Party leaders need to handle Britain's challenges carefully, former Labour prime minister says on rare return to Westminster

This article is more than 7 years old

This article is more than 7 years old

Tony Blair has warned David Cameron and Ed Miliband that Britain faces long-term policy challenges – from Europe and immigration to excessive banker-bashing – which could cause serious damage to the country if political leaders handle them badly.

He conceded that the public mood on tax avoidance has "changed completely" requiring the rich to pay their proper share in times of austerity. "I pay my full taxes in this country," he said.

In a rare return to Westminster, the former prime minister stood by his New Labour conviction that the "third way, progressive radical centre' is the best political position to adopt.

But he admitted that western states are passing through "an era of uniquely low predictability" in which "playing to prejudice" is a tempting option.

In a seven-point agenda Blair singled out Europe – where speculation that Britain might even leave the EU is causing widespread concern – and "scapegoating" over immigration as presenting such temptations for would-be Ukip voters.

He admitted his government "made mistakes" in not imposing transitional controls on new EU member states after 2004 but insisted that Polish migrants have brought benefits to Britain.

Far from being out of touch with voters' fears, he said: "I am not out of touch with people on this, I understand how they feel.

"It is absolutely sensible for Ed to speak on it and say 'these are the measures I want to take' and so on," he told a lunch for Westminster journalists.

"But … when it comes to this debate, for me it always comes in a box marked 'handle with care' because it can very quickly spill out into a false view that immigration is our problem."

In a wide-ranging analysis he also urged ministers and the opposition not to let "strong feelings" over the banking crash make them "go too far on regulation or capital requirements" in correcting bank excesses. The financial sector remains "an essential part" of Britain's future.

On public service and welfare reform, Blair offered an oblique critique of Miliband's direction of travel by saying he still favours "more reform rather than less" so that governments learn to do things differently.

On climate change he said that global action could be part of the economic recovery, stimulating jobs and technological innovation.

On foreign policy the priority is to nurture the "big process of transition" in the Middle East, despite the religious and ethnic animosities the Arab spring had been bound to release – and to do so without losing sight of the need for a Palestinian settlement, now at risk of being sidelined in the region's wider upheaval, he added.

On Europe Blair said that a referendum, now being toyed with by all the main parties, "in no way alleviates the responsibility of political leaders taking a position and fighting for it".

But before such a ballot is called, Britain must decide what sort of EU reforms it actually wants.

"The stakes are very big," he said, and Ukip's exit strategy is a cul-de-sac: "Never far from being nasty, never near being sensible."

Blair also appealed to the London Olympic spirit to remind voters that: "Britain does best when it is dynamic, entrepreneurial and open-minded."

He ducked giving Barack Obama advice over US gun control, or his own son, Euan, advice over a political career. On politics in general, he advised: "Don't do it unless you feel it's a vocation."

As for calling the coalition "the Tory version of New Labour" in the first draft of his memoirs, he had dropped that description from the published version – "because I didn't think it was correct".