Suddenly, there is a common sense of purpose at the top of the Government

Arguably, the darkness in Iraq has stifled the two most creative figures in British politics

In the shadow of the war against Iraq, a strange peace has broken out between Downing Street and the Treasury. A year ago these two mighty institutions were battling it out over the reform of the public services. There were sweaty rows between Tony Blair and Gordon Brown over the introduction of foundation hospitals and, to a lesser extent, top-up fees. They were linked to a broader ideological debate over the degree to which choice and equity in public services were compatible. Now, although questions rage about the future of both Prime Minister and Chancellor, they are working well together. Indeed it is partly because of the raging questions that they seek common ground.

This is how bad it got. Last year Mr Brown felt compelled to deliver a dense and lengthy lecture on the relationship between markets and centre-left governments. Some of his observations were a challenge to the fashionable thinking in Downing Street at the time. Earlier this week the lecture was published by the Social Market Foundation and toasted at a gathering at 11 Downing Street. Although ignored or misreported at the time of delivery, the lecture breathes again rather like an old LP re-released as a glossy CD. But at this week's gathering Mr Brown offered some fresh and conciliatory reflections, a bonus track. It was these reflections that pointed to a new synthesis between the Treasury and Downing Street.

Before getting to those reflections, it is worth noting a wider appreciation in government: vague proclamations about the need for choice in public services do not get anyone very far. As the suddenly ubiquitous John Prescott said on the BBC the other day: "No one is against choice. It is like being against sex." That is Mr Brown's view too. In theory no one is against "choice", but what does such an imprecise aspiration actually mean? More specifically how do you create choice for more than a privileged few? This is how Mr Brown attempted to answer the questions earlier this week:

"Our aim is to make public services more personal to the needs of the user. Personalisation means opening up wherever possible a greater range of options to the service user... personalisation is not opposed to equity; it is at the very core of what equity means."

Here is the basis for a consensus of sorts between Downing Street and the Treasury view: more flexible public services responding to personal needs, while acknowledging the limits of markets and the private sector, indeed aiming for public provision that exceeds anything offered by the private sector. This is Mr Brown again from the bonus track earlier in the week: "Public services can be shown to be superior to privately provided services in these areas; and a new model of non-centralised market public services can evolve-devolved, accountable, flexible with the user in the driving seat."

Mr Blair has also deployed similar terms. Earlier this year he gave a speech on education where he spoke less about choice and the role of the private sector and more about the need for schools to respond to the needs of each pupil. He made the speech in Rickmansworth a couple of days after the Hutton report. Whether it was because he delivered the speech in Rickmansworth or because of the timing, not much was made of it. Still, some in government accord it such significance they refer to it jokingly as his Rickmansworth Address, a speech in which he moved towards a new accommodation with the Treasury.

How big a deal is this? First, it is necessary to stress that the original disagreements, although fiery, were not as fundamental as they seemed. Mr Brown was never opposed to reforms of the public services as a matter of principle, clinging to an old Labour past. Indeed, his original lecture on markets was almost the promotion of a Third Way, although Mr Brown would never use the term. For example much of it celebrated markets, urging those on the left of centre to celebrate them too:

"In the modern economy competitiveness abroad is best served by competitiveness at home, so stronger markets become more and more necessary... Instead of being suspicious of competition we should embrace it."

The Blairites would agree with most of this. The rows were elusively fluid a year ago. For example, Stephen Byers, one of Mr Blair's outriders, supported Mr Brown's view about the need to limit the financial freedoms of foundation hospitals. The disputes were partly over tone. Mr Blair proclaimed his boldness, almost as if political courage were a guiding philosophy. Mr Brown believed that boldness could not be an end in itself, and that there were dangers of bold policies that had not been properly thought through. There were also more profound differences about the degree to which the private sector should play a role in public services and whether market-oriented solutions were appropriate for hospitals, schools and universities.

The current bleak political situation has wiped away the tensions for now. Ideally Mr Brown would like to say more about the role of markets, their importance and their limitations. But he cannot do so at the moment without it appearing to be a leadership bid. Instead, he goes out of his way to find agreement. Probably in a rosier political context Mr Blair would seek to highlight an expanding role for the private sector in public services, his theme at the start of this second term. He would seek again to be at his best when at his boldest, whether Mr Brown liked it or not. The grim fallout from Iraq and the cathartic dinner he shared with the Chancellor and Mr Prescott last November mean that he now moves more carefully before proclaiming new bold ventures.

Arguably, the darkness in Iraq has stifled the two most creative figures in British politics. Neither can say what they fully believe. But that means they do not fall out either. Perhaps that is one of the reasons why Mr Blair was in such confident form in Prime Ministers' Questions yesterday before the session was alarmingly disrupted. A curious calm, at odds with the frenetic headlines, has settled on his government.

Now the dividing line over public services will be between the Government and the Conservatives. Michael Howard plans soon to unveil more details about his proposals for schools and hospitals, including a substantial expansion of the private sector as well as new powers for patients and pupils. He is confident that his proposals will have a broad appeal. We shall see. For now he faces the daunting and novel prospect of a Prime Minister and Chancellor working together on the future of public services, partly because, for different reasons, they are in no position to work apart.

s.richards@independent.co.uk