In the quiet pause before the storm of the Makerfield result drops, good news has passed unnoticed. “The age of outsourcing is over,” declares the Cabinet Office. There will be “the biggest wave of insourcing of public services for a generation” Rachel Reeves says. Finally, here it comes: every government department promises to bring cleaners, security and others of all kinds back as public employees when current contracts expire.

“New approach to procurement signals ambition to end the era of outsourcing by default,” goes the government press release. Shares in the big state contractors Serco, Capita, and Mitie fell on Wednesday after the news.

You don’t often hear spontaneous outbursts of enthusiasm from the unions these days, but the Trades Union Congress (TUC) spokesperson’s response on Wednesday was: “It’s fantastic!”. Its statement celebrating this first step suggests it expects more to come. The Public and Commercial Services Union’s general secretary, Fran Heathcote, said: “This is a huge victory for members”, and “for too long outsourced workers have faced lower pay, poorer conditions and been treated as second-class citizens”.

A new public interest test will now be applied to every contract as it ends to reverse “years of outsourcing that eroded the state’s capability to deliver its own services”, the government says. This will apply to all kinds of services, including the training of senior civil servants, with the creation of a national school of government and public services replacing outsourced training contracts. A £563m learning and development contract with Capita has been cancelled with the service brought back in-house. Capita’s trouble running the civil service pension scheme may mean that, too, is brought back in-house.

As Reeves put it: “I am determined to change the UK’s economic model so that public services are run in the public interest with more workers brought back in-house”, providing “better value for the taxpayer”, with companies no longer siphoning off high profits.

The announcement should signal the end of another of Margaret Thatcher’s great destructions, when she forced compulsory competitive tendering on local councils, the NHS and all of government, obliging them to take the lowest bid, whatever the consequences for the quality of services and the lives of staff. She abolished the fair wages resolution, so thatcontracted workers could be employed at worse rates than existing public employees. Her policy worked: when I was researching my book Hard Work 20 years ago, I applied for minimum wage jobs: I couldn’t find a single post directly employed by the state. A hospital cleaner, dinner lady, nursery worker, hospital porter or care assistant … all the apparently state employee jobs I took were working for an outsourced subcontractor.

Returning to power in 2010, the Tories gave outsourcing a renewed push. Labour had brought in basic protections in pension and pay for outsourced employees of public services, with a “two-tier code” equalising pay, but Francis Maude abolished it so they could be paid less.

Why this announcement now? Is this an “Andy Burnham effect”, with more radical ideas suddenly blossoming? In the last week, the government made it clear that it was willing to take back control of Thames Water, ban social media for under 16s, and challenge private equity running children’s homes. There is a definite sense of the government accelerating action, possibly due to ministers getting things done before they are moved – or removed.

The TUC might disagree with that. “All kudos to Rachel Reeves,” its spokesperson told me. “She has been working really hard on this for a long time. It’s her resolve.” As a backbencher, Reeves chaired the business select committee’s inquiry into the chaotic collapse of the construction firm Carillion, which held more than 400 public sector contracts; she saw the very worst of the outsourcing culture. That should have been the pivotal point to return to insourcing, but Theresa May’s government resisted any reform.

There is much more to be done. The TUC has plenty of shocking examples, including the railway system: though Govia Thameslink has been renationalised, its cleaning contract hasn’t yet. The TUC says cleaners get two minutes to clean a carriage, including the toilets. Most cleaners are women, many from ethnic minorities. The body estimates that Churchill – the contractor that provides cleaners on Govia Thameslink – takes £2.52m a year in gross profits from this tender. Railways still have tens of thousands of workers subcontracted as security guards, caterers, infrastructure maintenance and engineering workers.

On the NHS, a Unison report from earlier this year found that subsidiary companies were “failing to generate new business or income for the NHS”, instead squeezing staff pensions for profit. This government has put a stop to it, with ministers only approving any future transfer of NHS workers into subsidiary companies where there is clear union support for the move and NHS conditions are protected.

What’s odd about all this is that, yet again, the government is doing good things but utterly failing to communicate them. This is who they are, the government and ministers who have passed the strongest employment rights legislation in generations, yet their natural supporters hardly associate them with it. Is that communications failure – or is it a result of government ambivalence and uncertainty in the face of the constant barrage of attack from the right and business? In the end Labour governments have to take a stand as to who they are and what they are for, without being pushed off course by fear of their natural opponents.

• Polly Toynbee is a Guardian columnist