.

He can do the same with Europe. Presumably, he wants three months to debate the treaty because parliamentary scrutiny is the alternative to a referendum. Some of Blair's advisers are contemptuous of such reasoning: if he is going to tough it out on a referendum, he might as well be hanged for curtailing parliamentary debate. Either way, Brown has to just drop his head and plough on. In the end, the demand for a referendum will be defeated. Even if Huhne becomes Lib Dem leader and changes the party line – an option that he left open in a little-noticed GMTV interview last month – the demand will be lost in the Commons and (I presume Bruce Grocott, the Lords chief whip, has done the sums) in the Lords.

Then, when the treaty is ratified, it becomes a problem for the Tories. I understand that Cameron has said privately that he does not want to push the European issue too hard for fear of rousing the demons of the Tory Eurosceptic past. One of his advisers told me that there would be no "campaign on the back of a lorry" against the treaty. But already we have seen too much of William Hague, reminding us of his campaign to "save the pound" in the 2001 election. Already Hague has compared Brown's "red lines" to the Maginot Line, saying they can be got round, a stupid analogy with the Nazi threat. But if the treaty is such a threat to Britain, the question, once it is ratified, is: Will the Tories seek to renegotiate it? Of course not, but Hague sounded as if this had not even occurred to him when he was asked it last week: "Let's think – first of all, er, there's several ifs there...".

Brown can get through this, but there is an important condition. He has to start to deliver improvements in public services. He has to be able to say that while the Tories have been demanding referendums he has been getting on with what Bill Clinton called "the people's business".

With the pre-Budget report earlier this month, the Treasury published a streamlined set of 30 targets across the public sector. I understand that the appointment of a new head of the Prime Minister's Delivery Unit is imminent. Whoever it is, he holds Brown's future in his hands.

Further listening William Hague on the European Treaty: www.bbc.co.uk/radio4/today/listenagain/friday.shtml