Labour is a party of moderate socialism and radical liberalism, a blend not dissimilar to the social democracy and liberalism of the Liberal Democrats. The philosophical differences between the mainstreams of two parties are probably lesser than the differences within the two parties.
Stephen mentions the 'increasingly authoritarian turn' of the government, opposed by many Labour MPs, as a possible problem. I don't know about authoritarianism, but I've become increasingly worried by the paternalism of New Labour, particularly since Gordon Brown took over, which I think casts doubt on the party's commitment to the 'radical liberalism' which has always been an element of its politics.
This week we've had Jack Straw (a politician whom I normally have a lot of time for) using the term 'villains' charter' to describe the Human Rights Act (even if it was in implied quotation marks, and even if it was in an interview with the Daily Mail), and trotting out the hoary old paternalist line that rights need to be 'balanced' by responsibilities. Unusually, I found myself cheering Shami Chakrabati, when she objected that Straw ran the risk of implying that rights had to be 'earned', rather than being the inalienable possession of all. And then there has been a whole raft of recent interventions in education, whose intention has appeared to be the moral moulding of children along lines dictated by the centre, rather than the development of free, empowered citizens (see also here, here and here.)
The British Labour Party often congratulates itself that its politics owe more historically to Methodism than to Marxism, as if this were an indisputably good thing. But the downside of this Nonconformist heritage, especially under the leadership of the dourly Presbyterian Brown, seems to be a growing tendency to micro-manage the moral life of the nation, based on an assumption that (as I've written before) Gordon knows what's good for us. Whether or not the prospects are good for a Lab-Lib realignment, Labour desperately needs to reclaim its radical liberal, as well as its social democratic heritage.