The proposed "compromise" by the Government over the fate of Catholic adoption agencies is in truth a defeat for the Catholic Church and a victory for those who have been opposing any exemption to the new regulations against homosexual discrimination. But the Government's position has to be confirmed by Parliament, and MPs have yet to test the strength of Catholic feeling in their constituencies. Not just Catholic either: Anglican and Muslim leaders have sided with the Catholic case, without subscribing to every detail of Catholic doctrine. The Government will be particularly embarrassed about the situation in Scotland, where, with elections pending, the nationalists are ready to exploit the fact that Westminster wants to overrule undertakings by the Scottish Executive to safeguard the position of Catholic agencies. It is a perfect demonstration, they say, of why Scotland needs to be master in its own house.

There are other principles at stake. One is that the leadership of the Catholic Church must start to engage with the many Catholics who find the Church's traditional treatment of homosexuality repugnant and indeed homophobic. The language of "gross depravity" - as in the Catechism - has to be repudiated. The Catholic case also needs to be more sharply defined as to what is really at stake. As Cardinal Murphy-O'Connor expressed it in an article in the Daily Telegraph this week, the argument is not that homosexual couples could never qualify as good parents for an adopted child - some have and more will - but that the new law demands recognition of a fundamental equivalence between homosexual and heterosexual couples and their lifestyles. The proposed law, in short, leaves no room for the many, who could well be in the majority, who believe that the best family setting for raising children is one parent of each sex. Any adoption agency, Catholic or not, that agrees with that principle is about to be driven out of business. That is an alarming proposition.

But more broadly even than this, politicians need to consider whether they are dealing a fatal blow to the policy, now promoted by both main parties, of drawing the religious and voluntary sector deeper into the functioning of the welfare state. Ministers have seen that the voluntary sector has a lot to offer; not just expertise but compassion and dedication beyond the call of duty between the hours of nine and five. But those qualities arise precisely because the motivation comes from deep religious commitment. With that religious commitment comes religious convictions, not all of which are likely to be compatible with a monolithic liberal-progressive orthodoxy. In short, the Government may be beckoning the voluntary agencies on board with one hand, and waving them away with the other. And this will be made worse if the perception grows that even politicians with deep religious convictions are no longer welcome in public life. Religion has long had a place in British public life, although as an influence rather than as a protagonist.

The interim period the Government has proposed before the agencies have to comply with the legislation gives time to devise working arrangements that could keep the Catholic agencies in being, perhaps no longer dealing with the public directly. But such a solution will demand goodwill, and it is that which has been lacking. It is ironic that in the name of fighting discrimination, the Government has stirred up intolerance.