Andrew Grice: Handle your positives better, Mr Brown

There was a joke doing the rounds of Labour MPs during the recent wobble over whether they should topple Gordon Brown: "I told Gordon he is denial about our problems – but he denied it."

This gallows humour – there's a lot of it about on the Labour benches these days – came back to mind this week. Watching Prime Minister's Questions, I couldn't help thinking that Mr Brown was in denial over the need for public spending cuts if Labour wins the election. I had the same feeling after he performed a handbrake turn over whether the inquiry into the Iraq war should be held in public.

Both issues could be positive for Labour. But the way they were handled this week threatened to turn them into a negative. The long-planned Iraq inquiry was meant to reassure jittery Labour MPs, many of whom regard an Iraq reckoning as unfinished business, and to send an "I'm not Blair" signal to those among the electorate who, six years on, still feel sore about the war.

I don't believe the Prime Minister sat down and took a self-interested decision to avoid the damaging headlines that a public inquiry would produce. Brown allies admit he was keen to avoid a "media circus" and "lawyers' paradise". But they insist the pivotal piece of advice came from the Cabinet Secretary Sir Gus O'Donnell. He argued that if the main purpose was to learn lessons from the Iraq experience, that would best be served by holding the bulk of the inquiry behind closed doors. "We are being accused of putting party interest before the national interest but it's not true," said one Brown aide. "If we had gone for the party interest, we would have announced the public inquiry that Labour MPs are clamouring for."

Another influential voice was Sir Jock Stirrup, the Chief of the Defence Staff, who explained it would be very difficult for serving – as opposed to retired – officers to give candid evidence in public. Mr Brown was livid when General Sir Richard Dannatt, the head of the Army, popped up on the BBC to say he had not been consulted about the inquiry – because his boss certainly had been.

Downing Street opened talks with the Tory Opposition about the inquiry three days before Mr Brown's Commons statement on Monday. The Tories intimated they would support a team of privy councillors taking evidence in private – the model used after the 1982 Falklands War. Mr Brown was surprised – and left looking isolated in the Commons – when David Cameron called for a more open inquiry and even threatened to change the way it works if he wins power before it concludes. Nifty footwork by the Tory leader. A bit cheeky, perhaps. The Tories insist there was no formal agreement on a secret inquiry.

Mr Brown has displayed a reverse Midas touch on the Iraq inquiry. An opening session by its chairman Sir John Chilcot will now be in public. Relatives of servicemen killed in the conflict will get the chance to state their case in a public hearing. The ball is now in Sir John's court about whether to go further. If he does, then Mr Brown will get no credit, because it will look as though it has been dragged out of him.

The Prime Minister finds it difficult to admit mistakes and say sorry. In Brussels, where he was attending an EU summit, I asked him why he had apparently changed his mind about the form of the Iraq inquiry. His response was illuminating. He said his Commons announcement had "opened up" a process of consultation about the best way to proceed. "I am in favour of openness and transparency," he insisted. In other words, he wouldn't admit that he was making a U-turn, even though he told MPs on Monday the inquiry would be held in private.

Mr Brown would much rather talk about the economy and public services than Iraq or MPs' expenses. But even on his home ground, he scored an own goal at Prime Minister's Questions on Wednesday by denying that spending on building projects would fall in future years if Labour retains power. The figures published in the Budget in April show capital spending will halve from £44bn to £22bn over the next four years. It's easier to understand why Mr Brown was in denial this time: he wants nothing to get in the way of his full-frontal attack on "Tory cuts" in the run-up to the election.

That could yet prove fertile territory. Mr Brown is convinced the Tories' landmark decision to promise a tough spending squeeze to balance the nation's books leaves them vulnerable. It's not just about five million public sector workers (and their families) who might fear for their jobs, or worries about cuts in services. He suspects that "Tory cuts" will revive latent fears that the Tories would revert to type if they win power, undermining the Cameron modernisation project.

To exploit the Tories' potential weakness, the Prime Minister will need to be more honest with the voters. They know "Labour cuts" would have to be made too. Mr Brown will have to acknowledge that and shift his much-vaunted dividing line with the Tories to where the cuts should fall. If he looks in denial, the public won't listen to him.