When Labour MPs gathered for their weekly meeting in committee room 14 at the House of Commons on the evening of 13 July, the mood was grimmer than at any point since the party’s general election defeat in May. Five days earlier, they had watched George Osborne triumphantly deliver the first Conservative-only Budget in 19 years, which included policies such as a “National Living Wage” and an apprenticeship levy on firms – measures considered but rejected under Ed Miliband. The Chancellor’s political opportunism was a reminder, as one shadow minister told me, that: “Being in opposition is horrible.”

In the days after the Budget, unease grew as Harriet Harman, the party’s acting leader, and Chris Leslie, the shadow chancellor, signalled that Labour would not oppose Conservative policies such as the 1 per cent cap on public-sector pay rises for four years and the reduced benefit cap of £20,000 (£23,000 in London). The tipping point came when Harman announced on 12 July that the leadership would also abstain on the welfare reform bill and would not reject the two-child limit on tax credits. To their fury, neither the shadow cabinet nor MPs had been consulted in advance.

“It’s gone to her head,” a senior figure told me of Harman’s ascension to leader of the opposition following Ed Miliband’s resignation in May. “She wants to teach Labour a lesson.”

After arriving at 6.10pm – ten minutes late – at committee room 14, Harman began by telling the meeting that as soon as the exit poll was published on election night, she knew that her constituents would “take a thumping” under the Tory government. Yet she reaffirmed her view that Labour could not credibly resist all of the government’s welfare cuts. “If we oppose everything, people will not hear those things we are opposing and why,” she said. Harman recalled that in the last parliament, Labour voted against all 13 of the government’s welfare bills but only its rejection of the “bedroom tax” registered with the public.

The acting leader was described by one Blairite MP as having been “mugged by reality”. Harman believes that Labour will only return to power if it explicitly repudiates its Miliband-era positioning on the deficit and welfare. When at a shadow cabinet meeting on 6 July Andy Burnham, the leadership front-runner, cautioned against embracing austerity, Harman acidly replied: “But Andy, we lost that argument. You may have noticed that we lost the election.”

In committee room 14, one MP after another rose to rebuke her. Of the 25 who spoke, just five defended Harman’s stance. One rebel, Andy McDonald, warned that she was tolerating the policies of “Mao Zedong and King Herod” by refusing to oppose the two-child tax credit cap. Frank Field, the work and pensions select committee chairman, began by praising Harman’s performance as acting leader, declaring that he would vote to give her the job permanently. He ended, however, by berating her refusal to table reasoned amendments against the cuts to tax credits. Keith Vaz, the chair of the home affairs select committee, quipped that he never thought he would see the day when Harman was attacked “from the left” by Field.

Midway through the meeting, the former party leader Neil Kinnock emerged. “Not much,” he replied disdainfully when asked what he thought of Harman’s speech. His son, Stephen, the MP for Aberavon, had earlier remarked that the two-child cap was “awfully reminiscent of some kind of eugenics policy”. Support for Harman came from the Labour leadership candidate Liz Kendall, who praised her for “a great speech” as she left the room. (Kendall’s rivals – Andy Burnham, Yvette Cooper and Jeremy Corbyn – were absent from the meeting.)

At an uneasy shadow cabinet meeting the following day, Labour’s senior figures were “completely divided”, in the words of one of those present. Some, such as Leslie and Rachel Reeves, the shadow work and pensions secretary and Burnham’s shadow chancellor-in-waiting, endorsed Harman’s call to abstain on the welfare bill. Others, such as Cooper, suggested tabling reasoned amendments. Three, including Burnham, argued that Labour should vote against the bill. The decisive stand taken by the shadow health secretary has helped his campaign. “This could be the day that he won,” one shadow cabinet minister told me afterwards.

Labour’s left is in despair at an acting leadership that it regards as needlessly austere. The right is in despair at a party that it regards as recklessly profligate. Yet their angst has points of crossover. Many MPs confess to being unenthusiastic about the party’s leadership contest and concede that Labour will likely lose the next election. One senior figure told me: “Nobody is interested in the leadership campaign. I liken it to one of those albums that people release and no one buys. They’ve printed loads of albums, all the sales teams are really into it – but no one is buying the record. It’s really quite serious now. We are falling outside of the affections and the interests of the people.”

Conversation frequently turns to who could lead the party after another defeat in 2020: the former paratrooper Dan Jarvis; the shadow business secretary, Chuka Umunna (who withdrew from the race after just a few days); the former director of public prosecutions Keir Starmer; even David Miliband. The question, an insider said, was whether the party was electing “Iain Duncan Smith or Michael Howard” – someone who will take the party backwards or someone who will achieve modest progress.

The only leadership candidate who has had consistent momentum is Corbyn, the 66-year-old left-winger who was elected in 1983. When the Islington North MP first made the ballot, after colleagues nominated him to ensure a “broad debate”, many dismissed him as a token contender. Now, almost all in the party expect him to finish ahead of Kendall and some predict that he will come second. It is a prospect that has caused alarm. Umunna told me: “In this leadership contest, there are no free hits when you’re voting. People have got to consider very carefully what message the result on 12 September will send to the public.

“It’s not just about who wins this contest, it is the shakedown of the results.”

At the time of writing, Corbyn had been nominated by 41 Constituency Labour Parties, putting him ahead of Kendall (5) and Cooper (30). One MP warned of “1980s-style entryism” as the left grew in strength. An aide to Cooper, however, told me that CLP meetings represented “a fraction of the membership”, adding that this was not “a panic situation”. The irony of Corbyn’s ascension (to the point where an increasing number ask whether he could win), one source said, is that "He doesn’t want to be leader, he was very open about just wanting to influence the debate. It would ruin his summer, it would ruin his life."

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Jeremy Corbyn’s supporters are satisfied that he has already shifted the terms of debate leftwards on issues such as the 1 per cent public-sector pay cap – which all of the candidates oppose – and the child tax credit cuts. Some MPs believe that Harman’s intervention was an attempt to halt this trajectory.

In the Kendall camp, there is anger that Burnham and Cooper have not rejected Corbyn more forcefully. John Woodcock, a member of Kendall’s campaign team, told me: “We all shared a view, the mainstream of the Labour Party, that advocating Jeremy’s route as a party spells sure-fire marginalisation and electoral defeat. But of all the people who are involved in this leadership race, Liz is the only one saying it. Are the others not saying it because they have changed their mind? Do they believe the basic approach of the Labour Party since Kinnock was wrong? Or are they not saying it out of misplaced tactics or convenience?”

Among MPs, the view is that Kendall recklessly positioned herself as the “New Labour” candidate, guaranteeing defeat among a selectorate that lies to the left of that of 2010. Umunna, who endorsed the shadow health minister after withdrawing from the race, told me that the “modernising part of the party” was “identifying the right problems” but was “wanting in coming up with the solutions”. He added: “We are using the vocabulary and concepts that were being used in the late Nineties and early Noughties when we’re heading towards the 2020s and the 2030s. I think we’ll know that we are ready and have successfully rebooted and are ready to govern again when we are actually using a different vocabulary and have new concepts to offer.”

Although many MPs predict that Cooper will ultimately triumph on second preferences as the least divisive candidate, her team concedes that Burnham remains the front-runner. Some believe the presence of Corbyn in the race has helped Burnham by making it harder to paint him as the creature of the left and the trade unions (it was Corbyn who won Unite’s nomination). And to the relief of the Blairites, Burnham has distanced himself from Cooper by apologising for the pre-crash deficit under the last Labour government. It is a stance that some suggest the shadow home secretary will not countenance, because it would amount to disowning the position of her husband, Ed Balls. A Cooper aide, however, told me that “Andy had set traps for himself” by ­“playing into Osborne’s hands” on the issue.

All of this does little to distract MPs from the defeat of 7 May and the defeat that many fear the party will suffer in 2020. Umunna describes Labour as still being “in shock and grief at what happened”. Even at the lowest moments of Ed Miliband’s leadership, a route back to power appeared open. Now, there is no consolation available, including of the false kind.

“We’ll be here all over again in five years’ time and probably the five after that,” one MP concluded. Labour, they fear, is once again the natural party of opposition.