The Government is divided into supporters of Old and New Family. In last week's Budget Gordon Brown came down firmly in favour of all kinds of relationships, not just traditional marriage
Tony Blair has children who play football in the Downing Street rose garden and hang Spice Girl posters on their bedroom walls. Gordon Brown has to gatecrash a jelly and ice-cream tea-party when he wants to be photographed with under-10s. But it was the Chancellor, not the Prime Minister, who insisted that last week's Budget should focus so heavily on children.

The front cover of last week's Treasury report had a picture of a group of eight-year-olds wearing Gap For Kids dungarees. Gordon Brown's package aimed tax incentives away from the institution of "the family" and towards parents in whatever situation. It was a defining moment for the Government.

In the past it has been Tory governments that have brought out "Budgets for the Family" encouraging people to get married; William Hague has been reinforcing the message with his stated aim of wanting to make Britons stay around the marital kitchen table, with tax breaks.

Labour has made much of its commitment to "the family" since getting into power. A ministerial group has been set up and a Green Paper produced to come up with proposals for supporting it. This week, at the end of the paper's consultation period, the Government will again emphasise the importance of the relationship between parents and children.

But the party is split about what exactly the family means. Rather than a conventional political divide or a generation gap, the differences here between the two camps of "Old Family" and "New Family" are rather to do with cultural and religious views.

On one side are the traditionalists who believe people should be encouraged to live in old-fashioned Christian marriages; on the other those who advocate a more liberal approach to partnerships and cohabitation. In the first camp are Tony Blair, Jack Straw and David Blunkett; in the second Robin Cook, Mo Mowlam, Chris Smith. It is more to do with background. "When we were letting our hair down in the Sixties Tony was getting into religion and Jack was already buried in student politics," one Blairite said. "There's still a big difference between the two types of attitude."

Last week Gordon Brown put himself firmly in the New Family gang. "Jack Straw has put some very good proposals forward on marriage - for example promoting health visitors or changing marriage guidance," he said. "But what's missing in the tax and benefit system is support for the financial cost of bringing up children, a recognition that children are our investment as a country."

Despite protests from Number 10, the Chancellor used his Budget to replace the married couple's allowance with a new tax credit for children, tapering off for high earners. He raised child benefit again to pounds 15 for the first child and pounds 10 for subsequent children and backed off taxing the universal payment. He also increased the means-tested benefits associated with children, raising the child element of the working family's tax credit and allocating more money for new mothers on low incomes. Eventually Brown plans to introduce a single children's credit incorporating all these elements.

According to the Institute of Fiscal Studies, there were average gains in every decile of the population from the Budget, but the biggest winners were people with children, whatever the structure of their family. Single parents will end up with a 3.81 per cent rise in disposable income, a non-earning couple with children get a 4.05 per cent rise, a one-salary couple with children gain 2.42 per cent, and a two salary couple 1.98 per cent. The system does not pay any attention to the type of relationships people have because it deals not with households but with individuals. This creates the anomaly that a couple with one working partner in the top tax bracket could lose the children's credit, while a household next door with two people earning just below the cut-off point individually but almost twice of it cumulatively, would keep it. Ceridwen Roberts, director of the Family Policy Studies Centre, says the Budget has directed money away from the institution of the family. "The Government has done nothing to stack up the bias in favour of marrying," she said. But it was a deliberate decision by the Chancellor to make children the defining quality.

When the Green Paper on the family was being written last year, there were huge rows between the "Old Family" and "New Family" wings of the Labour Party. Blair and Straw were adamant that it should specifically endorse marriage as the ideal; other ministers - including Joan Ruddock, then minister for women, and Harriet Harman, then Social Security Secretary - argued that government should not get involved in prescribing lifestyles.

The result was a compromise, with a paragraph describing marriage as the "surest foundation" for raising children and setting out the Government's determination to "strengthen the institution of marriage", complemented by one acknowledging that "family structure has become more complicated with many more children living with step-parents or in single- parent households".

The Green Paper advocates a new National Family and Parenting Institute, encouragement for grandparents to get involved with children, and more help for marriage guidance counsellors. But last week's Budget nails the Government's colours much more definitely to the mast in favour of a more liberal ideology, with financial incentives for children.

Mr Brown's allies say the Budget proposals on the family were shaped very much by his female friends and colleagues - he is the first Chancellor to have appointed a majority of women ministers at the Treasury. His girlfriend Sarah Macaulay and his assistant Sue Nye both pointed out that any measures should support children rather than marriage per se. "Women have always said that it's the children that count; if you want to keep families together, you have to help the kids; marriage is irrelevant," one friend said. "Gordon clocked that early on."

This is also further evidence of the Chancellor's redistributive instincts. It has allowed him to transfer money to the poor without alienating Middle England who would find it difficult to complain about extra support for children. Significantly, the Budget report justifies the changes in the tax system by saying that helping families out of poverty is crucial to reducing disadvantage and social exclusion in future generations. It highlights evidence that in Britain one in three children grows up in poverty; that the number of children growing up in workless households is higher than in any other country; that 10 to 15 per cent of families fall into poverty when they have a child. Later this month the Treasury will publish a paper emphasising that poverty "trickles down" the generations and that the Government must do more to break the vicious circle.

At the same time, Harriet Harman is conducting an extensive research project into the relationship between parents' work and a child's success at school. She will analyse groups of 10,000 people born in 1958 and 1970 and find out how their lifestyles have affected their offspring.

The project, based on data from the Centre for Longitudinal Studies, is almost certain to conclude that the offspring of working mothers are no less successful than the children of mothers who stay at home. It will inevitably be interpreted as undermining Tony Blair's commitment to traditional family life. But the study is being funded by the John Smith Institute, set up to support Gordon Brown's office in opposition. It will be launched at a seminar for ministers and civil servants at Number 11 Downing Street, the Chancellor's home.

"Everyone's been arguing about what the Government should do to help the family," one New Labour insider said. "Gordon's slipped in there when no one was looking and stolen their thunder."