Labour split over income tax rise

The reaction of the minister, who was a firm supporter of Tony Blair, spoke volumes about the effect of the new 50p rate for those on salaries of £150,000 or more on the Labour party.

While many backbenchers, certainly those steeped in the party's "soak the rich" traditions, thoroughly approved, the architects of Mr Blair's New Labour revolution were aghast.

This feeling was most pronounced among those who are no longer members of the government, and who did not know of precise tax details ahead of publication of the Budget, but it did not begin and end there.

A current Cabinet minister said: "I'm very uncomfortable with this, as New Labour, but I think it's necessary."

Peter Mandelson, the Business Secretary, strikingly used a weekend interview to declare: "None of us sitting round the Cabinet table, as far as I could make out, wanted it or welcomed it but you are faced with a really difficult choice."

Lord Mandelson, with a typical rhetorical flourish, also claimed the founding principles of New Labour, would only be abandoned over his "dead body", but most Westminster observers agree that the Budget tax rises effectively read the movement - which dominated British politics for more than a decade - its last rites.

Mr Blair was revealed on Saturday to believe that the new 50p top rate - something he prevented Gordon Brown from introducing while he was prime minister - was a "terrible mistake."

It can be disclosed, furthermore, that a much more intense pre-Budget debate raged among cabinet members than has subsequently been reported - with the new 50p top rate at the centre of the drama.

Over the last few months, a consensus was reached that now was the time to unveil it. Even such unlikely figures as David Miliband, the Foreign Secretary, another Blairite, who last summer came close to challenging Mr Brown for the party leadership, had advocated a 50p rate "for some time", it was being made clear this weekend.

The differences of opinion came, crucially, over the level of income at which it should come in.

Hardliners, including, it is understood, Harriet Harman, the Commons Leader, pushed for a threshold of £100,000.

Blairites, thought to include John Hutton, the Defence Secretary, and Hazel Blears, the Communities Secretary, were keen on £200,000, to dodge accusations (they hoped) that the government was restarting the class war.

Eventually, a key "quartet" of figures - Mr Brown, Mr Darling, Lord Mandelson and Ed Balls, the Schools Secretary - decided on £150,000 and other senior ministers, reluctantly in some cases, fell into line.

Had Mr Darling always been in favour of the move? One of his Cabinet colleagues, choosing his words carefully, replied: "I think Alistair became a great enthusiast about it."

The comment suggested that the Chancellor, a cautious politician, had taken some persuading.

Once this key political decision had been taken, however, Mr Darling appears to have had a relatively free hand over the rest of the Budget.

It was clear weeks ago there was to be no second "fiscal stimulus" to the economy after the Chancellor formed an alliance with Mervyn King, the Bank of the England governor, to thwart Mr Brown's original wishes in this direction.

To help pay off the staggering levels of debt, the small print included a serious public spending squeeze to be implemented after the next election - during a presumed economic recovery - another potential poison pill for Mr Cameron and the Conservatives.

One of the reasons for Mr Darling's relative freedom was the Prime Minister's continuing preoccupation with the fallout of the emails affair which seen leading Labour figures dragged in, and cost him the services of Mr McBride, his main political strategist.

While reports his anger was such that he had taken to sweeping desktop printers on to the floor and hurling pens, staplers and even his Nokia mobile phone at aides were denied by Number 10, last Sunday, just three days before Budget Day, he was sufficiently unhappy to be telephoning intimates and demanding "what's going on?"

One Cabinet minister on Saturday professed himself "entirely happy" to fight the Tories on a tax-and-spend dividing line.

"If you listen to the sort of things [David] Cameron is saying now," he said, "he sounds like an ardent Thatcherite. If he is suggesting cutting public spending now, in the depths of a recession, we think that would make the recession worse and we think the public would agree with that."

However, another senior ministerial source said he was "profoundly depressed."

He added: "I've just come back from holiday and all I read about is unpleasant emails, MPs' expenses and a new code of conduct for special advisers. Then we get all these terrible headlines over the Budget."

Asked about the future he would only say: "We'll have to wait and see what the economy does," and he refused to be drawn into questions about Mr Brown's leadership.

Can there ever have been a more nakedly political tax increase than Mr Brown's 50p levy? The amount of money the imposition will bring in - £1.13 billion in its first year of operation rising to £2.4 billion a year by 2011-12 - is negligible given the astronomical debt the government is running up.

Astonishingly, as this newspaper reveals today, the Treasury itself has estimated that 69 per cent of those liable to pay the tax will find some way of avoiding it.

Strategically, government insiders admit, the tax rise was brought in for two main reasons: to ensure headlines the day after Wednesday's Budget did not exclusively concentrate on the eye-watering debt levels, and to wrong-foot the Tories.

Mr Brown and his ministers concluded that if the Conservatives vowed to scrap the 50p increase if they won the general election they could be painted as the party of the privileged, while if they kept it this would alienate the Tory grass roots.

Either way, Mr Darling fired the starting gun for what is expected to be a gruelling 12-month election campaign.

One veteran Labour MP was greatly encouraged when he saw Mr Cameron, in his dispatch box response to Mr Darling, make imaginary inverted commas with his fingers when he pronounced the words "the rich."

"The inference is clear," the MP said. "Cameron thinks people on £150,000 a year are not rich. I'm amazed that you lot [the media] didn't pick that up."

That aside, however, the Conservatives have shown no sign of playing Labour's game.

The party's official line is that it is "not a priority" to reverse the increase, although Mr Cameron used a radio interview on Friday to signal that the 50p rise would be on a "list" of taxes a government led by him would seek to scrap.

Leading Tory right-wingers, moreover, have called on ministers to reverse the increase but have studiously avoided putting any pressure on their own leadership to pledge the same.

John Redwood, the former Cabinet minister and chair of the party's economic competitiveness commission, said: "David and George [Osborne, the shadow chancellor] are obviously right to say that higher taxes are not the right way to go but that we have no wish to have a row over it or be drawn into this silly stunt."

The "silly stunt" may still prove to be one of the classic dividing lines of modern British politics.

One Cabinet minister said this weekend: "If you asked me, can we win the general election," one said yesterday, "my answer would be 'absolutely'".

While his stomach for the fight cannot be faulted his hope may be misplaced, with the Tory lead in the polls currently running at 17 or 18 per cent.

Under Mr Blair Labour fought and won three successive general elections on a platform of not raising income tax. Under Mr Brown they are gambling on winning a fourth by taking precisely the opposite tack.

These might well be, as the Prime Minister tell us, "exceptional times", but the odds are not in Labour's favour.