The Government is at a crossroads. It must pick which course to steer

At the height of her powers in the mid-1980s Margaret Thatcher was asked a question she could not answer. That did not happen very often. Most of the time her answers were delivered with a brutal precision. The question was this: "If privatisation is such a good idea, why don't you privatise the health service?"

Uncharacteristically, the Lady waffled. The NHS was safe in her hands. She admired doctors and nurses. The new-look British Telecom was doing very well, thank you very much, but the NHS was an altogether different matter. She did not attempt to address the underlying points of the question. Why was the state still running one massive service when it was withdrawing from others? When is it appropriate for the state to play a highly active role, and what should that be?

These questions are still largely unanswered nearly two decades later. They go to the heart of the confusions, crises and occasional sense of aimlessness that afflict New Labour, explaining in particular why ministers have got into such a mess over transport. Britain's transport secretaries come and go (and how they come and go), but until there is a clearer sense of what the Government should do to address the problems – and why it needs to be involved – the crisis will not be resolved.

So the question once asked of an evasive Mrs Thatcher could now be addressed in an updated form to Tony Blair, Gordon Brown or the new Secretary of State for Transport, Alistair Darling: if privatisation is such a good idea, why have you taken Railtrack into a form of public ownership? Why did the state suddenly have a part to play in transport when it had taken a back seat for four years?

The Labour government does not have a coherent answer to these questions because it is still hopelessly unclear what its role should be in the provision of public services. In 1997 John Prescott declared with a flourish that he wanted to reduce the amount of car usage. Presumably he did not mean that he would sit at his desk keeping his fingers crossed. No, he was going to do something about traffic congestion. His bold declaration suggested that he believed in an active state, that he did not want to take a back seat.

But in the early years Mr Blair and Mr Brown did not share his enthusiasm. The Downing Street policy unit slapped Mr Prescott down. People liked their cars. The Government would do nothing to upset road users. For decades the Treasury has regarded investment in public transport as a waste of money. In the early 1990s the Conservative transport minister Steve Norris offered a single reason for railway privatisation. He said that there was no other way of raising the money. The Government had no option other than to hand the whole enterprise over to the private sector. But there was always another choice, which was for the Treasury to recognise that it had a role in investing in a public service as important as the NHS.

According to the Transport Select Committee's latest report, motoring costs have remained unchanged since the mid-1970s, while rail and bus fares have risen by around 60 per cent in real terms. The Chancellor gave the motorists a helping hand long before the fuel dispute by reducing taxes on petrol in an earlier Budget. The Government's surrender in the fuel dispute merely propelled an existing trend.

The explanation for this approach in both Downing Street and the Treasury appears to be rational: most people use cars, and it would be daft to hit them. But this is short-sighted. The reason why so many people use cars is that public transport is awful, and it has become so much cheaper to drive.

Not that motorists are grateful. Here is the twist that places the focus back on to the state. Drivers sitting in gridlocked traffic do not thank Mr Blair and Mr Brown for their generosity. They curse as much as the railway passenger waiting for non-existent trains. As far as transport is concerned, the Government gets the blame even if it has ceased to be the main service-provider, as is the case with trains.

Here is the reality that a thousand privatisations will not blow away. Voters blame the Government when public services are poor. Richard Branson's image has not suffered hugely as a result of the terrible service provided by Virgin Trains. Voters targeted Stephen Byers, the former secretary of state for transport, instead. Compare the image of the pale-faced, tearful Byers heading home last week with the photographs of a tanned, buoyant Sir Richard that appear in the newspapers from time to time.

The Government has been in denial about all of this. Speaking to highly intelligent and committed figures in this administration – advisers and ministers – I am struck by their sense of impotence over transport. "It is a nightmare. There is not a lot we can do about it." They do not realise they have chosen to be impotent, that there is quite a lot a government which is confident of its role could do about it.

This lack of confidence – at a national and local level – is a problem unique to Britain. In most other prosperous countries the Millennium Dome would have been built either by the state or the private sector or a combination of the two with clearly defined responsibilities. In Britain there was confusion. The same applies to a national football stadium. The Government wants a part in the project, but it does not know what that should be. No stadium has been built.

This is one of the enduring legacies of Thatcherism. The functions of the state have become an ill-defined mess. In my view, that is one of the reasons why both John Major and Tony Blair thrived in the nightmarish politics of Northern Ireland. At least they had a clear mission as a peace broker. But what part should a British government play in the development of public services? Margaret Thatcher was not sure of the answer. Only her strident posture gave the impression that she was.

As far as transport is concerned, an active, self-confident government would make it more expensive to drive and cheaper to travel on an efficient public transport system. Before long motorists would welcome the clearer roads, and commuters would celebrate improvements in trains, buses and trams.

Has Mr Darling got the guts to pursue such a line? Can he persuade the Prime Minister and Chancellor to support him? There are limits to what the state can do in a modern economy. But as far as transport is concerned, those limits have nowhere near been reached.