The difference in the Labour years was not so much that arts funding was increased in large amounts but that direct state funding increasingly replaced the new Lottery money, so that by 2006-2007, most of the money came from the state's grant-in-aid and not the Lottery, reversing the earlier ratio. That was a double disservice to the country, first by choosing to finance high levels of arts funding, ever controversial, from compulsory rather than voluntary taxation, and second because the justification for direct state funding now had to be made in increasingly instrumental terms.

The government embraced this politicisation of art, made plain by Culture Vultures: Is UK arts policy damaging the arts?, a collection of essays edited by Munira Mirza in 2006 for the think-tank Policy Exchange. As its publicity announced, "Politicians today often claim that the arts are now not only good in themselves, but make a vital contribution to the economy, urban regeneration and social inclusion... This collection shows that many of the claims made about the social benefits of arts are exaggerated, resulting in wasteful projects of poor artistic quality."

The conclusions of Culture Vultures are now widely accepted. But there has been little contrition. Recent attempts to distance the government from the early heights of its instrumental attitude to art remain unconvincing. The new attitude, not so very different from the old beneath the surface, can be seen in the 2008 McMaster Report. Commissioned by the Department for Culture, Media and Sport (DCMS), it calls for a return to artistic excellence as the main criterion for funding — an open admission that other values had previously been ascendant. But the report has not really learnt anything: it still sees excellence through the lens of social cohesion and instrumental justification, as in this ominous sentence from section 1.3: "I would like to see diversity put at the heart of everything cultural."

Such top down, one-size-fits-all interference is bad for art — and bad for artists too, as they are increasingly realising. In 2005, ACE warned: "We will closely monitor...your progress in meeting your race equality objectives, and future funding may include considerations on the ability to meet your race equality targets." Alan Riding, European cultural correspondent for the New York Times, commented: "In other words, go multi-ethnic or risk bankruptcy." As of 2008, ACE went on to demand, contrary to DCMS advice, to know the sexuality of board members in applications for funding. Christopher Hampton called it "bureaucracy and political correctness gone mad". Michael Frayn suggested it was as foolish as boxes for "how many wear black socks or brown socks". In early 2008, 500 of the country's top actors staged a vote of no-confidence in the Arts Council over its funding decisions, demonstrating publicly that the body designed to serve artists was now seen by some as a frustration best avoided.

This is unsurprising. Blair and Brown failed the arts by being content to keep arts funding from the government high, so long as the arts pot was spent in a quest for social impact. But their administrations also failed to solve the problems in the funding mechanism itself which the higher levels of funding — and the existence of a Department for Culture — made ever more obvious. The Arts Council, begun in a different time and at much lower levels of funding, even in real terms, was simply not equipped to cope with its new reality of increased funding from the mid-1990s onward. That became most visible in the mismanagement of major capital projects. By 1999, a highly critical National Audit Office report found that of 15 major arts projects costed at some £300 million, six were seriously over budget and nine were behind schedule and seeking further funds as a consequence. The total cost overrun was £94 million.