Leading article: Blair's litmus test as leader

Tony Blair passed an exacting test of his political skill this year; 1998 will be a harsh test of his political character. After eight months in office, it is a case of so far, so good, but there is no disguising the perils ahead in 1998. First among these is the economy. Unlike previous Labour leaders, Mr Blair inherited an economy that was fundamentally sound. But the trade cycle ensures that the ripe fruits of recovery will not last. Gordon Brown has been spared the consumer boom that appeared to threaten his policy at the time of his summer Budget, and his determination to contain public spending means that Labour has not repeated its fatal and historic error of spending itself deep into the red.

But not even an iron chancellor can manage a soft landing for the economy if the collapse of the East Asian economies is the start of a severe deflation around the world. The greatest single danger in 1998 could be a rapid increase in unemployment, which undermines his laudable supply-side measures that are designed to take jobless men and women off the dole queues and back into work. This government is better equipped to deal with a potential recession than the Conservatives were, but a serious deflation, accompanied by rising unemployment will expose acute internal strains: Mr Blair will find out who his real friends are. That alone will provide a severe test of character.

A second peril in the coming year is the Prime Minister's intention to press on with welfare reform in his first term. We think this is both courageous and correct. Some of the Government's critics still cling to the notion that a huge and growing social security budget is a symbol of a compassionate society rather than of economic failure and wasted human potential. Every benefit distributed to those who don't need it imposes greater pressures on the provision of the benefits due to those who do. The Government is right to take a hard look at benefits - such as disability benefits - which have grown at a rate apparently unconnected with the social ill they were intended to deal with. This is not, repeat not, an attack on the genuinely disabled and the really ill, but it does mean that Labour will have to rethink its old taboo on the means test, rather as it rethought Clause IV. It is true, of course, that if they are misapplied, means-tested benefits can provide a disincentive to work, particularly for younger people. But this is a practical problem which ought to be overcome by closer integration of the tax and benefits systems. The fact is that many benefits, including some disability benefits and child benefit, go to families that do not need them at all, and it seems to us to be an odd sort of socialism which assumes that poor people should pay out of their taxes for benefits for the rich. The opposition to Mr Blair will come from the benches behind him rather than those opposite, and dealing with it promises to test the Prime Minister's mettle again. The Government will need to exhibit much more care than it did over the cut in lone parents benefit - which fell mainly on the poor, and created for those already receiving the benefit, a disincentive to work that totally contradicted the original intention of the measure. The proper lesson from the deep pain inflicted on the party by the lone parents benefit row is certainly not to abandon welfare reform, but to make sure that it is properly considered and clearly explained in advance.

It's true that the Prime Minister sometimes forgets that, while the party needed him to win for them, he needed the party as the vehicle which brought him to power. His triumph in the Clause IV campaign was to persuade the party to accept the argument, not just as a means of getting elected, but because it was right. Irksome as it is for a man who has many other preoccupations, he needs to do the same in relation to our imperfect welfare system. And in persuading the party, he will help to persuade the country. Welfare cannot be reformed by stealth. Mr Blair must persuade his party and the electorate why it is entirely compatible with genuine help for the poorest and most needy to curb the benefit bill for the prosperous and able-bodied. It is not an exaggeration to argue that it is the historic duty of the left to modernise the welfare state, because, as its architect, the left can be trusted to do so in a way the right could not. We wish Mr Blair luck in this prodigious task. He will need it.