The Fabian Commission on Life Chances asks a simple question. Where would we all be if we had been born ourselves, but elsewhere? Born in the next street perhaps? Or in the next town? In a different county, or in a different class?

Same intelligence, same talent, same character, but a shadow, born and brought up in Hackney rather than Henley, Burnley rather than Berkhamsted, Southend rather than Southport.

The chances are, the Commission reveals, that by the age of 3 you would already be destined to have a very different future than the lives you live now.

You would be likely to die earlier, earn less and would be less likely to achieve your potential. If you happened to be a baby girl born in Kensington and Chelsea, you would on average live 7 years longer than if you were born in Manchester. If you were born to Pakistani or Bangladeshi parents, you would be ten times more likely to be a victim of crime than if you were born to white parents. If you were born to parents of a lower social class, you would be 15 times less likely to end up middle class than if born to middle class parents.

Those figures are the moral case for progressive politics. And the contrast between those figures and the statistics that are achieved in other countries is the practical case for progressive politics. It is not just that we are offended by how things are here - but that we know from other countries that they can be different.

My appeal today is that we use our political strength – the strength of our values, of our record, and of our ideas – to think afresh about the challenges ahead. To focus as the Fabian Commission says on life chances not just poverty, but to redistribute power, not just income. This is a journey for our party as well as our country.

Just reflect on where we have come from, and what has changed over the past nine years. If in 1992, when John Smith asked me to be Secretary to the Commission on Social Justice, I had said to him that I had a bright idea for the next manifesto: that the Labour Party should promise to help over two million people into work, take 2.7 million people out of relative poverty, including 800 000 children, reduce rough sleeping by two thirds, reduce the numbers of people suffering multiple social exclusion by over a million, help one million more people into home ownership, along with the largest ever increases in investment in education, health and the police, not to mention raising the minimum wage to £5.35, all in nine years, I think he would have said I was writing a second edition of the longest suicide note in history. Those things seemed a very long way away in 1992. If had said to John Smith that our government would halt and then reverse worldwide trends driving the top 10 per cent and the bottom 10 per cent further apart, I think he would have been pleased.

So let us take pride in our achievements. Don't anyone say this government doesn't have a legacy.

There is a political legacy too. Labour lost the 1992 election in large part because it could not justify or explain how much it wanted to spend. I honestly don't think John Smith would have dared believe that the Tories would lose the 2005 election because the public feared that they would spend too little? That is the scale of the change. Today, I don't know which is more startling: that the card the Tories are now trying to play is not race but compassion, or that that Iain Duncan Smith, that doughty champion of social justice, is the man chosen to lead the charge.

So it is important to get a proper perspective on our political situation today - to look forward to a Britain in 2009 and 2010, and by the end of a fourth Labour term in 2013 or 2014. Since the last election, there have been tactical reverses, which often dominate the headlines. These should not be underestimated. They can cumulate and do damage . But they must not obscure another story, of strategic political progress, which has turned the British Labour Party, once the sick party of the Europe Left, unable to win or to govern, into one of its most successful variants. Go overseas and it is New Labour that our counterparts on the centre-left want to copy.

But policy and politics does not stand still. We will not win the next election by re-fighting the last. As the slogan of the Swedish Social Democrats states, we should be 'proud but not satisfied'. We must deliver in office and renew ourselves in office, if we are to govern again. So how do we move forward?

At the next election, our offer must mobilise opinion with new goals, and new ways of achieving them. More of the same is not going to be enough.

Paradoxically, the reason why more of the same will not be enough is not the failure of Labour, but it is in many ways the product of our success. We have made more progress according to the IFS on issues of poverty than any government since 1961. Tax credits, child benefit increases, and the New Deal mean that 4.8 million working households with children are better off today. But our very success in managing the economy, tackling unemployment, and reducing child and pensioner poverty has reduced public concern. In 1994, 71 per cent people thought there was quite a lot of poverty in Britain. By 2003, the figure had fallen to 54 per cent. The proportion who thought there was 'very little real poverty' rose from 28 per cent to 41 per cent. Today, just 5 to 8 per cent of people cite poverty and inequality as 'one of the most important issues facing Britain today'. So while the goal of tackling poverty must be central to future policy, on its own it does not command sufficient support to provide the red thread for a fourth term.

But there is a second striking point from the report. One that to me highlights why hard thinking about means is as important as hard thinking about ends. The Commission quotes a finding that 80% of the public see the gap between rich and poor as too wide. But the Commission also faithfully and honestly report that only 40% agree that government should redistribute income to the less well off, and while the proportion of the population who say the gap between rich and poor has been growing in the last decade, the proportion who support income redistribution has been falling. People will the ends but they seem very unsure, to put it generously, about willing the means.

I want to dwell on that dilemma because it holds the key to what I want to argue in this lecture.

The Commission propose one way of resolving this dilemma. Broaden the goal from poverty to life chances in order to build a broader political base. There is a lot in this that makes sense in policy terms and in political terms. I agree with the Commission that the debate between equality of opportunity and equality of outcome is sterile. As they say, the opportunities for one generation are determined by the outcomes of the previous generation. So I agree that is a sterile debate. I agree too that the purpose of reducing poverty is to enhance life chances as well as give people better lives. I agree that the policy recommendations they make are substantive. But will they do the trick?

I have to say I am left with a nagging doubt. Let me explain my doubt, and how I see it resolved.

At this time last year, I spoke in a lecture series to launch the interim report of the Commission. The goal of equalising life chances is a good one to mobilise a broad political coalition. It speaks to a British sense of fair play. It is a goal that the majority of people can support out of self-interest as well as altruism.

I still believe that. But the five lectures and my experience in the last year have brought home to me a new perspective.

First, almost by definition life chances should not be about what is done to you by somebody else or still less by government; the whole point of the idea is that people should be guided by their aspirations, talents and effort, not by fate. What we are talking about here is the fact that inheritance plays far too great a role. So our goal is fundamentally about giving all people the power to choose the life they lead. We want them to be authors not actors in the drama of a life more open and individualistic and at the same time more interdependent - more bound together from traffic to terrorism. No generation has had more personal freedom; no generation is more closely bound together.

Second, tackling poverty through the tax and benefit system gives people power. It has made a huge difference to people's lives. Tax credits are tax cuts for low and middle income Britain. They work hard and now they are getting more reward. But it is not enough. It is necessary but insufficient to transform life chances. Skills and social networks are needed to give people power in the labour market. Status and respect needed to give people power in the community. Rights needed to protect citizens at work and in the community. Devolution needed to give citizens power over public services.

And third, it is clear to me that the central political debate in the years ahead will be about power, who holds it, how it is spread, how it accountable. The Tories will say the route to empowerment is to reduce the state. Less state means more power for the individual, they say. We have to show that we have the ideas to reform the state as an ally of aspiration. We know people feel they lack control over their lives, and that traditional political structures are inadequate. There are a couple of glancing but important references to this in the Commission's report, yet this is not a marginal point: where progressives have been seen as the enemies of personal freedom, control and fulfilment, they have lost, and where they show they are the allies of people's aspiration, they win.

Empowerment is not just a matter for dry constitutional discussions, though this is a good week to fly the flag for an elected, smaller, revising House of Lords. To persuade people about the efficacy of government we have to make them part of the action; the challenge is to spread the sense of power and autonomy citizens feel over their lifestyles and values to other parts of their life, notably their interactions with public services, markets, and the community. Empowerment is the oxygen of social change and political change, so the test for policy between now and 2009 or 2010 is whether it shifts the balance of power towards the mass of people rather than the few

More of the same is tempting. When it comes to economic stability, then I want more of the same. When it comes critical public investments, then more of the same is necessary. More of the same, yes please. When it comes to child benefit and tax credits, more of the same will be vital. But we know too that more of the same is not enough:

• more of the same is not enough in policy terms because some of the people we need to reach have not been reached with sufficient vigour by current policy, is not enough because the people we have reached have got new needs
• and is not enough in political terms because people know that the problems have changed from mass unemployment to lack of career progression, from mass homelessness to inability to get on the housing ladder, from crumbling classrooms to the need for more tailor-made learning.

In my own constituency, I have met numerous people who feel their life chances are being dictated to them. They are not authors of their own life story. Fate is still too important. And it is not just because they have lacked money to take the decisions about their own lives but for other reasons.

The parent of a child with ADHD, frustrated because the school had failed to diagnose her child's needs.

The refugee, depressed and isolated, because there was no community group to advocate for them or help them integrate into their local community.

The pensioner who could no longer drive to the supermarket, dependent on favours from friends and family, because the bus only ran once a day, and the local shops had closed.

The young person too scared to go to school because they were bullied on the way home.

These are all stories of people's quality of life being taken out of their hands. People's life chances being held back. Of people feeling powerless to change their lives.

The causes are not one dimensional. Citizens can be held back by public services that are unresponsive; by markets that exclude or exploit; by communities that discriminate and divide.

So a strategy for narrowing the gap in lifechances must include tax and benefit changes, but its got to go beyond it as well. We must use the power of the state, to disperse power – to create markets, public services, and communities society that enable citizens to be players not spectators.

The battle to make people agents of their own destiny and not victims of fate is a massive project. All three spheres – markets, state, community - have the ability to empower but also disempower. We need to address each carefully and honestly.

The challenge for public services is profound. People's needs are diverse. Let me point to something RH Tawney wrote in his great work on equality in the inter-war years. When people talk about great Labour thinkers at that time, it is often implied that their idea of equality meant that they wanted a uniformity of provision. But that is not true. Tawney wrote that equality must be achieved 'not by treating different needs the same way, but by devoting equal care to ensuring that they are met in different ways most appropriate to them, as is done by a doctor who prescribes different regimens for different constitutions, or a teacher who develops different types of intelligence by different curricula'.

That's true. But that is not the point I want to make. Where I would disagree with Tawney, or want to add something to that argument, it is that tailored services will not come only through the state or professionals diagnosing what citizens need and delivering services to them. People today are more educated and more demanding. They expect more choice, control and respect. Where citizens are given more power over what, where, who, and how services are provided – for instance through the devolution of budgets to disabled people through direct payments – it not only creates more innovation, and more responsive services, it fosters a sense of ownership and responsibility on behalf of the user. They become more than just consumers. They become contributors to their own welfare, and to their own life chances.

This is fundamental to changing life chances. Because the best education depends on the efforts of pupils and parents and the wider community as well as teachers; the highest standards of health depend on patients as well as doctors; the safest communities depend on citizens and communities as well as the police. Giving power to citizens helps create services that are more responsive, and citizens that are more responsible.

We know the benefits of collective action – ask most people how to turn round a deprived estate, and they will say government matters, and so does mobilising the local community. There are some half a million non-profit organizations, and a volunteer army of over 600,000. Let me say why they give power to citizens. They are advocates, notably for the disadvantaged, challenging the establishment and the status quo, like TELCO that won the battle for a living wage for cleaners in Canary Wharf. As service providers they reach parts the state cannot reach, like Beatbullying that helps young people tackle problems themselves. As the glue of community, they enable individuals to come together to tackle collective problems – bridging racial and religious divides, like Apna Ghar, the minority ethnic women's organisation in my constituency.

Creating a civil society that shifts power to citizens requires partnership with the state, not isolation. This is a very clear dividing line with the Conservatives. Their idea is that the state is the problem and the voluntary sector is the answer. Wrong. The state has a role in preventing one member of civil society dominating another; in strengthening the voluntary and community organizations through transferring assets; and in creating policies that build bridges between different communities and third sector organizations rather than deepen divides.

This is one vital tradition in our party - empowering people through collective action. But there is a second tradition – to promote individual freedom in a market economy. Markets too have the potential to be great agents of dispersing power. They are a way of coordinating numerous people and organisations without a single overall authority.

But markets do not exist in separation from government or society: that is the folly of the New Right. Markets rely on legal frameworks and regulation. They are affected by taxation and subsidy. They benefit from public investment in the skills, crime and health of a nation. They emerge out of the wider social and cultural milieu of a country – the trust, creativity, and innovation of citizens. There would be 1.5 million more children in poverty today without the tax and benefit changes made by Gordon Brown since 1997. They have been vital. But what has been essential in that progress is that employment and labour markets have been made to work in a different way.

If we want to create markets that shift power to consumers and employees, we must ask some tough questions:

Does competition policy really attack oligopolies and monopolies that hoard opportunities? Or are consumers still too likely to be exploited or excluded?

What must we do to reduce the barriers to new entrants entering markets, whether this is new childcare providers or new developers, so that consumers get the benefits of choice and competition?

Are there ways of ensuring consumers have richer information to inform their decisions and exercise pressure for higher standards, for instance, the new data on home energy efficiency that will be central to home information packs – to be launched next year.

How can we ensure the supply of new housing keeps pace with rising demand, so that getting on the housing ladder becomes affordable, and asset inequality does not widen?

And perhaps most difficult of all, how can we ensure rewards are earned on merit and are fairly distributed?

People talk about idealism in politics. In fact, they are usually talking about a lack of idealism. There is nothing more idealistic than a project that seeks to emancipate people from fate and make them the authors of their own personal story. In the developed world in the 20th century this crusade was about 'freedom from' social evils – in Beveridge's terms, idleness, want, ignorance, squalor, and disease. This project is urgent and vital for billions of our fellow citizens in the developing world today. But for them as well as for us the 21st Century must be about the 'power to' achieve our hopes and aspirations, as well as freedom from social ills.

I think the Fabian Commission is seen as an important contribution to how we achieve that goal. To achieve this goal, we must continue to raise the incomes of families. We must continue to make work pay, and remove the barriers to work. All this will be necessary, but it will not be enough.

Narrowing the gap in lifechances will not just be about giving people money. We are more than just consumers. We are parents. We are citizens. We are employees. We are entrepreneurs. We are members of communities. So we must give people power to shape each dimension of their life.

The implications for how we govern are really profound. Spreading power will not happen without an active state. A government that seeks not to hoard power, but to disperse power as widely as possible - through reforming public services, reforming markets, and refashioning civil society. It will require us to refashion each to adapt to changing values, circumstances and knowledge: public services that give power to people so that they are contributors and not just users; markets that create a fair balance between the interests of consumers, employers and employees; and a civil society that is open, inclusive, and diverse.

So there is a challenge from the Fabian Commission - but I also see that there is a tremendous opportunity. Every government needs to renew as well as deliver. Let this report be the start of a process that leads to a manifesto and a new government that makes choice not fate the expectation of the majority. If we do that, nobody will be able to say that there isn't idealism left in politics.

David Miliband's Fabian life chances lecture was held in the House of Commons on 30th March 2006 to launch Narrowing the Gap, the final report of the Fabian Commission on Life Chances and Child Poverty. The lecture was chaired by Ed Balls MP, Vice-Chair of the Fabian Society.