As Labour takes stock at the end of a turbulent year for Ed Miliband, one of his closest advisers, Lord Wood, puts the state of play like this: "We have wrecked a complacent narrative about the economy. There was a view that so long as the economy was going up by the next election, it would all fall into place for the Tories. I think that has proved to be very naive and simplistic. A year ago, the only issue was whether the growth graph was going up."

Wood, an Oxford academic, believes Labour has demonstrated that the link between people's incomes and economic growth has broken, a stance symbolised by Miliband's conference pledge to freeze energy prices, because there is a gap between "the felt recovery that people experience and the recovery expressed in graphs".

This cautious optimism about Labour's prospects is not shared by more experienced Labour MPs. One former minister told the Guardian the danger is that Labour is stuck with "small arguments" about living standards compared with Osborne's "big argument" about the return of growth. "Osborne is going to have six quarters of economic growth to amplify his argument."

This MP expresses his frustration at what he regards as Ed Balls' "rear-view mirror politics" – a fixation on whether George Osborne took the right decisions back in 2010, an unresolvable debate about a counter-factual. He described Balls' performance responding to the Autumn Statement as "a ritual slaughter".

Another former Labour cabinet minister frankly admits he expects the Tories to win with a majority of 40. He predicts a late surge to the Conservatives, of the kind that undid Neil Kinnock in 1992, as voters finally make up their mind on their choice of Prime Minister at the end of a brutal presidential-style campaign. There are some early signs of movement among the group of voters Labour may need most to take it to Downing Street – the disaffected 2010 Liberal Democrats. The pollster John Curtice, writing in Juncture, the IPPR thinktank's journal, suggests: "While lots of former Liberal Democrats are still backing Labour, they have evidently become somewhat less numerous." The polling suggest that on average 35% of former Lib Dem voters in 2010 said a year ago they would vote Labour, and now that figure has fallen to 30%. Former Liberal Democrat voters are now willing to "look past Labour" when contemplating what they should do next time around.

In addition, local byelections show Labour itself may have become vulnerable to Ukip, including in towns such as Nuneaton, Wakefield and St Helens. An alienated working-class vote may be finding a home in Ukip, enough for Labour to lose some marginals.

This clutch of negativity, or anxiety, inside Labour is worth describing if just to underline the sense of flux in British politics. Labour officials counter that there had been a consensus for months that British politics was at a turning of a tide, and that swing voters, albeit grudgingly and reluctantly, would have turned to the Conservatives by the end of this year. That has not happened. Labour remains electorally competitive. But that just sharpens the strategic questions for Labour's campaign team on how to keep Labour in the 38 to 41% region.

There is one school of Labour strategists that thinks it is sensible to "shrink the offer" by writing a modest manifesto, and another that wants it to be bold. Or, put another way, some say they want Labour only to offer something transactional to the electorate, and others, such as Jon Cruddas, suggest that Labour should propose something transformatory. Interlaced with this discussion is a secondary debate on whether to see the election campaign is conducted primarily by ground war – door-knocking allied to technology – or air war, TV debates and the like.

The choices are not entirely binary, but as Labour's still disunited election campaign team considers what to say to maintain its poll lead in the New Year, these issues occupy minds.

Those who favour the modest offer point to two factors – one, the cold economic climate, and the other, almost cultural. In an era of austerity, no government can spend Britain's way to Nirvana. But more importantly, politicians are so untrusted – the transmission mechanisms from Westminster to voter so broken – that a politician's promise is as likely to repel as inspire. The solution may be to think small.

Wood has been open about this dilemma. "In an age when pledge-based way of politics has been given the two fingers by the electorate how do you overcome that scepticism? There is a cultural isolation and impotence about politics – a belief that it is not talking to people's everyday concerns". Deborah Mattinson, a former Labour pollster and co-director of Britain Thinks, is even more stark. She has been charting declining trust for many decades, but came away from some recent focus groups – commissioned by the magazine Progress in four Tory-held marginals – startled by the near collapse in belief in politicians.

She says: "Where we are at the moment is quite frankly contempt. If you are a politician, and you start to talk about your values or big vision, voters switch off," describing most popular politicians of the day – Margaret Hodge, Boris Johnson, Nigel Farage – as "the anti-politics politicians". Her own solution is to find a small number of policies that actually cut through and stick in the memory – not unlike the 1997 Labour pledge card. Britain Thinks tested various symbolic policies and freely admits it did not find Labour's silver bullet, although a national care service for the elderly, or universal childcare come closest to registering with voters as credible. She also revealed voters are still uncertain what Labour represents, leaving the party to be defined as much by its past as the present.

Mattinson asked focus groups to conjure an image of Labour at a party and how it would behave. "He is quiet. He is on his own in the corner, and is likely to be a good listener. He wears a grey suit and brown tie. It looks cheap, but actually is expensive. He is a vegetarian, turning down most of the food on offer, but might eat one peanut for subsistence. He just flicks through the CDs, but does not choose one to play, although he likes The Very Best of the Pogues." In short, he is a pretty ineffectual guy. The focus groups equally disliked the loud-mouthed Conservative partygoer, especially his taste for tapas, olives and champagne, but respected his toughness.

Asked to write a letter to Ed Miliband, the focus groups suggested "You will win my vote if you could convince me you will to continue to take unpopular decisions, but implement them with more thought." So Labour needs to prove it is smart as well as nice.

Wood is reluctant to get into an auction of toughness, if this is conceived, as it has been traditionally, in terms of Labour carrying out "some act of punitive self-harm", for instance taking on the poor. Instead Miliband has tried to show toughness by taking on those who were perceived in previous ages to be "untakeable-on", such as newspaper proprietors, energy bosses, advocates of war in Syria and even union leaders.

But Labour will also have to be clearer about the economy. Polls now show voters for the first time believe the 2010 spending cuts were necessary. Wood insists Labour will be very clear-eyed about spending, and the public will want Labour at the election to concentrate on the future, not postmortems.

A former Labour cabinet minister, Hilary Armstrong, is less confident. She said: "We are in danger of being seen as we were in the late 80s – that our heart is in the right place, but actually we are not sufficiently concerned with public spending and about how we would pay for what we would talk about. That was really difficult in the early 90s, but unless we take that more seriously we are going to be in deep schtum."