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After two years of increasingly centralised control over public services, the head of a leading Blairite think- tank last week set out a challenge to New Labour to loosen its grip as it heads towards a second term of government.

The move immediately won the support of Cabinet Office minister Lord Falconer, who said ministers had to 'resist the temptation to set specific targets and standards save where necessary'.

Matthew Taylor, director of the Institute for Public Policy Research, and former senior Labour Party official, told a conference that, in opposition, the party had been influenced by the apparent failure of 'quasi-market- based decentralisation'.

'The symbolic representation of the perceived failure of this experiment came when health authority chief executive Stephen Thornton, rather than health secretary Virginia Bottomley, was required to defend the denial of treatment to Child B,' he said.

'This was deeply unpopular with both the medical and managerial professions, who saw this as passing the buck, and the public, who perceived the consequences of devolved decision- making as unfair and offending against the founding principles of the NHS.'

This and other events 'culminated in a manifesto which contained a series of measures which would require ministers to take powers they had not previously had,' he said.

In the health service that meant mechanisms to deliver the waiting-list pledge and the creation of the Commission for Health Improvement.

But there were, he said, 'political, intellectual and structural reasons' why the centralisation of power had to change.

'Ministers meeting with representatives of doctors, teachers, local authorities, health authorities and school governors find a recurrent complaint about the number of initiatives coming from the centre - the oft-quoted sense among managers and staff of simply being cogs in a machine.'

Mr Taylor admitted that dispersing power would need a strong lead from the centre. 'The principle of subsidiarity should be applied by all ministers as far as possible. There must be a good reason to do things centrally,' he said.

'The key requirement is that ministers accept that those who manage and provide services at the local level - from councillors to nurses - will tend to do the right thing if given the opportunity.'

But, Mr Taylor said, there were good reasons to keep central control in some areas. It was a question of striking an appropriate balance.

Where differences in outcome were unacceptable, there was limited scope for citizen involvement and there was 'one best way' based on scientific evidence - such as acute healthcare - the tendency would be to centralise control.

Where there was tolerance of a range of outcomes, citizen involvement was required and there were several competing options - such as in public health - the tendency would be to decentralise.

'As New Labour starts to consider its manifesto for a second term, it should question whether there is a need for pledges and plans which require ministers to take on new powers and establish new levels of control,' he said.

'The real challenge may be to develop policies which respond to people's needs and embody centre-left values, but which in their implementation also allow the space for local and frontline choice, creativity and innovation.'

Arriving late at the conference at Millbank Tower - the nerve-centre of New Labour's 1997 election campaign - Lord Falconer explained that he had been delayed at the Millennium Dome, for which he also has responsibility.

He defended the government's close monitoring of public services, which he said should ensure that local managers stayed within the government's overall strategy and helped it to deliver its promises.

But, he said, the centre should resist the temptation to intervene in ways which stifled creativity and innovation. 'Local managers are not being given sufficient autonomy if judgmental disagreement becomes sufficient reason for intervention,' he said.

Nick Raynsford, the minister for London, admitted that centrally set targets did not always have the desired effect, and could lead to people concentrating on target delivery rather than service improvements.

'If you write rubbish targets you will not get the outcomes you want,' he told the conference.