Gordon Brown's Treasury dominated the domestic agenda of the second Blair term, as it had from 1997 to 2001. Credit for the buoyant state of the economy was claimed, with justification, by New Labour's chancellor. Brown's supporters liked to claim progressive measures and the pursuit of social justice were down to Gordon, while Blair did Middle England, ensuring the electoral coalition Labour had built for 1997 prospered.

The division of labour was in fact nothing like as simple. Brown had become a capitalist-fatalist. He believed that if the markets paid staff less than they could live on, if they showered not-especiallycompetent executives with gold and silver, then a government's only duty was to compensate the losers, not to meddle with the sanctity of markets.

But the Brown camp did provide for the market losers. From the thickets of taxand- benefit details emerged a chancellor intent on making poor people better off, as well as the rest of us. New Labour's second term was a growth era. In the 1990s, the UK economy had grown by 1.7% a year; in Labour's new century, it was 2.7%. Whatever else Blair's Britain did, it worked. From 2001 to 2005, some 1.5m jobs were created; a million or so disappeared. The net result was near-full employment, even in the most deprived parts of the UK, with unemployment at a historic low.

Brown's objective was simple: to create conditions of stability within which private business could flourish. However, British business could not be trusted to invest, innovate, re-skill or play fair. Under Labour, the government was not going to retreat from inspecting or worrying about markets; but then, neither had it really retreated under Thatcher. Brown's problem was that he had no model for intervention. He had a vision of what the economy could look like, which is why he was happy opening pharmaceutical labs. But what else?

The DTI was full of schemes to help business and it worked at the governance of companies. Labour ministers were more often than not tempted to regulate: to give staff rights, to make directors more responsible, to protect the climate, to encourage training. Business whinged, and turned up the volume as the second term went on.

Blair took the complaints to heart, creating an anti-regulatory apparatus to police the regulations imposed on business. He promised to make the drive on regulation the centrepiece of the UK presidency of the EU, due to start in July 2005.

The public, better employed, with higher incomes, sometimes joined in bemoaning higher taxes which were, in fact, minimally extra on most middling earners.

Polls of ABC1s, the top people, showed 60% of them believed they had not prospered under Labour, and nearly 70% thought their tax bills had risen. In mid- 2004 a calculation of all direct and indirect taxes concluded the "burden" on a 50,000-a-year earner had risen from 35% to 50% since 1997.

But these oft-quoted figures need careful examination. Leave out stamp duty and this high earner was only paying 2% more of his or her income in tax.

For some, the fact that a reasonably well-paid person was still paying less than third of their income in all taxes after seven years of a Labour government was itself the scandal.

The median income, where half the population earned more and half less, was still only £21,000.

The chancellor's prudence helped to reverse popular perceptions of Labour's lack of competence at managing the economy. That he was able to combine this with very substantial increases in public spending took New Labour a long way towards achieving its ambition of redefining consensus for a political generation.

The public, at least the 70% doing well, might judge the Labour government by its grip on the economy, growth, jobs, wealth and mainstream public services. But Labour itself never felt these were enough as long as poverty persisted. Did social justice get any better?

Labour justly directed cash straight into the pockets of the poorest and, as a result, made large numbers significantly better off, including those not yet lifted out of officially defined poverty. Foundations were laid, with Sure Start, for a national network of children's centres that might, perhaps, begin to mitigate the effects of material deprivation. But this will only happen if these centres become a fixture of local life, remain high in quality, are never cut back and skimped on - and do not turn into warehouses for kids.

Labour never got credit for publicly monitoring its own record on social justice. Every year, a large document called Opportunity for All emerged from the Department for Work and Pensions with a detailed analysis of deprivation.

It was remorselessly frank, its charts often depressing. It reminded us, for example, how far class determined success: "The UK continues to have one of the widest socio-economic gaps in educational attainment in western Europe."

Although, by 2005, most figures were moving in the right direction, how slowly they inched upwards. Some indicators remained obstinately flat.

The overall answer was that, at best, Labour stopped inequality in the UK getting worse. Under pressure from global economic forces, that was something. Its programme of benefits and credits was egalitarian and redistributive, but served only, as the independent Institute of Fiscal Studies put it, "just about to halt" growing inequality, not to cut it.

The Social Exclusion Unit reported a grim tale of housing in Blair's Britain: both a symptom and a cause of a widening inequality of wealth. Some 70% of people owned their own homes and they had seen their value double on Labour's watch. Yet fewer homes, private and social, were being built than for years.

Not surprisingly, the number of families accepted by councils as homeless and in need of emergency accommodation more than doubled from 40,000 in 1997 to 100,000 - and this figure represented just the most extreme housing need.

Fast-rising house prices meant the average deposit for first-time buyers mushroomed from £4,800 in 1997 to £26,800 in 2003. Some could afford the deposits - notably those who benefited from parents' or grandparents' assets cascading down to them. But this served only to enlarge the social chasm between homeowning wealth-holders and families with no assets. Paralysed by questions about the distribution of wealth, Labour stood by while the housing market drove divisions in wealth and social standing.

Labour continued to hope that it might be possible to create a fairer society, even a society with no poor children, by pulling them all up to somewhere nearer the middle, while doing nothing at all about the incomes and the accumulating wealth at the top.

But how could one break a cycle where only 15% of children of the unskilled go to university, compared with 79% of children of professionals, without creating fewer differences between those two backgrounds? In private, Labour policymakers acknowledged this conundrum. In public, they were dumb.

But we should be thankful for small mercies. Labour came to power barely breathing a word about social justice and they have accomplished more than anyone expected.

If they are to remain in power, though, how much further can they travel along the path to fairness and opportunity for all without engaging the public - including the affluent - with the full implications of a programme for social justice?

· Better or Worse? - Has Labour Delivered? by Polly Toynbee and David Walker is published by Bloomsbury. To order a copy for £7.99 with free UK p&p, call the Guardian Book Service on 0870 836 0875, or go to www.theguardian.com/bookshop