How can the Tories deal with Tony now?

Blair yesterday was as liberated from his party's past as his opponent is hemmed in by his

British Conservatism has faced a dilemma about how to deal with Tony Blair almost since he became leader in 1994. Wasn't he just an ersatz Tory and shouldn't voters simply be urged to stick with the real thing? Or was he just the acceptable face of an unchangeable party? Two years, and a new Clause IV later, the argument changed: OK, the party has been reformed but it's still dangerous. Was this a new danger or an old danger? The theoreticians pondered long and hard and decided that the danger, too, was new.

But the underlying dilemma was never quite resolved. Lord Saatchi and Sir Tim Bell, since 1979 the two gurus of Tory campaigning, have never come to blows. But they have disagreed pretty consistently about how to turn on Tony Blair. Sir Tim never wanted the demon eyes "New Danger" campaign at all, preferring instead - another idea, to be fair, developed by Lord Saatchi - a smiling Labour leader with the punning slogan "What lies behind the smile?". Then Sir Tim, who despite his Thatcherite views, had grave doubts about the salience of Europe as an election issue, was unable to stop Lord Saatchi from persuading Brian Mawhinney to run the New Labour Euro Danger ads, with their now famous lion. There was even disagreement about the slogan for Wednesday's manifesto launch - with one Saatchi proposal "True to Britain" only being rejected at the eleventh hour in favour of "You Can Only Be Sure with the Conservatives" - internally agreed to be the only acceptable phrasing for "Better the Devil You Know".

Ad wars are a sure symbol of anxiety at the top. But otherwise they don't tell you very much except insofar as they symbolise a larger, deeper difficulty. And that has always been how to turn the argument against Blair. It's a difficulty which, if anything, is even greater after two days of sleaze- free politics. The reason is precisely the modesty and attainability of the specific pledges the Labour leader reaffirmed yesterday. In a stunning performance, perhaps his most stunning yet, Blair held out the prospect of radical change while almost revelling in the word "limited" for what he promises for the first term.

In one way the Labour manifesto is more momentous than it looks. It is now part of Tory folklore that at one of his frequent meetings with Lord Rothermere, Tony Blair said that New Labour was to the post-1945 welfare state as De Gaulle was to Algeria. The meaning of this statement - which his closest colleagues do not rush to deny he made - was that only a Labour government could extract the taxpayer from the welfare state's most wasteful and unnecessary commitments because only a Labour government could be trusted not to destroy it in the process. In describing how they will reduce the welfare bill, Labour politicians refer to the use of the windfall tax to bring at least 250,000 under-25s back onto the labour market and off dependency. And that would be a change as significant as it is, initially, incremental; the seeds of hope for all those neighbourhoods without it, where the young are second-generation unemployed and the most vivid role model is the crack dealer with the mobile phone on the corner of the street.

But that may not be all: for Labour's commitment to reducing the welfare bill - and in the process generating more funds for education and health - will surely, in time, go further. Labour may be able to reduce universal benefits such as old- age pensions and child benefit for those rich enough not to need them. Its willingness to replace universal child benefit for 16- to 18-year olds suggests as much. It may produce its own scheme for privatising much of the social insurance system, as Frank Field, the party's most creative social security thinker, wants it to. Peter Lilley's ambitious plan to do so may make it easier for Labour to enact something, if not similar, at least as ambitious. Pressed on the details of the welfare reform agenda, Blair is breathtakingly unfazed: "We make a virtue of the fact that we cannot prescribe a blueprint for this in opposition."

This is especially galling to the Tory right; it means that it may be left to Blair to slaughter one of the dragons still breathing after 18 years of Thatcher-Major. It means that Labour have a half-hidden agenda - though in no more sinister sense than Margaret Thatcher had one on the unions and state ownership in 1979. But it is not one that it is easy for John Major to attack. It will scarcely impress core Tory supporters to warn them that Labour may prove as bold, or even bolder, about the unfinished business of his own government than he intends to be. Much less that the savings will go not to an ideological programme of state shrinking (which doesn't much interest the voters who defected after 1992) but on better education and health, the two public services which profoundly do matter to them. Blair stakes a convincing claim to have found a way of fulfilling genuinely Labour goals without increasing, overall, the size of the state.

That doesn't mean that the Tories have nothing to go on. They will argue vigorously that those aspects of the European Social Chapter decided by qualified majority voting threaten the kind of labour market regulation Blair says he doesn't want. More tellingly, perhaps, William Waldegrave, the Chief Secretary, will press for more convincing answers from Blair and Gordon Brown as to how - since they are relying on the government's own spending projections - they will make up the "hole" of several billion pounds left if you subtract privatisation and frozen local authority receipts from the totals. (It's just as well for Labour, in this context, that the Tories are committed to a new pounds 1.2bn family tax allowance which it also expects, vaguely and uncharacteristically, to fund from growth. And just as well for the Tories that Kenneth Clarke resisted some of the more far-reaching and expensive social- engineering aspirations of Norman Blackwell, head of the Downing Street Policy Unit.)

The Tories, bad as the auspices are, have started to fight in earnest. But they are dealing with what one of the brightest of the coming 1997 Tory intake yesterday described in a chance conversation as "perhaps the best British politician for several decades. And getting better". Blair yesterday was a leader as liberated from his party's past as his opponent is hemmed in by his. There are charges against which he will still have to defend his party. But yesterday you could see, finally, what the Tories are up against.