During the 1990s the urban became an important “institutional laboratory” for state-initiated policy experiments to address the social costs and political repercussions of economic polarisation and social exclusion associated with neo-liberalism. One such policy experiment has been neo-communitarianism, emphasising the contribution of the “third sector” to improving social welfare and reinvigorating a sense of civil society. Focusing on the UK, I examine the background to and implications of the emergence of a neo-communitarian strategy under the “new” Labour government, which came to power in 1997. First, I consider the repositioning of the third sector within contemporary policy discourse as a result of the Labour government's programme of welfare reforms and Prime Minister Blair's “Third Way” political philosophy, which attempts to combine neo-liberalism with a neo-communitarian stance of stressing the importance of civil society for social cohesion. Then, I draw on Foucauldian notions of governmentality to examine how Labour's neo-communitarian agenda has involved a fundamental reconfiguration of the governance of the third sector, centred on the creation of government–voluntary sector “compacts” at national and local levels. These compacts are of strategic importance for the restructuring of the UK third sector and so the local implications of such restructuring are then considered. In particular, case study evidence from Glasgow is used to critically evaluate government claims that the third sector can contribute to the “reinvigoration of civic life” by highlighting the importance of the internal characteristics and political environment of local third sector organisations for the differential development of social capital and citizenship.